UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-3382
CAROLINA POWER & LIGHT COMPANY
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(Exact name of registrant as specified in its charter)
North Carolina
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(State or other jurisdiction of incorporation or organization)
56-0165465
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(I.R.S. Employer Identification No.)
411 Fayetteville Street, Raleigh, North Carolina 27601-1748
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(Address of principal executive offices) (Zip Code)
919-546-6111
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(Registrant's telephone number, including area code)
NONE
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(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 .
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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, 1998: 151,330,894.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
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The matters discussed throughout this Form 10-Q that are not historical
facts are forward-looking and, accordingly, involve estimates,
projections, goals, forecasts, assumptions and uncertainties that could
cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements.
Examples of forward-looking statements discussed in this Form 10-Q,
PART 1, ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", include, but are not limited to,
statements under the heading "Other Matters" concerning the effects of
deregulation and the outcome of the Company's Year 2000 Project.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made.
Examples of factors that should be considered with respect to any
forward-looking statements made throughout this document include, but
are not limited to, the following: Governmental policies and regulatory
actions (including those of the Federal Energy Regulatory Commission,
the Environmental Protection Agency, the Nuclear Regulatory Commission,
the Department of Energy, the North Carolina Utilities Commission and
the South Carolina Public Service Commission); general industry trends;
operation of nuclear power facilities; nuclear storage facilities;
nuclear decommissioning costs; general economic growth; weather
conditions and catastrophic weather-related damage; deregulation;
market demand for energy; inflation; capital market conditions;
unanticipated changes in operating expenses and capital expenditures
and legal and administrative proceedings. All such factors are
difficult to predict, contain uncertainties that may materially affect
actual results, and may be beyond the control of the Company. New
factors emerge from time to time and it is not possible for management
to predict all of such factors, nor can it assess the effect of each
such factor on the Company.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Carolina Power & Light Company
(ORGANIZED UNDER THE LAWS OF NORTH CAROLINA)
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
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STATEMENTS OF INCOME
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
(In thousands except per share amounts) 1998 1997 1998 1997 1998 1997
- ------------------------------------------- --------- --------- ----------- ----------- ----------- -----------
Operating Revenues ........................ $ 736,151 $ 666,023 $ 1,488,447 $ 1,382,107 $ 3,130,429 $ 2,908,270
- ------------------------------------------- --------- --------- ----------- ----------- ----------- -----------
Operating Expenses
Fuel .................................... 135,903 118,982 279,705 252,250 561,724 516,779
Purchased power ......................... 102,711 92,545 188,052 174,164 401,184 375,041
Other operation and maintenance ......... 165,607 185,846 322,400 341,809 642,058 729,186
Depreciation and amortization ........... 123,597 120,128 245,610 239,000 488,259 440,041
Taxes other than on income .............. 34,571 33,519 69,451 68,525 140,404 136,348
Income tax expense ...................... 58,231 21,836 127,832 82,865 298,015 208,361
Harris Plant deferred costs, net ........ 2,028 6,179 3,807 13,744 14,358 28,070
- ------------------------------------------- --------- --------- ----------- ----------- ----------- -----------
Total Operating Expenses ............ 622,648 579,035 1,236,857 1,172,357 2,546,002 2,433,826
- ------------------------------------------- --------- --------- ----------- ----------- ----------- -----------
Operating Income .......................... 113,503 86,988 251,590 209,750 584,427 474,444
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Other Income (Expense)
Allowance for equity funds used during
construction 3 55 6 116 (110) (2,096)
Income tax benefit ...................... 11,695 2,039 22,213 5,125 36,420 10,141
Harris Plant carrying costs ............. 954 1,195 1,920 2,503 4,043 5,444
Interest income ......................... 1,037 10,516 4,474 12,185 10,624 14,073
Other income, net ....................... (16,493) (2,486) (38,912) (4,478) (53,709) 20,863
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Total Other Income (Expense) ........ (2,804) 11,319 (10,299) 15,451 (2,732) 48,425
- ------------------------------------------- --------- --------- ----------- ----------- ----------- -----------
Income Before Interest Charges ............ 110,699 98,307 241,291 225,201 581,695 522,869
- ------------------------------------------- --------- --------- ----------- ----------- ----------- -----------
Interest Charges
Long-term debt .......................... 43,998 40,438 86,820 81,148 169,140 165,740
Other interest charges .................. 2,719 4,905 5,330 10,317 13,755 17,567
Allowance for borrowed funds used during
construction (1,487) (1,325) (2,898) (2,815) (5,005) (7,264)
- ------------------------------------------- --------- --------- ----------- ----------- ----------- -----------
Net Interest Charges ................ 45,230 44,018 89,252 88,650 177,890 176,043
- ------------------------------------------- --------- --------- ----------- ----------- ----------- -----------
Net Income ................................ 65,469 54,289 152,039 136,551 403,805 346,826
Preferred Stock Dividend Requirements ..... (741) (741) (1,483) (3,143) (4,391) (7,948)
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Earnings for Common Stock ................. $ 64,728 $ 53,548 $ 150,556 $ 133,408 $ 399,414 $ 338,878
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Average Common Shares Outstanding ......... 143,892 143,475 143,829 143,485 143,816 143,506
Basic and Diluted Earnings per Common Share $ 0.45 $ 0.37 $ 1.05 $ 0.93 $ 2.78 $ 2.36
Dividends Declared per Common Share ....... $ 0.485 $ 0.470 $ 0.970 $ 0.940 $ 1.925 $ 1.865
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See Supplemental Data and Notes to Consolidated Interim Financial Statements.
Carolina Power & Light Company
BALANCE SHEETS
June 30 December 31
(In thousands) ...................................... 1998 1997 1997
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ASSETS
Electric Utility Plant
Electric utility plant in service ................. $ 10,199,995 $ 9,968,079 $ 10,113,334
Accumulated depreciation .......................... (4,358,703) (3,966,186) (4,181,417)
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Electric utility plant in service, net ..... 5,841,292 6,001,893 5,931,917
Held for future use ............................... 11,886 14,176 12,255
Construction work in progress ..................... 196,555 127,692 158,347
Nuclear fuel, net of amortization ................. 218,506 200,359 190,991
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Total Electric Utility Plant, Net .......... 6,268,239 6,344,120 6,293,510
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Current Assets
Cash and cash equivalents ......................... 40,336 20,386 14,426
Accounts receivable ............................... 484,812 343,669 406,872
Fuel .............................................. 88,595 62,120 47,551
Materials and supplies ............................ 143,707 127,039 136,253
Deferred fuel cost (credit) ....................... 25,914 (5,102) 20,630
Prepayments ....................................... 52,182 54,197 62,040
Other current assets .............................. 18,881 40,271 47,034
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Total Current Assets ....................... 854,427 642,580 734,806
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Deferred Debits and Other Assets
Income taxes recoverable through future rates ..... 302,904 356,700 328,818
Abandonment costs ................................. 24,397 52,345 38,557
Harris Plant deferred costs ....................... 61,839 72,156 63,727
Unamortized debt expense .......................... 37,712 59,205 48,407
Nuclear decommissioning trust funds ............... 286,301 168,731 245,523
Miscellaneous other property and investments ...... 253,380 212,417 256,291
Other assets and deferred debits .................. 293,946 222,331 211,089
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Total Deferred Debits and Other Assets ..... 1,260,479 1,143,885 1,192,412
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Total Assets ............................ $ 8,383,145 $ 8,130,585 $ 8,220,728
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CAPITALIZATION AND LIABILITIES
Capitalization
Common stock equity ............................... $ 2,836,285 $ 2,705,823 $ 2,818,807
Preferred stock - redemption not required ......... 59,376 59,376 59,376
Long-term debt, net ............................... 2,581,325 2,525,808 2,415,656
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Total Capitalization ....................... 5,476,986 5,291,007 5,293,839
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Current Liabilities
Current portion of long-term debt ................. 168,075 43,436 207,979
Current portion of preferred stock ................ - 84,425 -
Short-term debt ................................... - 93,900 -
Accounts payable .................................. 277,812 159,563 290,352
Taxes accrued ..................................... 46,431 28,108 13,666
Interest accrued .................................. 43,034 38,873 43,620
Dividends declared ................................ 72,101 71,727 72,266
Other current liabilities ......................... 99,451 78,494 102,943
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Total Current Liabilities .................. 706,904 598,526 730,826
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Deferred Credits and Other Liabilities
Accumulated deferred income taxes ................. 1,689,799 1,784,344 1,722,908
Accumulated deferred investment tax credits ....... 216,925 227,145 222,028
Other liabilities and deferred credits ............ 292,531 229,563 251,127
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Total Deferred Credits and Other Liabilities 2,199,255 2,241,052 2,196,063
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Commitments and Contingencies (Notes 2, 3 and 4)
Total Capitalization and Liabilities .... $ 8,383,145 $ 8,130,585 $ 8,220,728
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SCHEDULES OF COMMON STOCK EQUITY
(In thousands)
Common stock ...................................... $ 1,369,636 $ 1,370,858 $ 1,371,520
Unearned ESOP common stock ........................ (157,306) (166,866) (165,804)
Capital stock issuance expense .................... (790) (790) (790)
Retained earnings ................................. 1,624,745 1,502,621 1,613,881
- ----------------------------------------------------- ------------ ------------ ------------
Total Common Stock Equity .................. $ 2,836,285 $ 2,705,823 $ 2,818,807
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See Supplemental Data and Notes to Consolidated Interim Financial Statements.
Carolina Power & Light Company
STATEMENTS OF CASH FLOWS Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
(In thousands) 1998 1997 1998 1997 1998 1997
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Operating Activities
Net income $ 65,469 $ 54,289 $ 152,039 $ 136,551 $ 403,805 $ 346,826
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 144,886 138,595 290,047 278,953 576,306 497,178
Harris Plant deferred costs 1,074 4,984 1,887 11,241 10,315 22,626
Deferred income taxes (13,145) (15,463) (36,602) (41,282) (61,866) 62,271
Investment tax credit (2,551) (2,558) (5,103) (5,117) (10,219) (10,339)
Deferred fuel cost (credit) (11,862) (8,851) (5,284) 763 (31,016) (12,457)
Net (increase) decrease in receivables,
inventories and prepaid expenses (117,960) (18,703) (140,392) (35,517) (216,091) (65,025)
Net increase (decrease) in payables and accrued
expenses 50,781 (43,719) 94,011 (67,064) 154,661 (73,080)
Miscellaneous 10,085 (3,998) (3,046) 19,786 36,361 6,188
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Net Cash Provided by Operating Activities 126,777 104,576 347,557 298,314 862,256 774,188
- ------------------------------------------------------- --------- --------- --------- --------- --------- ---------
Investing Activities
Gross property additions (94,464) (64,578) (171,798) (140,125) (353,878) (339,933)
Nuclear fuel additions (15,179) (12,189) (71,283) (33,805) (98,987) (85,172)
Contributions to external decommissioning trust (7,688) (7,723) (17,939) (18,021) (30,644) (30,684)
Contributions to retiree benefit trusts - - - (21,096) - (21,096)
Net cash flow of company-owned life insurance
program (2,797) 136,692 (2,524) 137,529 (1,545) 191,956
Miscellaneous (20,084) (12,568) (40,055) (20,851) (73,937) (32,542)
- ------------------------------------------------------- --------- --------- --------- --------- --------- ---------
Net Cash Provided by (Used in) Investing
Activities (140,212) 39,634 (303,599) (96,369) (558,991) (317,471)
- ------------------------------------------------------- --------- --------- --------- --------- --------- ---------
Financing Activities
Proceeds from issuance of long-term debt 1,001 - 1,001 - 200,076 -
Net increase (decrease) in short-term debt
(maturity less than 90 days) - (55,300) - 31,676 (93,900) (57,931)
Net increase (decrease) in commercial paper
classified as long-term debt 130,270 - 164,400 - 60,300 73,743
Retirement of long-term debt (40,000) - (41,476) (61,427) (83,459) (137,762)
Redemption of preferred stock - - - - (85,850) -
Purchase of Company common stock - (23,418) - (23,418) - (42,030)
Dividends paid on common and preferred stock (70,712) (70,007) (141,340) (139,331) (279,849) (274,799)
Miscellaneous (633) - (633) - (633) -
- ------------------------------------------------------- --------- --------- --------- --------- --------- ---------
Net Cash Provided by (Used in) Financing
Activities 19,926 (148,725) (18,048) (192,500) (283,315) (438,779)
- ------------------------------------------------------- --------- --------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 6,491 (4,515) 25,910 9,445 19,950 17,938
Cash and Cash Equivalents at Beginning of the Period 33,845 24,901 14,426 10,941 20,386 2,448
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Cash and Cash Equivalents at End of the Period $ 40,336 $ 20,386 $ 40,336 $ 20,386 $ 40,336 $ 20,386
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Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 35,170 $ 36,935 $ 91,127 $ 90,037 $ 172,601 $ 181,038
income taxes $ 120,724 $ 96,490 $ 126,794 $ 97,294 $ 319,193 $ 198,254
Noncash Activities
In June 1997, Strategic Resource Solutions Corp., a wholly-owned subsidiary,
purchased all remaining shares of Knowledge Builders, Inc. (KBI). In connection
with the purchase of KBI, the Company issued $20.5 million in common stock and
paid $1.9 million in cash.
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See Supplemental Data and Notes to Consolidated Interim Financial Statements.
Carolina Power & Light Company
SUPPLEMENTAL DATA Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
1998 1997 1998 1997 1998 1997
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Operating Revenues (in thousands)
Residential $ 220,677 $ 191,479 $ 479,813 $ 439,862 $ 1,026,786 $ 943,351
----------- ----------- ----------- ----------- ----------- -----------
Commercial 167,689 150,331 321,229 299,971 669,698 625,934
Industrial 185,951 184,613 352,417 355,505 734,997 734,864
Government and municipal 19,253 17,463 37,873 36,900 78,122 73,267
Power Agency contract requirements 24,156 19,627 42,814 28,746 85,387 76,666
NCEMC 48,435 46,480 104,964 100,700 230,215 210,923
Other wholesale 21,483 18,938 44,975 44,259 92,800 89,828
Other utilities 37,100 23,265 76,789 48,844 157,030 97,812
Miscellaneous revenue 11,407 13,827 27,573 27,320 55,394 55,625
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Total Operating Revenues $ 736,151 $ 666,023 $ 1,488,447 $ 1,382,107 $ 3,130,429 $ 2,908,270
----------- ----------- ----------- ----------- ----------- -----------
Energy Sales (millions of kWh)
Residential 2,868 2,451 6,306 5,719 13,075 11,881
Commercial 2,640 2,342 4,999 4,629 10,380 9,587
Industrial 3,904 3,877 7,383 7,392 15,065 14,823
Government and municipal 318 284 632 610 1,316 1,219
Power Agency contract requirements 603 460 1,001 840 2,233 1,977
NCEMC 995 825 1,984 1,772 4,386 3,766
Other wholesale 528 480 1,057 1,047 2,130 2,078
Other utilities 1,321 1,026 3,274 2,185 6,623 4,433
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Total Energy Sales 13,177 11,745 26,636 24,194 55,208 49,764
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Energy Supply (millions of kWh)
Generated - coal 6,779 5,850 13,565 11,260 27,851 24,092
nuclear 5,069 4,743 10,658 10,615 21,733 20,416
hydro 266 253 641 571 868 931
combustion turbines 140 48 159 50 299 88
Purchased 1,415 1,367 2,571 2,582 6,307 6,152
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Total Energy Supply (Company Share) 13,669 12,261 27,594 25,078 57,058 51,679
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Detail of Income Taxes (in thousands)
Included in Operating Expenses
Income tax expense (credit) - current $ 73,889 $ 41,115 $ 168,913 $ 129,823 $ 370,969 $ 166,753
deferred (13,107) (16,721) (35,978) (41,841) (62,735) 51,947
investment tax
credit adjustments (2,551) (2,558) (5,103) (5,117) (10,219) (10,339)
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Subtotal 58,231 21,836 127,832 82,865 298,015 208,361
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Harris Plant deferred costs - investment tax
credit adjustments - (40) - (100) (51) (237)
Total Included in Operating Expenses 58,231 21,796 127,832 82,765 297,964 208,124
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Included in Other Income
Income tax expense (credit) - current (11,657) (3,297) (21,589) (5,684) (37,289) (20,465)
deferred (38) 1,258 (624) 559 869 10,324
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Total Included in Other Income (11,695) (2,039) (22,213) (5,125) (36,420) (10,141)
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Total Income Tax Expense $ 46,536 $ 19,757 $ 105,619 $ 77,640 $ 261,544 $ 197,983
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FINANCIAL STATISTICS
Ratio of earnings to fixed charges 4.39 3.74
Return on average common stock equity 14.50 % 12.72 %
Book value per common share $ 19.72 $ 18.82
Capitalization ratios
Common stock equity 51.79 % 51.14 %
Preferred stock - redemption not required 1.08 1.12
Long-term debt, net 47.13 47.74
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Total 100.00 % 100.00 %
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See 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
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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
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statements should be read in conjunction 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
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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 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 affects 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 June 30, 1998, the Company's regulatory assets totaled
$493 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
and results of operations 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. The Company cannot
predict the outcome of these matters.
The Company carries a liability, in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for
Contingencies", 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, has undertaken measures to force the DOE to take
spent nuclear fuel and/or to pay damages. To date, the courts
have rejected attempts to force DOE to take spent nuclear
fuel. 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 and results of operations of the
Company.
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, 1998,
As Compared With the Corresponding Periods One Year Earlier
-----------------------------------------------------------
Operating Revenues
------------------
For the three, six and twelve months ended June 30, 1998, operating
revenues were affected by the following factors (in millions):
Three Months Six Months Twelve Months
Weather $ 41 $ 51 $ 86
Customer growth/changes in usage patterns 24 32 115
Sales to other utilities 14 28 59
Price (11) (19) (47)
Sales to Power Agency 4 14 9
Other (2) - -
--- --- ---
Total $ 70 $ 106 $ 222
== === ===
The increase in the weather component of revenue for all periods is the
result of more favorable temperatures in the current periods as
compared to prior periods. The increase in the customer growth/changes
in usage patterns component of revenue for all comparison periods
reflects continued growth in the number of customers served by the
Company. For the twelve months ended June 30, 1997, both the weather
and customer growth/changes in usage patterns components of revenue
were affected by lost revenues caused by Hurricanes Fran and Bertha.
Sales to other utilities increased in all comparison periods as a
result of the Company's continued active pursuit of opportunities in
the wholesale power market. The price-related decrease for the three
months and six months ended June 30, 1998, is primarily attributable to
a decrease in the fuel cost component of revenue. The price-related
decrease for the twelve months ended June 30, 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.
Operating Expenses
------------------
Fuel expense increased for all periods primarily due to an increase in
generation of approximately 12.5%, 11.2% and 11.5% for the three, six
and twelve months ended June 30, 1998, respectively. The increase in
fuel expense for all periods is also related to a change in the
generation mix, with an increase in fossil generation and a decrease in
nuclear generation. These increases were partially offset by a decrease
in fuel prices during all comparison periods.
The increase in purchased power for the three- and twelve-month periods
is primarily due to an increase in purchases from other utilities. The
increase for the six-month period is due to a combination of increased
purchases from other utilities and an increase in cogeneration.
Other operation and maintenance expense decreased for all comparison
periods reflecting the Company's continued cost reduction efforts. Also
contributing to the decrease were lower expenses resulting from fewer
fossil outages during the current periods.
Depreciation and amortization increased approximately $48 million for
the twelve months ended June 30, 1998, of which approximately $34
million was a result of the accelerated amortization of certain
regulatory assets, and approximately $2 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 all comparison periods primarily due
to an increase in pretax operating income. In addition, the increase
for all comparison periods is due to tax provision adjustments recorded
for potential audit issues in open tax years which decreased income tax
expense in the prior periods.
Harris Plant deferred costs, net decreased for all 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 benefit related to other income increased for all
comparison periods primarily as a result of a decrease in other income.
Interest income decreased for all comparison periods primarily as a
result of a decrease in tax refund-related interest income recognized
in the current periods.
Other income, net decreased for the three, six and twelve-month periods
primarily due to an increase in pre-tax start-up losses incurred by
certain non-regulated subsidiaries of approximately $12 million, $25
million, and $36 million, respectively. Management has projected losses
for these non-regulated subsidiaries as they evolve through start-up
phases; however, the 1998 losses have been higher than management's
expectations. Accordingly, the Company has initiated cost-cutting and
revenue enhancing efforts at the subsidiaries to mitigate the effects
of these losses. The decrease in the twelve-month period was also due
to an adjustment of $23 million to the unamortized balance of
abandonment costs related to the Harris Plant, which increased other
income in the prior period.
Interest Charges
----------------
Interest Charges related to long-term debt increased for all comparison
periods primarily due to the issuance of $200 million principal amount
of first mortgage bonds in August 1997. Other interest charges
decreased for all reported periods primarily as a result of a decrease
in commercial paper borrowings classified as short-term debt.
Preferred Stock Dividend Requirements
-------------------------------------
The decrease in the preferred stock dividend requirements for the six-
and twelve-month 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 June 30, 1998
and From June 30, 1997 to June 30, 1998
---------------------------------------
Cash Flow and Financing
-----------------------
The proceeds from commercial paper borrowings and/or internally
generated funds financed the redemption or retirement of long-term debt
totaling $40 million and $80 million during the six and twelve months
ended June 30, 1998, respectively.
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.
As of June 30, 1998, the Company's long-term revolving credit
facilities, which support its commercial paper borrowings, totaled $750
million. The Company is required to pay minimal annual commitment fees
to maintain its credit facilities. Consistent with management's intent
to maintain all or 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 $410 million and $350 million of
commercial paper outstanding as of June 30, 1998 and 1997,
respectively.
The Company's capital structure as of June 30 was as follows:
1998 1997
---- ----
Common Stock Equity 51.79% 51.14%
Long-term Debt, net 47.13% 47.74%
Preferred Stock 1.08% 1.12%
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
-----------
Wholesale Competition
---------------------
During the last week of June 1998, some wholesale power markets
experienced sharp increases in prices. That upsurge in power costs was
due, in part, to the unavailability of generating capacity and
unusually hot weather in the midwestern portion of the country. The
relatively sudden movement in wholesale power prices disrupted certain
power transactions, including some to which the Company was a party.
The Company anticipates volatility in the wholesale power market to
increase during peak demand periods; however, the Company does not
expect this volatility to have a material adverse affect on the
Company's financial position and results of operations.
North Carolina Activities
-------------------------
The 23-member study commission established to evaluate the future of
electric service in North Carolina issued an interim report to the 1998
North Carolina General Assembly (General Assembly) in June 1998. The
report summarized the numerous fact-finding and educational activities
and analytical projects the commission has initiated or completed since
it began meeting in November 1997, but offered no judgments or
recommendations. The commission will reconvene after the General
Assembly ends its session this summer, and will make its final report
during the General Assembly's 1999 session. The Company cannot predict
the outcome of this matter.
South Carolina Activities
-------------------------
The South Carolina General Assembly ended its 1998 session without
enacting any legislation regarding electric restructuring; however, the
issue of electric restructuring is expected to be considered again
during the 1999 legislative session, which will begin in January.
The Company cannot predict the outcome of this matter.
Federal Activities
------------------
At the federal level, deregulation legislation has not progressed out
of committee. The Congress has not found common ground on the issue of
electric industry restructuring. Some lawmakers advocate setting a
federal deadline by which states must open their retail electricity
markets to competition. Others argue that each state should be allowed
to decide the issue. The Clinton Administration proposed a bill in June
1998 that encourages states to begin retail competition by 2003, but
also provides states the option to maintain the status quo or pursue a
different plan. The Company cannot predict the outcome of this matter.
Year 2000
---------
Year 2000 Background
--------------------
The Company's overall goal is to be Year 2000 ready. "Year 2000 ready"
means that critical systems, devices, applications or business
relationships have been evaluated and are expected to be suitable for
continued use into and beyond the Year 2000, or contingency plans are
in place.
The Company began addressing the Year 2000 issue in 1994 by beginning
to assess its business computer systems, such as general ledger,
payroll, customer billing and inventory control. The majority of these
systems have been corrected and running in the Company's day-to-day
computing environment since 1996. Also, by the mid-1990s, two major
accounting systems were replaced with systems that were designed to be
Year 2000 ready. The Company plans to complete corrections to the
remaining business systems by the end of 1998.
During mid-1997 a Corporate Year 2000 Project was established to
provide leadership and direction to the Year 2000 efforts throughout
the Company and its subsidiaries. Also, the project scope was expanded
to include "embedded' systems (such as process control computers, chart
recorders, data loggers, calibration equipment and chemical analysis
equipment), end-user computing hardware and software (including
personal computers, spreadsheets, word processing and other personal
and workgroup applications), plant and corporate facilities (such as
security systems, elevators and heating and cooling systems) and
business relationships with key suppliers and customers.
The Company is using a multi-step approach in conducting its Year 2000
Project. These steps are: inventory, assessment, remediation and
testing, and contingency planning. The first step, an inventory of all
systems and devices with potential Year 2000 problems, was completed in
January 1998. The next step, completed in March 1998, was to conduct an
initial assessment of the inventory to determine the state of its Year
2000 readiness. As part of the assessment phase, remediation strategies
were identified and remediation cost estimates were developed. The
Company will utilize both internal and external resources to remediate
and test for Year 2000 readiness. The Company has recently initiated
formal communications with the suppliers with which it has active
contracts to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate their own Year 2000 issue.
The Company cannot predict the outcome of other companies' remediation
efforts.
Year 2000 Costs
---------------
The Company currently plans to complete the Year 2000 Project by August
1999. The total remaining cost of the Year 2000 Project is estimated at
$15 million. (This estimate excludes Year 2000 Project costs
attributable to recent subsidiary acquisitions, which the Company does
not expect to be material to the financial position and results of
operations.) Approximately $6 million is for new software and hardware
purchases and will be capitalized. The remaining $9 million will be
expensed as incurred over the next two years. To date, the Company has
incurred and expensed approximately $3 million related to the
inventory, assessment and development of a Year 2000 Project
remediation plan. The costs of the project and the date on which the
Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third parties' Year 2000 readiness and other
factors.
Risk Assessment
---------------
At this time, the Company believes its most reasonably likely worst
case scenario is that key customers could experience significant
reductions in their power needs due to their own Year 2000 issues.
Although the Company does not believe that this scenario will occur,
it has assessed the effect of such a scenario by using current
financial data. In the event that this scenario does occur, the Company
does not expect that it would have a material adverse affect on the
Company's financial position and results of operations.
The Company believes a more likely scenario is a temporary disruption
of service to its electric customers, including the effect of cascading
disruptions caused by other entities whose electrical systems are
connected to the Company's. The Company has assessed the risk of this
scenario, and believes that its contingency plans would mitigate the
long-term effect of such a scenario. In the event that a temporary
disruption does occur, the Company does not expect that it would have a
material adverse affect on its financial position and results of
operations.
Contingency Plans
-----------------
Contingency plans will be prepared so that the Company's critical
business processes can be expected to continue to function on January
1, 2000 and beyond. The Company's contingency plans will be structured
to address both remediation of systems and their components and overall
business operating risk. These plans are intended to mitigate both
internal risks as well as potential risks in the supply chain of the
Company's suppliers and customers.
One of the Company's emergency contingency plans specifically addresses
emergency scenarios that may arise due to the fact that electric
utility systems throughout the southeast region of the United States
are interconnected. The Company has been working actively with the
North American Electric Reliability Council and the Southeastern
Electric Reliability Council to address the issue of overall grid
reliability and protection. The Company has the ability to isolate its
transmission system either automatically or manually to mitigate the
risk of cascading regional failures. The Company's emergency readiness
contingency plan includes the performance of regular training exercises
that include simulated disaster recovery scenarios. As part of its Year
2000 contingency planning, the Company will review its disaster
recovery scenarios to identify those that can be used specifically for
Year 2000 readiness training.
New Accounting Standards
------------------------
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires the recognition of
all derivative instruments as assets or liabilities in the statement of
financial position and measurement of those instruments at fair value.
The accounting treatment of changes in fair value is dependent upon
whether or not an instrument is designated as a hedge and, if so, the
type of hedge. The Company has not fully analyzed the provisions of
SFAS No. 133. Currently, the Company does not have a material position
in derivative instruments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------- ----------------------------------------------------------
The Company's market risk exposure has not changed materially from the
exposure as disclosed in the Company's 1997 Annual Report on Form 10-K.
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 INTELLIGENT SOLUTIONS, INC.:
(a) Securities Delivered. Pursuant to an asset purchase agreement
----------------------
dated June 18, 1998, on June 29, 1998, 12,351 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 Intelligent
Solutions, Inc., a Nevada corporation, (ISI). All Common Shares
delivered by SRS pursuant to the ISI asset purchase 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 transactions identified above. ISI was the
only recipient of the Common Shares.
(c) Consideration. The consideration for the Common Shares was the
--------------
delivery of certain assets of ISI 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 June 1, 1998 and August 3, 1998, 18,300
----------------------
shares and 19,900 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.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
(a) The Annual Meeting of the Shareholders was held on May 13, 1998.
(b) The meeting involved the election of one Class II director to
serve a two-year term and three Class III directors to serve for
three-year terms. 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 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)
Walter Y. Elisha 127,501,932 2,500,560
Class III Votes For Votes Withheld
-------- --------- --------------
(Terms Expiring in 2001)
William Cavanaugh III 126,403,489 3,599,003
Charles W. Coker 127,699,024 2,303,467
Estell C. Lee 127,654,798 2,347,694
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: August 12, 1998
EXHIBIT INDEX
Exhibit Number Description
10(a) Resolutions of Board of Directors dated July
17, 1998, amending the Supplemental Executive
Retirement Plan of Carolina Power & Light
Company, effective January 1, 1999.
10(b) Amended Management Incentive Compensation
Program of Carolina Power & Light Company,
effective January 1, 1999, as amended by the
Organization and Compensation Committee of
the Board of Directors on July 17, 1998.
27 Financial Data Schedule