UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------- .
Commission file number 1-3382
CAROLINA POWER & LIGHT COMPANY
------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-0165465
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
411 Fayetteville Street, Raleigh, North Carolina 27601-1748
(Address of principal executive offices) (Zip Code)
919-546-6111
(Registrant's telephone number, including area code)
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 . ---
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. Common Stock
(Without Par Value) shares outstanding at April 30, 1999: 151,337,503.
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 and the outcome of the Company's Year
2000 compliance efforts.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made.
Examples of factors that should be considered with respect to any
forward-looking statements made throughout this document include, but
are not limited to, the following: Governmental policies and regulatory
actions (including those of the Federal Energy Regulatory Commission,
the Environmental Protection Agency, the Nuclear Regulatory Commission,
the Department of Energy, the North Carolina Utilities Commission and
the South Carolina Public Service Commission); general industry trends;
operation of nuclear power facilities; availability of nuclear waste
storage facilities; nuclear decommissioning costs; changes in the
economy of areas served by the Company; legislative and regulatory
initiatives that impact the speed and degree of industry restructuring;
ability to obtain adequate and timely rate recovery of costs, including
potential stranded costs arising from industry restructuring;
competition from other energy suppliers; ability of the Company and its
suppliers and customers to successfully address Year 2000 readiness
issues; weather conditions and catastrophic weather-related damage;
market demand for energy; inflation; capital market conditions; the
success of the Company's diversified businesses; unanticipated changes
in operating expenses and capital expenditures and legal and
administrative proceedings. All such factors are difficult to predict,
contain uncertainties that may materially affect actual results, and may
be beyond the control of the Company. New factors emerge from time to
time and it is not possible for management to predict all of such
factors, nor can it assess the effect of each such factor on the
Company.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
CAROLINA POWER & LIGHT COMPANY
(ORGANIZED UNDER THE LAWS OF NORTH CAROLINA)
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 1999
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
Three Months Ended
March 31
(In thousands except per share amounts) 1999 1998
- -------------------------------------------------------------------------------------------
OPERATING REVENUES
Electric $ 738,559 $ 752,296
Diversified businesses 24,343 9,199
- -------------------------------------------------------------------------------------------
Total Operating Revenues 762,902 761,495
- -------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel 138,964 143,803
Purchased power 85,222 85,341
Other operation and maintenance 142,967 156,794
Depreciation and amortization 120,556 122,012
Taxes other than on income 36,001 34,880
Harris Plant deferred costs, net 1,524 1,778
Diversified businesses 38,260 22,621
- -------------------------------------------------------------------------------------------
Total Operating Expenses 563,494 567,229
- -------------------------------------------------------------------------------------------
OPERATING INCOME 199,408 194,266
- -------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 2,293 3,437
Other, net (6,996) (8,028)
- -------------------------------------------------------------------------------------------
Total Other Income (Expense) (4,703) (4,591)
- -------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES AND INCOME TAXES 194,705 189,675
- -------------------------------------------------------------------------------------------
INTEREST CHARGES
Long-term debt 42,401 42,822
Other interest charges 2,761 2,610
Allowance for borrowed funds used during construction (1,828) (1,411)
- -------------------------------------------------------------------------------------------
Net Interest Charges 43,334 44,021
- -------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 151,371 145,654
INCOME TAXES 59,159 59,083
- -------------------------------------------------------------------------------------------
NET INCOME 92,212 86,571
PREFERRED STOCK DIVIDEND REQUIREMENTS 742 742
- -------------------------------------------------------------------------------------------
EARNINGS FOR COMMON STOCK $ 91,470 $ 85,829
- -------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING 144,293 143,766
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.63 $ 0.60
DIVIDENDS DECLARED PER COMMON SHARE $ 0.500 $ 0.485
- -------------------------------------------------------------------------------------------
See Supplemental Data and Notes to Consolidated Interim Financial Statements.
3
Carolina Power & Light Company
BALANCE SHEETS
March 31 December 31
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------
ASSETS
ELECTRIC UTILITY PLANT
Electric utility plant in service $ 10,358,166 $ 10,280,638
Accumulated depreciation (4,583,477) (4,496,632)
- ------------------------------------------------------------------------------------------
Electric utility plant in service, net 5,774,689 5,784,006
Held for future use 11,984 11,984
Construction work in progress 335,675 306,866
Nuclear fuel, net of amortization 202,823 196,684
- ------------------------------------------------------------------------------------------
Total Electric Utility Plant, Net 6,299,540
- ------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 43,594 28,872
Accounts receivable 402,134 406,418
Taxes receivable 21,000
Fuel 82,946 78,086
Materials and supplies 143,545 146,615
Deferred fuel cost 42,239 42,647
Prepayments 14,945 18,446
Other current assets 72,212 58,772
- ------------------------------------------------------------------------------------------
Total Current Assets 801,615 800,856
- ------------------------------------------------------------------------------------------
DEFERRED DEBITS AND OTHER ASSETS
Income taxes recoverable through future rates 265,513 277,894
Abandonment costs 12,576 16,083
Harris Plant deferred costs 59,406 60,021
Unamortized debt expense 22,286 27,010
Nuclear decommissioning trust funds 331,458 310,702
Miscellaneous other property and investments 392,680 294,678
Other assets and deferred debits 254,247 260,622
- ------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,338,166 1,247,010
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $ 8,464,952 $ 8,347,406
- ------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity $ 2,980,850 $ 2,949,305
Preferred stock - redemption not required 59,376 59,376
Long-term debt, net (Note 4) 2,604,585 2,614,414
- ------------------------------------------------------------------------------------------
Total Capitalization 5,644,811 5,623,095
- ------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 201,611 53,172
Accounts payable 186,382 265,163
Taxes accrued 69,158 -
Interest accrued 30,253 39,941
Dividends declared 74,548 74,400
Other current liabilities 105,930 108,824
- ------------------------------------------------------------------------------------------
Total Current Liabilities 667,882 541,500
- ------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Accumulated deferred income taxes ,657,787 1,678,924
Accumulated deferred investment tax credits 209,272 211,822
Other liabilities and deferred credits 285,200 292,065
- ------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,152,259 2,182,811
COMMITMENTS AND CONTINGENCIES (NOTES 3 AND 5)
TOTAL CAPITALIZATION AND LIABILITIES $ 8,464,952 $ 8,347,406
- ------------------------------------------------------------------------------------------
SCHEDULES OF COMMON STOCK EQUITY
(In thousands)
Common stock $ 1,380,604 $ 1,374,773
Unearned ESOP common stock (146,373) (152,979)
Capital stock issuance expense (790) (790)
Retained earnings 1,747,409 1,728,301
- ------------------------------------------------------------------------------------------
Total Common Stock Equity $ 2,980,850 $ 2,949,305
- ------------------------------------------------------------------------------------------
See Supplemental Data and Notes to Consolidated Interim Financial Statements.
4
Carolina Power & Light Company
STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 92,212 $ 86,571
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 143,371 145,161
Harris Plant deferred costs 614 812
Deferred income taxes (17,398) (23,457)
Investment tax credit (2,550) (2,552)
Deferred fuel cost (credit) 407 6,578
Net (increase) decrease in receivables, (8,432) (22,432)
inventories and prepaid expenses
Net increase (decrease) in payables and 18,756 43,230
accrued expenses
Miscellaneous (5,180) (13,131)
- ----------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 221,800 220,780
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Gross property additions (169,066) (77,334)
Nuclear fuel additions (27,134) (56,104)
Contributions to nuclear decommissioning trust (10,283) (10,251)
Net cash flow of company-owned life insurance (121) 273
program
Investment in non-electric activities (64,934) (19,971)
- ----------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (271,538) (163,387)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 400,970 -
Net increase (decrease) in commercial paper
classified as long-term debt (262,250) 34,130
Retirement of long-term debt (1,636) (1,476)
Dividends paid on common and preferred stock (72,955) (70,628)
Miscellaneous 331 -
- ----------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 64,460 (37,974)
- ----------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,722 19,419
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE 28,872 14,426
PERIOD
- ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 43,594 $ 33,845
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period - interest $ 53,019 $ 55,957
income taxes $ 1,156 $ 6,070
- ----------------------------------------------------------------------------------------
See Supplemental Data and Notes to Consolidated Interim Financial Statements.
5
Carolina Power & Light Company
SUPPLEMENTAL DATA Three Months Ended
March 31
1999 1998
- -----------------------------------------------------------------------------------------
OPERATING REVENUES (IN THOUSANDS)
Electric:
Retail $ 602,263 $ 597,762
Wholesale 121,289 138,368
Miscellaneous revenue 15,007 16,166
- -----------------------------------------------------------------------------------------
Total Electric 738,559 752.296
Diversified businesses 24,343 9,199
- -----------------------------------------------------------------------------------------
Total Operating Revenues $ 762,902 $ 761,495
- -----------------------------------------------------------------------------------------
ENERGY SALES (MILLIONS OF KWH)
Retail
Residential 3,662 3,438
Commercial 2,433 2,358
Industrial 3,284 3,479
Other Retail 312 314
- -----------------------------------------------------------------------------------------
Total retail 9,691 9,589
Wholesale 3,270 3,870
- -----------------------------------------------------------------------------------------
Total Energy Sales 12,961 13,459
- -----------------------------------------------------------------------------------------
ENERGY SUPPLY (MILLIONS OF KWH)
Generated - coal 6,552 6,786
nuclear 5,740 5,589
hydro 210 375
combustion turbines 20 19
Purchased 928 1,156
- -----------------------------------------------------------------------------------------
Total Energy Supply (Company Share) 13,450 13,925
- -----------------------------------------------------------------------------------------
DETAIL OF INCOME TAXES (IN THOUSANDS)
Income tax expense (credit)-current $ 79,107 $ 85,092
deferred (17,398) (23,457)
investment tax credit amortization (2,550) (2,552)
- -----------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 59,159 $ 59,083
- -----------------------------------------------------------------------------------------
See Notes to Consolidated Interim Financial Statements.
6
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
A. Organization. Carolina Power & Light Company (the Company) is a
public service corporation primarily engaged in the generation,
transmission, distribution and sale of electricity in portions of North
and South Carolina. The Company has no other material segments of
business. Operating income on the Statements of Income includes
approximately $213 million and $208 million attributable to the electric
segment for the three months ended March 31, 1999 and 1998,
respectively.
B. Basis of Presentation. These consolidated interim financial
statements should be read in conjunction with the Company's consolidated
financial statements included in the Company's 1998 Annual Report on
Form 10-K. The amounts are unaudited but, in the opinion of management,
reflect all adjustments necessary to fairly present the Company's
financial position and results of operations for the interim periods.
Due to temperature variations between seasons of the year and the timing
of outages of electric generating units, especially nuclear-fueled
units, the results of operations for interim periods are not necessarily
indicative of amounts expected for the entire year. Certain amounts for
1998 have been reclassified to conform to the 1999 presentation, with no
effect on previously reported net income or common stock equity.
In preparing financial statements that conform with generally accepted
accounting principles, management must make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial
statements and amounts of revenues and expenses reflected during the
reporting period. Actual results could differ from those estimates.
2. NCNG MERGER
-----------
The Company has determined that the merger with North Carolina Natural
Gas Corporation (NCNG) no longer qualifies for the pooling-of-interests
method of accounting and will instead be accounted for as a purchase. As
a result of this change, the Agreement and Plan of Merger the Company
and NCNG entered into on November 10, 1998 was amended and restated,
effective April 22, 1999. The Amended and Restated Merger Agreement
reflects the change in accounting treatment for the transaction and a
related change concerning the calculation of the Exchange Ratio. The
Boards of Directors of both the Company and NCNG have approved the
Amended and Restated Merger Agreement.
The description of the Amended and Restated Merger Agreement set forth
above does not purport to be complete and is qualified in its entirety
by the provisions of the Amended and Restated Merger Agreement, which is
attached hereto as Exhibit 2 and incorporated herein by reference.
3. NUCLEAR DECOMMISSIONING
-----------------------
In the Company's retail jurisdictions, provisions for nuclear
decommissioning costs are approved by the North Carolina Utilities
Commission and the South Carolina Public Service Commission and are
based on site-specific estimates that include the costs for removal of
all radioactive and other structures at the site. In the wholesale
jurisdiction, the provisions for nuclear decommissioning costs are based
on amounts agreed upon in applicable rate agreements. Based on the
site-specific estimates discussed below, and using an assumed after-tax
earnings rate of 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 the Company's nuclear
facilities.
The Company'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 $279.8 million for Robinson Unit No. 2,
7
$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, which holds an undivided ownership
interest in the Brunswick and Harris nuclear generating facilities.
Operating licenses for the Company's nuclear units expire in the year
2010 for Robinson Unit No. 2, 2016 for Brunswick Unit No. 1, 2014 for
Brunswick Unit No. 2 and 2026 for the Harris Plant.
The Financial Accounting Standards Board is proceeding with its project
regarding accounting practices related to obligations associated with
the retirement of long-lived assets, and an exposure draft of a proposed
accounting standard is expected to be issued during the first half of
1999. It is uncertain when the final statement will be issued and what
effects it may ultimately have on the Company's accounting for nuclear
decommissioning and other retirement costs.
4. CAPITALIZATION
--------------
On March 5, 1999, the Company issued $400 million principal amount of
Senior Notes, 5.95% Series due March 1, 2009.
5. COMMITMENTS AND CONTINGENCIES
-----------------------------
A. Commitments
The Company has entered into an agreement to purchase all of the output
of a combustion turbine project to be built, owned, and operated by
Broad River Energy, LLC, in Cherokee County, South Carolina. The project
is scheduled to be in service on or before June 1, 2001 and is expected
to have a net dependable capacity of approximately 500 megawatts. The
agreement is for an initial period of 15 years, with an option for the
Company to extend the agreement for two additional five year terms.
Minimum annual payments provided for under the agreement will not be
material to the Company's expected results of operations.
B. Contingencies
1) Applicability of SFAS-71. As a regulated entity, the Company is
subject to the provisions of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS-71). Accordingly, the Company records certain assets and
liabilities resulting from the effects of the ratemaking process, which
would not be recorded under generally accepted accounting principles for
unregulated entities. The Company's ability to continue to meet the
criteria for application of SFAS-71 may be affected in the future by
competitive forces, deregulation and restructuring in the electric
utility industry. In the event that SFAS-71 no longer applied to a
separable portion of the Company's operations, related regulatory assets
and liabilities would be eliminated unless an appropriate regulatory
recovery mechanism is provided. Additionally, these factors could result
in an impairment of electric utility plant assets as determined pursuant
to Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The Company's regulatory assets totaled $452 million and
$480 million as of March 31, 1999 and December 31, 1998, respectively.
2) Claims and Uncertainties. a) The Company is subject to federal, state
and local regulations addressing air and water quality, hazardous and
solid waste management and other environmental matters.
Various organic materials associated with the production of manufactured
gas, generally referred to as coal tar, are regulated under various
federal and state laws. There are several manufactured gas plant (MGP)
sites to which the Company and certain entities that were later merged
into the Company had some connection. In this regard, the Company, along
with others, is participating in
8
a cooperative effort with the North Carolina Department of Environment
and Natural Resources, Division of Waste Management (DWM), which has
established a uniform framework to address MGP sites. The investigation
and remediation of specific MGP sites will be addressed pursuant to one
or more Administrative Orders on Consent (AOC) between the DWM and the
potentially responsible party or parties. The Company has signed AOC's
to investigate certain sites. The Company continues to investigate the
identities of parties connected to individual MGP sites, the relative
relationships of the Company and other parties to those sites and the
degree to which the Company will undertake efforts with others at
individual sites. The Company does not expect the costs associated with
these sites to be material to the financial position and results of
operations of the Company.
The Company has been notified by regulators of its involvement or
potential involvement in several sites, other than MGP sites, that may
require investigation and/or remediation. Although the Company may incur
costs at these sites, based upon the current status of the sites, the
Company does not expect those costs to be material to the results of
operations of the Company.
The Company carries a liability for the estimated costs associated with
certain remedial activities. This liability is not material to the
financial position of the Company.
b) As required under the Nuclear Waste Policy Act of 1982, the Company
entered into a contract with the U.S. Department of Energy (DOE) under
which the DOE agreed to dispose of the Company's spent nuclear fuel by
January 31, 1998. The DOE defaulted on its January 31, 1998, obligation
to begin taking spent nuclear fuel, and a group of utilities, including
the Company, has undertaken measures to force the DOE to take spent
nuclear fuel and/or to pay damages. To date, the courts have rejected
these attempts. In addition, several utilities have filed actions for
damages in the United States Court of Claims. The Company is in the
process of evaluating whether it should file a similar action for
damages. The Company will also monitor legislation that has been
introduced in Congress that would provide for interim storage of spent
nuclear fuel at a storage facility operated by the DOE. The Company
cannot predict the outcome of this matter.
With certain modifications and additional approval by the Nuclear
Regulatory Commission (NRC), the Company's spent fuel storage facilities
will be sufficient to provide storage space for spent fuel generated on
the Company's system through the expiration of the current operating
licenses for all of the Company's nuclear generating units. Subsequent
to the expiration of these licenses, dry storage may be necessary. The
Company has applied for a license amendment to use additional spent fuel
storage capacity at the Harris Nuclear Plant. The Board of County
Commissioners of Orange County, North Carolina has filed a petition to
intervene in the license amendment proceeding. The Company has answered
the petition and the matter has been set for a pre-hearing conference
before the Atomic Safety Licensing Board, which was established by the
NRC, to determine whether the petitioner has submitted contentions
worthy of a further hearing by the Licensing Board. The NRC staff has
made a preliminary finding that the license amendment poses no
significant hazards, and the NRC staff's final decision in the matter is
expected by year-end. The Company cannot predict the outcome of the
proceeding before the Licensing Board.
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 the Company.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999,
AS COMPARED WITH THE CORRESPONDING PERIOD ONE YEAR EARLIER
----------------------------------------------------------
Operating Revenues - Electric
-----------------------------
For the three months ended March 31, 1999, electric operating revenues
were affected by the following factors (in millions):
Price $ (20)
Customer growth/changes in usage patterns 19
Sales to other utilities (15)
Weather 2
Sales to North Carolina Eastern
Municipal Power Agency 1
Other (1)
---
Total $ (14)
====
The price-related decrease is due to changes in the contract price
structure, which became effective January 1, 1999, between the Company
and North Carolina Electric Membership Corporation, and to the effect of
real-time pricing on sales to industrial customers. The increase in the
customer growth/changes in usage patterns component of revenue reflects
continued growth in the number of customers served by the Company; while
residential and commercial sales increased, industrial sales have
decreased, primarily reflecting downturns in the chemical and textile
industries. The decrease in sales to other utilities is primarily due to
milder temperatures in the Northeast and Midwest during the current
period.
Operating Expenses - Electric
-----------------------------
Other operation and maintenance expense decreased during the three
months ended March 31, 1999 primarily due to the timing of plant
outages.
Diversified Business Operations
-------------------------------
Operating revenues and expenses of diversified business operations
primarily reflect results of two of the Company's subsidiaries,
Strategic Resource Solutions Corp. (SRS) and Interpath Communications,
Inc. (Interpath). The increase in operating revenues is primarily due to
an increase in the customer base of both subsidiaries. The increase in
operating expenses is substantially attributable to the rapid growth
experienced by Interpath, which doubled the number of its employees
during the past year. Operating expenses at SRS did not increase
significantly due to cost-cutting measures implemented during 1998.
MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES
FOR THE THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------
Cash Flow and Financing
-----------------------
On March 5, 1999 the Company issued $400 million principal amount of
Senior Notes, 5.95% Series due March 1, 2009. The net proceeds from the
issuance were used to reduce commercial paper borrowings.
As of March 31, 1999, the Company's revolving credit facilities totaled
$750 million, all of which are long-term agreements supporting its
commercial paper borrowings. The Company is required to pay minimal
annual commitment fees to maintain its credit facilities. Consistent
with management's intent to maintain its commercial paper on a long-term
basis, and as supported by its long-term revolving credit facilities,
the Company included in
10
long-term debt all commercial paper outstanding of approximately $226
million and $488 million as of March 31, 1999 and December 31, 1998,
respectively.
The Company's First Mortgage Bonds are currently rated "A2" by Moody's
Investors Service, "A" by Standard and Poor's and "A+" by Duff and
Phelps. Moody's Investors Service, Standard and Poor's and Duff and
Phelps have rated the Company's commercial paper "P-1", "A-1" and "D-1",
respectively.
OTHER MATTERS
-------------
NCNG Merger
-----------
The Company has determined that the merger with North Carolina Natural
Gas Corporation (NCNG) no longer qualifies for the pooling-of-interests
method of accounting and will instead be accounted for as a purchase. As
a result of this change, the Agreement and Plan of Merger the Company
and NCNG entered into on November 10, 1998 was amended and restated,
effective April 22, 1999. The Amended and Restated Merger Agreement
reflects the change in accounting treatment for the transaction and a
related change concerning the calculation of the Exchange Ratio. The
Boards of Directors of both the Company and NCNG have approved the
Amended and Restated Merger Agreement.
The description of the Amended and Restated Merger Agreement set forth
above does not purport to be complete and is qualified in its entirety
by the provisions of the Amended and Restated Merger Agreement, which is
attached hereto as Exhibit 2 and incorporated herein by reference.
Competition
-----------
NORTH CAROLINA ACTIVITIES
-------------------------
On March 19, 1999, a consultant hired by the 23-member study commission
established to evaluate the future of electric service in North Carolina
issued a report regarding options for addressing the nearly $6 billion
debt of North Carolina's municipal power agencies. The report outlines a
menu of options that range from maintaining the status quo to requiring
the municipal members of the power agencies to sell their electric
system assets. The report makes no recommendation regarding the various
options. The study commission plans to make its final report to the
North Carolina General Assembly during 2000.
SOUTH CAROLINA ACTIVITIES
-------------------------
Four bills regarding electric industry restructuring have been
introduced in the South Carolina General Assembly this year. Both the
House and the Senate continue to study the issue. The South Carolina
General Assembly's 1999 legislative session will end in June.
FEDERAL ACTIVITIES
------------------
On April 15, 1999, the Clinton Administration announced its proposal for
restructuring the nation's power industry. The plan is similar to the
one the Administration proposed last year in that it calls for customer
choice by 2003 unless a state's investigation concludes that the status
quo or a different policy is best for that state. The Administration's
proposal contains numerous provisions which would, among other things,
significantly expand the authority of the Federal Energy Regulatory
Commission.
COMPANY ACTIVITIES
-------------------
As part of its strategy to become a total energy provider, the Company
recently received exclusive negotiation rights from the Albemarle
Regional Energy Authority (AREA) in its effort to bring natural gas
service to five northeastern North Carolina counties. AREA represents
Chowan, Perquimans, Pasquotank, Camden and Currituck counties in their
quest to bring natural gas to the region. AREA will act as a wholesale
purchaser of natural gas and will resell it within the region. AREA has
indicated that it wants to own its distribution system within the five
counties. The Company's proposal calls for it to build, operate and
maintain a gas transmission line to the region. AREA and the
11
Company plan to make use of some of the state's $200 million in bonds
approved by voters in November 1998 for expansion of natural gas and
water infrastructure in North Carolina. The Company's proposal was
selected from among several submitted in response to a request from AREA
in January.
Year 2000
---------
BACKGROUND
----------
The Company's overall goal is to be Year 2000 ready, and its efforts to
reach this goal are on target. "Year 2000 ready" means that critical
systems, devices, applications or business relationships have been
evaluated and are expected to be suitable for continued use into and
beyond the Year 2000, or contingency plans are in place. Critical
systems are defined as those that (i) directly relate to the safe and
reliable generation and delivery of electricity and (ii) support the
Company's ability to provide high-quality customer service.
The Company began addressing the Year 2000 issue in 1994 by beginning to
assess its business computer systems, such as general ledger, payroll,
customer billing and inventory control. The majority of these systems
have been corrected and running in the Company's day-to-day computing
environment since 1996. Also, by the mid-1990s, two major accounting
systems were replaced with systems that were designed to be Year 2000
ready. The Company had substantially addressed the remaining business
systems by the end of 1998 and will conduct supplementary testing in
1999, as appropriate.
During mid-1997, a Corporate Year 2000 Project was established to
provide leadership and direction to the Year 2000 efforts throughout the
Company and its subsidiaries. Also, the project scope was expanded to
include "embedded" systems (such as process control computers, chart
recorders, data loggers, calibration equipment and chemical analysis
equipment), end-user computing hardware and software (including personal
computers, spreadsheets, word processing and other personal and
workgroup applications), plant and corporate facilities (such as
security systems, elevators and heating and cooling systems) and
business relationships with key suppliers and customers.
The Company is using a multi-step approach in conducting its Year 2000
Project. These steps are: inventory, assessment, remediation and
testing, and contingency planning. The first step, an inventory of all
systems and devices with potential Year 2000 problems, was completed in
January 1998. The next step, completed in the first half of 1998, was to
conduct an initial assessment of the inventory to determine the state of
its Year 2000 readiness. As part of the assessment phase, remediation
strategies were identified and remediation cost estimates were
developed. The Company is currently utilizing both internal and external
resources to remediate and test for Year 2000 readiness. The Company's
primary approach has been for the Corporate Year 2000 Program Office to
provide overall leadership and direction and assign responsibility to
individual departments and business units for Year 2000 readiness in
their respective areas. Staffing decisions regarding the labor required
to complete the project are made at the department/business unit level.
Several hundred of the Company's employees as well as contract personnel
have been used on this effort. Vendor labor is also occasionally used.
The Company is currently on schedule to have its critical systems Year
2000 ready by June 30, 1999. This is consistent with the target dates
established by the Nuclear Regulatory Commission (NRC) and the North
American Electric Reliability Council (NERC).
Several external reviews of the project have been conducted to validate
the reliability of risk and cost estimates as well as work processes and
work products. These have included project reviews by two consulting
firms, an embedded systems audit by an engineering firm and a legal
review by an external law firm. In addition, the Company is actively
conducting formal communications with the suppliers and customers with
which it has active contracts to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their
own Year 2000 issues. The Company ranked its vendors and suppliers to
identify those considered to be critical. Those identified as critical
include telecommunications providers, fuel suppliers (nuclear, coal,
natural gas and other), transportation carriers, vendors of certain
nuclear systems and components, vendors of fossil power plant digital
control systems and financial services suppliers. The Company cannot
predict the outcome of other companies' remediation efforts.
12
COSTS
-----
As of March 31, 1999, the total remaining cost of the Year 2000 Project
is estimated at $10 million. Approximately $4 million is for new
software and hardware purchases and will be capitalized. The remaining
$6 million will be expensed as incurred. To date, the Company has
incurred and expensed approximately $10 million related to the
inventory, assessment and remediation of non-compliant systems,
equipment and applications. The costs of the project and the date on
which the Company plans to complete the Year 2000 modifications are
based on management's best estimates, which were derived using
assumptions of future events including the continued availability of
certain resources, third parties' Year 2000 readiness and other factors.
RISK ASSESSMENT
---------------
At this time, the Company believes its most reasonably likely worst case
scenario is that key customers could experience significant reductions
in their power needs due to their own Year 2000 issues. The Company is
conducting informal meetings with its largest wholesale, industrial and
commercial customers and is holding information sharing forums to gather
information on Year 2000 readiness. Based on the information provided
through these contacts, the Company has not identified any major
customer that appears to be at significant risk of not being Year 2000
ready. For this reason, the Company does not believe that this scenario
is likely to occur. Nonetheless, the Company has assessed the effect of
such a scenario by using current financial data. That data indicates
that if the Company's twenty key industrial customers experienced
significant reduced power needs for a period of one month, the Company's
revenues would decrease by approximately 6% for that month.
An alternative worst-case scenario includes the effect of cascading
disruptions caused by other entities whose electrical systems are
connected to the Company's. The Company has assessed the risk of this
scenario, believes that its contingency plans would mitigate the
long-term occurrence of such a scenario, and does not expect that it
would have a material adverse effect on its financial position and
results of operations.
CONTINGENCY PLANS
-----------------
Contingency plans are being prepared to help ensure that the Company's
critical business processes will continue to function on January 1, 2000
and beyond. The Company's contingency plans are being structured to
address both remediation of systems and their components and overall
business operating risk. These plans are intended to mitigate internal
risks, as well as potential risks in the supply chain of the Company's
suppliers and customers. The Company's contingency plans will be
developed by June 30, 1999 in accordance with the target dates
established by the NRC and the NERC.
The Company is developing contingency plans to mitigate the risk
associated with the failure of critical vendors or suppliers. Based on
the Company's assessment of the risk of non-compliance, the Company will
take action up to and including entering into a business relationship
with an alternate vendor or supplier.
One of the Company's emergency contingency plans specifically addresses
emergency scenarios that may arise due to the fact that electric utility
systems throughout the southeast region of the United States are
interconnected. The Company has been working actively with the NERC and
the Southeastern Electric Reliability Council to address the issue of
overall grid reliability and protection. In order to mitigate the risk
of cascading regional electric failures, the Company can, as a last
resort, isolate its transmission system either automatically or
manually. The Company's emergency readiness contingency plan includes
the performance of regular training exercises that include simulated
disaster recovery scenarios. As part of its Year 2000 contingency
planning, the Company will review its disaster recovery scenarios to
identify those that can be used specifically for Year 2000 readiness
training.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------ ----------------------------------------------------------
During the three months ended March 31, 1999, the Company's market risk
exposure was affected by the issuance of $400 million principal amount
of Senior Notes, 5.95% Series due March 1, 2009. Total fixed rate
long-term debt at March 31, 1999 was $1.975 billion, with an average
interest rate of 7.02%. Related to the issuance, the Company settled its
interest rate lock, receiving approximately $9.7 million which will
reduce interest expense over the 10-year debt term. The proceeds from
the issuance were used to reduce commercial paper borrowings. Total
commercial paper outstanding at March 31, 1999 was $226 million, with an
average interest rate of 4.87%.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
------ ----------------
Legal aspects of certain matters are set forth in Part I, Item 1.
Item 2. Changes in Securities and Use of Proceeds
------- -----------------------------------------
RESTRICTED STOCK AWARDS:
(a) Securities Delivered. On March 25, 1999, 13,300 restricted shares of
the Company's Common Stock were delivered to certain key employees
pursuant to the terms of the Company's 1997 Equity Incentive Plan
(Plan), which was approved by the Company's shareholders on May 7, 1997.
Section 9 of the Plan provides for the granting of Restricted Stock by
the Personnel, Executive Development and Compensation Committee (now
know as the Committee on Organization and Compensation, (the Committee))
to key employees of the Company. The Common Stock delivered pursuant to
the Plan were acquired in market transactions directly for the accounts
of the recipients and do not represent newly-issued shares of the
Company.
(b) Underwriters and Other Purchasers. No underwriters were used in
connection with the delivery of Common Stock described above. The
Common Stock were delivered to certain key employees of the Company.
The Plan defines "key employees" 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 Stock were delivered to provide an
incentive to the employee recipients to exert their 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 Stock 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
Stock 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 5. Other Information
------ -----------------
NCNG MERGER
The Company has determined that the merger with North Carolina Natural
Gas Corporation (NCNG) no longer qualifies for the pooling-of-interests
method of accounting and will instead be accounted for as a purchase. As
a result of this change, the Agreement and Plan of Merger the Company
and NCNG entered into on November 10, 1998 was amended and restated,
effective April 22, 1999. The Amended and Restated Merger Agreement
reflects the change in the accounting treatment for the transaction and
a related change concerning the calculation of the Exchange Ratio. The
Board of Directors of both the Company and NCNG have approved the
Amended and Restated Merger Agreement.
The description of the Amended and Restated Merger Agreement set forth
above does not purport to be complete and is qualified in its entirety
by the provisions of the Amended and Restated Merger Agreement, which is
attached hereto as Exhibit 2 and incorporated herein by reference.
The pre-merger notification filings required by the Hart-Scott-Rodino
Antitrust Act of 1976, as amended (HSR Act), were initially made by the
Company and NCNG on March 30, 1999. On April 29, 1999, the Company
withdrew and resubmitted its HSR Act notification in order to provide
the Department of Justice with additional time for review. Both the
North Carolina Utilities Commission (NCUC) and the South Carolina Public
Service Commission (SCPSC) must approve the merger and the issuance of
the Company's common stock in connection with the merger. During the
month of May, the NCUC is scheduled to hold public hearings and an
evidentiary hearing regarding the joint application for approval the
Company and NCNG filed in connection with the merger on January 11,
1999. The SCPSC is expected to act as early as May 1999 on the
application the Company filed in connection with the merger.
14
POTENTIAL TRANSITION TO HOLDING COMPANY STRUCTURE
-------------------------------------------------
The Company is considering the formation of a holding company structure,
in which the Company would become a subsidiary of a newly formed holding
company. This conversion is being considered because of the advantages
it might offer as the Company continues to confront the rapidly changing
environment facing electric utilities. The holding company structure
would allow greater organizational flexibility, including a clearer
separation of regulated businesses from each other and from unregulated
businesses such as energy services, telecommunications, and electric
generation projects for wholesale markets. This structure would also
offer greater financing flexibility, because the holding company would
not be required to obtain utility commission approval each time it seeks
to issue securities to raise cash or as consideration in acquisitions.
The Company's shareholders would have to approve formation of a holding
company structure, as would various regulatory authorities. If the
Company converts to a holding company structure, each share of the
Company's common stock will automatically be exchanged for one share of
common stock of the new holding company. There can be no assurance as to
when or whether the contemplated holding company structure will be
submitted for shareholder approval or be established.
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:
The Company filed a Current Report on Form 8-K on February 26,
1999, reporting under Item 7 the Company's 1998 Financial
Statements and related exhibits.
The Company filed a Current Report on Form 8-K on March 19, 1999,
reporting under Item 5 the March 5, 1999 issuance of $400 million
principal amount of Senior Notes, 5.95% Series due March 1, 2009.
Exhibits related to the issuance were listed under Item 7 of the
Report.
15
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAROLINA POWER & LIGHT COMPANY
-------------------------------
(Registrant)
By /s/ Glenn E. Harder
---------------------------
Glenn E. Harder
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 13, 1999
16
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
2 Agreement and Plan of Merger By and Among
Carolina Power & Light Company, North Carolina
Natural Gas Corporation and Carolina Acquisition
Corporation, Dated as of November 10, 1998, as
Amended and Restated as of April 22, 1999.
27 Financial Data Schedule
17