Progress Energy Inc., the parent of Florida Power Corp., said Wednesday that the Internal Revenue Service is auditing one of its coal-based synthetic fuel plants.
The facility, in Colona, Ky., has gathered $220-million in synfuel tax credits to date. Progress is the largest single recipient of such credits, having reaped $349-million last year alone.
The Raleigh, N.C., energy company revealed the IRS audit while reporting second-quarter earnings, which rose 8 percent from the same period last year but fell short of Wall Street expectations. The results included an 8.9 percent decline in Florida Power's earnings.
Progress said that it is "complying with all the necessary requirements" for synfuel credits, adding that it expects to win any potential IRS challenge on the Colona plant.
IRS officials toured the facility in May and first informed Progress of the audit last October.
Progress spokesman Keith Poston said the company didn't disclose the audit earlier because it didn't think the audit notification was important enough to merit public disclosure. But given Wall Street's heightened focus on improving financial transparency, "we wanted to err on the side of disclosure," he said.
Bonnie Hancock, Progress senior vice president for finance and information technology, said she had heard that the IRS is auditing other synfuelmakers as well, but downplayed the significance of the audits.
"It is routine and expected for something that generates that level of credits," she said.
A spokesman for the IRS in Washington said the agency is prohibited from commenting on specific audit cases.
The synfuel tax credit program was instituted during the Carter administration to encourage the development of alternative fuelsources. But some energy companies, including Progress, have generated huge tax savings through coal-based synfuel plants by making what critics say are only minor improvements to the coal.
Progress now wants to expand the financial benefit it derives from the synfuel program. The company holds a 100 percent interest in most of the synfuel facilities it operates. But the plants are running at about 75 percent of capacity because they generate more coal-based synfuel than the company is allowed to claim credits for, Hancock said. As a result, the company is seeking to tap the unused capacity by selling an interest to potential partners.
Such a sale is important to Progress' financial goals for this year. Progress expects to report net income of $3.90 to $4 for the year, of which 8 to 10 cents is expected to come from the sale of a synfuel interest, Hancock said. In 2001, the company reported net income of $2.65 a share, or $3.40 excluding one-time charges.
Progress reported net income of $120.6-million in the quarter ended June 30, up from $111.7-million during the same period last year. Earnings were 56 cents per share, flat from a year earlier, which was affected by a 7 percent increase in the number of outstanding shares. The company posted second-quarter revenue of $2.04-billion, down from $2.32-billion a year ago.
Excluding non-operating charges, Progress reported ongoing earnings of 83 cents a share, up from 77 cents a share a year earlier but short of the 86 cents consensus estimate of analysts polled by Thomson Financial/First Call.
Despite customer growth and warmer weather in the second quarter, Florida Power's earnings fell to $76.8-million from $84.3-million a year earlier because of increased benefit and pension costs and $5-million in additional costs related to the company's efforts to improve its systems and reliability.
Because of continued weak energy demand among North Carolina industrial customers, particularly textile and chemical manufacturers, Progress chief financial officer Peter Scott said during a conference call with analysts that the company will put off providing specific earnings guidance for 2003 for about two months.
Although Progress had been maintaining an annual earnings growth target of about 7 percent to 8 percent after Carolina Power & Light's merger with Florida Power, such expectations will have to be lowered given the current economic climate, Scott said.
"What we're in right now is an extraordinarily soft situation," he said.
Progress' shares closed Wednesday at $43.70, up $3.88, or 9.7 percent.
_ Louis Hau can be reached at hausptimes.com or (813) 226-3404.