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
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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
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are prepared in conformity with the accounting principles reflected in
the financial statements included in the Company's 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.
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
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. CAPITALIZATION
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A. Preferred Stock Redemption. On July 1, 1997, the Company redeemed all
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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 were funded with additional commercial
paper borrowings and/or internally generated funds.
B. Long-Term Debt. On August 26, 1997, the Company issued $200 million
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principal amount of First Mortgage Bonds, 6.80% Series due August 15,
2007.
See Common Stock issuance information in "Note 5" below.
4. 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. Oral argument before the North Carolina Court of
Appeals is scheduled for November 19, 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.
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
5. 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.
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
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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 that SFAS-71 no longer applied
to certain regulatory assets and liabilities, those assets and
liabilities would be eliminated. At September 30, 1997, the Company's
regulatory assets totaled $590.9 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
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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 others, is participating in a
cooperative effort with the North Carolina Department of Environment
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 the
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.
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)
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 ending 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.