UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-- --
Commission file number 1-3382
CAROLINA POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
North Carolina
(State or other jurisdiction of incorporation or organization)
56-0165465
(I.R.S. Employer Identification No.)
411 Fayetteville Street, Raleigh, North Carolina 27601-1748
(Address of principal executive offices) (Zip Code)
919-546-6111
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock (Without Par
Value) shares outstanding at July 31, 1997: 151,340,394
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Reference is made to the attached Appendix containing the Consolidated
Interim Financial Statements for the periods ended June 30, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
For the Three, Six and Twelve Months Ended June 30, 1997,
As Compared With the Corresponding Periods One Year Earlier
-----------------------------------------------------------
Operating Revenues
------------------
For the three, six and twelve months ended June 30, 1997, operating
revenues were affected by the following factors (in millions):
Three Months Six Months Twelve Months
Weather ............................ $(43) $(91) $(140)
Customer Growth / Changes In
Usage Patterns ..................... 33 41 73
Power Agency ....................... (4) (20) (27)
NCEMC Load Loss .................... -- -- (47)
Price .............................. (8) (11) (19)
Sales to Other Utilities ........... 1 (7) (3)
Other .............................. 1 1 5
- ------------------------------------ ---- ---- -----
Total ......................... $(20) $(87) $(158)
===== ===== =====
The decrease in the weather component of revenue for the three, six and
twelve months ended June 30, 1997, is the result of milder than normal
temperatures in the current periods as compared to more extreme weather patterns
in the prior periods. The increase in customer growth / changes in usage
patterns component of revenue for all comparison periods is primarily a result
of economic growth within the Company's service territory. Sales to North
Carolina Eastern Municipal Power Agency (Power Agency) decreased for the six and
twelve months ended June 30, 1997, due to the impacts of milder weather, along
with the increased availability in the current period of generating units owned
jointly by the Company and Power Agency. Beginning in January 1996, North
Carolina Electric Membership Corporation (NCEMC) replaced 200 MW of load
capacity it formerly purchased from the Company with power purchases from
another supplier. For all comparison periods, part of the decrease in the price
component of revenue is attributable to a decrease in the fuel cost component of
revenue, along with the impact of changes to the NCEMC Power Coordination
Agreement, which became effective in January 1997.
Operating Expenses
------------------
The increase in fuel expense for the three months ended June 30, 1997,
reflects changes in the generation mix due to the refueling outage at the Harris
Nuclear Plant, which resulted in a higher ratio of fossil generation to total
generation in the current period. This increase is partially offset by a
decrease in deferred fuel costs due to under-recovery of fuel costs in the
current quarter. The decrease in fuel expense for the twelve months ended June
30, 1997, primarily reflects decreases in generation as a result of lower sales
during the current period.
Purchased power decreased for the three, six and twelve months ended
June 30, 1997, primarily due to amendments to electric purchase power agreements
between the Company and Cogentrix of North Carolina, Inc. and Cogentrix Eastern
Carolina Corporation, which became effective in September 1996.
The increase in other operation and maintenance expense for the three-
and twelve-month periods is primarily as a result of the timing of plant
outages. There were more outages in the current periods, resulting in higher
expense as compared to the prior periods.
In December 1996, the North Carolina Utilities Commission (NCUC)
authorized the Company to accelerate amortization of certain regulatory assets
over a three-year period beginning January 1, 1997. In March 1997, the South
Carolina Public Service Commission (SCPSC) approved a similar plan for the
Company to accelerate the amortization of certain regulatory assets, including
plant abandonment costs related to the Harris Nuclear Plant, over a three-year
period beginning January 1, 1997. Depreciation and amortization for the three,
six and twelve months ended June 30, 1997, includes approximately $17 million,
$34 million, and $34 million, respectively, related to accelerated amortization
of these regulatory assets. The increase in depreciation and amortization
expense for the three, six and twelve months ended June 30, 1997, also reflects
amortization of deferred Hurricane Fran operation and maintenance expenses of
approximately $3 million, $6 million and $10 million, respectively, in the
current periods.
Income tax expense decreased for all periods due to a decrease in
operating income and the impact of tax provision adjustments recorded in June
1996 and June 1997 for potential audit issues in open tax years.
Other Income
------------
Allowance for equity funds used during construction decreased for the
three, six and twelve months ended June 30, 1997, in accordance with the
application of the formula prescribed by the Federal Energy Regulatory
Commission. During the current periods, a greater proportion of the total
allowance for funds used during construction was credited to interest charges as
allowance for borrowed funds used during construction.
The increase in interest income for all periods is a result of $8.7
million of interest income that was recorded in the second quarter of 1997
related to an income tax refund.
The change in other income, net, for the three, six and twelve months
ended June 30, 1997, includes losses recorded in the current periods incurred in
the start-up phases of certain non-regulated investments and decreases in
certain income items, none of which is individually significant. Offsetting
these decreases in the current twelve-month period, was an adjustment of $22.9
million to the unamortized balance of abandonment costs related to the Harris
Nuclear Plant. See additional discussion of the abandonment adjustment in the
Retail Rate Matters section of Other Matters.
Interest Charges
----------------
Interest charges on long-term debt decreased for all reported periods
primarily due to reduced long-term debt balances. Also contributing to the
decrease in interest charges for the twelve-month period were refinancings of
long-term debt with lower interest cost commercial paper borrowings.
Other interest charges decreased for the twelve months ended June 30,
1997, primarily due to a $6 million interest accrual recorded in the prior
period related to the 1995 NCUC fuel order.
MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES
From December 31, 1996, to June 30, 1997
and From June 30, 1996, to June 30, 1997
----------------------------------------
Capital Requirements
--------------------
The Company did not issue long-term debt in the twelve-month period
ended June 30, 1997. The proceeds from the issuance of short-term debt and/or
internally generated funds financed the redemption or retirement of long-term
debt totaling $60 million and $135 million during the six and twelve months
ended June 30, 1997, respectively.
On July 1, 1997, the Company redeemed 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. On June 30, 1997, $84.4 million
was reclassified to current liabilities. The redemptions were funded with
additional commercial paper borrowings and/or internally generated funds.
The Company's capital structure as of June 30 was as follows:
1997 1996
------- -------
Common Stock Equity .................... 51.14% 49.32%
Long-term Debt ......................... 47.74% 47.99%
Preferred Stock ........................ 1.12% 2.69%
The Company's First Mortgage Bonds are currently rated "A2" by Moody's
Investors Service, "A" by Standard & Poor's and "A+" by Duff & Phelps. Moody's
Investors Service, Standard & Poor's and Duff & Phelps have rated the Company's
commercial paper "P-1," "A-1" and "D-1," respectively.
OTHER MATTERS
Retail Rate Matters
-------------------
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 filed
its brief in this matter on July 18, 1997. The Company cannot predict the
outcome of this matter.
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 Nuclear Plant, over a three-year period
beginning January 1, 1997. In anticipation of approval of the proposal in 1997,
the unamortized balance of plant abandonment costs related to the Harris Nuclear
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.
Other Business
--------------
In 1996, the Company established a wholly owned subsidiary,
CaroCapital, Inc. (CaroCapital), which purchased a minority equity interest
(40%) in Knowledge Builders, Inc. (KBI), an energy-management software and
control systems company. On May 6, 1997, CaroCapital entered into a merger
agreement pursuant to which KBI was merged into CaroCapital. In connection with
the merger, the remaining KBI stock was exchanged for common stock of the
Company according to a market value formula. The merger resulted in the issuance
of approximately 604,000 shares of the Company's common stock (valued at $20.5
million) and a cash payment of $1.9 million. The merger agreement also provided
for incentive payments based on CaroCapital's future results of operations. If
earned, these additional payments will be made primarily in shares of the
Company's common stock. The merger was completed on June 5, 1997. Following the
completion of the merger, CaroCapital was renamed Strategic Resource Solutions
Corp., a North Carolina Enterprise Corporation.
Competition
-----------
On April 17, 1997, the North Carolina General Assembly approved
legislation establishing a 23-member study commission to evaluate the future of
electric service in the state. The members of the commission will be comprised
of legislators and representatives from retail customers, electric companies and
other interested parties. The commission will examine a wide range of issues
related to the cost and delivery of electric service, including the issue of
customer choice of electric providers. The commission will make an interim
report to the 1998 General Assembly and a final report in 1999. Also on April
17, 1997, a bill was introduced in the North Carolina House of Representatives
calling for retail electric competition. The bill would require that residential
customers be able to choose their provider by October 1, 1998, commercial
customers by January 1, 1999, and industrial customers by July 1, 1999. The
Company cannot predict the outcome of these matters.
On February 6, 1997, representatives in the South Carolina General
Assembly introduced a bill calling for a transition to full competition in the
electric utility industry beginning in 1998. No action was taken on this bill.
In addition, by letter dated May 6, 1997, the Speaker of the South Carolina
House of Representatives requested that the SCPSC prepare a proposal for the
deregulation and restructuring of electricity in South Carolina, with a report
date of January 31, 1998. The SCPSC has requested and received comments,
including those filed by the Company, on deregulation and has invited interested
parties to make presentations on August 19, 1997. The South Carolina General
Assembly's Utility Subcommittee has scheduled a series of hearings around the
state beginning this August in order to receive citizen input on the
deregulation issue. The Company cannot predict the outcome of these matters.
Numerous bills have been introduced in both the House and Senate of the
105th Congress concerning the restructuring of the electric utility industry.
There is little consensus among key provisions of the various bills. Some bill
sponsors have held workshops and hearings to discuss various aspects of
restructuring. No legislation has been passed to date in this session. More
restructuring-related bills are expected to be introduced later in the session.
The Company cannot predict the outcome of these matters.
Impact of New Accounting Standard
---------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
(SFAS-128), which changed the previous standards on computing and presenting
earnings per share. SFAS-128 is effective for fiscal years beginning after
December 15, 1997; earlier application is not permitted. The Company does not
expect the adoption of SFAS-128 to have a material impact on its financial
statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
Legal aspects of certain matters are set forth in Item 5 below.
Item 2. Changes in Securities
- ------- ---------------------
(Reference is made to the Company's 1996 Form 10-K, Other
Matters, paragraph 7, page 26. Reference is also made to the
Company's Form 10-Q for the quarter ended March 31, 1997, Item
5, paragraph 3.)
(a) Securities Sold. On June 5, 1997, the Company issued 603,872
shares of its Common Stock (Common Shares) in connection
with the merger of Knowledge Builders, Inc. (KBI) into a
wholly-owned subsidiary of the Company (CaroCapital, Inc., a
North Carolina Enterprise Corporation, since renamed
Strategic Resource Solutions, Corp.). Of these Common
Shares, 583,200 shares were issued as merger consideration
to the former holders of KBI common stock for KBI shares
that were canceled in the merger. The remaining 20,672 of
these Common Shares were issued to former holders of options
to purchase KBI common stock, as consideration for the
cancellation of those options.
Additional Common Shares (with a maximum market value at
time of issuance of $11.4 million) will be issued as merger
consideration to the former holders of KBI common stock. The
number of these additional Common Shares will depend on (A)
the results of operations of Strategic Resource Solutions,
Corp. for fiscal years 1998 through 2001 and (B) the market
value of Common Shares immediately prior to issuance.
Up to 20,672 additional Common Shares may be issued to
former holders of options to purchase KBI common stock.
These additional Common Shares would be issued on October
15, 1999, subject to continuation of employment with
Strategic Resource Solutions, Corp. through that date.
In connection with the merger, the Company also agreed to
make certain incentive compensation payments based upon
future performance of Strategic Resource Solutions, Corp.
through 2001. The payment obligations are subject to certain
vesting requirements. If vested, payments are payable
partially in restricted shares of Common Stock. The number
of shares to be issued, if any, cannot be determined at this
time.
(b) Underwriters and Other Purchasers. No underwriters were used
in connection with this issuance of Common Shares. Common
Shares (and the right to receive additional Common Shares
subject to certain conditions described above) were issued
(A) as merger consideration to former holders of KBI common
stock whose KBI shares were canceled in the merger and (B)
as consideration to former holders of options to purchase
KBI common stock, as consideration for the cancellation of
those options.
(c) Consideration. The consideration for the Common Shares
issued (and to be issued in the future as described above)
was the cancellation of former shares of KBI in the merger
and the cancellation of the KBI options as a condition
precedent to completion of the merger.
(d) Exemption from Registration Claimed. The Common Shares
described in this Item were (and will be) issued on the
basis of an exemption from registration under Section 4(2)
of the Securities Act of 1933. The Common Shares were issued
to a limited number of persons and subjected to restrictions
on resale appropriate for private placements, and
appropriate disclosure was made to all persons to whom
Common Shares were issued.
Item 3. Defaults upon Senior Securities ) Not applicable for the
- ------ ------------------------------- quarter ended June 30, 1997.
)
)
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) The Annual Meeting of the Shareholders was held on May 7,
1997.
(b) The meeting involved the election of Class II directors.
Proxies for the meeting were solicited pursuant to
Regulation 14, there was no solicitation in opposition to
management's nominees as listed below, and all such nominees
were elected.
(c) The total votes for the election of directors were as
follows:
Class II .............. Votes For Votes Withheld
(Term Expiring in 2000)
Edwin B. Borden ....... 129,766,494 3,537,515
Richard L. Daugherty .. 129,724,639 3,579,370
Robert L. Jones ....... 129,574,585 3,729,424
The Board of Directors' proposal to approve the 1997 Equity
Incentive Plan was approved by the shareholders. The number
of shares voted for the proposal was 113,487,684 and the
number of shares voted against the proposal was 15,352,897.
Item 5. Other Information
- ------- -----------------
1. (Reference is made to the Company's 1996 Form 10-K,
Generating Capability, paragraph 3.a., page 4.) With regard
to the construction of two new combustion turbine generating
units, located at the Company's Darlington County Electric
Plant near Hartsville, South Carolina, one unit began
operation on May 31, 1997, the other on June 12, 1997. These
units have a total generating capacity of approximately 240
MW.
2. (Reference is made to the Company's 1996 Form 10-K,
Generating Capability, paragraph 3.d., page 4.) With regard
to the Company's June 12, 1996, Request for Proposal for
purchasing peaking power, on July 14, 1997, the Company and
PECO Power Team, a division of PECO Energy Co., announced an
agreement for the Company to purchase up to 300 megawatts of
peaking power from PECO for the summer periods of 1999 to
2003.
3. (Reference is made to the Company's 1996 Form 10-K,
Competition and Franchises, paragraph 1.b., page 6.
Reference is also made to the Company's Form 10-Q for the
quarter ended March 31, 1997, Item 5, paragraph 1.) With
regard to the 23-member deregulation study commission
established by the North Carolina General Assembly, the
appointment of the commission members is not expected to
occur until this fall.
In South Carolina, 30 parties , including the Company, filed
comments regarding deregulation with the South Carolina
Public Service Commission (SCPSC) on June 30, 1997. Reply
comments were filed on July 21, 1997. Interested parties
have been invited to make presentations to the SCPSC on
August 19, 1997. The South Carolina General Assembly's
Utility Subcommittee has scheduled a series of hearings
around the state beginning this August in order to receive
citizen input on the deregulation issue.
The Company cannot predict the outcome of these matters.
4. (Reference is made to the Company's 1996 Form 10-K, Retail
Rate Matters, paragraph 2, page 12.) With regard to the
filing by Carolina Industrial Group for Fair Utility Rates
(CIGFUR) of a Notice of Appeal with the North Carolina Court
of Appeals, the Company filed its brief with the court on
July 18, 1997. The Company cannot predict the outcome of
this matter.
5. (Reference is made to the Company's 1996 Form 10-K, Retail
Rate Matters, paragraph 4, page 13.) With regard to the
annual fuel factor hearing before the North Carolina
Utilities Commission (NCUC), on June 5, 1997, the Company
filed its 1997 application proposing to lower the Company's
billing fuel factor from 1.109 cents/kwh to 1.097 cents/kwh.
The fuel factor hearing was held on August 5, 1997. The
Company anticipates receiving a final order from the NCUC in
September. The Company cannot predict the outcome of this
matter.
6. (Reference is made to the Company's 1996 Form 10-K, Retail
Rate Matters, paragraph 5.a., page 14.) With regard to the
avoided cost proceedings with the NCUC, by order issued June
19, 1997, the NCUC approved the updated avoided cost rates
and provisions that were reflected in the Company's proposed
order.
7. (Reference is made to the Company's 1996 Form 10-K,
Environmental Matters, paragraph 2, page 15.) In an effort
to resolve ozone non-attainment issues in the Northeast,
Chicago, and Atlanta areas, the Environmental Protection
Agency (EPA) formed the Ozone Transport Assessment Group
(OTAG), a partnership involving the EPA and environmental
regulators from 37 states. At its final meeting on June 20,
1997, OTAG approved a recommendation endorsing a range of
potential reductions of utility Nitrogen Oxide (NOx)
emissions beyond the Phase II reductions. Specific reduction
targets will be proposed by the EPA on a state-by-state
basis. The EPA's final rulemaking for the individual states
is expected in late 1998. The Company cannot determine the
estimated costs for the further NOx reductions at this time.
The Company cannot predict the outcome of this matter.
8. (Reference is made to the Company's 1996 Form 10-K,
Environmental matters, paragraph 2, page 15) With regard to
revisions to existing air quality standards, the EPA issued
final regulations revising the ozone standard and
establishing a new fine-particulate standard on July 17,
1997. These regulations may require the installation of
additional control equipment at some of the Company's
fossil-fueled electric generating plants. The Company is
evaluating the impact of the new regulations on its
facilities and cannot determine the estimated costs of
additional controls which may be required for compliance
with the new standards. The Company cannot predict the
outcome of this matter.
9. (Reference is made to the Company's 1996 Form 10-K, Other
Matters, paragraph 1, page 24. Reference is also made to the
Company's Form 10-Q for the quarter ended March 31, 1997,
Item 5, paragraph 2.) With regard to the Independent
Consultant's Safety Inspection Report required to be filed
under Federal Energy Regulatory Commission (FERC) Regulation
18 CFR Part 12, the Company filed a response on April 24,
1997, to the FERC's letter dated February 27, 1997. In its
response, the Company agreed with some of the FERC's
comments and took exception to others. The Company has not
received a reply from the FERC as of this date. The Company
cannot predict the outcome of this matter.
10. (Reference is made to the Company's 1996 Form 10-K, Other
Matters, paragraph 7, page 26. Reference is also made to the
Company's Form 10-Q for the quarter ended March 31, 1997,
Item 5, paragraph 3.) With regard to the Company's
wholly-owned subsidiary, CaroCapital, Inc. (CaroCapital),
the merger with Knowledge Builders, Inc. was completed and
applications for authority to issue additional shares of the
Company's Common Stock in connection with the merger were
approved by the NCUC and the SCPSC on May 28, 1997, and June
5, 1997, respectively. Following the completion of the
merger, CaroCapital's board of directors recommended and its
sole shareholder (the Company) adopted a resolution
approving the change of CaroCapital's name to Strategic
Resource Solutions Corp., a North Carolina Enterprise
Corporation. Articles of Amendment to change the name were
filed with the North Carolina Secretary of State on June 16,
1997. See additional discussion of this transaction in Part
II, Item 2.
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits Filed:
Exhibit No. Description
3(i) Restated Charter of Carolina
Power & Light Company as amended
on May 10, 1996.
3(ii) By-Laws of Carolina Power &
Light Company as amended on
September 18, 1996.
*10(a) 1997 Equity Incentive Plan,
approved by the Company's
shareholders May 7, 1997, effective
as of January 1, 1997 (filed as
Appendix A to the Company's 1997
Proxy Statement, File No.
001-03382).
10(b) Performance Share Sub-Plan of the
1997 Equity Incentive Plan, adopted
by the Personnel, Executive
Development and Compensation
Committee of the Board of
Directors, March 19, 1997, (subject
to shareholder approval of the 1997
Equity Incentive Plan, which was
obtained on May 7, 1997).
(b) Reports on Form 8-K filed during or with respect to the
quarter:
None.
- -------------
*Incorporated herein by reference as indicated.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAROLINA POWER & LIGHT COMPANY
(Registrant)
By /s/ Glenn E.Harder
---------------------
Glenn E. Harder
Executive Vice President and
Chief Financial Officer
By /s/ Bonnie V. Hancock
------------------------
Bonnie V. Hancock
Vice President and Controller
(and Principal Accounting Officer)
Date: August 13, 1997