NOTES TO FINANCIAL STATEMENTS
1. These interim financial statements are prepared in conformity with the
accounting principles reflected in the financial statements included in
the Company's 1994 Annual Report to Shareholders and the 1994 Annual
Report on Form 10-K. These are interim financial statements, and because
of temperature variations between seasons of the year and the timing of
outages of electric generating units, especially nuclear-fueled units, the
amounts reported in the Statements of Income for periods of less than
twelve months are not necessarily indicative of amounts expected for the
year. Certain amounts for 1994 have been reclassified to conform to the
1995 presentation.
2. In 1994, the Company established a wholly-owned subsidiary, CaroNet, Inc.,
and the subsidiary joined a regional partnership led by BellSouth Personal
Communications, Inc. (BellSouth). On March 14, 1995, BellSouth won its bid
for a Federal Communications Commission license for the partnership to
operate a personal communications services (PCS) system covering most of
North Carolina and South Carolina, as well as a small portion of Georgia.
PCS, a wireless communications technology, is expected to provide
high-quality mobile communications. Wireless technology could also support
automated meter reading, automated service connection and disconnection,
and control and monitoring of certain aspects of the Company's electric
transmission and distribution systems. BellSouth will transfer the PCS
license to the partnership. BellSouth will be the general partner and
handle day-to-day management of the business. Construction of the system
infrastructure is expected to begin this summer, with service start-up
anticipated by mid-1996.
3. In April 1995, the Company intends to issue $125 million principal amount
of 8.55% Quarterly Income Capital Securities (Series A Subordinated
Deferrable Interest Debentures). These capital securities would mature on
June 30, 2025. The obligations of the Company under the securities would
be subordinate and junior in right of payment to the senior indebtedness
of the Company.
4. In 1994, the Board of Directors of the Company authorized the Executive
Committee of the Board to repurchase up to 10 million shares of the
Company's common stock on the open market. In accordance with the stock
repurchase program, the Company has purchased approximately 4.5 million
shares through March 31, 1995. The decrease in average common shares
outstanding resulted in an increase in earnings per common share of
approximately $.02 and $.04 for the three and twelve month periods ended
March 31, 1995, respectively.
5. Contingencies existing as of the date of these statements are described
below. No significant changes have occurred since December 31, 1994, with
respect to the commitments discussed in Note 10 of the financial
statements included in the Company's 1994 Annual Report to Shareholders.
a) In the Company's retail jurisdictions, provisions for nuclear
decommissioning costs are approved by the North Carolina Utilities
Commission and the South Carolina Public Service Commission and are
based on site-specific estimates that included the costs for removal
of all radioactive and other structures at the site. In the
wholesale jurisdiction, the provisions for nuclear decommissioning
costs are based on amounts agreed upon in applicable rate
settlements. Based on the site-specific estimates discussed below,
and using an assumed after-tax earnings rate of 8.5% and an assumed
cost escalation rate of 4%, current levels of rate recovery for
nuclear decommissioning costs are adequate to provide for
decommissioning of the Company's nuclear facilities.
The Company's most recent site-specific estimates of decommissioning
costs were developed in 1993, using 1993 cost factors, and are based
on prompt dismantlement decommissioning, which reflects the cost of
removal of all radioactive and other structures currently at the
site, with such removal occurring shortly after operating license
expiration. These estimates, in 1993 dollars, are $257.7 million for
Robinson Unit No. 2, $235.4 million for Brunswick Unit No. 1, $221.4
million for Brunswick Unit No. 2 and $284.3 million for the Harris
Plant. These estimates are subject to change based on a variety of
factors including, but not limited to, cost escalation, changes in
technology applicable to nuclear decommissioning, and changes in
federal, state or local regulations. The cost estimates exclude the
portion attributable to North Carolina Eastern Municipal Power
Agency, which holds an undivided ownership interest in certain of
the Company's generating facilities. Operating licenses for the
Company's nuclear units expire in the year 2010 for Robinson Unit
No. 2, 2016 for Brunswick Unit No. 1, 2014 for Brunswick Unit No. 2
and 2026 for the Harris Plant.
The Financial Accounting Standards Board has added a project to its
agenda regarding the electric industry's current accounting
practices related to decommissioning costs. Any changes to these
practices could affect such items as: 1) when the decommissioning
obligation is recognized, 2) where balances of accumulated
decommissioning costs are recorded, 3) where income earned on
external decommissioning trust balances is recorded and 4) the
levels of annual decommissioning cost provisions. It is uncertain
what impact, if any, this project may have on the Company's
accounting for decommissioning costs.
b) As required under the Nuclear Waste Policy Act of 1982, the Company
entered into a contract with the U. S. Department of Energy (DOE)
under which the DOE agreed to dispose of the Company's spent nuclear
fuel. The Company cannot predict whether the DOE will be able to
perform its contractual obligations and provide interim storage or
permanent disposal repositories for spent nuclear fuel and/or
high-level radioactive waste materials on a timely basis.
With certain modifications, the Company's spent fuel storage
facilities are sufficient to provide storage space for spent fuel
generated on the Company's system through the expiration of the
current operating licenses for all of the Company's nuclear
generating units. Subsequent to the expiration of the licenses, dry
storage may be necessary.
c) The Company is subject to federal, state and local regulations
addressing air and water quality, hazardous and solid waste
management and other environmental matters.
Various organic materials associated with the production of
manufactured gas, generally referred to as coal tar, are regulated
under various federal and state laws, and a liability may exist for
their remediation. There are several manufactured gas plant (MGP)
sites to which the Company and certain entities that were later
merged into the Company may have had some connection. In this
regard, the Company, along with other entities alleged to be former
owners and operators of MGP sites in North Carolina, is
participating in a cooperative effort with the North Carolina
Department of Environment, Health and Natural Resources, Division of
Solid Waste Management (DSWM) to establish a uniform framework for
addressing those sites. It is anticipated that the investigation and
remediation of specific MGP sites will be addressed pursuant to one
or more Administrative Orders on Consent between DSWM and individual
potentially responsible parties. To date, the Company has not
entered into any such orders.
The Company has been approached by another North Carolina public
utility concerning a possible cost-sharing arrangement with respect
to the investigation and, if necessary, remediation of four MGP
sites. The Company is currently engaged in discussions with the
other utility regarding this matter.
In addition, a current owner of property that was the site of one
MGP owned by Tidewater Power Company (Tidewater Power), which merged
into the Company in 1952, and the Company have entered into an
agreement to share the cost of investigation and, if necessary, the
remediation of this site. The Company has also been approached by a
North Carolina municipality that is the current owner of another MGP
site that was formerly owned by Tidewater Power. The Company is
engaged in discussions with that municipality concerning a possible
cost-sharing arrangement with respect to the investigation and, if
necessary, the remediation of that site.
The Company is continuing its investigation regarding the identities
of parties connected to several additional MGP sites, the relative
relationships of the Company and other parties to those sites and
the degree, if any, to which the Company should undertake shared
voluntary efforts with others at individual sites.
The Company has been notified by regulators of its involvement or
potential involvement in several sites, other than MGP sites, that
require remedial action. Although the Company cannot predict the
outcome of these matters, it does not anticipate significant costs
associated with these sites.
In 1994, the Company accrued a liability for the estimated costs
associated with investigation and remediation activities for certain
MGP sites and for sites other than MGP sites. This accrual was not
material to the results of operations of the Company. Due to the
lack of information with respect to the operation of MGP sites for
which a liability has not been accrued and due to the uncertainty
concerning questions of liability and potential environmental harm,
the extent and cost of required remedial action, if any, are not
currently determinable. The Company cannot predict the outcome of
these matters or the extent to which other MGP sites may become the
subject of inquiry.
PAUL S. BRADSHAW
Vice President and Controller
Raleigh, NC 27602
April 20, 1995