Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
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A. Organization. Carolina Power & Light Company (the Company) is a public
service corporation primarily engaged in the generation, transmission,
distribution and sale of electricity in portions of North and South
Carolina. The Company has no other material segments of business.
B. Basis of Presentation. 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 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. 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 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 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. PURCHASE OF KNOWLEDGE BUILDERS, INC. (KBI)
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On May 6, 1997, CaroCapital, Inc. (CaroCapital), a wholly owned
subsidiary of the Company, entered into a merger agreement pursuant to
which KBI was merged into CaroCapital. KBI is an energy-management
software and control systems company in which CaroCapital purchased a
40% equity interest in 1996. 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.
5. PREFERRED STOCK REDEMPTION
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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.
6. 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 June 30, 1997, the Company's
regulatory assets totaled $627.1 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 Long-Lived 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 certain 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.
7. IMPACT OF NEW ACCOUNTING STANDARD
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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.