Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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These consolidated interim financial statements are prepared
in conformity with the accounting principles reflected
in the financial statements included in the Company's 1996
Annual Report to Shareholders and the 1996 Annual Report on
Form 10-K. Due to 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.
The amounts are unaudited but, in the opinion of
management, reflect all adjustments necessary to fairly present
the Company's financial position and results of operations for the
interim periods. Certain amounts for 1996 have been reclassified
to conform to the 1997 presentation, with no effect on previously
reported net income or common stock equity.
In preparing financial statements that conform with
generally accepted accounting principles, management must
make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial
statements and amounts of revenues and expenses reflected
during the reporting period. Actual results could differ
from those estimates.
2. NUCLEAR DECOMMISSIONING
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In the Company's retail jurisdictions, provisions for
nuclear decommissioning costs are approved by the North
Carolina Utilities Commission (NCUC) and the South Carolina
Public Service Commission (SCPSC) and are based on site-
specific estimates that include 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 agreements. Based on the site specific
estimates discussed below, and using an assumed aftertax
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. The 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 the Brunswick and Harris
nuclear 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 (the Board) has
reached several tentative conclusions with respect to its
project regarding accounting practices related to closure and removal
of long-lived assets. The primary conclusions as they relate
to nuclear decommissioning are: 1) the cost of
decommissioning should be accounted for as a liability
and accrued as the obligation is incurred; 2)
recognition of a liability for decommissioning results in
recognition of an increase to the cost of the plant; 3) the
decommissioning liability should be measured based on
discounted cash flows using a risk-free rate; and 4)
decommissioning trust funds should not be offset against
the decommissioning liability. It is uncertain what impacts
the final statement may ultimately have on the Company's
accounting for nuclear decommissioning and other closure and
removal costs. The Board has announced that the effective
date would be no earlier than 1998.
3. RETAIL RATE MATTERS
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A petition was filed in July 1996 by the Carolina
Industrial Group for Fair Utility Rates (CIGFUR) with the
NCUC requesting that the NCUC conduct an investigation of
the Company's base rates or treat its petition as a
complaint against the Company. The petition alleged that the
Company's return on equity (which was authorized by the
NCUC in the Company's last general rate proceeding in 1988)
and earnings are too high. In December 1996, the NCUC
issued an order denying CIGFUR's petition and stating that
it tentatively found no reasonable grounds to proceed with
CIGFUR's petition as a complaint. In January 1997, CIGFUR
filed its Comments and Motion for Reconsideration to which
the Company responded. On February 6, 1997, the NCUC issued
an order denying CIGFUR's Motion for Reconsideration. On
February 25, 1997, CIGFUR filed a Notice of Appeal of the
NCUC's decision with the North Carolina Court of Appeals.
The Company cannot predict the outcome of this matter.
Additionally, in December 1996, the Company filed a proposal
with the SCPSC to accelerate amortization of certain
regulatory assets, including plant abandonment costs related
to the Harris Plant, over a three-year period beginning
January 1, 1997. This accelerated amortization will reduce
income by approximately $13 million, after tax, in each of
the three years. In anticipation of approval of the proposal
in 1997, the unamortized balance of plant abandonment costs
related to the Harris Plant was adjusted in 1996 to reflect
the present value impact of the shorter recovery period.
This adjustment resulted in an increase in income of
approximately $14 million, after tax, in the fourth quarter
of 1996. On March 20, 1997, the SCPSC approved the
Company's accelerated amortization proposal.
4. COMMITMENTS AND CONTINGENCIES
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Contingencies existing as of the date of these statements
are described below. No significant changes have occurred
since December 31, 1996, with respect to the commitments
discussed in Note 11 of the financial statements included
in the Company's 1996 Annual Report to Shareholders.
A. Applicability of SFAS-71
As a regulated entity, the Company is subject to the
provisions of Statement of Financial Accounting Standards
No.71, "Accounting for the Effects of Certain Types of
Regulation," (SFAS-71). Accordingly, the Company records
certain assets and liabilities resulting from the effects of
the ratemaking process, which would not be recorded under
generally accepted accounting principles for non-
regulated entities. The continued applicability of
SFAS-71 will require further evaluation as competitive
forces, deregulation and restructuring take effect in the
electric utility industry. In the event the Company
discontinued the application of SFAS-71, amounts recorded
under SFAS-71 as regulatory assets and liabilities would be
eliminated. At March 31, 1997, the Company's regulatory assets
totaled $663.0 million. Additionally, the factors discussed
above could result in an impairment of electric utility
plant assets as determined pursuant to Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for LongLived Assets to Be Disposed
Of."
B. Claims and Uncertainties
1) 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. There
are several manufactured gas plant (MGP) sites to which the Company
and certain entities that were later merged into the Company 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
Waste Management (DWM) to establish a uniform framework for addressing
these MGP sites. The investigation and remediation of specific MGP
sites will be addressed pursuant to one or more Administrative Orders
on Consent between the DWM and individual potentially responsible party
or parties. The Company continues to investigate the identities of
parties connected to individual MGP sites, the relative relationships of
the Company and other parties to those sites and the degree to which the
Company will 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 expect costs associated
with these sites to be material to the results of operations of
the Company.
The Company carries a liability for the estimated costs
associated with certain remedial activities at several MGP and
other sites. This liability is not material to the financial
position of the Company. Due to uncertainty regarding the
extent of remedial action that will be required and questions of
liability, the cost of remedial activities at certain MGP sites
is not currently determinable. The Company cannot predict the
outcome of these matters.
2) 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 these licenses,
dry storage may be necessary.
3) In the opinion of management, liabilities, if any, arising
under other pending claims would not have a material effect on
the financial position, results of operations or cash flows of
the Company.
5. SUBSEQUENT EVENTS
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Events occurring subsequent to the date of these financial
statements are described below.
A. Purchase of Knowledge Builders, Inc. (KBI)
On May 6, 1997, CaroCapital, Inc. (CaroCapital), a wholly owned
subsidiary of the Company, entered into a merger agreement
pursuant to which KBI will be merged into CaroCapital. KBI is an
energy-management software and control systems company in which
CaroCapital purchased a 40% equity interest in 1996. The merger
agreement provides that the remaining KBI stock will be
exchanged for shares of common stock of the Company according to a
market value formula. The merger agreement provides for
initial payments totaling approximately $22 million, payable
primarily in unregistered restricted shares of the Company's
common stock. The merger agreement also provides for other
incentive payments based on CaroCapital's future results of
operations. If earned, these additional payments will be made
primarily in unregistered restricted shares of the Company's
common stock. The closing of the merger is subject to certain
regulatory approvals. The Company cannot predict the outcome of
this matter.
B. Preferred Stock Redemption
On May 7, 1997, the Company announced plans to redeem on July 1,
1997, all 500,000 shares of $7.72 Serial Preferred Stock and all
350,000 shares of $7.95 Serial Preferred Stock, both at a
redemption price of $101 per share. The redemptions will be
funded with additional commercial paper borrowings and/or
internally generated funds.