Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
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 should be read in onjunction with the Company's
consolidated financial statements included in the Company's
1997 Annual Report on Form 10-K. 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. Due to
temperature variations between seasons of the year and the
timing of outages of electric generating units, especially
nuclear-fueled units, the results of operations for interim
periods are not necessarily indicative of amounts expected for
the entire year. Certain amounts for 1997 have been
reclassified to conform to the 1998 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
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 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 $258 million for Robinson Unit
No. 2, $235 million for Brunswick Unit No. 1, $221 million for
Brunswick Unit No. 2 and $284 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 has reached several tentative
conclusions with respect to its project regarding accounting practices
related to obligations associated with the retirement of long-lived
assets (formerly referred to as liabilities for closure and removal of
long-lived assets). It is uncertain when the final statement will be
issued and what impacts it may ultimately have on the Company's
accounting for nuclear decommissioning and other retirement costs.
3. 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. In February 1997, the NCUC issued an order denying CIGFUR's
Motion for Reconsideration. CIGFUR filed a Notice of Appeal of the NCUC
Order with the North Carolina Court of Appeals. The Company filed its
brief in this matter in July 1997, and oral argument was held before
the North Carolina Court of Appeals in November 1997. The Company
cannot predict the outcome of this matter.
4. COMMITMENTS AND CONTINGENCIES
Contingencies existing as of the date of these statements are described
below. No significant changes have occurred since December 31, 1997,
with respect to the commitments discussed in Note 11 of the financial
statements included in the Company's 1997 Annual Report on Form 10-K.
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
unregulated entities. The Company's ability to continue to
meet the criteria for application of SFAS-71 may be affected
in the future by competitive forces, deregulation and
restructuring in the electric utility industry. In the event
that SFAS-71 no longer applied to a separable portion of the
Company's operations, related regulatory assets and
liabilities would be eliminated unless an appropriate
regulatory recovery mechanism is provided. Additionally, these
factors 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." At March 31, 1998, the Company's regulatory assets
totaled $525 million.
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 others, is participating in a cooperative effort
with the North Carolina Department of Environment and Natural
Resources, Division of Waste Management (DWM), which has
established a uniform framework to address MGP sites. The
investigation and remediation of specific MGP sites will be
addressed pursuant to one or more Administrative Orders on
Consent (AOC) between the DWM and the potentially responsible
party or parties. The Company has signed AOC's to investigate
certain sites. 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
efforts with others at individual sites. The Company does not
expect these costs to be material to the financial position of
the Company.
The Company has been notified by regulators of its involvement
or potential involvement in several sites, other than MGP
sites, that may 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
financial position of the Company.
The Company carries a liability for the estimated costs
associated with certain remedial activities. This liability is
not material to the financial position of the Company.
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 by January 31, 1998. The DOE
defaulted on its January 31, 1998, obligation to begin taking
spent nuclear fuel, and a group of utilities, including the
Company, is considering measures to force the DOE to take
spent nuclear fuel or to pay damages from monies other than
the Nuclear Waste Fund. The Company cannot predict the outcome
of this matter.
With certain modifications, the Company's spent fuel storage
facilities will be 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
For the Three and Twelve Months Ended March 31, 1998,
As Compared With the Corresponding Periods One Year Earlier
Operating Revenues
For the three and twelve months ended March 31, 1998, operating revenues were
affected by the following factors (in millions):
Three Months Twelve Months
Customer growth/changes in usage patterns $ 7 $ 126
Sales to other utilities 14 46
Price (8) (43)
Weather 11 -
Sales to Power Agency 9 -
Other 3 3
- -
Total $ 36 $ 132
== ===
The increase in the customer growth/changes in usage patterns component of
revenue for both comparison periods reflects continued growth in the number of
customers served by the Company. Sales to other utilities increased in both
comparison periods as a result of the Company's active pursuit of opportunities
in the wholesale power market. The price-related decrease for the three months
ended March 31, 1998, is primarily attributable to a decrease in the fuel cost
component of revenue. The price-related decrease for the twelve months ended
March 31, 1998, is due to a combination of a decrease in the fuel cost component
of revenue and changes to the Power Coordination Agreement, which were effective
January 1, 1997, between the Company and North Carolina Electric Membership
Corporation . The increase in the weather component of revenue for the three
months ended March 31, 1998, was due to colder weather in the current period,
although temperatures were significantly milder than normal. For the twelve
months ended March 31, 1997, both the customer growth/changes in usage patterns
and weather components of revenue were affected by lost revenues caused by
Hurricanes Fran and Bertha. The increase in revenue related to sales to North
Carolina Eastern Municipal Power Agency (Power Agency) for the three months
ended March 31, 1998, is primarily due to year-to-year differences in the timing
of supplemental capacity adjustments.
Operating Expenses
Fuel expense increased for both periods primarily due to an increase in
generation of approximately 10% and 8.4% for the three months and twelve months
ended March 31, 1998, respectively. The increase for both periods is related to
a change in the generation mix, with an increase in fossil generation and a
decrease in nuclear generation.
Other operation and maintenance expense decreased for the twelve months ended
March 31, 1998, reflecting the Company's continued cost reduction efforts. Also
contributing to the decrease were lower expenses resulting from fewer fossil
outages during the current period.
Depreciation and amortization increased approximately $71 million for the twelve
months ended March 31, 1998, of which approximately $51 million was a result of
the accelerated amortization of certain regulatory assets, and approximately $5
million resulted from the amortization of deferred operation and maintenance
expenses associated with Hurricane Fran, in accordance with orders from the
commissions in the Company's retail jurisdictions.
Income tax expense increased for the three- and twelve-month periods primarily
due to an increase in pretax operating income. For the twelve-month period, the
increase in income tax expense was partially offset by the effects of tax
provision adjustments recorded for potential audit issues in open tax years.
Harris Plant deferred costs, net decreased for both comparison periods primarily
due to the completion, in late 1997, of the amortization of the Harris Plant
phase-in costs related to the North Carolina retail jurisdiction.
Other Income
The income tax credit (i.e., income tax benefit) related to other income
increased for both comparison periods primarily as a result of a decrease in
other income.
Interest income increased for both comparison periods primarily as a result of
tax refund-related interest income.
Other income, net decreased for the three-month period primarily due to losses
incurred on certain diversified investments which are in start-up phases. For
the twelve-month period, the decrease in other income, net was partially
attributable to losses incurred on those diversified investments. In addition,
the decrease in the twelve-month period was due to an adjustment of $23 million
to the unamortized balance of abandonment costs related to the Harris Plant,
which had increased other income in the prior period.
Interest Charges
Net interest charges decreased for both reported periods primarily as a result
of a decrease in commercial paper borrowings. This decrease was partially offset
by an increase in interest due to the issuance of $200 million principal amount
of first mortgage bonds in August 1997.
Preferred Stock Dividend Requirements
The decrease in the preferred stock dividend requirements for both periods is
the result of the redemption of two preferred stock series in July 1997.
MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES
From December 31, 1997 to March 31, 1998
and From March 31, 1997 to March 31, 1998
Cash Flow and Financing
The proceeds from commercial paper borrowings and/or internally generated funds
financed the retirement of long-term debt totaling $40 million during the twelve
months ended March 31, 1998.
In July 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, at a redemption
price of $101 per share. The redemptions were funded with additional commercial
paper borrowings and/or internally generated funds.
In August 1997, the Company issued $200 million principal amount of first
mortgage bonds. The net proceeds from the issuance were used to reduce the
outstanding balance of commercial paper and other short-term debt and for other
general corporate purposes. There were no other long-term debt issuances during
the twelve months ended March 31, 1998.
As of March 31, 1998, the Company's revolving credit facilities totaled $515
million, substantially all of which are long-term agreements supporting its
commercial paper borrowings. In addition, on April 1, 1998 the Company entered
into a new $150 million short-term revolving credit agreement. The Company is
required to pay minimal annual commitment fees to maintain its credit
facilities. Consistent with management's intent to maintain a portion of its
commercial paper on a long-term basis, and as supported by its long-term
revolving credit facilities, the Company included in long-term debt $280 million
and $350 million of commercial paper outstanding as of March 31, 1998 and 1997,
respectively.
The Company's capital structure as of March 31 was as follows:
1998 1997
---- ----
Common Stock Equity 53.06% 50.44%
Long-term Debt, net 45.83% 46.89%
Preferred Stock 1.11% 2.67%
The Company's First Mortgage Bonds are currently rated "A2" by Moody's Investors
Service, "A" by Standard and Poor's and "A+" by Duff and Phelps. Moody's
Investors Service, Standard and Poor's and Duff and Phelps have rated the
Company's commercial paper "P-1", "A-1" and "D-1", respectively.
OTHER MATTERS
Competition
North Carolina Activities
The study commission established to evaluate the future of electric service in
North Carolina continued to meet and hold public hearings around the state. The
Company participated in the commission's meetings and filed comments with the
commission on March 31, 1998. The commission has retained consultants to conduct
analyses and studies concerning various deregulation issues, including stranded
costs, state and local tax implications and electric rate comparisons. These
projects are in progress and are scheduled to be completed over the next six
months. The commission will make an interim report, summarizing its activities,
to the 1998 North Carolina General Assembly. The commission's final report is
due in 1999. The Company cannot predict the outcome of this matter.
South Carolina Activities
In January 1998, the South Carolina Public Service Commission (SCPSC) rejected a
power marketer's petition requesting that the SCPSC bypass the South Carolina
General Assembly and open South Carolina's electricity markets to competition by
1999. The South Carolina General Assembly's House Utility Subcommittee continues
to meet and discuss the deregulation issue. The Company cannot predict the
outcome of this matter.
Federal Activities
In January 1998, the Internal Revenue Service ruled that public power systems
can compete in deregulated markets without jeopardizing the tax-exempt status of
their existing debt. In March 1998, the Clinton Administration unveiled its
recommended guidelines for bringing competition and customer choice to the
electric industry. Key provisions would accomplish the following: encourage
states to begin retail competition by 2003, but allow them to "opt out" if they
determine they would be better off under the current regulated system or a
different plan; allow utilities to recover their legitimate stranded costs;
triple the use of renewable energy, such as solar and wind, by mandating that at
least 5.5 percent of the nation's electricity be from renewable sources
(excluding hydro) by 2010; and impose consumer labeling standards, requiring
electricity suppliers to disclose information about their pricing, generation
mix and plant emissions. In April 1998, the national trade associations of rural
electric co-ops and public power interests requested that the federal government
impose a two-year hold on mergers between electric utilities. Congressional
discussion of deregulation is expected to continue during 1998; however, it is
uncertain whether Congress will pass legislation regarding deregulation this
year. The Company cannot predict the outcome of this matter.
Year 2000 Computer Issues
The Company initiated steps in 1994 to bring its computer systems into Year 2000
compliance. Only a few of the Company's core business applications remain to be
converted. All remaining computer systems, including equipment and devices
containing microprocessors, are being evaluated and will be converted or
replaced if necessary. The estimated costs to be incurred are expected to be
determined in 1998.
The Year 2000 issue may affect other entities with which the Company transacts
business. During the second quarter of 1998, the Company will be initiating
company-wide efforts to evaluate whether these entities will be compliant and
identify contingency plans to be put in place to counteract the adverse
consequences of any entity's failure to adequately address these issues. The
Company cannot predict the outcome of these matters.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal aspects of certain matters are set forth in Part I, Item 1, Notes 3 and 4
of the Company's financial statements.
Item 2. Changes in Securities and Use of Proceeds
ACQUISITION OF PARKE INDUSTRIES, INCORPORATED:
(a) Securities Delivered. On February 11, 1998, 19,496 shares of the Company's
common stock (Common Shares) that had been recently purchased in the open market
by the Company's wholly-owned subsidiary, Strategic Resource Solutions Corp., a
North Carolina Enterprise Corporation (SRS), were delivered by SRS as part of
the consideration for the purchase of certain assets of Parke Industries,
Incorporated, a California corporation (Parke). In addition, on each of the
first three anniversaries of the closing, SRS is obligated to deliver to Parke
additional Common Shares having a market value of $450,000. Finally, SRS is
obligated to deliver to Parke additional Common Shares, in amounts that cannot
currently be determined, if certain financial performance objectives for the
years 1998 through 2000 are met. These Common Shares delivered, or to be
delivered, by SRS pursuant to the Parke asset purchase agreement were or will be
acquired in market transactions, and do not represent newly-issued shares of the
Company.
(b) Underwriters and Other Purchasers. No underwriters were used in connection
with the transactions identified above. Parke was the only recipient of the
Common Shares.
(c) Consideration. The consideration for the Common Shares was the delivery of
certain assets of Parke pursuant to the asset purchase agreement.
(d) Exemption from Registration Claimed. The Common Shares described in this
Item were delivered on the basis of an exemption from registration under Section
4(2) of the Securities Act of 1933. The Common Shares were received by one
corporation and are subject to restrictions on resale typical for private
placements.
Appropriate disclosure was made to the recipient of the Common Shares.
RESTRICTED STOCK AWARDS:
(a) Securities Delivered. On January 22, 1998 and February 20, 1998, 220,600
shares and 16,000 shares, respectively, of the Company's Common Shares were
delivered to certain key employees pursuant to the terms of the Company's 1997
Equity Incentive Plan (Plan), which was approved by the Company's shareholders
on May 7, 1997. Section 9 of the Plan provides for the granting of Restricted
Stock by the Personnel, Executive Development and Compensation Committee (now
known as the Committee on Organization and Compensation , (the Committee)) to
key employees of the Company. The Common Shares delivered pursuant to the Plan
were acquired in market transactions directly for the accounts of the recipients
and do not represent newly-issued shares of the Company.
(b) Underwriters and Other Purchasers. No underwriters were used in connection
with the delivery of Common Shares described above. The Common Shares were
delivered to certain key employees of the Company. The Plan defines "key
employee" as an officer or other employee of the Company who, in the opinion of
the Committee, can contribute significantly to the growth and profitability of,
or perform services of major importance to, the Company.
(c) Consideration. The Common Shares were delivered to provide an incentive to
each employee recipient to exert his utmost efforts on the Company's behalf and
thus enhance the Company's performance while aligning the employee's interest
with those of the Company's shareholders.
(d) Exemption from Registration Claimed. The Common Shares described in this
Item were delivered on the basis of an exemption from registration under Section
4(2) of the Securities Act of 1933. Receipt of the Common Shares required no
investment decision on the part of the recipients. All award decisions were made
by the Committee, which consists entirely of non-employee directors.
DIVERSIFIED CONTROL SYSTEMS, INC., STOCK AWARDS:
(a) Securities Delivered. On March 12, 1998, 12,072 shares of the Company's
Common Shares that had been purchased in the open market by SRS were delivered
by SRS to former shareholders of Diversified Control Systems, Inc., a North
Carolina corporation (DCS). The Common Shares were delivered pursuant to a
October 30, 1997 Agreement of Reorganization and Share Exchange (the Exchange
Agreement) pursuant to which SRS acquired all of the outstanding shares of DCS.
These shares were delivered because DCS met certain financial performance
objectives set forth in the Exchange Agreement. All Common Shares delivered by
SRS pursuant to the Exchange Agreement were acquired in market transactions, and
do not represent newly-issued shares of the Company.
(b) Underwriters and Other Purchasers. No underwriters were used in connection
with the share exchange transactions identified above. The recipients of the
Common Shares were former shareholders of DCS who all agreed to exchange their
DCS shares for Common Shares pursuant to the Exchange Agreement.
(c) Consideration. The consideration for the Common Shares was the exchange of
all outstanding shares of DCS stock pursuant to the Exchange Agreement.
(d) Exemption from Registration Claimed. The Common Shares described in this
Item were delivered on the basis of an exemption from registration under Section
4(2) of the Securities Act of 1933. The Common Shares were received by a limited
number of individuals and are subject to restrictions on resale typical for
private placements. Adequate disclosure was made to all persons receiving Common
Shares in the exchange with SRS.
Item 6. Exhibits and Reports on Form 8-K
(a) See EXHIBIT INDEX
(b) Reports on Form 8-K filed during or with respect to the quarter:
NONE
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
(Principal Financial Officer)
By /s/ Bonnie V. Hancock
-------------------
Bonnie V. Hancock
Vice President and Controller
(Chief Accounting Officer)
Date: May 15, 1998