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 September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________.
Exact name of registrants as specified in their
Commission charters, state of incorporation, address of principal I.R.S. Employer
File Number executive offices, and telephone number Identification Number
1-15929 CP&L Energy, Inc. 56-2155481
411 Fayetteville Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6411
State of Incorporation: North Carolina
1-3382 Carolina Power & Light Company 56-0165465
411 Fayetteville Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6411
State of Incorporation: North Carolina
NONE
(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 .
---- ----
This combined Form 10-Q is filed separately by two registrants: CP&L
Energy, Inc. (CP&L Energy) and Carolina Power & Light Company (CP&L).
Information contained herein relating to either individual registrant
is filed by such registrant solely on its own behalf. Each registrant
makes no representation as to information relating exclusively to the
other registrant.
As of October 31, 2000, shares of Common Stock outstanding for each
registrant were as listed:
Description of
Registrant Common Stock Shares
-----------------------------------------------------------------------------------------------------
CP&L Energy, Inc. Common Stock (Without Par Value) 159,597,655
Carolina Power & Light Company Common Stock (Without Par Value) 159,608,055
(All held by CP&L Energy, Inc.)
CP&L ENERGY, INC. AND CAROLINA POWER & LIGHT COMPANY
FORM 10-Q - For the Quarter Ended September 30, 2000
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements:
CP&L Energy, Inc.
-----------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Carolina Power & Light Company
--------------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Supplemental Data Schedule
Notes to Consolidated Financial Statements
CP&L Energy, Inc. and Carolina Power & Light Company
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
Amended Agreement Amended and Restated Agreement and Plan of Share Exchange dated as of March
3, 2000.
AOC Administrative Order on Consent
APEC Albemarle-Pamlico Economic Development Corporation
Bain Bain Capital, Inc. and affiliates
BellSouth BellSouth Corporation
BellSouth Carolinas PCS BellSouth Carolinas, PCS L.P.
BellSouth PCI BellSouth Personal Communications, Inc.
Caronet Caronet, Inc.
CP&L Carolina Power & Light Company
CP&L Energy CP&L Energy, Inc.
CVO Contingent value obligations
DOE Department of Energy
Dt Dekatherm
DWM North Carolina Department of Environment and Natural Resources, Division of
Waste Management
EEI Edison Electric Institute
EMF Experience Modification Factor
ENCNG Eastern North Carolina Natural Gas
EPS Earnings per share
Energy Ventures CPL Energy Ventures, Inc.
EPA Environmental Protection Agency
ESOP Employee Stock Ownership Plan
FERC Federal Energy Regulatory Commission
Final Stock Price Average of the closing sale price per share of
CP&L Energy common stock as reported on the New
York Stock Exchange composite tape for the twenty
consecutive trading days ending with the fifth
trading day immediately preceding the closing
date for the exchange
FPC Florida Progress Corporation
3
GLOSSARY OF TERMS - cont.
HSR Act Hart-Scott-Rodino Antitrust Improvements Act of 1976
Interpath Interpath Communications, Inc.
IRS Internal Revenue Service
KWh Kilowatt-hour
LIBOR London Inter Bank Offering Rate
MD&A Management's Discussion and Analysis of Financial Condition and Results of
Operations
MGP Manufactured Gas Plant
Monroe Power Monroe Power Company
MW Megawatt
NCNG North Carolina Natural Gas Corporation
NCUC North Carolina Utilities Commission
NOx SIP Call EPA rule which requires 22 states including
North and South Carolina to further reduce
nitrogen oxide emissions.
NRC Nuclear Regulatory Commission
NSP Northern States Power
Plan CP&L 1997 Equity Incentive Plan
PLRs Private Letter Rulings
Pollution control bonds Pollution control revenue refunding bonds
Power Agency North Carolina Eastern Municipal Power Agency
RTO Regional Transmission Organization
SAB 101 Staff Accounting Bulletin 101 "Revenue Recognition in Financial Statements"
SCE&G South Carolina Electric & Gas
SCPSC Public Service Commission of South Carolina
SEC United States Securities and Exchange Commission
SFAS No. 71 Statement of Financial Accounting Standards No. 71, Accounting for the
Effects of Certain Types of Regulation
SFAS No. 133 Statement of Financial Accounting Standards No. 133, Accounting for
Derivative and Hedging Activities
4
GLOSSARY OF TERMS - cont.
SFAS No. 138 Statement of Financial Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of
FASB Statement No. 133
SRS Strategic Resource Solutions Corp.
the Agreement The agreement to settle and merger plan by and among Caronet, Inc., DukeNet
communications, Inc., BellSouth Personal Communications, Inc., BellSouth
Corporation, BellSouth Carolinas PCS, L.P., and Carolina Power & Light
Company
the Committee The Committee on Organization and Compensation
the Merger The merger of BellSouth Carolinas PCS into BellSouth PCI
Transco Transcontinental Interstate Pipeline
5
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The matters discussed throughout this Form 10-Q that are not historical
facts are forward-looking and, accordingly, involve estimates,
projections, goals, forecasts, assumptions, risks 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
electric utility industry restructuring.
Any forward-looking statement speaks only as of the date on which such
statement is made, and neither CP&L Energy, Inc. (CP&L Energy) nor
Carolina Power & Light Company (CP&L) undertakes any 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 you should consider with respect to any
forward-looking statements made throughout this document include, but
are not limited to, the following:
o 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 Public Service Commission of South Carolina);
o general industry trends;
o operation of nuclear power facilities;
o availability of nuclear waste storage facilities;
o nuclear decommissioning costs;
o changes in the economy of areas served by CP&L or NCNG;
o legislative and regulatory initiatives that impact the speed and
degree of industry restructuring;
o ability to obtain adequate and timely rate recovery of costs,
including potential stranded costs arising from industry
restructuring;
o competition from other energy and gas suppliers;
o the success of CP&L Energy's direct and indirect subsidiaries;
o weather conditions and catastrophic weather-related damage;
o market demand for energy;
o inflation;
o capital market conditions;
o the proposed share exchange with Florida Progress Corporation;
o failure of the potential benefits of CP&L's conversion to a holding
company structure to materialize;
o ability to use tax credits associated with the operations of the
synthetic fuel plants;
o ability to access and utilize the natural gas expansion fund
established by the North Carolina Utilities Commission;
o unanticipated changes in operating expenses and capital
expenditures;
o 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
CP&L Energy and CP&L. 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 CP&L Energy and CP&L.
6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CP&L Energy, Inc.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
Three Months Ended Nine Months Ended
STATEMENTS OF INCOME September 30 September 30
(In thousands except per share amounts) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 938,839 $ 947,233 $ 2,497,216 $ 2,419,791
Natural gas 75,645 48,041 223,093 48,041
Diversified businesses 69,716 29,482 133,334 82,648
- ------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,084,200 1,024,756 2,853,643 2,550,480
- ------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 175,090 161,495 472,479 443,377
Purchased power 98,173 120,938 253,498 303,121
Gas purchased for resale 62,736 38,026 166,471 38,026
Other operation and maintenance 169,912 183,576 533,128 491,362
Depreciation and amortization 134,099 126,447 400,722 368,287
Taxes other than on income 39,883 39,419 112,729 110,089
Harris Plant deferred costs, net 3,085 1,970 11,181 5,458
Diversified businesses 104,630 43,922 207,551 125,018
- ------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 787,608 715,793 2,157,759 1,884,738
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income 296,592 308,963 695,884 665,742
- ------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 2,687 2,303 7,997 6,866
Other, net 197,363 (17,189) 195,385 (33,918)
- ------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) 200,050 (14,886) 203,382 (27,052)
- ------------------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 50,703 45,926 155,625 132,320
Other interest charges 5,092 3,060 14,372 8,863
Allowance for borrowed funds used during construction (4,728) (2,976) (15,657) (7,768)
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Charges 51,067 46,010 154,340 133,415
- ------------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 445,575 248,067 744,926 505,275
Income Taxes 148,492 100,955 255,124 204,275
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 297,083 $ 147,112 $ 489,802 $ 301,000
==============================================================================================================================
Average Common Shares Outstanding 153,324 151,581 153,230 146,807
Basic Earnings per Common Share $ 1.94 $ 0.97 $ 3.20 $ 2.05
Diluted Earnings per Common Share $ 1.93 $ 0.97 $ 3.19 $ 2.05
Dividends Declared per Common Share $ 0.515 $ 0.500 $ 1.545 $ 1.500
==============================================================================================================================
The accompanying notes as they relate to CP&L Energy, Inc. are an integral part
of these Consolidated Interim Financial Statements.
7
CP&L Energy, Inc.
BALANCE SHEETS September 30 September 30 December 31
(In thousands) 2000 1999 1999
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Utility Plant
Electric utility plant in service $ 10,956,135 $ 10,571,157 $ 10,633,823
Gas utility plant in service 365,610 352,571 354,773
Accumulated depreciation (5,383,255) (4,898,618) (4,975,405)
- ------------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 5,938,490 6,025,110 6,013,191
Held for future use 8,028 11,984 11,282
Construction work in progress 790,957 475,967 536,017
Nuclear fuel, net of amortization 171,741 185,874 204,323
- ------------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 6,909,216 6,698,935 6,764,813
- ------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 252,261 76,651 79,871
Accounts receivable 511,121 482,474 446,367
Taxes receivable - - 3,770
Inventory 266,501 230,498 247,913
Deferred fuel cost 113,864 79,623 81,699
Prepayments 15,974 17,218 42,631
Other current assets 149,179 145,436 177,082
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,308,900 1,031,900 1,079,333
- ------------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 230,395 240,059 229,008
Harris Plant deferred costs 47,207 57,253 56,142
Unamortized debt expense 20,112 16,546 10,924
Nuclear decommissioning trust funds 440,207 358,707 379,949
Diversified business property, net 276,014 189,730 239,982
Miscellaneous other property and investments 432,468 231,193 252,454
Goodwill, net 285,818 290,816 288,970
Other assets and deferred debits 169,044 179,984 192,444
- ------------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,901,265 1,564,288 1,649,873
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 10,119,381 $ 9,295,123 $ 9,494,019
========================================================================================================================
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock equity $ 3,676,881 $ 3,410,638 $ 3,412,647
Preferred stock of subsidiary - redemption not required 59,334 59,376 59,376
Long-term debt, net 3,489,512 2,800,068 3,028,561
- ------------------------------------------------------------------------------------------------------------------------
Total Capitalization 7,225,727 6,270,082 6,500,584
- ------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 7,140 150,000 197,250
Accounts payable 298,982 314,748 269,053
Taxes accrued 160,492 90,503 -
Interest accrued 40,913 29,610 47,607
Dividends declared 80,697 78,579 80,939
Short-term obligations - 100,000 168,240
Other current liabilities 131,732 139,065 130,036
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 719,956 902,505 893,125
- ------------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,600,158 1,642,591 1,632,778
Accumulated deferred investment tax credits 195,907 206,303 203,704
Other liabilities and deferred credits 377,633 273,642 263,828
- ------------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,173,698 2,122,536 2,100,310
- ------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 6)
========================================================================================================================
Total Capitalization and Liabilities $ 10,119,381 $ 9,295,123 $ 9,494,019
========================================================================================================================
SCHEDULES OF COMMON STOCK EQUITY
(In thousands)
Common stock (without par value, authorized 500,000,000; issued and $ 1,743,979 $ 1,744,728 $ 1,745,455
outstanding 159,597,655, 159,589,744 and
159,599,650 shares, respectively)
Unearned ESOP common stock (127,211) (142,077) (140,153)
Retained earnings 2,060,113 1,807,987 1,807,345
- ------------------------------------------------------------------------------------------------------------------------
Total Common Stock Equity $ 3,676,881 $ 3,410,638 $ 3,412,647
========================================================================================================================
The accompanying notes as they relate to CP&L Energy, Inc. are an integral part
of these Consolidated Interim Financial Statements.
8
CP&L Energy, Inc. Nine Months Ended
STATEMENTS OF CASH FLOWS September 30
(In thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 489,802 $ 301,000
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 470,509 437,019
Harris Plant deferred costs 8,935 2,767
Deferred income taxes (74,760) (30,442)
Investment tax credit (7,798) (7,699)
Gain on sale of investment (200,000) -
Deferred fuel cost (credit) (26,215) (36,977)
Net increase in receivables, inventories,
prepaid expense and other current assets (7,698) (133,184)
Net increase in payables and accrued expenses 209,761 108,679
Other 35,095 115,050
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 897,631 756,213
- ------------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (634,014) (528,097)
Nuclear fuel additions (46,936) (54,718)
Proceeds from sale of investment 200,000 -
Proceeds from sale of assets 12,825 -
Contributions to nuclear decommissioning trust (25,603) (25,707)
Increase in cash restricted for redemption of long-term debt 4,051 -
Net cash flow of company-owned life insurance program (4,858) (6,668)
Investment in non-utility activities (120,443) (139,062)
- ------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (614,978) (754,252)
- ------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 783,052 400,970
Net increase in short-term indebtedness 695 38,000
Net increase (decrease) in outstanding payments 38,885 (68,583)
Retirement of long-term debt (695,147) (113,291)
Redemption of preferred stock (42) -
Dividends paid on common and preferred stock (237,706) (217,133)
Other - 3,979
- ------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (110,263) 43,942
- ------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 172,390 45,903
Increase in Cash from Acquisition - 1,876
Cash and Cash Equivalents at Beginning of the Period 79,871 28,872
- ------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 252,261 $ 76,651
============================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 155,023 $ 142,355
income taxes $ 157,172 $ 174,573
============================================================================================================
The accompanying notes as they relate to CP&L Energy, Inc. are an integral part
of these Consolidated Interim Financial Statements.
9
PART I. FINANCIAL INFORMATION (cont.)
Item 1. Financial Statements (cont.)
- ------ ----------------------------
Carolina Power & Light Company
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2000
Three Months Ended Nine Months Ended
STATEMENTS OF INCOME September 30 September 30
(In thousands) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 938,839 $ 947,233 $ 2,497,216 $ 2,419,791
Natural gas - 48,041 147,448 48,041
Diversified businesses 4,273 29,482 67,891 82,648
- -------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 943,112 1,024,756 2,712,555 2,550,480
- -------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 175,090 161,495 472,479 443,377
Purchased power 98,173 120,938 253,498 303,121
Gas purchased for resale - 38,026 103,734 38,026
Other operation and maintenance 153,721 183,576 516,937 491,362
Depreciation and amortization 128,923 126,447 395,548 368,287
Taxes other than on income 38,672 39,419 111,517 110,089
Harris Plant deferred costs, net 3,085 1,970 11,181 5,458
Diversified businesses 14,773 43,922 117,694 125,018
- -------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 612,437 715,793 1,982,588 1,884,738
- -------------------------------------------------------------------------------------------------------------------------------
Operating Income 330,675 308,963 729,967 665,742
- -------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 3,655 2,303 8,965 6,866
Other, net 195,100 (16,447) 194,606 (31,693)
- -------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) 198,755 (14,144) 203,571 (24,827)
- -------------------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 50,703 45,926 155,625 132,320
Other interest charges 4,949 3,060 14,229 8,863
Allowance for borrowed funds used during construction (4,414) (2,976) (15,343) (7,768)
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Charges 51,238 46,010 154,511 133,415
- -------------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 478,192 248,809 779,027 507,500
Income Taxes 186,278 100,955 292,910 204,275
- -------------------------------------------------------------------------------------------------------------------------------
Net Income 291,914 147,854 486,117 303,225
Preferred Stock Dividend Requirements 741 742 2,225 2,225
- -------------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 291,173 $ 147,112 $ 483,892 $ 301,000
===============================================================================================================================
The accompanying notes as they relate to Carolina Power & Light Company are an
integral part of these Consolidated Interim Financial Statements.
10
Carolina Power & Light Company
BALANCE SHEETS September 30 September 30 December 31
(In thousands) 2000 1999 1999
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Utility Plant
Electric utility plant in service $ 10,956,135 $ 10,571,157 $ 10,633,823
Gas utility plant in service - 352,571 354,773
Accumulated depreciation (5,244,184) (4,898,618) (4,975,405)
- -------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 5,711,951 6,025,110 6,013,191
Held for future use 7,105 11,984 11,282
Construction work in progress 733,261 475,967 536,017
Nuclear fuel, net of amortization 171,741 185,874 204,323
- -------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 6,624,058 6,698,935 6,764,813
- -------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 214,820 76,651 79,871
Accounts receivable 508,255 482,474 446,367
Notes receivable from affiliate 131,260 - -
Taxes receivable - - 3,770
Inventory 244,574 230,498 247,913
Deferred fuel cost 105,305 79,623 81,699
Prepayments 19,339 17,218 42,631
Other current assets 69,697 145,436 177,082
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,293,250 1,031,900 1,079,333
- -------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 232,021 240,059 229,008
Harris Plant deferred costs 47,207 57,253 56,142
Unamortized debt expense 15,986 16,546 10,924
Nuclear decommissioning trust funds 440,207 358,707 379,949
Diversified business property, net 83,048 189,730 239,982
Miscellaneous other property and investments 391,190 231,193 252,454
Goodwill, net - 290,816 288,970
Other assets and deferred debits 117,998 179,984 192,444
- -------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,327,657 1,564,288 1,649,873
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 9,244,965 $ 9,295,123 $ 9,494,019
===================================================================================================================
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock equity (without par value, authorized 200,000,000,
issued and outstanding 159,608,055, 159,589,744 and
159,599,650 shares, respectively) $ 3,003,068 $ 3,410,638 $ 3,412,647
Preferred stock - redemption not required 59,334 59,376 59,376
Long-term debt, net 3,489,512 2,800,068 3,028,561
- -------------------------------------------------------------------------------------------------------------------
Total Capitalization 6,551,914 6,270,082 6,500,584
- -------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt - 150,000 197,250
Accounts payable 234,454 314,748 269,053
Taxes accrued 214,397 90,503 -
Interest accrued 37,167 29,610 47,607
Dividends declared 83,675 78,579 80,939
Short-term obligations - 100,000 168,240
Other current liabilities 121,430 139,065 130,036
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 691,123 902,505 893,125
- -------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,537,351 1,642,591 1,632,778
Accumulated deferred investment tax credits 193,971 206,303 203,704
Other liabilities and deferred credits 270,606 273,642 263,828
- -------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,001,928 2,122,536 2,100,310
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 6)
===================================================================================================================
Total Capitalization and Liabilities $ 9,244,965 $ 9,295,123 $ 9,494,019
===================================================================================================================
The accompanying notes as they relate to Carolina Power & Light Company are an
integral part of these Consolidated Interim Financial Statements.
11
Carolina Power & Light Company Nine Months Ended
STATEMENTS OF CASH FLOWS September 30
(In thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 486,117 $ 303,225
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 465,475 437,019
Harris Plant deferred costs 8,935 2,767
Deferred income taxes (73,516) (30,442)
Investment tax credit (7,749) (7,699)
Gain on sale of investment (200,000) -
Deferred fuel cost (credit) (26,215) (36,977)
Net increase in receivables, inventories,
prepaid expense and other current assets (35,848) (133,184)
Net increase in payables and accrued expenses 238,751 108,679
Other 56,601 115,050
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 912,551 758,438
- -------------------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (613,985) (528,097)
Nuclear fuel additions (46,936) (54,718)
Proceeds from sale of investment 200,000 -
Contributions to nuclear decommissioning trust (25,603) (25,707)
Increase in cash restricted for redemption of long-term debt 4,051 -
Net cash flow of company-owned life insurance program (4,858) (6,668)
Investment in non-utility activities (141,072) (139,062)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (628,403) (754,252)
- -------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 783,052 400,970
Net (decrease) increase in short-term indebtedness (6,445) 38,000
Net increase (decrease) in outstanding payments 21,069 (68,583)
Retirement of long-term debt (695,147) (113,291)
Redemption of preferred stock (42) -
Dividends paid on common stock (237,706) (217,133)
Dividend paid on preferred stock (2,225) (2,225)
Other - 3,979
- -------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (137,444) 41,717
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 146,704 45,903
- -------------------------------------------------------------------------------------------------------------------
Increase in Cash from Acquisition - 1,876
Decrease in Cash from Stock Distribution (see Note 1) (11,755) -
Cash and Cash Equivalents at Beginning of the Period 79,871 28,872
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 214,820 $ 76,651
===================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 158,940 $ 142,355
income taxes $ 187,340 $ 174,573
===================================================================================================================
The accompanying notes as they relate to Carolina Power & Light Company are an
integral part of these Consolidated Interim Financial Statements.
12
CP&L Energy, Inc. Three Months Ended Nine Months Ended
SUPPLEMENTAL DATA September 30 September 30
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands)
Electric
Retail $ 743,431 $ 754,985 $ 2,000,325 $ 1,937,404
Wholesale 175,262 172,127 443,737 430,247
Miscellaneous revenue 20,146 20,121 53,154 52,140
- ------------------------------------------------------------------------------------------------------------------------
Total Electric 938,839 947,233 2,497,216 2,419,791
Natural gas 75,645 48,041 223,093 48,041
Diversified businesses 69,716 29,482 133,334 82,648
- ------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 1,084,200 $ 1,024,756 $ 2,853,643 $ 2,550,480
========================================================================================================================
Energy Sales
Electric (millions of kWh)
Retail
Residential 3,784 4,001 10,845 10,417
Commercial 3,257 3,221 8,731 8,342
Industrial 3,766 3,711 10,957 10,822
Other retail 415 410 1,093 1,048
- ------------------------------------------------------------------------------------------------------------------------
Total retail 11,222 11,343 31,626 30,629
Wholesale 3,561 4,166 10,572 11,208
- ------------------------------------------------------------------------------------------------------------------------
Total Electric 14,783 15,509 42,198 41,837
- ------------------------------------------------------------------------------------------------------------------------
========================================================================================================================
Natural Gas Delivered (thousands of dt) 12,119 12,737 42,960 12,737
========================================================================================================================
Energy Supply (millions of kWh)
Generated - coal 7,674 8,224 22,018 21,616
nuclear 5,975 5,598 17,072 16,743
hydro 71 80 404 435
combustion turbines 309 355 625 422
Purchased 1,447 1,890 3,778 4,210
- ------------------------------------------------------------------------------------------------------------------------
Total Energy Supply (Company Share) 15,476 16,147 43,897 43,426
========================================================================================================================
Detail of Income Taxes (in thousands)
Income tax expense (credit) - current $ 174,746 $ 101,191 $ 337,681 $ 242,416
deferred (23,655) 2,363 (74,760) (30,442)
investment tax credit (2,599) (2,599) (7,797) (7,699)
- ------------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 148,492 $ 100,955 $ 255,124 $ 204,275
========================================================================================================================
See CP&L Energy, Inc. notes to Consolidated Interim Financial Statements
13
CP&L ENERGY, INC. and CAROLINA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization. On June 19, 2000, Carolina Power & Light Company (CP&L)
was reorganized into a holding company structure and all of the shares
of common stock of CP&L were exchanged for an equal number of shares of
common stock of CP&L Energy, Inc. (CP&L Energy). The outstanding
preferred stock and debt securities of CP&L were not affected by the
holding company restructuring and remain outstanding as securities of
CP&L. The holding company structure will allow greater organizational
flexibility, including a clearer separation of regulated businesses
from each other and from unregulated business such as energy services,
telecommunications and electric generation projects for wholesale
markets.
CP&L is a public service corporation primarily engaged in the
generation, transmission, distribution and sale of electricity in
portions of North and South Carolina.
Basis of Presentation. This Quarterly Report on Form 10-Q is a combined
report of CP&L Energy and CP&L, a regulated electric utility subsidiary
of CP&L Energy. For periods prior to the reorganization, CP&L Energy's
consolidated financial statements have been prepared from CP&L's
consolidated financial statements, except that certain items have been
reclassified to reflect CP&L Energy's structure.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments necessary to fairly
present CP&L Energy's and CP&L's financial position and results of
operations for the interim periods. These consolidated interim
financial statements do not contain the complete detail or footnote
disclosure which would be included in full year financial statements
and, therefore, should be read in conjunction with the consolidated
financial statements included in CP&L's Annual Report on Form 10-K for
the Year Ended December 31, 1999. 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 1999 have been reclassified to
conform to the 2000 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.
On July 1, 2000, CP&L distributed its ownership interest in the stock
of North Carolina Natural Gas Corporation (NCNG), Strategic Resource
Solutions Corp. (SRS), Monroe Power Company (Monroe Power) and CPL
Energy Ventures, Inc. (Energy Ventures) to CP&L Energy. As a result,
those companies are direct subsidiaries of CP&L Energy and are not
included in CP&L's results of operations and financial position since
that date.
2. FLORIDA PROGRESS CORPORATION
CP&L, Florida Progress Corporation (FPC), a Florida corporation, and
CP&L Energy, entered into an Amended and Restated Agreement and Plan of
Share Exchange dated as of August 22, 1999, amended and restated as of
March 3, 2000 (the Amended Agreement).
Under the terms of the Amended Agreement, all outstanding shares of
common stock, no par value, of FPC common stock would be acquired by
CP&L Energy in a statutory share exchange with an approximate value of
$5.0 billion, which is subject to change based on CP&L Energy's stock
price and on the value of the contingent value obligations (CVO)
discussed below. Each share of FPC common stock, at the election of the
holder, will be exchanged for (i) $54.00 in cash and one CVO, or (ii)
the number of shares of common stock, no par value, of CP&L Energy
equal to the ratio determined by dividing $54.00 by the average of the
closing sale price per share of CP&L Energy common stock (Final Stock
Price), as reported on the New York Stock Exchange composite tape for
the twenty consecutive trading days ending with the fifth trading day
immediately preceding the closing date for the exchange, and one CVO,
or (iii) a combination of cash and CP&L Energy common stock, and one
CVO; provided, however, that shareholder elections shall be subject to
allocation and proration to achieve a mix of the aggregate exchange
consideration that is 65% cash and 35% common stock. The number of
shares of CP&L Energy common stock that will be issued as stock
consideration will vary if the Final Stock Price is within a range of
$37.13 to $45.39, but not outside that range. Thus, the maximum number
of shares of CP&L Energy common stock into which one share of FPC
common stock could be exchanged would be 1.4543 and the minimum would
be 1.1897. FPC shareholders will
14
receive one CVO for each share of FPC stock owned. Each CVO will
represent the right to receive contingent payments that may be made by
CP&L Energy based on certain cash flows that may be derived from future
operations of four synthetic fuel plants, purchased by FPC in October
1999. In conjunction with this proposed share exchange, CP&L Energy
plans to issue debt to fund the cash portion of the exchange.
The transaction has been approved by the Boards of Directors of FPC,
CP&L and CP&L Energy. Consummation of the exchange is subject to the
satisfaction or waiver of certain closing conditions including, among
others, the approval by the shareholders of FPC and the approval of the
issuance of CP&L Energy common stock in the exchange by the
shareholders of CP&L Energy; the approval or regulatory review by the
Federal Energy Regulatory Commission (FERC), the Securities and
Exchange Commission (SEC), the Nuclear Regulatory Commission (NRC), the
North Carolina Utilities Commission (NCUC), and certain other federal
and state regulatory bodies; the expiration or early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (HSR Act); and other customary closing conditions. In addition,
FPC's obligation to consummate the exchange is conditioned upon the
Final Stock Price being not less than $30.00. CP&L, CP&L Energy and FPC
have agreed to certain undertakings and limitations regarding the
conduct of their respective businesses prior to the closing of the
transaction. The transaction is expected to be completed by the end of
2000.
Either FPC or CP&L Energy and CP&L may terminate the Amended Agreement
under certain circumstances, including if the exchange has not been
consummated on or before December 31, 2000; provided that if certain
conditions have not been satisfied on December 31, 2000, but all other
conditions have been satisfied or waived then such date shall be June
30, 2001. In the event that FPC or CP&L Energy terminate the Amended
Agreement in certain limited circumstances, FPC would be required to
pay CP&L Energy a termination fee of $150 million, plus CP&L Energy's
reasonable out-of-pocket expenses which are not to exceed $25 million
in the aggregate.
On May 23, 2000, the NRC approved the change in control of FPC that
will result from the share exchange. On July 12, 2000, the FERC
approved the change of control over FPC's jurisdictional facilities
resulting from the share exchange. Also, on July 12, 2000, the
Department of Justice terminated the waiting period under the HSR Act
and completed its antitrust review. On February 3, 2000, CP&L Energy
filed an application with the NCUC for authorization of the share
exchange with FPC and the issuance of common stock in connection with
the transaction. A hearing was held on this matter on July 18, 2000. As
part of the settlement with the NCUC Public Staff, CP&L agreed to
reduce rates to all of its non-Real Time Pricing customers by $3
million in 2002, $4.5 million in 2003, $6 million in 2004 and $6
million in 2005. By order issued August 22, 2000 the NCUC approved the
proposed settlement and the Company's application. CP&L also agreed to
write off and forego recovery of $10 million of unrecovered fuel costs
in its 2000 fuel cost recovery proceeding. On March 14, 2000, CP&L
Energy and FPC filed an application with the SEC requesting approval of
the share exchange under the Public Utility Holding Company Act. On
July 28, 2000, the parties filed an amended application with the SEC,
and the SEC issued its notice of the merger application on August 4,
2000. CP&L Energy and CP&L expect to obtain the final regulatory
approvals and close the transaction by the end of 2000. However, CP&L
Energy and CP&L cannot predict the outcome of this matter.
3. FINANCIAL INFORMATION BY BUSINESS SEGMENT
CP&L Energy provides services through the following business segments:
electric, natural gas and other.
Through June 30, 2000, the business segments, operations and assets of
CP&L Energy and CP&L were substantially the same. Subsequent to July 1,
2000, CP&L's operations consist primarily of the CP&L Energy electric
segment and the gain on the sale of assets described in note 9 to the
Consolidated Interim Financial Statements.
The electric segment generates, transmits, distributes and sells
electric energy in portions of North and South Carolina. Electric
operations are subject to the rules and regulations of the FERC, the
NCUC and the Public Service Commission of South Carolina (SCPSC).
The natural gas segment transmits, distributes and sells gas in
portions of North Carolina. Gas operations are subject to the rules and
regulations of the NCUC.
The other segment primarily includes telecommunication services, energy
management services, propane and miscellaneous non-regulated
activities.
For reportable segments presented in the accompanying table, segment
earnings (losses) before taxes include intersegment sales accounted for
at prices representative of unaffiliated party transactions.
15
(in thousands) Electric Natural Other Eliminations Segment
Gas Totals
==================================================================================================================
Three Months Ended 9/30/00
Revenues
Unaffiliated $938,839 $73,411 $69,716 - $1,081,966
Intersegment - 2,234 516 (516) 2,234
-------------- -------------- ------------- -------------- --------------
Total Revenues $938,839 $75,645 $70,232 $(516) $1,084,200
Depreciation and Amortization $128,923 $4,845 $6,020 - $139,788
Net Interest Charges $51,237 $1,898 - $(2,068) $51,067
Earnings(Losses) Before Taxes $288,812 $894 $451,724 $(295,855) $445,575
Total Segment Assets $8,650,093 $571,977 $1,109,211 $(211,900) $10,119,381
Capital and Investment Expenditures $220,088 $20,029 $34,533 - $274,650
==================================================================================================================
Electric Natural Other Eliminations Segment
Gas Totals
==================================================================================================================
Three Months Ended 9/30/99
Revenues
Unaffiliated $947,233 $48,041 $29,482 - $1,024,756
Intersegment - 991 7,450 (8,441) -
-------------- -------------- ------------- -------------- --------------
Total Revenues $947,233 $49,032 $36,932 $(8,441) $1,024,756
Depreciation and Amortization $121,953 $4,494 $4,036 - $130,483
Net Interest Charges $45,698 $1,390 $287 $(1,078) $46,297
Earnings(Losses) Before Taxes $272,642 $(2,788) $(21,769) $ (18) $248,067
Total Segment Assets $8,563,785 $548,282 $287,626 $(104,570) $9,295,123
Capital and Investment Expenditures $219,582 $14,827 $17,201 - $251,610
==================================================================================================================
Electric Natural Other Eliminations Segment
Gas Totals
==================================================================================================================
Nine Months Ended 9/30/00
Revenues
Unaffiliated $2,497,217 $219,158 $132,492 - $2,848,867
Intersegment - 4,776 14,327 (14,327) 4,776
-------------- -------------- ------------- -------------- --------------
Total Revenues $2,497,217 $223,934 $146,819 $(14,327) $2,853,643
Depreciation and Amortization $385,931 $14,461 $19,524 - $419,916
Net Interest Charges $154,902 $5,285 $567 $(5,847) $154,907
Earnings(Losses) Before Taxes $615,219 $16,238 $409,360 $(295,891) $744,926
Total Segment Assets $8,650,093 $571,977 $1,109,211 $(211,900) $10,119,381
Capital and Investment Expenditures $649,928 $36,526 $68,003 - $754,457
==================================================================================================================
Nine Months Ended 9/30/99
Revenues
Unaffiliated $2,419,791 $48,041 $82,648 - $2,550,480
Intersegment - 990 20,157 (21,147) -
-------------- -------------- ------------- -------------- --------------
Total Revenues $2,419,791 $49,031 $102,805 $(21,147) $2,550,480
Depreciation and Amortization $363,793 $4,494 $12,182 - $380,469
Net Interest Charges $133,103 $1,390 $1,067 $(1,078) $134,482
Earnings(Losses) Before Taxes $565,168 $(2,788) $(57,046) $(59) $505,275
Total Segment Assets $8,563,785 $548,282 $287,626 $(104,570) $9,295,123
Capital and Investment Expenditures $512,442 $14,827 $139,890 - $667,159
==================================================================================================================
16
Segment totals for depreciation and amortization expense include
expenses related to the other segments that are included in diversified
business operating expenses on a consolidated basis. Segment totals for
interest expense include expenses related to the other segments that
are included in other, net on a consolidated basis.
4. FINANCING ACTIVITIES
During 2000, CP&L has issued a total of $300 million principal amount
of Senior Notes and $497.64 million principal amount of variable rate
First Mortgage Bonds. The issuances were as follows:
a) On April 11, 2000, CP&L issued $300 million principal amount of Senior
Notes, 7.50% Series Due April 1, 2005.
b) On June 15, 2000, CP&L issued $67.3 million principal amount of First
Mortgage Bonds, Pollution Control Series N, Wake County Pollution
Control Revenue Refunding Bonds (Carolina Power & Light Company
Project) 2000 Series A Due November 1, 2018.
c) On June 15, 2000, CP&L issued $55.64 million principal amount of First
Mortgage Bonds, Pollution Control Series O, Person County Pollution
Control Revenue Refunding Bonds (Carolina Power & Light Company
Project) 2000 Series A Due November 1, 2018.
d) On July 13, 2000, CP&L issued $329.1 million principal amount of First
Mortgage Bonds, Pollution Control Series P, Q, and S through V, Wake
County Pollution Control Revenue Refunding Bonds (Carolina Power &
Light Company Project) 2000 Series B, C, and D through G Due October 1,
2022.
e) On July 13, 2000, CP&L issued $45.6 million principal amount of First
Mortgage Bonds, Pollution Control Series R, Person County Solid Waste
Disposal Revenue Refunding Bonds (Carolina Power & Light Company
Project) 2000 Series B Due October 1, 2022.
In addition, CP&L retired or redeemed $47.25 million principal amount
of Promissory Notes, $150 million principal amount of First Mortgage
Bonds and $497.64 million principal amount of variable rate Pollution
Control Obligations. The following contains details of each retirement
or redemption:
a) The retirement on January 15, 2000 of $47.25 million principal amount
of non-interest bearing Promissory Notes, Series 1993A, which matured
on that date.
b) The retirement on February 1, 2000 of $150 million principal amount of
First Mortgage Bonds, 6-1/8% Series, which matured on that date.
c) The redemption of Pollution Control Obligations relating to:
i) The redemption on June 30, 2000, of $67.3 million principal amount
of The Wake County Industrial Facility and Pollution Control
Financing Authority Pollution Control Revenue Bonds (Carolina Power
& Light Company Project) Series 1985A due May 1, 2015, at 100% of
the principal amount of such bonds.
ii) The redemption on July 28, 2000, of $50 million principal amount of
The Wake County Industrial Facility and Pollution Control Financing
Authority Pollution Control Revenue Bonds (Carolina Power & Light
Company Project) Series 1985B due September 1, 2015, at 100% of the
principal amount of such bonds.
iii) The redemption on July 28, 2000, of $97.4 million principal amount
of The Wake County Industrial Facility and Pollution Control
Financing Authority Pollution Control Revenue Bonds (Carolina Power
& Light Company Project) Series 1985C due October 1, 2015, at 100%
of the principal amount of such bonds.
iv) The redemption on August 1, 2000, of $45.6 million principal amount
of The Person County Industrial Facility and Pollution Control
Financing Authority Solid Waste Disposal Revenue Bonds (Carolina
Power & Light Company Project) Series 1986 due November 1, 2016, at
100% of the principal amount of such bonds.
v) The redemption on August 1, 2000, of $41.7 million principal amount
of The Wake County Industrial Facility and Pollution Control
Financing Authority Pollution Control Revenue Bonds (Carolina Power
& Light Company Project) Series 1987 due March 1, 2017, at 100% of
the principal amount of such bonds.
vi) The redemption on August 1, 2000, of $70 million principal amount
of The Wake County Industrial Facility and Pollution Control
Financing Authority Pollution Control Revenue Refunding Bonds
(Carolina Power & Light Company Project) Series 1990A due June 15,
2014, at 100% of the principal amount of such bonds.
vii) The redemption on August 1, 2000, of $70 million principal amount
of The Wake County Industrial Facility and Pollution Control
Financing Authority Pollution Control Revenue Refunding Bonds
(Carolina Power & Light Company Project) Series 1990B due June 15,
2014, at 100% of the principal amount of such bonds.
viii) The redemption on August 2, 2000, of $55.64 million principal
amount of The Person County Industrial Facility and Pollution
Control Financing Authority Pollution Control Revenue Refunding
Bonds
17
(Carolina Power & Light Company Project) Series 1992A due November
1, 2019, at 100% of the principal amount of such bonds.
5. NUCLEAR DECOMMISSIONING
In CP&L's retail jurisdictions, provisions for nuclear decommissioning
costs are approved by the NCUC and the 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 7.75% and an assumed cost escalation rate of
4%, current levels of rate recovery for nuclear decommissioning costs
are adequate to provide for decommissioning of CP&L's nuclear
facilities.
CP&L's most recent site-specific estimates of decommissioning costs
were developed in 1998, using 1998 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 1998 dollars, are $281.5 million for Robinson Unit
No. 2, $299.6 million for Brunswick Unit No. 1, $298.7 million for
Brunswick Unit No. 2 and $328.1 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 (Power Agency), which
holds an undivided ownership interest in the Brunswick and Harris
nuclear generating facilities. Operating licenses for CP&L'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 is proceeding with its project
regarding accounting practices related to obligations associated with
the retirement of long-lived assets, and a revised exposure draft of a
proposed accounting standard was issued during the first quarter of
2000. It is uncertain what effects this draft may ultimately have on
CP&L's accounting for nuclear decommissioning and other asset
retirement costs.
6. COMMITMENTS AND CONTINGENCIES
Contingencies existing as of the date of these statements are described
below. No significant changes have occurred since December 31, 1999,
with respect to the commitments discussed in Note 16 of the financial
statements included in CP&L's 1999 Annual Report on Form 10-K.
Contingencies
1) Applicability of SFAS No. 71. As regulated entities, CP&L and NCNG are
subject to the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No.71). Accordingly, CP&L and NCNG record 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. CP&L and NCNG's ability
to continue to meet the criteria for application of SFAS No. 71 may be
affected in the future by competitive forces, deregulation and
restructuring in the electric and gas utility industries. In the event
that SFAS No. 71 no longer applies to a separable portion of CP&L and
NCNG'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 and gas 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." CP&L's net regulatory assets totaled $419.6 million,
$421.5 million and $405.0 million as of September 30, 2000, September
30, 1999 and December 31, 1999, respectively. NCNG's net regulatory
assets totaled $12.7 million, $11.5 million and $9.2 million as of
September 30, 2000, September 30, 1999 and December 31, 1999,
respectively.
2) Claims and Uncertainties.
a) CP&L 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)
18
sites to which the electric utility and gas utility have some
connection. In this regard, both the electric utility and gas utility,
along with others, are participating in a cooperative effort with the
North Carolina Department of Environment and Natural Resources,
Division of Waste Management (DWM). The DWM has established a uniform
framework to address MGP sites. The investigation and remediation of
specific MGP sites will be addressed pursuant to an Administrative
Order on Consent (AOC) between the DWM and the potentially responsible
party or parties. Both the electric utility and gas utility have signed
an AOC to investigate and remediate certain sites. Both the electric
utility and the gas utility continue to identify parties connected to
individual MGP sites, and to determine their relative relationship to
other parties at those sites and the degree to which they will
undertake efforts with others at individual sites. CP&L Energy and CP&L
do not expect the costs associated with these sites to be material to
the consolidated results of operations or financial position of CP&L
Energy and CP&L.
The electric utility and gas utility are periodically notified by
regulators such as the North Carolina Department of Environment and
Natural Resources, the South Carolina Department of Health and
Environmental Control, and other state and federal agencies including
the U.S. Environmental Protection Agency (EPA) of involvement or
potential involvement in sites, other than MGP sites, that may require
investigation and/or remediation. Although CP&L may incur costs at the
sites about which it has been notified, based upon the current status
of the sites, CP&L Energy and CP&L do not expect those costs to be
material to the consolidated results of operations or financial
position of CP&L Energy and CP&L.
The EPA has been conducting an enforcement initiative related to a
number of coal-fired electric utility power plants in an effort to
determine whether modifications at those facilities were subject to New
Source Review requirements or New Source Performance Standards under
the Clean Air Act. CP&L has been asked to provide information to the
EPA as part of this initiative and has cooperated in providing the
requested information. The EPA has initiated enforcement actions, which
may have potentially significant penalties, against other companies
that have been subject to this initiative. CP&L cannot predict the
outcome of this matter.
The EPA published a final rule approving petitions under section 126 of
the Clean Air Act, which requires certain sources to make reductions in
nitrogen oxide emissions. The final rule also includes a set of
regulations that affect nitrogen oxide emissions from sources included
in the petitions. CP&L's fossil-fueled electric generating plants are
included in these petitions. CP&L, other utilities, trade organizations
and states are participating in litigation challenging the EPA's
action. CP&L cannot predict the outcome of this matter.
In 1998, the EPA published a final rule addressing the issue of
regional transport of ozone. This rule is commonly known as the NOx SIP
Call. The EPA's rule requires 23 jurisdictions, including North and
South Carolina, to further reduce nitrogen oxide emissions in order to
attain a pre-set state NOx emission. The EPA's rule also suggests to
the states that these additional nitrogen oxide emission reductions be
obtained from the utility sector. CP&L is evaluating necessary measures
to comply with the rule and estimates its related capital expenditures
could be approximately $370 million, which has not been adjusted for
inflation. Increased operation and maintenance costs relating to the
NOx SIP Call are not expected to be material to CP&L's results of
operations. Further controls are anticipated as electricity demand
increases. CP&L, other utilities, trade organizations and states are
participating in litigation challenging the NOx SIP Call. The District
of Columbia Circuit Court of Appeals upheld the EPA's NOx SIP Call.
Further appeals to the U.S. Supreme Court have been filed. Prior to
resolution of a potential appeal, the EPA is requiring regulations in
the states involved in the NOx SIP Call including North and South
Carolina to comport with the NOx SIP Call. Acceptable state plans can
be approved in lieu of the final rules the EPA approved as part of the
126 petitions. North and South Carolina are proceeding to adopt such
plans. CP&L cannot predict the outcome of this matter.
In July 1997, the EPA issued final regulations establishing a new
eight-hour ozone standard. In October 1999, the District of Columbia
Circuit Court of Appeals ruled against the EPA with regard to the
federal eight-hour ozone standard. CP&L, other utilities, trade
organizations and states are participating in a further appeal to the
U.S. Supreme Court. North Carolina adopted the federal eight-hour ozone
standard and is proceeding with the implementation process. North
Carolina has promulgated final regulations, which will require CP&L to
install nitrogen oxide controls under the State's eight-hour standard.
These costs fall within the estimate set forth above.
19
b) As required under the Nuclear Waste Policy Act of 1982, CP&L entered
into a contract with the U.S. Department of Energy (DOE) under which
the DOE agreed to begin taking spent nuclear fuel by no later than
January 31, 1998. All similarly situated utilities were required to
sign the same standard contract.
In April 1995, the DOE issued a final interpretation that it did not
have an unconditional obligation to take spent nuclear fuel by January
31, 1998. In Indiana & Michigan Power v. DOE, the Court of Appeals
vacated the DOE's final interpretation and ruled that the DOE had an
unconditional obligation to begin taking spent nuclear fuel. The Court
did not specify a remedy because the DOE was not yet in default.
After the DOE failed to comply with the decision in Indiana & Michigan
Power v. DOE, a group of utilities (including CP&L) petitioned the
Court of Appeals in Northern States Power (NSP) v. DOE, seeking an
order requiring the DOE to begin taking spent nuclear fuel by January
31, 1998. The DOE took the position that their delay was unavoidable,
and the DOE was excused from performance under the terms and conditions
of the contract. The Court of Appeals did not order the DOE to begin
taking spent nuclear fuel, stating that the utilities had a potentially
adequate remedy by filing a claim for damages under the contract.
After the DOE failed to begin taking spent nuclear fuel by January 31,
1998, a group of utilities (including CP&L) filed a motion with the
Court of Appeals to enforce the mandate in NSP v. DOE. Specifically,
the utilities asked the Court to permit the utilities to escrow their
waste fee payments, to order the DOE not to use the waste fund to pay
damages to the utilities, and to order the DOE to establish a schedule
for disposal of spent nuclear fuel. The Court denied this motion based
primarily on the grounds that a review of the matter was premature, and
that some of the requested remedies fell outside of the mandate in NSP
v. DOE.
Subsequently, a number of utilities each filed an action for damages in
the Court of Claims. In a recent decision, the U.S. Circuit Court of
Appeals (Federal Circuit) ruled that utilities may sue the DOE for
damages in the Federal Court of Claims instead of having to file an
administrative claim with the DOE. CP&L is in the process of evaluating
whether it should file a similar action for damages.
CP&L also continues to monitor legislation that has been introduced in
Congress which might provide some limited relief. CP&L cannot predict
the outcome of this matter.
With certain modifications and additional approval by the NRC, CP&L's
spent fuel storage facilities will be sufficient to provide storage
space for spent fuel generated on CP&L's system through the expiration
of the current operating licenses for all of CP&L's nuclear generating
units. Subsequent to the expiration of these licenses, dry storage may
be necessary. CP&L has initiated the process of obtaining the
additional NRC approval.
c) 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 CP&L Energy, CP&L and NCNG.
7. EARNINGS PER COMMON SHARE OF CP&L ENERGY
Restricted stock awards and contingently issuable shares had a dilutive
effect on earnings per share for the three and nine months ended
September 30, 2000 and increased the weighted-average number of common
shares outstanding for dilutive purposes by 481,036 and 407,381 for the
three and nine months ended September 30, 2000, respectively, and by
286,739 and 277,299 for the three and nine months ended September 30,
1999, respectively. The weighted-average number of common shares
outstanding for dilutive purposes was 153.8 million and 153.6 million
for the three and nine months ended September 30, 2000, respectively,
and 151.9 million and 147.1 million for the three and nine months ended
September 30, 1999, respectively.
Employee Stock Ownership Plan shares that have not been committed to be
released to participants' accounts are not considered outstanding for
the determination of earnings per common share. Those shares totaled
5,782,376 and 6,458,088 at September 30, 2000 and September 30, 1999,
respectively.
20
8. NEW ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board published
Statement of Financial Accounting Standards (SFAS) No. 138, which
amended SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The amendment to SFAS No. 133 includes expansion
of the normal purchases and sales exception to most contracts for which
physical delivery of the asset being sold or purchased is probable.
Based on CP&L's understanding of the amended normal purchases and sales
exception, it has not expected SFAS No. 133 to have a significant
impact on its financial position or results of operations. Recently,
however, a number of issues have arisen in the industry with regard to
whether or not certain power contracts fall within the scope of SFAS
No. 133. These issues are expected to be addressed by the Derivatives
Implementation Group of the Financial Accounting Standards Board during
the fourth quarter of 2000. CP&L will continue SFAS No. 133
implementation efforts during the last quarter of 2000, including
monitoring developments regarding the recent SFAS No. 133 scope issues
discussed above.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements"
(SAB 101) to provide guidance regarding the recognition, presentation
and disclosure of revenue in the financial statements. The Company
expects to adopt the provisions of SAB 101 (as amended by SAB 101B,
which deferred the implementation date, by three quarters) on October
1, 2000. The adoption of SAB 101 is not expected to have a material
effect on the financial statements of CP&L Energy and CP&L.
9. SALE OF ASSETS
On September 12, 2000, Caronet, Inc., a North Carolina corporation that
is also domesticated in Virginia and a wholly-owned subsidiary of CP&L,
entered into an Agreement to Settle and Merger Plan (the Agreement) by
and among DukeNet Communications, Inc., a North Carolina corporation;
BellSouth Personal Communications, Inc., a Delaware corporation
(BellSouth PCI); BellSouth Corporation, a Georgia corporation
(BellSouth), and BellSouth Carolinas PCS, L.P., a Delaware limited
partnership (BellSouth Carolinas PCS) and CP&L. The transaction closed
on September 28, 2000. Pursuant to the terms of the Agreement,
BellSouth PCI acquired the interests of the limited partners in
BellSouth Carolinas PCS in conjunction with a merger of BellSouth
Carolinas PCS into BellSouth PCI (the Merger). As consideration for the
Merger, BellSouth PCI paid the limited partners $20 million for each
one percent interest in BellSouth Carolinas PCS. Upon consummation of
the Merger, CP&L received $200 million for Caronet, Inc.'s 10% limited
partnership interest in BellSouth Carolinas PCS. The sale resulted in
an after-tax gain of $121.1 million.
10. RISK MANAGEMENT AND DERIVATIVE INFORMATION
CP&L uses interest rate swap agreements to hedge its exposure on
variable rate debt positions. The agreements, with a total notional
amount of $500 million, were effective in July 2000 and mature in July
2002. Under these agreements, CP&L receives a floating rate based on
the three month LIBOR and pays a weighted-average fixed rate of
approximately 7.17%. The notional amount of the contracts is not
exchanged and does not represent exposure to credit loss. In the event
of default by a counterparty, the risk in these transactions is the
cost of replacing the agreements at current market rates. CP&L only
enters into swap agreements with strong creditworthy counterparties.
The fair value of the swaps was a $3.9 million liability position at
September 30, 2000.
During September and October 2000, CP&L entered into forward starting
swaps to hedge its exposure to interest rates with regard to future
issuances of fixed rate debt. The agreements, with a total notional
amount of $900 million, will be cash settled at the time that the
hedged debt is issued. The resulting receipts or payments will be
recorded as adjustments to interest expense over the life of the
related debt. These agreements have computational periods of 2, 5 and
10 years, with $300 million notional amount for each computational
period. Under the agreements, CP&L receives a floating rate based on
the three month LIBOR and pays weighted-average fixed rates of
approximately 6.73%, 6.81% and 6.83% for the 2, 5 and 10 year
computational periods, respectively. At September 30, 2000, $450
million notional amount of these forward starting swaps was outstanding
and had a fair value of $1.2 million liability position. The notional
amount of the contracts is not exchanged and does not represent
exposure to credit loss. In the event of default by counterparty, the
risk in these transactions is the cost of replacing the agreements at
current market rates. CP&L only enters into swap agreements with strong
creditworthy counterparties.
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2000,
As Compared With the Corresponding Period One Year Earlier
This is a combined Quarterly Report on Form 10-Q of CP&L Energy, Inc.
(CP&L Energy) and Carolina Power & Light Company (CP&L). Therefore, the
Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) applies to CP&L Energy and CP&L, unless indicated
otherwise. The MD&A should be read in conjunction with the consolidated
financial statements included in this report.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000
Net income for CP&L Energy and CP&L for the three months ended
September 30, 2000, and 1999, was as follows:
(Dollars in millions) CP&L Energy CP&L
----------- ----
2000 1999 2000 1999
---- ---- ---- ----
Net income $297.1 $147.1 $291.9 $147.9
CP&L Energy's basic earnings per common share for the third quarter of
2000 increased to $1.94 per share from $0.97 per share for the same
period of 1999.
The increase in earnings was primarily due to a $121.1 million, or
$0.79 per share, after-tax gain on the sale of the 10% limited
partnership interest in BellSouth Carolinas PCS in September 2000 and
the absence of expenses of $0.14 per share related to costs incurred
for Hurricanes Dennis and Floyd in 1999. Quarterly earnings were offset
by a write-off of $10.0 million, or $0.04 per share, of deferred fuel
costs to settle the 2000 NCUC fuel case.
The following sections explain the significant variance on the
Statements of Income for CP&L Energy and CP&L as compared to the same
period in 1999.
ELECTRIC OPERATING REVENUES
(Dollars in millions)
Electric operating revenues for the three months ended September 30,
2000, and 1999, are as follows:
CP&L
------------------------------------------
2000 1999 % Change
---- ---- --------
Retail $743.4 $755.0 (1.5)
Wholesale 175.3 172.1 1.9
Other 20.1 20.1 -
------------- -------------
Total $938.8 $947.2 (0.9)
============= =============
The fluctuations in electric operating revenues for the three months
ended September 30, 2000 as compared to the same period in 1999 were
affected by the following factors (in millions):
Customer growth/changes in usage patterns* $ 27
Industrial sales 3
Weather (37)
Price 3
Sales to Power Agency (3)
Sales to other utilities (1)
---
Total $ (8)
---
* Customer growth/changes in usage patterns excludes industrial
customers.
Electric operating revenues for CP&L decreased slightly for the quarter
ended September 30, 2000, as compared to 1999, due to customer growth,
offset by weather. Customer growth continued in the third quarter, with
CP&L adding over 8,000 new customers. However, temperatures for the
quarter were much lower than normal and more than offset growth.
Industrial sales increased, reflecting that many customers are coming
out of the economic
22
downturn experienced in 1999. The increase was driven by the textile
industry and lumber & wood industry, which experienced increased market
demand, while the chemicals and paper industries continued to decline.
NATURAL GAS OPERATING REVENUES
Natural gas operating revenues for CP&L Energy increased $27.6 million,
when compared to the same period in 1999, primarily due to increases in
the market price of gas, which is a pass-thru charge to the customers.
CP&L distributed its ownership interest in NCNG to CP&L Energy on July
1, 2000, and therefore, no longer includes natural gas operating
revenues in its Consolidated Financial Statements subsequent to that
date.
DIVERSIFIED BUSINESSES
Diversified business revenues for CP&L Energy increased $40.2 million
for the third quarter when compared to the same period in 1999.
Strategic Resource Solution Corp.'s (SRS) operating revenues increased
by $14.8 million due to work completed on performance contracts with
educational and military customers. Energy Ventures, a new subsidiary
that has an ownership interest in synthetic fuel plants, was
established late in the second quarter of 2000 and added $28.4 million
in operating revenues for the third quarter. Monroe Power, which began
operations in December 1999, contributed revenues of $7.6 million for
the quarter. Operating revenues from Caronet, Inc. (Caronet), decreased
by $10.4 million for the third quarter. Caronet, formerly reported as
Interpath, contributed net assets used in its application service
provider business to a newly formed company for a 35% ownership
interest effective June 28, 2000. Therefore, the application service
provider revenues are not reflected in the Consolidated Financial
Statements subsequent to that date.
Diversified business expenses for CP&L Energy increased $60.7 million
over the third quarter of 1999. SRS had a $10.2 million increase in
operating expenses related to performance contracts noted above. Energy
Ventures operating expenses in the current period were $57.2 million.
Energy Ventures generates tax credits from the operation of synthetic
fuel plants, which are discussed in the INCOME TAXES section. Caronet
expenses decreased by $10.7 million and Monroe Power added $4.5 million
in operating expenses for the third quarter.
Diversified business revenues for CP&L decreased $25.2 million, and
diversified business expenses decreased $29.1 million when compared to
the same period in 1999, primarily due to the distribution of certain
subsidiaries to CP&L Energy on July 1, 2000, as detailed in Note 1 to
the Consolidated Interim Financial Statements.
FUEL USED IN ELECTRIC GENERATION
Fuel used in electric generation increased $13.6 million, when compared
to the same period in 1999, primarily due to deferred fuel adjustments
of approximately $15.0 million, which were partially offset by a
decrease in fuel expense of $1.6 million. The deferred fuel adjustments
included a write-off of unrecovered fuel and a change in the Experience
Modification Factor (EMF), both in North Carolina. Also included in the
deferred fuel adjustments was a change in the fuel costs recovery rate.
Fuel expense decreased as the result of a decrease in generation and a
shift in generation mix from steam to nuclear.
PURCHASED POWER
Purchased power decreased $22.8 million, when compared to the same
period in 1999, primarily due to a decrease in volume. This reduction
in volume was affected by cooler weather or fewer degree-days, which
required fewer market purchases to meet the base load requirements.
GAS PURCHASED FOR RESALE
Gas purchased for resale for CP&L Energy increased $24.7 million, when
compared to the same period in 1999, primarily due to the increase in
the market price of gas over the previous year.
CP&L distributed its ownership interest in NCNG to CP&L Energy on July
1, 2000, and therefore, no longer includes gas purchased for resale in
its Consolidated Financial Statements subsequent to that date.
OTHER OPERATION AND MAINTENANCE
Other operation and maintenance expenses for CP&L Energy decreased
$13.7 million when compared to the same period in 1999, primarily due
to a decrease in storm-related expenses. Operation and maintenance
expenses for the
23
third quarter of 1999 included substantial storm costs related to
Hurricanes Dennis and Floyd. This decrease was partially offset by the
effects of emission allowances that CP&L Energy began to expense in
2000. CP&L's other operation and maintenance expenses decreased $29.9
million, when compared to the same period in 1999, primarily due to the
decreases detailed for CP&L Energy above as well as the distribution of
NCNG to CP&L Energy on July 1, 2000, as detailed in Note 1 to the
Consolidated Interim Financial Statements.
OTHER INCOME
Other income increased for the three months ended September 30, 2000
primarily due to the sale of Caronet's 10% limited partnership interest
in BellSouth Carolinas PCS for $200.0 million on September 28, 2000.
Other income also increased due to an increase in non-operating income
from subsidiary operations during the three months ended September 30,
2000.
INCOME TAXES
Income taxes increased for the three months ended September 30, 2000
primarily due to the sale of Caronet's 10% limited partnership interest
in BellSouth Carolinas PCS for $200.0 million on September 28, 2000.
Taxes related to the sale were approximately $79.0 million. This
increase was partially offset by the income tax credits generated by
the synthetic fuels operation of Energy Ventures.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000
Net income for CP&L Energy and CP&L for the nine months ended September
30, 2000, and 1999, was as follows:
(Dollars in millions) CP&L Energy CP&L
----------- ----
2000 1999 2000 1999
---- ---- ---- ----
Net income $489.8 $301.0 $486.1 $303.2
CP&L Energy's basic earnings per common share for the nine months
ending September 30, 2000 increased to $3.20 per share from $2.05 per
share for the same period of 1999.
The increase in earnings was primarily due to a $121.1 million, or
$0.79 per share, after-tax gain on the sale of the 10% limited
partnership interest in BellSouth Carolinas PCS in September 2000 and
the absence of expenses of $0.14 per share related to costs incurred
for Hurricanes Dennis and Floyd in 1999. Earnings were offset by a
reduction of $15.9 million, or $0.06 per share, for the write-off of
deferred fuel costs to settle the 2000 NCUC fuel case.
The following sections explain the significant variance on the
Statements of Income for CP&L Energy and CP&L as compared to the same
period in 1999.
ELECTRIC OPERATING REVENUES
(Dollars in millions)
Electric operating revenues for the nine months ended September 30,
2000, and 1999, are as follows:
CP&L
------------------------------------------
2000 1999 % Change
---- ---- --------
Retail $2,000.3 $1,937.4 3.2
Wholesale 443.7 430.2 3.1
Other 53.2 52.2 1.9
------------- -------------
Total $2,497.2 $2,419.8 3.2
============= =============
24
The fluctuations in electric operating revenues for the nine months
ended September 30, 2000 as compared to last year were affected by the
following factors (in millions):
Customer growth/changes in usage patterns* $ 86
Industrial sales 7
Weather (5)
Price (10)
Sales to Power Agency 6
Sales to other utilities (7)
--
Total $ 77
--
*Customer growth/changes in usage patterns excludes normal industrial
customers.
ELECTRIC OPERATING REVENUES
The increase in the customer growth/changes in usage patterns component
of electric operating revenues reflects continued growth in the number
of customers served by CP&L. During the nine-month period, industrial
sales experienced an overall increase primarily related to the textile,
lumber, and primary metal industries. These increases were largely
offset by the continued downturn in the chemical industry. Revenues
decreased due to weather that was milder than normal for the same
nine-month period last year. The price related decrease reflects
capacity pricing changes between CP&L and the North Carolina Electric
Membership Corporation that took effect January 1, 2000, and the
effects of real-time pricing rate participation by industrial
customers. The increase in revenue related to sales to North Carolina
Eastern Municipal Power Agency (Power Agency) is primarily due to
increased demand. The decrease in sales to other utilities is
attributable to unit outages, and offering prices that were not
competitive with the market.
NATURAL GAS OPERATING REVENUES
Natural gas operating revenues for CP&L Energy increased $175.1
million, when compared to the same period in 1999, primarily due to the
acquisition of NCNG on July 15, 1999. NCNG provides natural gas,
propane gas and related services to approximately 178,000 customers in
south-central and eastern North Carolina. The results of operations for
the nine months ended September 30, 2000 include nine months of natural
gas operating revenues for NCNG. Additionally, natural gas operating
revenues have increased due to increases in the market price of gas
charged to customers.
CP&L's natural gas operating revenues for the nine months ended
September 30, 2000 only include activity through July 1, 2000 when CP&L
distributed its ownership interest in NCNG to CP&L Energy.
Additionally, the 1999 period only includes activity subsequent to the
acquisition of NCNG on July 15, 1999.
DIVERSIFIED BUSINESSES
Diversified business revenues for CP&L Energy increased $50.7 million
for the nine months ended September 30, 2000 when compared to the same
period in 1999. SRS's operating revenues increased by $16.7 million due
to work completed on performance contracts with educational and
military customers. Energy Ventures, a new subsidiary that has an
ownership interest in synthetic fuel plants, was established late in
the second quarter of 2000 and added $28.4 million in operating
revenues. Monroe Power, which began operations in December 1999,
contributed operating revenues of $14.3 million for the current period.
Operating revenues from Caronet, Inc. (Caronet), decreased by $14.0
million for the nine months ended September 30, 2000. Caronet, formerly
reported as Interpath, contributed net assets used in its application
service provider business to a newly formed company for a 35% ownership
interest effective June 28, 2000. Therefore, the application service
provider revenues are not reflected in the Consolidated Financial
Statements subsequent to that date.
Diversified business expenses for CP&L Energy increased $82.5 million
over the first nine months of 1999. SRS had a $5.4 million increase in
expenses due to performance contracts noted above. Energy Ventures had
$57.2 million in expenses in the current period. Energy Ventures
generates tax credits from the operation of synthetic fuel plants,
which are discussed in the INCOME TAXES section. Caronet expenses
increased by $6.9 million and Monroe Power had $9.5 million in
operating expenses in the current period.
Diversified business revenues for CP&L decreased $14.8 million, and
diversified business expenses decreased $7.3 million when compared to
the same period in 1999, primarily due to the distributions of certain
subsidiaries to CP&L Energy on July 1, 2000, as detailed in Note 1 to
the Consolidated Interim Financial Statements.
25
PURCHASED POWER
Purchased power decreased $49.6 million, when compared to the same
period in 1999, primarily due to the termination of contract with Duke
Energy in June 1999.
GAS PURCHASED FOR RESALE
Gas purchased for resale for CP&L Energy increased $128.4 million, when
compared to the same period in 1999, primarily due to the acquisition
of NCNG on July 15, 1999. The results of operations for the nine months
ended September 30, 2000 include nine months of gas purchased for
resale for NCNG. Additionally, gas purchased for resale increased due
to the increase in the market price of gas over the previous year.
CP&L's gas purchased for resale for the nine months ended September 30,
2000 only includes activity through July 1, 2000 when CP&L distributed
its ownership interest in NCNG to CP&L Energy. Additionally, the 1999
period only includes activity subsequent to the acquisition of NCNG on
July 15, 1999.
FUEL USED IN ELECTRIC GENERATION
Fuel used in electric generation increased $29.1 million, when compared
to the same period in 1999, primarily due to deferred fuel adjustments
and an increase in fuel expense, which was the result of an increase in
volume with an increased percentage being produced by a more expensive
fuel source.
OTHER OPERATION AND MAINTENANCE
Other operation and maintenance expenses for CP&L Energy increased
$41.8 million in the nine months ended September 30, 2000, when
compared to the same period in 1999, primarily due to the effects of
emission allowances that CP&L Energy began to expense in 2000 as well
as NCNG impacts. NCNG was acquired on July 15, 1999 and the results of
operations of NCNG were included in consolidated financial statements
of CP&L Energy as of July 15, 1999. Therefore, the results of
operations for the nine months ended September 30, 2000 include nine
months of NCNG operation and maintenance expenses. Additionally, other
operation and maintenance expenses increased due to an increase in
plant outage costs during 2000 compared to 1999 and due to integration
costs incurred during 2000 as part of the FPC acquisition. These
increases in operation and maintenance expenses were partially offset
by a decrease in storm-related expenses during 2000. CP&L's other
operation and maintenance expenses increased $25.6 million when
compared to the same period in 1999, partially due to the increases
detailed for CP&L Energy above, which were partially offset by a
decrease in operation and maintenance expenses due to the distribution
of NCNG to CP&L Energy on July 1, 2000, as detailed in Note 1 to the
Consolidated Interim Financial Statements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased for the nine months ended
September 30, 2000 primarily due to the approval to accelerate the cost
recovery of certain nuclear generating assets. This increase is
partially offset by the absence of depreciation and amortization of
costs related to Hurricane Fran and the absence of accelerated
amortization of certain regulatory assets, which expired on December
31,1999.
INTEREST CHARGES
Net interest charges for CP&L Energy increased $20.9 million in the
nine months ended September 30, 2000, when compared to the same period
in 1999, primarily due to long-term debt issued during 2000 and an
increase in interest rates.
OTHER INCOME
Other income increased for the nine months ended September 30, 2000
primarily due to the sale of Caronet's 10% limited partnership interest
in BellSouth Carolinas PCS for $200.0 million on September 28, 2000.
Other income also increased due to an increase in non-operating income
from subsidiary operations during the nine months ended September 30,
2000
26
INCOME TAXES
Income taxes increased for the nine months ended September 30, 2000
primarily due to the sale of Caronet's 10% limited partnership interest
in BellSouth Carolinas PCS for $200.0 million on September 28, 2000.
Taxes related to the sale were approximately $79.0 million. This
increase was partially offset by the income tax credits generated by
the synthetic fuels operation of Energy Ventures.
MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES
Cash Flow and Financing
The Company's balance sheet continues to reflect a strong working
capital position.
Cash provided by operating activities increased for the nine months
ended September 30, 2000, as compared to the comparable 1999 period.
The increase in cash from operating activities for the 2000 period is
largely the result of higher operating income and changes in the
balances of certain current assets and liabilities. The changes in
current assets and liabilities are due to operational fluctuations in
addition to increased tax liability related to the gain on the sale of
investment.
Net cash used in investing activities decreased for the nine months
ended September 30, 2000, as compared to the prior period. The decrease
in cash used investing activities was due primarily to the proceeds
from the sale of investments partially offset by an increase in gross
property additions. Gross property additions for CP&L Energy totaled
$634 million, compared to $528 million for the comparable period, and
gross property additions for CP&L totaled $614 million, compared to
$528 million for the comparable period. These additions were for
increased activity related to combustion turbine construction. The
proceeds from the sale of investment relates to the sale of the 10%
limited partnership interest in BellSouth Carolinas PCS by Caronet,
Inc. (see note 9 to the Consolidated Interim Financial Statements).
In July 2000, CP&L established a $300 million medium term notes, Series
D program. As of November 14, 2000, there were no medium term notes,
Series D, issued and outstanding.
During the nine months ended September 30, 2000, CP&L has issued a
total of $300 million principal amount of Senior Notes and $497.64
million principal amount of variable rate First Mortgage Bonds,
Pollution Control Series. In addition, CP&L retired or redeemed $47.25
million principal amount of Promissory Notes, $150 million principal
amount of First Mortgage Bonds and $497.64 million principal amount of
variable rate Pollution Control Obligations (see note 4 to the
Consolidated Interim Financial Statements).
As of September 30, 2000, CP&L's revolving credit facilities totaled
$750 million, all of which are long-term agreements supporting its
commercial paper borrowings and other short-term indebtedness. CP&L is
required to pay minimal annual commitment fees to maintain its credit
facilities. Consistent with management's intent to maintain its
commercial paper and other short-term indebtedness on a long-term
basis, and as supported by its long-term revolving credit facilities,
CP&L included in long-term debt commercial paper and other short-term
indebtedness of $750 million, $420 million and $750 million at
September 30, 2000, September 30, 1999 and December 31, 1999,
respectively.
CP&L's access to outside capital depends on its ability to maintain its
credit ratings. The debt ratings for CP&L are as follows:
---------------------------- --------------------- ------------ ---------------
Moody's
Investors Standard &
Duff and Phelps Service Poor's
----------------------------- --------------------- ------------ ---------------
----------------------------- --------------------- ------------ ---------------
First Mortgage Bonds A+ Rating Watch-Down A2 A-CreditWatch
with negative
implications
---------------------------- --------------------- ------------ ---------------
---------------------------- --------------------- ------------ ---------------
Commercial Paper D-1 P-1 A-1
---------------------------- --------------------- ------------ ---------------
---------------------------- --------------------- ------------ ---------------
Extendible Commercial Notes N/A P-1 A-1
---------------------------- --------------------- ------------ ---------------
---------------------------- --------------------- ------------ ---------------
Extendible Notes D-1 P-1 A-1
---------------------------- --------------------- ------------ ---------------
27
In addition to the above, an anticipated issuance of common stock and
debt by CP&L Energy is discussed in the "Florida Progress Corporation"
under OTHER MATTERS.
OTHER MATTERS
Florida Progress Corporation
CP&L, Florida Progress Corporation (FPC), a Florida corporation, and
CP&L Energy, entered into an Amended and Restated Agreement and Plan of
Share Exchange dated as of August 22, 1999, amended and restated as of
March 3, 2000 (the Amended Agreement).
Under the terms of the Amended Agreement, all outstanding shares of
common stock, no par value, of FPC common stock would be acquired by
CP&L Energy in a statutory share exchange with an approximate value of
$5.0 billion, which is subject to change based on CP&L Energy's stock
price and on the value of the contingent value obligations (CVO)
discussed below. Each share of FPC common stock, at the election of the
holder, will be exchanged for (i) $54.00 in cash and one CVO, or (ii)
the number of shares of common stock, no par value, of CP&L Energy
equal to the ratio determined by dividing $54.00 by the average of the
closing sale price per share of CP&L Energy common stock (Final Stock
Price), as reported on the New York Stock Exchange composite tape for
the twenty consecutive trading days ending with the fifth trading day
immediately preceding the closing date for the exchange, and one CVO,
or (iii) a combination of cash and CP&L Energy common stock, and one
CVO; provided, however, that shareholder elections shall be subject to
allocation and proration to achieve a mix of the aggregate exchange
consideration that is 65% cash and 35% common stock. The number of
shares of CP&L Energy common stock that will be issued as stock
consideration will vary if the Final Stock Price is within a range of
$37.13 to $45.39, but not outside that range. Thus, the maximum number
of shares of CP&L Energy common stock into which one share of FPC
common stock could be exchanged would be 1.4543 and the minimum would
be 1.1897. FPC shareholders will receive one CVO for each share of FPC
stock owned. Each CVO will represent the right to receive contingent
payments that may be made by CP&L Energy based on certain cash flows
that may be derived from future operations of four synthetic fuel
plants, purchased by FPC in October 1999. In conjunction with this
proposed share exchange, CP&L Energy plans to issue debt to fund the
cash portion of the exchange.
The transaction has been approved by the Boards of Directors of FPC,
CP&L and CP&L Energy. Consummation of the exchange is subject to the
satisfaction or waiver of certain closing conditions including, among
others, the approval by the shareholders of FPC and the approval of the
issuance of CP&L Energy common stock in the exchange by the
shareholders of CP&L Energy; the approval or regulatory review by the
Federal Energy Regulatory Commission (FERC), the Securities and
Exchange Commission (SEC), the Nuclear Regulatory Commission (NRC), the
North Carolina Utilities Commission (NCUC), and certain other federal
and state regulatory bodies; the expiration or early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (HSR Act); and other customary closing conditions. In addition,
FPC's obligation to consummate the exchange is conditioned upon the
Final Stock Price being not less than $30.00. CP&L, CP&L Energy and FPC
have agreed to certain undertakings and limitations regarding the
conduct of their respective businesses prior to the closing of the
transaction. The transaction is expected to be completed by the end of
2000.
Either FPC or CP&L Energy and CP&L may terminate the Amended Agreement
under certain circumstances, including if the exchange has not been
consummated on or before December 31, 2000; provided that if certain
conditions have not been satisfied on December 31, 2000, but all other
conditions have been satisfied or waived then such date shall be June
30, 2001. In the event that FPC or CP&L Energy terminate the Amended
Agreement in certain limited circumstances, FPC would be required to
pay CP&L Energy a termination fee of $150 million, plus CP&L Energy's
reasonable out-of-pocket expenses which are not to exceed $25 million
in the aggregate.
On May 23, 2000, the NRC approved the change in control of FPC that
will result from the share exchange. On July 12, 2000, the FERC
approved the change of control over FPC's jurisdictional facilities
resulting from the share exchange. Also, on July 12, 2000, the
Department of Justice terminated the waiting period under the HSR Act
and completed its antitrust review. On February 3, 2000, CP&L Energy
filed an application with the NCUC for authorization of the share
exchange with FPC and the issuance of common stock in connection with
the transaction. A hearing was held on this matter on July 18, 2000. As
part of the settlement with the NCUC Public Staff, CP&L agreed to
reduce rates to all of its non-Real Time Pricing customers by $3
million in 2002, $4.5 million in 2003, $6 million in 2004 and $6
million in 2005. By order issued August 22, 2000 the NCUC approved the
proposed settlement and the Company's application. CP&L also agreed to
write off and forego recovery of $10 million of unrecovered fuel costs
in its 2000 fuel cost recovery proceeding. On March 14, 2000, CP&L
Energy and FPC filed an application with the SEC requesting approval of
the share exchange under the Public Utility Holding Company Act. On
July 28, 2000, the parties filed an amended application with the SEC,
and the SEC issued its notice of the merger application on August 4,
2000. CP&L Energy and CP&L expect to obtain the final regulatory
approvals and
28
close the transaction by the end of 2000. However, CP&L Energy and CP&L
cannot predict the outcome of this matter.
Competition
Wholesale Competition
To assist in the development of wholesale competition, the FERC, in
1996, issued standards for wholesale wheeling of electric power through
its rules on open access transmission and stranded costs and on
information systems and standards of conduct (Orders 888 and 889). The
rules require all transmitting utilities to have on file an open access
transmission tariff, which contains provisions for the recovery of
stranded costs and numerous other provisions that could affect the sale
of electric energy at the wholesale level. CP&L filed its open access
transmission tariff with the FERC in mid-1996. Shortly thereafter,
Power Agency and other entities filed protests challenging numerous
aspects of CP&L's tariff and requesting that an evidentiary proceeding
be held. The FERC set the matter for hearing and set a discovery and
procedural schedule. In July 1997, CP&L filed an offer of settlement in
this matter. The administrative law judge certified the offer to the
full FERC in September 1997. In February 2000, the FERC issued a basket
order for several utilities including CP&L to file a compliance filing
stating whether there were any remaining undisputed issues surrounding
CP&L's open access transmission tariff. On May 1, 2000, CP&L made the
compliance filing setting forth the remaining undisputed issues and a
plan for settling those issues. CP&L made additional compliance filings
on June 8, 2000 and July 12, 2000 to report the status of negotiations
with the remaining intervenors. On August 25, 2000, CP&L filed
modifications to its open access transmission tariff as a result of
settlement negotiations with the remaining intervenors. CP&L cannot
predict the outcome of this matter.
Regional Transmission Organizations (RTO)
On December 20, 1999, the FERC issued Order No. 2000 on Regional
Transmission Organizations (RTO), which sets forth four minimum
characteristics and eight functions for transmission entities,
including independent system operators and transmission companies, to
become FERC-approved RTOs. The rule states that public utilities that
own, operate or control interstate transmission facilities must file by
October 2000, either a proposal to participate in an RTO or an
alternative filing describing efforts and plans to participate in an
RTO. CP&L is participating in an effort with Duke Power and South
Carolina Electric & Gas (SCE&G) to develop a for-profit transmission
company to comply with Order No. 2000. The RTO is currently known as
GridSouth and is expected to operate the transmission systems of CP&L,
Duke Power, SCE&G and perhaps others. GridSouth held five public
meetings on the proposed transmission company during August and
September 2000. GridSouth filed an application for approval from FERC
on October 16, 2000. CP&L cannot predict the outcome of these matters.
North Carolina Activities
On May 16, 2000, the Study Commission on the Future of Electric Service
in North Carolina issued its report to the General Assembly. The report
includes the recommendations adopted by the study commission on April
3, 2000, as well as discussion regarding the recommendations, a summary
of past study commission meetings, summaries of studies prepared for
the study commission by its consultants, and other background
information.
As proposed by the study commission's April 3, 2000 recommendations,
the General Assembly acted during its 2000 short session, which
concluded on July 13, 2000, to extend the authorization and funding of
the study commission until June 30, 2006. According to its report, the
study commission will recommend to the 2001 General Assembly, and where
necessary, the 2003 General Assembly, specific legislation to
accomplish its recommendations. CP&L cannot predict the outcome of this
matter.
Federal Activities
A draft bill regarding electric industry restructuring passed the House
Commerce Subcommittee on October 27, 1999, and remains pending before
the full Commerce Committee, which has yet to reach a consensus on the
issue of jurisdiction over bundled retail transmission sales. The
Senate Energy Committee passed a stand-alone reliability bill on June
20, 2000, after failing to reach a consensus on a comprehensive
restructuring bill introduced by the chairman of the Committee in
February. The reliability bill passed the full Senate on June 30 and
was then sent to the House, where it awaits review and approval. On
July 18, 2000, a new comprehensive restructuring bill was introduced in
the Senate, which would require all states to implement retail
competition by January 1, 2002. No date has been set for consideration
of the bill. CP&L cannot predict the outcome of this matter.
29
Company Activities
In October 1999, CP&L and the Albemarle-Pamlico Economic Development
Corporation (APEC) announced their intention to build an 850-mile,
$197.5 million, natural gas transmission and distribution system to 14
currently unserved counties in eastern North Carolina. CP&L will
operate both the transmission and distribution systems, and APEC will
help ensure that the new facilities are built in the most advantageous
locations to promote development of the economic base in the region. In
conjunction with this proposal, CP&L and APEC filed a joint request
with the NCUC for $186 million of a $200 million state bond package
established for natural gas infrastructure to pay for the portion of
the project that likely could not be recovered from future gas
customers through rates. CP&L and APEC have executed agreements
creating Eastern North Carolina Natural Gas (ENCNG), which will be the
local distribution natural gas company serving the 14 counties in
question. CP&L and APEC will be the joint owners. The operations of
ENCNG will be subject to the rules and regulations of the NCUC. On June
15, 2000, the NCUC issued an order awarding ENCNG an exclusive
franchise to all 14 counties and granted $38.7 million in bond funding
for phase one of the project. Phase one, which will cost a total of
$50.5 million, will bring gas service to 6 of the 14 counties. The NCUC
will consider approval of bond funding for subsequent phases of the
project at a later date. CP&L cannot predict the outcome of this
matter.
On April 7, 2000, CP&L announced the execution of an agreement to
purchase 75 million cubic feet per day of firm gas transportation
service to be provided through the Williams Energy's Sundance Expansion
Project on the Transcontinental Interstate Pipeline (Transco). This
service will be used, beginning in mid-2002, to supply the 30-inch
natural gas pipeline, Sandhills Pipeline that CP&L announced in
December 1999 it would build. In March 2000, CP&L transferred ownership
of the pipeline to NCNG. The pipeline will extend from Iredell County
to Richmond County in North Carolina. The agreement is contingent upon
FERC approval and both parties can terminate if Transco fails to
commence service by April 3, 2003. On September 27, 2000, the FERC
granted Transco a preliminary determination that authorizes
construction subject to environmental reviews and issuance of a final
order. CP&L cannot predict the outcome of this matter.
In April 2000, CP&L signed a 5-1/2 year agreement with Duke Energy,
whereby CP&L will provide peaking generation capacity. CP&L will
provide 300 MW of capacity for the first 11 months of the contract,
beginning July 1, 2000, and will provide 150 MW for the remainder of
the contract.
In late 1998 and early 1999, the North Carolina Utilities Commission
and Public Service Commission of South Carolina approved the
accelerated cost recovery of the CP&L's nuclear generating assets.
Pursuant to the orders, the allowed range of accelerated depreciation
expense was set at a minimum of $106 million to a maximum of $150
million per year from 2000 through 2004. CP&L has recently filed
requests with the NCUC and the SCPSC to further accelerate the cost
recovery of its nuclear generation facilities in 2000 up to the extent
of the gain on the sale of the 10% limited partnership interest in
BellSouth Carolinas PCS. As part of these filings, CP&L has also
requested that the minimum annual depreciation expense for 2001 through
2004 be reduced to $75 million. If the commissions approve CP&L's
requests, CP&L would record an additional $125 million in accelerated
depreciation, or a total of $275 million of accelerated depreciation in
2000. The additional depreciation would be recorded in the fourth
quarter and approximately offset the BellSouth PCS gain.
On September 15, 2000, CP&L signed a power purchase agreement whereby
Monroe Power will provide 155 MW of capacity and energy to Dynegy Power
from June 1, 2001 through May 31, 2006. The contract also includes
terms for a two-year extension put/call option from June 1, 2006
through May 31, 2008. Additionally, the contract contains a tolling
agreement whereby Dynegy will provide the natural gas for the project.
In November 2000, CP&L announced its intention to build its second
power plant in the state of Georgia on a tract in Effingham County. The
plant would be owned and operated by Monroe Power Co., a wholly-owned
subsidiary of CP&L Energy, that currently operates a peaking plant in
Monroe, GA. The 525-megawatt combustion-turbine plant will be fueled
primarily by natural gas and will be used to provide peaking capacity
to the region. The first phase of the construction, used for peaking
operation, is expected to begin construction in the summer of 2001 and
become available for commercial operation in June 2002. The second
phase of the construction which involves conversion of the peaking
generators to combined-cycle operation is expected to be completed in
June 2003.
Interpath Agreement
Pursuant to a Contribution Agreement effective June 28, 2000 between
CP&L, Caronet, Inc. (Caronet), the wholly-owned subsidiary of CP&L
formerly known as Interpath Communications, Inc., a North Carolina and
Virginia Corporation, and Interpath Communications, Inc. (Interpath), a
Delaware corporation formed in conjunction with the transaction,
Caronet contributed the assets used in the application service provider
business to Interpath. Under the terms of the agreement, Caronet owns
35% of Interpath's stock (10% voting stock) and Bain Capital, Inc. a
private
30
equity fund, and its affiliates (Bain) own 65% of Interpath's stock. On
July 6, 2000, Caronet and Bain each invested $25 million of additional
equity in Interpath.
Sale of Limited Partnership Interest
On September 11, 2000, Caronet, Inc., a North Carolina corporation that
is also domesticated in Virginia and a wholly-owned subsidiary of CP&L
entered into an Agreement to Settle and Merger Plan (the Agreement) by
and among DukeNet Communications, Inc., a North Carolina corporation;
BellSouth Personal Communications, Inc., a Delaware corporation
(BellSouth PCI); BellSouth Corporation, a Georgia corporation
(BellSouth), and BellSouth Carolinas PCS, L.P., a Delaware limited
partnership (BellSouth Carolinas PCS) and CP&L. The transaction closed
on September 28, 2000. Pursuant to the terms of the Agreement,
BellSouth PCI acquired the interests of the limited partners in
BellSouth Carolinas PCS in conjunction with a merger of BellSouth
Carolinas PCS into BellSouth PCI (the Merger). As consideration for the
Merger, BellSouth PCI paid the limited partners $20 million for each
one percent interest in BellSouth Carolinas PCS. Upon consummation of
the Merger, CP&L received $200 million for Caronet, Inc.'s 10% limited
partnership interest in BellSouth Carolinas PCS. This sale resulted in
an after-tax gain of $121.1 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Certain market risks are inherent in CP&L's financial instruments,
which arise from transactions entered into in the normal course of
business. CP&L's primary exposures are changes in interest rates with
respect to long-term debt and commercial paper, and fluctuations in the
return on marketable securities with respect to its nuclear
decommissioning trust funds. CP&L's exposure to return on marketable
securities for the decommissioning trust funds has not changed
materially since December 31, 1999. The total fixed rate debt at
September 30, 2000 was $2.026 billion, with an average interest rate of
7.17% and the total variable rate debt at September 30, 2000 was $1.120
billion, with an average interest rate of 5.63%. The total commercial
paper and extendible notes outstanding at September 30, 2000 was $356
million, with an average interest rate of 6.58%, and $500 million, with
an average interest rate of 7.23%, respectively.
CP&L uses interest rate swap agreements to hedge its exposure on
variable rate debt positions. The agreements, with a total notional
amount of $500 million, were effective in July 2000 and mature in July
2002. Under these agreements, CP&L receives a floating rate based on
the three month LIBOR and pays a weighted-average fixed rate of
approximately 7.17%. The notional amount of the contracts is not
exchanged and does not represent exposure to credit loss. In the event
of default by a counterparty, the risk in these transactions is the
cost of replacing the agreements at current market rates. CP&L only
enters into swap agreements with strong creditworthy counterparties.
The fair value of the swaps was a $3.8 million liability position at
September 30, 2000.
During September and October 2000, CP&L Energy entered into forward
starting swaps to hedge its exposure to interest rates with regard to
future issuances of fixed rate debt. The agreements, with a total
notional amount of $900 million, will be cash settled at the time that
the hedged debt is issued. The resulting receipts or payments will be
recorded as adjustments to interest expense over the life of the
related debt. These agreements have computational periods of 2, 5 and
10 years, with $300 million notional amount for each computational
period. Under the agreements, CP&L Energy receives a floating rate
based on the three month LIBOR and pays weighted-average fixed rates of
approximately 6.73%, 6.87% and 6.88% for the 2, 5 and 10 year
computational periods, respectively. At September 30, 2000, $450
million notional amount of these forward starting swaps was outstanding
and had a fair value of $1.2 million liability position. The notional
amount of the contracts is not exchanged and does not represent
exposure to credit loss. In the event of default by counterparty, the
risk in these transactions is the cost of replacing the agreements at
current market rates. CP&L only enters into swap agreements with strong
creditworthy counterparties.
31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal aspects of certain matters are set forth in Part I, Item 1 Notes
to the Consolidated Interim Financial Statements, and Note 6:
Commitments and Contingencies.
Item 2. Changes in Securities and Use of Proceeds
RESTRICTED STOCK AWARDS:
(a) Securities Delivered. On September 25, 2000, 100,000 restricted
shares of CP&L Energy's Common Shares were delivered to a certain key
employee pursuant to the terms of the 1997 Equity Incentive Plan
(Plan), which was approved by CP&L'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
(currently the Committee on Organization and Compensation), (the
Committee) to key employees of CP&L, including its Affiliates and
Subsidiaries (hereinafter collectively referred to as the "Company").
The Common Shares delivered pursuant to the Plan were acquired in
market transactions directly for the account of the recipient and do
not represent newly issued shares of CP&L Energy.
(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 a certain key employee 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 the 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) A special shareholder meeting was held on August 16, 2000.
(b) The meeting was held to vote upon the issuance of shares of common
stock of CP&L Energy, Inc. to be delivered to shareholders of Florida
Progress Corporation (FPC) in connection with an Amended and Restated
Agreement and Plan of Share Exchange among Carolina Power & Light
Company, CP&L Energy and FPC dated August 22, 1999, as amended and
restated as of March 3, 2000.
(c) The total votes were as follows:
Total Votes Cast 112,161,089
Votes For Votes Against Votes Withheld
--------- ------------- --------------
108,549,033 2,141,610 1,470,446
32
Item 5. Other Information
CP&L Energy has a 90% interest in two limited liability companies that
own facilities that produce synthetic fuel from fine coal feedstock
under the Internal Revenue Service Code Section 29. The production and
sale of the synthetic fuel from these facilities qualifies for tax
credits under Section 29 if certain requirements are satisfied,
including a requirement that the synthetic fuel differs significantly
in chemical composition from the fine coal feedstock used to produce
such synthetic fuel. On October 5, 2000, the limited liability
companies applied for Private Letter Rulings (PLRs) with the Internal
Revenue Service (IRS) regarding this and several other issues relating
to the facilities' qualification for tax credits, but the IRS has yet
to act on the PLRs. Should the tax credits be denied on future audits,
and CP&L Energy fails to prevail through the audit process, there could
be significant tax liability owed that had previously been reduced by
taking Section 29 credits.
In Management's opinion, CP&L Energy is complying with all the
necessary requirements to be allowed such credits under Section 29, but
cannot provide certainty as to the likelihood of prevailing on any
credits taken.
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:
CP&L Energy filed a Current Report on Form 8-K on September 20,
2000, detailing the Agreement to Settle and Merger Plan entered
into by Caronet, Inc., a wholly-owned subsidiary of CP&L, to sell
its 10% limited partnership interest in BellSouth Carolinas.
Exhibits related to the Agreement to Settle and Merger Plan are
included therewith.
CP&L Energy and Carolina Power & Light Company filed a combined
Current Report on Form 8-K on September 1, 2000, responding to the
intervention filed by Mr. Edwin Dove on August 18, 2000, under Item
5 of the Current Report.
CP&L Energy and Carolina Power & Light Company filed a combined
Current Report on Form 8-K on October 31, 2000, disclosing the
remarks made by William Cavanaugh III at the EEI Fall Finance
Conference in San Francisco, CA on October 31, 2000.
33
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.
CP&L ENERGY, INC.
------------------
(Registrant)
By /s/ Peter M. Scott III
-----------------------------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
CAROLINA POWER & LIGHT COMPANY
------------------------------------
(Registrant)
By /s/ Robert H. Bazemore, Jr.
------------------------------------------
Robert H. Bazemore, Jr.
Vice President and Controller
(Chief Accounting Officer)
Date: November 14, 2000
34
EXHIBIT INDEX
Exhibit Number Description
10(i) Employment Agreement dated August 1, 2000 between CP&L
Service Company LLC and William Cavanaugh III.
10(ii) Employment Agreement dated August 1, 2000 between
Carolina Power & Light Company and William S. "Skip"
Orser.
10(iii) Employment Agreement dated August 1, 2000 between
Carolina Power & Light Company and Tom Kilgore.
10(iv) Employment Agreement dated August 1, 2000 between CP&L
Service Company LLC and Robert McGehee.
10(v) Form of Employment Agreement dated August 1, 2000 (i)
between Carolina Power & Light Company and Don K. Davis;
and (ii) between CP&L Service Company LLC and Peter M.
Scott III and William D. Johnson.
10(vi) Form of Employment Agreement dated August 1, 2000 (i)
between Carolina Power & Light Company and Fred Day IV,
C. S. "Scotty" Hinnant and E. Michael Williams; and (ii)
between CP&L Service Company LLC and Cecil L. Goodnight.
27(a) Financial Data Schedule - CP&L Energy, Inc.
27(b) Financial Data Schedule - Carolina Power & Light Company
35