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, 2001
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________.
Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer
File Number incorporation, address of principal executive offices, and telephone number Identification Number
1-15929 Progress Energy, Inc. 56-2155481
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina
1-3382 Carolina Power & Light Company 56-0165465
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
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: Progress Energy,
Inc. (Progress 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.
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. As of October 31, 2001, each
registrant had the following shares of common stock outstanding
Registrant Description Shares
---------- ----------- ------
Progress Energy, Inc. Common Stock (Without Par Value) 218,739,274
Carolina Power & Light Company Common Stock (Without Par Value) 159,608,055 (all of which were
held by Progress Energy, Inc.)
PROGRESS ENERGY, INC. AND CAROLINA POWER & LIGHT COMPANY
FORM 10-Q - For the Quarter Ended September 30, 2001
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Interim Financial Statements:
Progress Energy, Inc.
-----------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Supplemental Data Schedule
Notes to Consolidated Interim Financial Statements
Carolina Power & Light Company
--------------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Interim Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 6. Exhibits and Reports on Form 8-K
Signatures
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
APEC Albemarle-Pamlico Economic Development Corporation
Code Internal Revenue Service Code
CP&L Carolina Power & Light Company
CP&L Energy CP&L Energy, Inc., now known as Progress Energy, Inc.
CR3 Florida Power's nuclear generating plant, Crystal River Unit No. 3
CVO Contingent value obligation
DOE Department of Energy
Dt Dekatherm
DWM North Carolina Department of Environment and Natural Resources, Division of
Waste Management
EasternNC Eastern North Carolina Natural Gas Company
Electric Fuels Electric Fuels Corporation
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FDEP Florida Department of Environment and Protection
FERC Federal Energy Regulatory Commission
Florida Power Florida Power Corporation
FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Generally accepted Accounting principles generally accepted in the United States of America
accounting principles
IRS Internal Revenue Service
kWh kilowatt-hour
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 United States Nuclear Regulatory Commission
NSP Northern States Power
PLRs Private Letter Rulings
Progress Energy Progress Energy, Inc. and subsidiaries or the Company
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
Progress Ventures Business segment of Progress Energy
primarily made up of merchant energy generation,
coal and synthetic fuel operations and energy
marketing and trading, formerly referred to as Energy Ventures
PUHCA Public Utility Holding Company Act of 1935, as amended
RTO Regional Transmission Organization
SCPSC Public Service Commission of South Carolina
SEC United States Securities and Exchange Commission
SFAS No. 133 Statement of Financial Accounting Standards No. 133, Accounting for
Derivative and Hedging Activities
SFAS No. 138 Statement of Financial Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of
SFAS No. 133
SRS Strategic Resource Solutions Corp.
3
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
------------------------------------------
Statements made throughout this Form 10-Q that are not statements of
historical facts are forward-looking statements 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.
For example, forward-looking statements are made in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including, but not limited to, statements under the sub-heading "Other
Matters" concerning synthetic fuel tax credits and regulatory developments.
Any forward-looking statement speaks only as of the date on which such
statement is made, and Progress Energy 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 you should consider 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 Securities and Exchange Commission under the
Public Utility Holding Company Act of 1935, as amended, the North Carolina
Utilities Commission, the Public Service Commission of South Carolina and
the Florida Public Service Commission), particularly legislative and
regulatory initiatives that may impact the speed and degree of the
restructuring of the electricity industry and the results of negotiations
related to the expiration of Florida Power's rate stipulation; the outcome
of legal and administrative proceedings, including proceedings before our
principal regulators; risks associated with operating nuclear power
facilities, availability of nuclear waste storage facilities, and nuclear
decommissioning costs; terrorist threats and activities, particularly with
respect to our nuclear facilities, economic uncertainty caused by recent
terror attacks on the United States, and potential adverse reactions to
United States anti-terrorism activities; changes in the economy of areas
served by CP&L, Florida Progress or NCNG; the extent to which we are able
to obtain adequate and timely rate recovery of costs, including potential
stranded costs arising from the restructuring of the electricity industry;
weather conditions and catastrophic weather-related damage; general
industry trends, increased competition from energy and gas suppliers, and
market demand for energy; inflation and capital market conditions; the
extent to which we are able to realize the potential benefits of our recent
acquisition of Florida Progress Corporation and successfully integrate it
with the remainder of our business; the extent to which we are able to
realize the potential benefits of the conversion of Carolina Power & Light
Company to a non-regulated holding company structure and the success of our
direct and indirect subsidiaries; the extent to which we are able to use
tax credits associated with the operations of the synthetic fuel
facilities; the extent to which we are able to reduce our capital
expenditures through the utilization of the natural gas expansion fund
established by the North Carolina Utilities Commission; and unanticipated
changes in operating expenses and capital expenditures.
All such factors are difficult to predict, contain uncertainties that may
materially affect actual results, and may be beyond the control of Progress
Energy. New factors emerge from time to time, and it is not possible for
management to predict all such factors, nor can it assess the effect of
each such factor on Progress Energy.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------ --------------------
Progress Energy, Inc.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
September 30, 2001
STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands except per share amounts) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 1,879,934 $ 919,547 $ 5,077,928 $ 2,474,847
Natural gas 51,671 75,645 258,820 223,093
Diversified businesses 398,942 69,716 1,217,532 133,334
-------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 2,330,547 1,064,908 6,554,280 2,831,274
-------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 446,309 175,090 1,194,453 472,479
Purchased power 268,794 98,172 698,218 253,498
Gas purchased for resale 36,282 62,736 203,060 166,471
Other operation and maintenance 290,651 169,912 890,148 533,128
Depreciation and amortization 268,475 137,183 849,395 411,903
Taxes other than on income 105,125 39,884 298,716 112,729
Diversified businesses 461,393 104,630 1,372,840 207,551
-------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,877,029 787,607 5,506,830 2,157,759
-------------------------------------------------------------------------------------------------------------------------
Operating Income 453,518 277,301 1,047,450 673,515
-------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 3,018 2,686 20,132 7,997
Other, net 16,724 216,654 6,544 217,754
-------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) 19,742 219,340 26,676 225,751
-------------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 152,505 50,703 435,011 155,625
Other interest charges 15,061 5,092 89,713 14,373
Allowance for borrowed funds used during
construction (4,206) (4,728) (9,559) (15,657)
-------------------------------------------------------------------------------------------------------------------------
Net Interest Charges 163,360 51,067 515,165 154,341
-------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 309,900 445,574 558,961 744,925
Income Taxes (Benefit) (56,543) 148,493 (73,187) 255,124
-------------------------------------------------------------------------------------------------------------------------
Net Income $ 366,443 $ 297,081 $ 632,148 $ 489,801
=========================================================================================================================
Average Common Shares Outstanding 205,866 153,324 201,925 153,230
Basic Earnings per Common Share $ 1.78 $ 1.94 $ 3.13 $ 3.20
Diluted Earnings per Common Share $ 1.77 $ 1.93 $ 3.12 $ 3.19
Dividends Declared per Common Share $ 0.530 $ 0.515 $ 1.590 $ 1.545
=========================================================================================================================
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
5
Progress Energy, Inc
BALANCE SHEETS
(In thousands) September 30, December 31,
Assets 2001 2000
------------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 18,955,425 $ 18,124,036
Gas utility plant in service 487,700 378,464
Accumulated depreciation (9,948,848) (9,350,172)
------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 9,494,277 9,152,328
Held for future use 15,380 16,302
Construction work in progress 917,158 1,043,376
Nuclear fuel, net of amortization 247,244 224,692
------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 10,674,059 10,436,698
------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 103,863 101,296
Accounts receivable 1,139,800 925,911
Inventory 842,052 420,985
Deferred fuel cost 189,871 217,806
Prepayments 32,878 50,040
Assets held for sale, net (12,247) 747,745
Other current assets 191,815 192,347
------------------------------------------------------------------------------------------------------------------
Total Current Assets 2,488,032 2,656,130
------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 241,379 228,686
Harris Plant deferred costs 35,661 44,813
Unamortized debt expense 42,276 38,771
Nuclear decommissioning trust funds 811,055 811,998
Diversified business property, net 1,127,828 720,231
Miscellaneous other property and investments 589,560 636,677
Deferred purchased power contract termination costs 138,601 226,656
Goodwill, net 3,768,820 3,652,429
Other assets and deferred debits 755,718 657,612
------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 7,510,898 7,017,873
------------------------------------------------------------------------------------------------------------------
Total Assets $ 20,672,989 $ 20,110,701
==================================================================================================================
Capitalization and Liabilities
------------------------------------------------------------------------------------------------------------------
Capitalization
------------------------------------------------------------------------------------------------------------------
Common stock equity $ 6,203,097 $ 5,424,201
Preferred stock of subsidiaries-not subject to mandatory redemption 92,831 92,831
Long-term debt, net 8,627,029 5,890,099
------------------------------------------------------------------------------------------------------------------
Total Capitalization 14,922,957 11,407,131
------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 719,483 184,037
Accounts payable 715,925 828,568
Interest accrued 124,895 121,433
Dividends declared 114,650 107,645
Short-term obligations 664,045 3,972,674
Other current liabilities 613,308 448,302
------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,952,306 5,662,659
------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,615,144 1,807,192
Accumulated deferred investment tax credits 230,782 261,255
Other liabilities and deferred credits 951,800 972,464
------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,797,726 3,040,911
------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 10)
------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 20,672,989 $ 20,110,701
==================================================================================================================
SCHEDULES OF COMMON STOCK EQUITY
(In thousands except share data)
Common stock (without par value, authorized 500,000,000, issued and $ 4,106,101 $ 3,608,902
outstanding 218,739,274 and 206,089,047 shares, respectively)
Unearned ESOP common stock (114,914) (127,211)
Accumulated other comprehensive loss (37,609) -
Retained earnings 2,249,519 1,942,510
------------------------------------------------------------------------------------------------------------------
Total Common Stock Equity $ 6,203,097 $ 5,424,201
==================================================================================================================
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
6
Progress Energy, Inc.
STATEMENTS OF CASH FLOWS Nine Months Ended
September 30,
(In thousands) 2001 2000
---------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 632,148 $ 489,801
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 926,690 479,444
Deferred income taxes (78,986) (74,760)
Investment tax credit (18,480) (7,798)
Gain on sale of investment - (200,000)
Deferred fuel cost (credit) 29,310 (26,215)
Net increase in accounts receivable (40,935) (80,725)
Net increase in inventories (249,599) (16,602)
Net decrease in prepaids and other current assets 21,846 89,629
Net increase (decrease) in accounts payable (94,701) 11,190
Net increase in other current liabilities 62,309 198,571
Other 18,912 35,096
---------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,208,514 897,631
---------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (874,867) (634,014)
Diversified business property additions (185,230) (38,808)
Proceeds from sale of asset 5,532 12,825
Proceeds from sale of investment - 200,000
Nuclear fuel additions (113,099) (46,936)
Contributions to nuclear decommissioning trust (40,540) (25,603)
Increase in cash restricted for redemption of long-term debt - 4,051
Net cash flow of company-owned life insurance program (5,137) (4,858)
Investments in non-utility activities 11,118 (81,635)
---------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,202,223) (614,978)
---------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 3,772,376 783,052
Net decrease in commercial paper reclassified to long-term debt (323,136) (6,445)
Net increase (decrease) in short-term indebtedness (3,309,666) 7,140
Net increase (decrease) in outstanding payments (78,816) 38,885
Retirement of long-term debt (186,295) (695,147)
Issuance of common stock 488,290 -
Redemption of preferred stock - (42)
Dividends paid on common stock (318,910) (237,706)
Other (47,567) -
---------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (3,724) (110,263)
---------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 2,567 172,390
Cash and Cash Equivalents at Beginning of the Period 101,296 79,871
---------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 103,863 $ 252,261
=========================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 507,284 $ 155,023
income taxes $ 31,664 $ 157,172
=========================================================================================================
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
7
Progress Energy, Inc.
SUPPLEMENTAL DATA Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 (a) 2001 2000 (a)
----------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands)
Electric
Retail $ 1,591,713 $ 758,104 $ 4,214,165 $ 1,990,575
Wholesale 256,113 150,902 731,642 416,503
Unbilled (7,493) (9,606) (54,272) 14,615
Miscellaneous revenue 39,601 20,147 186,393 53,154
----------------------------------------------------------------------------------------------------------------------
Total Electric 1,879,934 919,547 5,077,928 2,474,847
Natural gas 51,671 75,645 258,820 223,093
Diversified businesses 398,942 69,716 1,217,532 133,334
----------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 2,330,547 $ 1,064,908 $ 6,554,280 $ 2,831,274
======================================================================================================================
Energy Sales
Electric (millions of kWh)
Retail
Residential 9,385 3,924 25,310 10,876
Commercial 6,597 3,353 17,553 8,713
Industrial 4,473 3,892 13,068 10,969
Other retail 1,164 416 3,135 1,079
----------------------------------------------------------------------------------------------------------------------
Total Retail 21,619 11,585 59,066 31,637
Unbilled (350) (371) (893) (11)
Wholesale 5,087 3,569 13,946 10,572
----------------------------------------------------------------------------------------------------------------------
Total Electric 26,356 14,783 72,119 42,198
----------------------------------------------------------------------------------------------------------------------
======================================================================================================================
Natural Gas (thousands of dt) 13,080 12,119 39,022 42,960
======================================================================================================================
Energy Supply (millions of kWh)
Generated - steam 13,451 7,674 37,242 22,019
nuclear 7,553 5,975 21,503 17,072
hydro 83 71 200 404
combustion turbines 2,461 309 5,270 624
Purchased 3,945 1,447 11,330 3,778
----------------------------------------------------------------------------------------------------------------------
Total Energy Supply (Company Share) 27,493 15,476 75,545 43,897
======================================================================================================================
Detail of Income Taxes (in thousands)
Income tax expense (credit) - current $ (4,197) $ 174,747 $ 24,279 $ 337,681
deferred (47,082) (23,655) (78,987) (74,760)
investment tax credit (5,264) (2,599) (18,479) (7,797)
----------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ (56,543) $ 148,493 $ (73,187) $ 255,124
======================================================================================================================
(a) Supplemental data does not include information related to Florida Progress
for the three and nine months ended September 30, 2000.
8
Progress Energy, Inc.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
A. Organization. Progress Energy, Inc. (Progress Energy) is a registered
------------
holding company under the Public Utility Holding Company Act of 1935,
as amended (PUHCA). Both Progress Energy and its subsidiaries are
subject to the regulatory provisions of the PUHCA. Progress Energy was
formed as a result of the reorganization of Carolina Power & Light
Company (CP&L) into a holding company structure on June 19, 2000. All
shares of common stock of CP&L were exchanged for an equal number of
shares of CP&L Energy, Inc (CP&L Energy). On December 4, 2000, CP&L
Energy changed its name to Progress Energy, Inc. Through its
wholly-owned regulated subsidiaries, CP&L, Florida Power Corporation
(Florida Power) and North Carolina Natural Gas Corporation (NCNG),
Progress Energy is primarily engaged in the generation, transmission,
distribution and sale of electricity in portions of North Carolina,
South Carolina and Florida and the transport, distribution and sale of
natural gas in portions of North Carolina. Through the Progress
Ventures business segment, Progress Energy is involved in merchant
energy generation, coal and synthetic fuel operations and energy
marketing and trading. Through other business units, Progress Energy
engages in other non-regulated business areas, including energy
management and related services, rail services and telecommunications.
Progress Energy's legal structure is not currently aligned with the
functional management and financial reporting of the Progress Ventures
business segment. Whether, and when, the legal and functional
structures will converge depends upon legislative and regulatory
action, which cannot currently be anticipated.
B. Basis of Presentation. These financial statements have been prepared
---------------------
in accordance with accounting principles generally accepted in the
United States of America (generally accepted accounting principles)
for interim financial information and with the instructions to Form
10-Q and Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Because the accompanying
consolidated interim financial statements do not include all of the
information and footnotes required by generally accepted accounting
principles, they should be read in conjunction with the audited
financial statements for the period ended December 31, 2000, and notes
thereto included in Progress Energy's Form 10-K for the year ended
December 31, 2000.
The amounts included in the consolidated interim financial statements
are unaudited but, in the opinion of management, reflect all
adjustments necessary to fairly present Progress Energy's financial
position and results of operations for the interim periods. Due to
seasonal weather variations 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 2000 have
been reclassified to conform to the 2001 presentation.
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. FLORIDA PROGRESS CORPORATION
----------------------------
On November 30, 2000, Progress Energy completed its acquisition of Florida
Progress Corporation (FPC) for an aggregate purchase price of approximately
$5.4 billion. Progress Energy paid cash consideration of approximately $3.5
billion and issued approximately 46.5 million common shares valued at
approximately $1.9 billion. In addition, Progress Energy issued 98.6
million contingent value obligations (CVOs) valued at approximately $49.3
million. At September 30, 2001, the CVOs had a fair market value of
approximately $32.5 million. Progress Energy recorded gains of $16.8
million and $7.9 million for the three and nine-month periods ended
September 30, 2001, respectively, to record the change in fair value of
CVOs. The purchase price includes approximately $18.6 million in direct
transaction costs.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations for FPC have been
included in Progress Energy's consolidated financial statements since the
date of acquisition. The excess of the purchase price over the estimated
fair value of the net identifiable assets and liabilities
9
acquired has been recorded as goodwill. The goodwill, approximately $3.6
billion, is being amortized on a straight-line basis over a period of
primarily 40 years (See Note 5).
The fair values of FPC's rate-regulated net assets acquired were considered
to be equivalent to book value since book value represents the amount that
is expected to be recoverable through regulated rates. The allocation of
the purchase price includes estimated amounts expected to be realized from
the sale of FPC's Inland Marine Transportation business segment, which is
classified as net assets held for sale.
In 2000, Progress Energy began the implementation of a plan to combine
operations of the companies resulting in a non-executive involuntary
termination cost accrual of approximately $52.2 million. Approximately
$41.8 million is attributable to Florida Power employees and has been
reflected as part of the purchase price allocation, while approximately
$10.4 million attributable to acquiring company employees was charged to
operating results in 2000. Progress Energy completed the implementation
phase of the plan in June 2001 and expects to finalize the plan by the end
of 2001. The majority of the related severance payments are expected to
occur in 2001 with the remaining payments occurring through 2003.
The third quarter activity for the termination costs is detailed in the
table below:
Non-Executive
(In millions) Termination Costs
-----------------
Balance at June 30, 2001 $ 34.5
Payments (10.3)
-----------------
Balance at September 30, 2001 $ 24.2
=================
The final purchase price allocation and estimated life of goodwill are
subject to adjustment for changes in Progress Energy's preliminary
assumptions and analyses, pending additional information concerning asset
and liability valuations and the evaluation of certain pre-acquisition
contingent liabilities, including but not limited to:
. final actuarial valuation of other postretirement benefit plan
obligations
. proceeds realized from the disposition of assets held for sale; and
. valuations of non-regulated businesses and individual assets and
liabilities.
The following unaudited pro forma combined results of operations for the
three and nine months ended September 30, 2000, has been prepared assuming
the acquisition of FPC had occurred on January 1, 2000. The pro forma
results are provided for information purposes only. The results are not
necessarily indicative of the actual results that would have been realized
had the acquisition occurred on the indicated date, nor are they
necessarily indicative of future results of operations of the combined
companies.
(in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------ ------------------
Revenues $2,332,628 $6,059,436
Net income $ 388,127 $ 649,632
Basic and diluted earnings per share $ 1.94 $ 3.25
Average shares 199,815 199,722
3. NET ASSETS HELD FOR SALE
------------------------
FPC's Inland Marine Transportation business segment is included in Progress
Energy's net assets held for sale. Inland Marine Transportation provides
transportation of coal, agriculture and other dry-bulk commodities as well
as fleet management services. On July 23, 2001, Progress Energy announced
that it had entered into a contract to sell the Inland Marine
Transportation business segment to AEP Resources, Inc., a wholly owned
subsidiary of American Electric Power, for a purchase price of $270
million. On November 1, 2001, Progress Energy completed the sale of the
Inland Marine Transportation segment. Of the $270 million purchase price,
approximately $225 million will be used for the early termination of
certain off-balance sheet arrangements for assets currently leased by the
segment. The remaining proceeds, after disposition costs, were used to
retire commercial paper. Since the results of operations for the Inland
Marine transportation segment are recorded one month in arrears, the
purchase price allocation will be finalized in the fourth quarter.
Progress Energy's results of operations for the three and nine months ended
September 30, 2001, exclude net income of $2.6 million and $5.3 million,
respectively, from the Inland Marine Transportation business and allocated
interest
10
expense, net of tax, for the nine months totaling approximately $3.2
million. Both the expected earnings from this business and allocated
interest expense, net of tax, during the holding period on the incremental
debt incurred to finance the purchase of this business segment has been
included in the determination of net assets held for sale.
As a result of the completion of the sale, Progress Energy has updated the
net realizable value of the Inland Marine Transportation segment. The table
below reflects the adjustments to the carrying value of the net assets held
for sale for the three months ended September 30, 2001:
(in thousands)
---------------------------------------------------------------------------
Carrying value at June 30, 2001 $ 2,504
Cash flows funded by parent 2,981
Adjustment to Inland Marine carrying value (17,732)
---------------------------------------------------------------------------
Carrying value at September 30, 2001 $(12,247)
In connection with the sale, Progress Energy entered into environmental
indemnification provisions covering both unknown and known sites (See Note
10). The carrying value adjustment relates to the interest rate effects on
the early termination of certain off-balance sheet arrangements, an
environmental indemnification accrual and an adjustment to expected
earnings. The net assets held for sale balance at September 30, 2001
reflects deferred tax and environmental liabilities retained by Progress
Energy in excess of net proceeds.
4. FINANCIAL INFORMATION BY BUSINESS SEGMENT
-----------------------------------------
Effective with the acquisition of FPC on November 30, 2000, Progress Energy
changed the basis of segment reporting and measurement of segment
profitability beginning with the fourth quarter of 2000. Prior periods have
been restated to reflect this change. Progress Energy currently provides
services through the following business segments: CP&L Electric, Florida
Power Electric, Natural Gas, Progress Ventures, Rail Services and Other.
Progress Energy changed its basis of segment reporting in the second
quarter of 2001 to include the energy marketing and trading activities
performed by Progress Ventures on behalf of CP&L and Florida Power in the
Progress Ventures segment and include Rail Services as a separate segment.
FPC operations are not included in Progress Energy's results of operations
prior to the acquisition date of November 30, 2000.
The CP&L Electric and Florida Power Electric segments are engaged in the
generation, transmission, distribution, and sale of retail electric energy
in portions of North Carolina, South Carolina and Florida. Electric retail
operations are subject to the rules and regulations of FERC, the NCUC, the
SCPSC and the FPSC.
The Natural Gas segment is engaged in the transportation, distribution and
sale of gas in portions of North Carolina. Gas operations are subject to
the rules and regulations of the NCUC.
The Progress Ventures segment is primarily made up of merchant energy
generation, coal and synthetic fuel operations, and energy marketing and
trading. The energy marketing and trading activity is currently performed
by Progress Ventures on behalf of the regulated utilities, CP&L and Florida
Power, and includes wholesale sales on behalf of these utilities. Electric
wholesale operations are subject to the rules and regulations of FERC, the
NCUC, the SCPSC and the FPSC.
The Rail Services segment operations include railcar repair, rail parts
reconditioning and sales, railcar leasing and sales, providing rail and
track material, and scrap metal recycling.
The Other segment is primarily made up of other diversified businesses and
holding company operations. The Other segment includes telecommunication
services, energy management services, miscellaneous non-regulated
activities and elimination entries.
For reportable segments presented in the accompanying table, segment income
includes intersegment revenues accounted for at prices representative of
unaffiliated party transactions.
11
Florida
(in thousands) CP&L Power Progress Rail Segment
Electric Electric Natural Gas Ventures Services Other Totals
--------------------------------------------------------------------------------------------------------------------------------
Three Months Ended 9/30/01
Revenues
Unaffiliated $ 793,599 $ 836,336 $ 43,049 $ 394,510 $219,554 $ 34,877 $ 2,321,925
Intersegment - - 8,622 88,014 478 (88,492) 8,622
-----------------------------------------------------------------------------------------------
Total Revenues $ 793,599 $ 836,336 $ 51,671 $ 482,524 $220,032 $ (53,615) $ 2,330,547
Segment Income (Loss) $ 153,392 $ 107,398 $ (3,167) $ 80,073 $ (2,165) $ 30,912 $ 366,443
Total Segment Assets $9,101,248 $5,044,029 $666,458 $1,005,962 $828,384 $4,026,908 $20,672,989
================================================================================================================================
Florida
CP&L Power Progress Rail Segment
Electric Electric Natural Gas Ventures Services Other Totals
--------------------------------------------------------------------------------------------------------------------------------
Three Months Ended 9/30/00
Revenues
Unaffiliated $ 771,140 - $ 74,654 $ 184,361 - $ 33,762 $ 1,063,917
Intersegment - - 991 - - - 991
-----------------------------------------------------------------------------------------------
Total Revenues $ 771,140 - $ 75,645 $ 184,361 - $ 33,762 $ 1,064,908
Segment Income (Loss) $ 154,408 - $ (533) $ 35,069 - $ 108,137 $ 297,081
Total Segment Assets $8,886,769 - $571,977 $ 254,336 - $ 406,299 $10,119,381
================================================================================================================================
Florida
CP&L Power Progress Rail Segment
Electric Electric Natural Gas Ventures Services (a) Other Totals
--------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended 9/30/01
Revenues
Unaffiliated $2,081,994 $2,291,121 $245,310 $1,100,581 $739,863 $ 81,901 $ 6,540,770
Intersegment - - 13,510 280,410 1,102 (281,512) 13,510
-----------------------------------------------------------------------------------------------
Total Revenues $2,081,994 $2,291,121 $258,820 $1,380,991 $740,965 $ (199,611) $ 6,554,280
Segment Income (Loss) $ 327,848 $ 251,601 $ (878) $ 218,777 $ (9,698) $ (155,502) $ 632,148
Total Segment Assets $9,101,248 $5,044,029 $666,458 $1,005,962 $828,384 $4,026,908 $20,672,989
================================================================================================================================
Florida
CP&L Power Progress Rail Segment
Electric Electric Natural Gas Ventures Services Other Totals
--------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended 9/30/00
Revenues
Unaffiliated $2,063,996 - $218,317 $ 453,551 - $ 90,634 $ 2,826,498
Intersegment - - 4,776 - - - 4,776
-----------------------------------------------------------------------------------------------
Total Revenues $2,063,996 - $223,093 $ 453,551 - $ 90,634 $ 2,831,274
Segment Income (Loss) $ 322,487 - $ 8,392 $ 76,820 - $ 82,102 $ 489,801
Total Segment Assets $8,886,769 - $571,977 $ 254,336 - $ 406,299 $10,119,381
================================================================================================================================
(a) Amounts reflect cumulative operating results of Rail Services since the
acquisition date of November 30, 2000.
5. IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
Effective January 1, 2001, Progress Energy adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No.
138. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 requires that an entity recognize all derivatives as assets
or liabilities in the consolidated balance sheet and measure those
instruments at fair value.
As a result of the adoption of SFAS No. 133, Progress Energy recorded a
transition adjustment as a cumulative effect of a change in accounting
principle of $23.6 million, net of tax, which increased accumulated
other comprehensive loss as of January 1, 2001. This amount relates to
several derivatives used to hedge cash flows related to interest on
long-term debt. The net derivative losses will be reclassified into
earnings consistent with hedge designations, primarily over the life of
the related debt instruments, which principally range from three to ten
years. Progress Energy estimates that approximately $6.8 million of the
$23.6 million net losses will be reclassified into earnings during the
twelve months ended December 31, 2001. There was no transition
adjustment affecting the consolidated statement of income as a result of
the adoption of SFAS No. 133.
During the second quarter of 2001, the Financial Accounting Standards
Board (FASB) issued interpretations of SFAS No. 133 indicating that
options in general cannot qualify for the normal purchases and sales
exception, but provided an exception that allows certain electricity
contracts, including certain capacity-energy contracts, to be
12
excluded from the mark-to-market requirements of SFAS No. 133. These
interpretations were effective July 1, 2001. Those interpretations would
not result in mark-to-market effects on Progress Energy's financial
statements based on contracts currently outstanding. In October 2001, the
FASB revised criteria related to the exception for certain electricity
contracts, with the revision to be effective January 1, 2002. It is unclear
whether or not that revision will be sustained and, if so, what effects the
revision would have on Progress Energy's financial statements. If an
electricity or fuel supply contract in its regulated businesses is subject
to mark-to-market accounting, there would be no income statement effect of
the mark to market because the contract's mark-to-market gain or loss will
be recorded as a regulatory asset or liability. Any mark-to-market gains or
losses in its non-regulated businesses will affect income unless those
contracts qualify for hedge accounting treatment.
The application of the new rules is still evolving, and further guidance
from the FASB is expected, which could additionally impact Progress
Energy's financial statements.
On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" and
No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting and clarifies the criteria for
recording of other intangible assets separately from goodwill. SFAS No. 142
requires that, effective January 1, 2002, Progress Energy cease
amortization of goodwill. It also requires Progress Energy to evaluate
goodwill for impairment at least annually, which could result in periodic
impairment charges. Goodwill amortization was $24.9 million and $72.6
million for the three and nine months ended September 30, 2001,
respectively, and is expected to be approximately $96.8 million for the
year. Progress Energy is currently assessing the impact adoption of these
statements will have on the financial statements.
On August 15, 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" that provides accounting guidance for the costs of
retiring long-lived assets and is effective for fiscal years beginning
after June 15, 2002. Progress Energy is currently assessing the impact
adoption of this statement will have on the financial statements.
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 provides
accounting guidance for financial accounting and reporting for the
impairment or disposal of long-lived assets. The statement supercedes FASB
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". It also supercedes the accounting and
reporting provisions of APB Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" related to the disposal of a segment of a business. The
Statement is effective for fiscal years beginning after December 15, 2001,
with early adoption encouraged. Progress Energy is currently assessing the
impact adopting this statement will have on the financial statements.
6. COMPREHENSIVE INCOME
--------------------
Comprehensive income for the three and nine months ended September 30, 2001
was $363.0 million and $594.5 million, respectively. Items of other
comprehensive income for the three and nine month periods consisted
primarily of derivatives used to hedge cash flows related to interest on
long term debt. Prior to the adoption of SFAS No. 133 (see Note 5) Progress
Energy had no other comprehensive income items and therefore comprehensive
income for the three and nine months ended September 30, 2000, is equal to
net income for those periods.
7. FINANCING ACTIVITIES
--------------------
On February 22, 2001, Progress Energy issued $3.2 billion of senior
unsecured notes with maturities ranging from three to thirty years.
Proceeds from this issuance were primarily used to retire short-term
obligations issued in connection with the FPC acquisition. Additionally, as
part of this transaction, Progress Energy terminated the $1.125 billion
notional amount of interest rate forward contracts that were issued in
anticipation of the debt issuance. Progress Energy recognized a $45.3
million loss on these contracts, designated as cash flow hedges, that is
deferred through accumulated other comprehensive loss and amortized over
the life of the associated debt instruments.
During the first quarter of 2001, Progress Capital Holdings retired $31
million of Medium-Term Notes. The $6 million of medium-term notes that were
retired in January had a 9.95% coupon rate, and the $25 million of
medium-term notes that were retired in February had a 6.13% coupon rate.
Progress Energy issued commercial paper to fund the maturing medium-term
notes.
13
On April 9, 2001, CP&L issued $300 million of Medium-Term Notes, 6.65%
Series D due April 1, 2008. Proceeds from the issuance were primarily
used to retire commercial paper.
On July 1, 2001, $80 million of Florida Power's Medium-Term Notes,
6.47% Series matured. Florida Power issued commercial paper to fund the
maturing medium-term notes.
On July 18, 2001, Florida Power issued $300 million of First Mortgage
Bonds, 6.650% Series due July 15, 2011. Proceeds from the issuance were
primarily used to retire commercial paper.
During the third quarter of 2001, Progress Capital Holdings retired $70
million of Medium-Term Notes. The $10 million of medium-term notes that
were retired in July had a 9.55% coupon rate, and the $60 million of
medium-term notes that were retired in August had a 6.88% coupon rate.
Progress Energy issued commercial paper to fund the maturing
medium-term notes.
On August 20, 2001, Progress Energy issued 11 million shares of common
stock at $40 per share for gross proceeds of $440 million. On August
24, 2001, Progress Energy issued an additional 1.65 million shares of
common stock at $40 per share for gross proceeds of $66 million.
Proceeds from the issuances were primarily used to retire commercial
paper. This transaction completed the permanent financing of the FPC
acquisition that closed on November 30, 2000.
On October 16, 2001, CP&L announced the redemption on November 15,
2001, of $125 million principal amount of 8.55% Quarterly Income
Capital Securities (Series A Subordinated Deferrable Interest
Debentures), at 100% of the principal amount of such securities.
On October 30, 2001, Progress Energy issued $400 million of Senior
Notes, 5.85% Series due 2008 and $400 million of Senior Notes, 7.00%
Series due 2031. Proceeds from the issuance were used to retire
commercial paper.
8. EARNINGS PER COMMON SHARE
-------------------------
Contingently issuable shares and restricted stock awards had a dilutive
effect on earnings per share for the three and nine months ended
September 30, 2001 and 2000, and increased the weighted-average number
of common shares outstanding for dilutive purposes by 673,344 and
658,295 for the three and nine months ended September 30, 2001,
respectively, and by 481,036 and 407,381 for the three and nine months
ended September 30, 2000, respectively. The weighted-average number of
common shares outstanding for dilutive purposes was 206.5 million and
202.5 million for the three and nine months ended September 30, 2001,
respectively, and 153.8 million and 153.6 million for the three and
nine months ended September 30, 2000, 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
5,223,387 and 5,782,376 at September 30, 2001 and September 30, 2000,
respectively.
9. FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES (QUIPS) OF
--------------------------------------------------------------------
SUBSIDIARY HOLDING SOLELY FPC GUARANTEED NOTES
----------------------------------------------
In April 1999, FPC Capital I (the Trust), an indirect wholly-owned
subsidiary of FPC, issued 12 million shares of $25 par cumulative
FPC-obligated mandatorily redeemable preferred securities due 2039
(Preferred Securities), with an aggregate liquidation value of $300
million and a quarterly distribution rate of 7.10%. Currently, all 12
million shares of the Preferred Securities that were issued are
outstanding. Concurrent with the issuance of the Preferred Securities,
the Trust issued to Florida Progress Funding Corporation (Funding
Corp.) all of the common securities of the Trust (371,135 shares) for
$9.3 million. Funding Corp. is a direct wholly-owned subsidiary of FPC.
The existence of the Trust is for the sole purpose of issuing the
Preferred Securities and the common securities and using the proceeds
thereof to purchase from Funding Corp. its 7.10% Junior Subordinated
Deferrable Interest Notes (subordinated notes) due 2039, for a
principal amount of $309.3 million. The subordinated notes and the
Notes Guarantee (as discussed below) are the sole assets of the Trust.
Funding Corp.'s proceeds from the sale of the subordinated notes were
advanced to Progress Capital and used for general corporate purposes
including the repayment of a portion of certain outstanding short-term
bank loans and commercial paper.
14
FPC has fully and unconditionally guaranteed the obligations of Funding
Corp. under the subordinated notes (the Notes Guarantee). In addition,
FPC has guaranteed the payment of all distributions required to be made
by the Trust, but only to the extent that the Trust has funds available
for such distributions (Preferred Securities Guarantee). The Preferred
Securities Guarantee, considered together with the Notes Guarantee,
constitutes a full and unconditional guarantee by FPC of the Trust's
obligations under the Preferred Securities.
The subordinated notes may be redeemed at the option of Funding Corp.
beginning in 2004 at par value plus accrued interest through the
redemption date. The proceeds of any redemption of the subordinated
notes will be used by the Trust to redeem proportional amounts of the
Preferred Securities and common securities in accordance with their
terms. Upon liquidation or dissolution of Funding Corp., holders of the
Preferred Securities would be entitled to the liquidation preference of
$25 per share plus all accrued and unpaid dividends thereon to the date
of payment.
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
Contingencies existing as of the date of these statements are described
below. No significant changes have occurred since December 31, 2000,
with respect to the commitments discussed in Note 19 of the financial
statements included in Progress Energy's 2000 Annual Report on Form
10-K.
Contingencies
1) Insurance. Progress Energy is a member of Nuclear Electric
---------
Insurance Limited (NEIL), which provides primary and excess
insurance coverage against property damage to members' nuclear
generating facilities. Under the primary program, Progress
Energy is insured for $500 million at each of its nuclear
plants. In addition to primary coverage, NEIL also provides
decontamination, premature decommissioning and excess property
insurance with limits of $2.0 billion on the Brunswick and
Harris Plants, and $1.1 billion on the Robinson Plant and
Crystal River Unit No. 3 (CR3).
Insurance coverage against incremental costs of replacement power
resulting from prolonged accidental outages at nuclear generating
units is also provided through membership in NEIL. Progress
Energy is insured thereunder, following a twelve week deductible
period, for 52 weeks in the amount of $3.5 million per week at
each of the nuclear units. An additional 104 weeks of coverage is
provided at 80% of the above weekly amount. For the current
policy period, Progress Energy is subject to retrospective
premium assessments of up to approximately $15 million with
respect to the primary coverage, $16.6 million with respect to
the decontamination, decommissioning and excess property
coverage, and $11.3 million for the incremental replacement power
costs coverage, in the event covered losses at insured facilities
exceed premiums, reserves, reinsurance and other NEIL resources.
Pursuant to regulations of the NRC, Progress Energy's property
damage insurance policies provide that all proceeds from such
insurance be applied, first, to place the plant in a safe and
stable condition after an accident and, second, to
decontamination costs, before any proceeds can be used for
decommissioning, plant repair or restoration. Progress Energy is
responsible to the extent losses may exceed limits of the
coverage described above.
Progress Energy is insured against public liability for a nuclear
incident up to $9.54 billion per occurrence. Under the provisions
of the Price Anderson Act, which limits liability for accidents
at nuclear power plants, Progress Energy, as an owner of nuclear
plants, can be assessed for a portion of any third-party
liability claims arising from an accident at any commercial
nuclear power plant in the United States. In the event that
public liability claims from an insured nuclear incident exceed
$200 million (currently available through commercial insurers),
CP&L and Florida Power would be subject to pro rata assessments
of up to $88.1 million for each reactor owned per occurrence.
Payment of such assessments would be made over time as necessary
to limit the payment in any one year to no more than $10 million
per reactor owned.
CP&L and Florida Power self-insure their transmission and
distribution lines against loss due to storm damage and other
natural disasters. Additionally, pursuant to a regulatory
order, Florida Power is accruing $6 million annually to a
storm damage reserve and may defer any losses in excess of the
reserve. The reserve balance is approximately $34.0 million at
September 30, 2001.
2) Regulatory developments. Florida Power previously operated
----------------------
under an agreement committing several parties not to seek any
reduction in its base rates or authorized return on equity. That
agreement expired on June 30, 2001. On May 3, 2001, the staff of
the Florida Public Service Commission, or FPSC, recommended that
the FPSC require Florida Power to submit, by September 14, 2001,
minimum filing
15
requirements, based on a 2002 projected year, to initiate a rate proceeding
regarding its future base rates. The FPSC staff also recommended to the
FPSC that, pending completion of Florida Power's rate case, annual revenues
of $114 million should be held subject to refund to its customers. On June
20, 2001, the FPSC issued an order that Florida Power be required to hold
$114 million of revenue subject to refund and to file, by September 14,
2001, minimum filing requirements based on a projected 2002 test year. On
July 2, 2001, Florida Power filed a request for rehearing of the portion of
the FPSC's order requiring that it hold $114 million of revenues subject to
refund on the grounds that the order contradicted FPSC precedent, was
inconsistent with the applicable statutory requirements and violated
Florida Power's due process rights. On October 16, 2001, the Commission
approved Florida Power's motion for reconsideration and reduced the revenue
subject to refund by $16 million to $98 million. The Commission also
allowed Florida Power to reduce the amount subject to refund if it is
successful in recovering certain expenses incurred during 2001, thus
potentially reducing the amount subject to refund.
On September 14, 2001, Florida Power submitted its required rate filing,
including its revenue requirements and supporting testimony. Under the
filing, Florida Power customers would receive a $5 million annual credit
rate for 15 years, or $75 million in total, from net synergies of its
merger with Progress Energy. Additionally, the filing provides that the
regulatory asset related to the purchase of Tiger Bay cogeneration facility
in 1997 would be fully amortized by the end of 2003, which would provide
customers with a further rate reduction of $37 million annually beginning
in 2004. Also included in the filing is an incentive regulatory plan, which
would provide for additional rate reductions through efficiencies derived
as a result of Florida Power's ability to lower the future costs of its
utility operations. Florida Power expects to satisfy an additional filing
requirement due November 15, 2001. Hearings are scheduled to begin March
20, 2002, with a final decision expected in July 2002. The FPSC has
encouraged its staff, Florida Power, and other parties to negotiate a
settlement, if possible, before the hearings begin. Progress Energy cannot
predict the outcome or impact of these matters.
3) Claims and uncertainties.
------------------------
a) Progress Energy 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 federal and
state laws. The lead or sole regulatory agency that is responsible for a
particular former coal tar site depends largely upon the state in which the
site is located. There are several manufactured gas plant (MGP) sites to
which both electric utilities and the gas utility have some connection. In
this regard, both electric utilities and the gas utility, with other
potentially responsible parties, are participating in investigating and, if
necessary, remediating former coal tar sites with several regulatory
agencies, including, but not limited to, the U.S. Environmental Protection
Agency (EPA), the Florida Department of Environment and Protection (FDEP)
and the North Carolina Department of Environment and Natural Resources,
Division of Waste Management (DWM). Although Progress Energy may incur
costs at these sites about which it has been notified, based upon current
status of these sites, Progress Energy does not expect those costs to be
material to its consolidated financial position or results of operations.
Progress Energy has accrued amounts to address known costs at certain of
these sites.
Both electric utilities, the gas utility and Progress Fuels are
periodically notified by regulators such as the EPA and various state
agencies of their involvement or potential involvement in sites, other than
MGP sites, that may require investigation and/or remediation. Although
Progress Energy's subsidiaries may incur costs at the sites about which
they have been notified, based upon the current status of these sites,
Progress Energy does not expect those costs to be material to the
consolidated financial position or results of operations of Progress
Energy.
The EPA has been conducting an enforcement initiative related to a number
of coal-fired 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.
Both CP&L and Florida Power have been asked to provide information to the
EPA as part of this initiative and have cooperated in providing the
requested information. The EPA has initiated civil enforcement actions
against other unaffiliated utilities as part of this initiative, some of
which have resulted in settlement agreements calling
16
for expenditures, ranging from $1.0 billion to $1.4 billion. These
settlement agreements have generally called for expenditures to be made
over extended time periods, and some of the companies may seek recovery of
the related cost through rate adjustments or similar mechanisms. Progress
Energy 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,
Georgia, but not Florida, to further reduce nitrogen oxide emissions in
order to attain a pre-set state NOx emission level by May 31, 2004. CP&L is
evaluating necessary measures to comply with the rule and estimates its
related capital expenditures to meet these measures in North and South
Carolina 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 Progress Energy's results
of operations. Further controls are anticipated as electricity demand
increases. Progress Energy 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. The U.S. Supreme Court has upheld, in part, the
District of Columbia Circuit Court of Appeals decision. Further litigation
and rulemaking are anticipated. 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. The cost of those controls are included in the cost
estimate of $370 million set forth above.
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 by May 1, 2003. The final rule also includes a set
of regulations that affect nitrogen oxide emissions from sources included
in the petitions. The North Carolina fossil-fueled electric generating
plants are included in these petitions. Acceptable state plans under the
NOx SIP Call can be approved in lieu of the final rules the EPA approved as
part of the 126 petitions. CP&L, other utilities, trade organizations and
other states are participating in litigation challenging the EPA's action.
On May 15, 2001, the District of Columbia Circuit Court of Appeals ruled in
favor of the EPA which will require North Carolina to make reductions in
nitrogen oxide emissions by May 1, 2003. However, the Court in its May 15th
decision rejected the EPA's methodology for estimating the future growth
factors the EPA used in calculating the emissions limits for utilities. In
August 2001, the court granted a request by CP&L and other utilities to
delay the implementation of the 126 Rule for electric generating units
pending resolution by the EPA of the growth factor issue. The court's order
tolls the three-year compliance period (originally set to end on May 1,
2003) for electric generating units as of May 15, 2001. Progress Energy
cannot predict the outcome of this matter.
On November 1, 2001, Progress Energy completed the sale of the Inland
Marine Transportation segment to AEP Resources, Inc. In connection with the
sale, Progress Energy entered into environmental indemnification provisions
covering both unknown and known sites. As of September 30, 2001, Progress
Energy has recorded an accrual to cover estimated probable future
environmental expenditures. Progress Energy believes that it is reasonably
possible that additional costs, which cannot be currently estimated, may be
incurred related to the environmental indemnification provision beyond the
amounts accrued as a result of new information. Progress Energy cannot
predict the outcome of this matter.
CP&L, Florida Power, Progress Ventures and NCNG have filed claims with
Progress Energy's general liability insurance carriers to recover costs
arising out of actual or potential environmental liabilities. Some claims
have settled and others are still pending. While management cannot predict
the outcome of these matters, the outcome is not expected to have a
material effect on the consolidated financial position or results of
operations.
b) As required under the Nuclear Waste Policy Act of 1982, CP&L and Florida
Power each entered into a contract with the 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.
17
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 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 found that the delay was not unavoidable, but 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 filed a motion with the Court of Appeals to
enforce the mandate in NSP v. DOE. Specifically, this group of
----------
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 DOE. CP&L and Florida Power are in the
process of evaluating whether they should each file a similar action
for damages.
CP&L and Florida Power also continue to monitor legislation that has
been introduced in Congress which might provide some limited relief.
CP&L and Florida Power cannot predict the outcome of this matter.
With certain modifications, CP&L's spent nuclear 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 obtained NRC approval to use additional storage space
at the Harris Plant in December 2000. Florida Power currently is
storing spent nuclear fuel onsite in spent fuel pools. If Florida
Power does not seek renewal of the CR3 operating license, CR3 will
have sufficient storage capacity in place for fuel consumed through
the end of the expiration of the license in 2016. If Florida Power
extends the CR3 operating license, dry storage may be necessary.
c) Progress Energy and its subsidiaries are involved in various
litigation matters in the ordinary course of business, some of which
involve substantial amounts. Where appropriate, accruals have been
made in accordance with SFAS No. 5, "Accounting for Contingencies," to
provide for such matters. In the opinion of management, the final
disposition of pending litigation would not have a material adverse
effect on Progress Energy's consolidated results of operations or
financial position.
11. SUBSEQUENT EVENT
----------------
Progress Energy has compensation plans for officers and key employees of
the Company that are stock-based in whole or in part. The Company measures
compensation cost for stock-based compensation plans using the intrinsic
value method of accounting as prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations.
Progress Energy may grant stock option awards pursuant to the Company's
1997 Equity Incentive Plan, Amended and Restated as of September 26, 2001.
On October 1, 2001, Progress Energy made an initial grant of approximately
2.4 million options at a price equal to the closing market price of the
stock on the date of the grant. The stock options expire 10 years from the
date they were granted and vest over a three-year period, with one-third of
the options vesting each year.
18
CAROLINA POWER & LIGHT COMPANY
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
September 30, 2001
STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 973,803 $ 919,547 $ 2,577,664 $ 2,474,847
Natural gas - - - 147,448
Diversified businesses 3,088 4,273 9,208 67,891
----------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 976,891 923,820 2,586,872 2,690,186
----------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 186,546 175,090 497,687 472,479
Purchased power 113,837 98,172 291,038 253,498
Gas purchased for resale - - - 103,734
Other operation and maintenance 167,153 153,721 515,241 516,937
Depreciation and amortization 143,720 132,010 421,513 406,729
Taxes other than on income 40,872 38,672 115,130 111,517
Diversified businesses 2,286 14,773 7,756 117,694
----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 654,414 612,438 1,848,365 1,982,588
----------------------------------------------------------------------------------------------------------------------------
Operating Income 322,477 311,382 738,507 707,598
----------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 2,660 3,654 13,686 8,965
Other, net 4,610 214,392 16,530 216,975
----------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) 7,270 218,046 30,216 225,940
----------------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 60,423 50,703 185,689 155,625
Other interest charges 2,587 4,948 7,500 14,229
Allowance for borrowed funds used during construction (3,777) (4,414) (8,125) (15,343)
----------------------------------------------------------------------------------------------------------------------------
Net Interest Charges 59,233 51,237 185,064 154,511
----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 270,514 478,191 583,659 779,027
Income Taxes 102,640 186,278 210,033 292,910
----------------------------------------------------------------------------------------------------------------------------
Net Income 167,874 291,913 373,626 486,117
Preferred Stock Dividend Requirements 741 741 2,223 2,225
----------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 167,133 $ 291,172 $ 371,403 $ 483,892
============================================================================================================================
See Notes to Carolina Power & Light Company Consolidated Interim Financial
Statements.
19
Carolina Power & Light Company
CONSOLIDATED BALANCE SHEETS
(In thousands) September 30, December 31,
Assets 2001 2000
-------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 11,855,720 $ 11,125,901
Accumulated depreciation (5,866,676) (5,505,731)
-------------------------------------------------------------------------------------------------------------
Utility plant in service, net 5,989,044 5,620,170
Held for future use 7,105 7,105
Construction work in progress 648,034 815,246
Nuclear fuel, net of amortization 180,909 184,813
-------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 6,825,092 6,627,334
-------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 39,725 30,070
Accounts receivable 552,271 466,774
Receivables from affiliated companies 313,846 362,834
Taxes receivable - 15,412
Inventory 325,673 233,369
Deferred fuel cost 132,070 119,853
Prepayments 21,245 24,284
Other current assets 75,882 75,451
-------------------------------------------------------------------------------------------------------------
Total Current Assets 1,460,712 1,328,047
-------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 217,649 210,571
Harris Plant deferred costs 35,661 44,813
Unamortized debt expense 16,605 15,716
Nuclear decommissioning trust funds 409,538 411,279
Diversified business property, net 105,306 102,294
Miscellaneous other property and investments 356,760 395,995
Other assets and deferred debits 119,025 124,339
-------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,260,544 1,305,007
-------------------------------------------------------------------------------------------------------------
Total Assets $ 9,546,348 $ 9,260,388
=============================================================================================================
Capitalization and Liabilities
-------------------------------------------------------------------------------------------------------------
Capitalization
-------------------------------------------------------------------------------------------------------------
Common stock $ 1,900,993 $ 1,753,105
Unearned ESOP common stock (114,914) (127,211)
Retained earnings 1,380,743 1,226,144
Accumulated other comprehensive loss (8,370) -
Preferred stock - not subject to mandatory redemption 59,334 59,334
Long-term debt, net 3,099,154 3,619,984
-------------------------------------------------------------------------------------------------------------
Total Capitalization 6,316,940 6,531,356
-------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 630,970 -
Accounts payable 300,718 281,026
Payables to affiliated companies 10,393 275,976
Taxes accrued 174,127 -
Interest accrued 58,440 56,259
Dividends declared 1,482 1,482
Other current liabilities 207,384 146,191
-------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,383,514 760,934
-------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,366,029 1,491,660
Accumulated deferred investment tax credits 172,710 197,207
Other liabilities and deferred credits 307,155 279,231
--------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 1,845,894 1,968,098
-------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 6)
-------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 9,546,348 $ 9,260,388
=============================================================================================================
See Notes to Carolina Power & Light Company Consolidated Interim Financial
Statements.
20
Carolina Power & Light Company
STATEMENTS OF CASH FLOWS Nine Months Ended
September 30,
(In thousands) 2001 2000
----------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 373,626 $ 486,117
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 489,420 474,410
Deferred income taxes (93,073) (73,516)
Investment tax credit (12,518) (7,749)
Gain on sale of investment - (200,000)
Deferred fuel credit (12,217) (26,215)
Net (increase) decrease in accounts receivable 62,351 (119,217)
Net increase in inventories (92,304) (14,904)
Net decrease in prepaids and other current assets 2,607 98,273
Net increase (decrease) in accounts payable (193,524) 10,224
Net increase in other current liabilities 137,988 228,527
Other 48,376 56,601
----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 710,732 912,551
----------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (615,554) (613,985)
Nuclear fuel additions (70,316) (46,936)
Proceeds from sale of investment - 200,000
Contributions to nuclear decommissioning trust (25,564) (25,603)
Increase in cash restricted for redemption of long-term debt - 4,051
Net cash flow of company-owned life insurance program (5,137) (4,858)
Diversified business property additions (5,311) (34,875)
Investments in non-utility activities (8,355) (106,197)
----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (730,237) (628,403)
----------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 296,124 783,052
Net decrease in commercial paper reclassified to long-term debt (181,860) (6,445)
Net increase in outstanding payments - 21,069
Retirement of long-term debt (217) (695,147)
Redemption of preferred stock - (42)
Equity contribution from parent 115,000 -
Dividends paid to parent (197,664) -
Dividends paid on common stock - (237,706)
Dividends paid on preferred stock (2,223) (2,225)
----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 29,160 (137,444)
----------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 9,655 146,704
Decrease in Cash from Stock Distribution (see Note 1) (11,755)
----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period 30,070 79,871
----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 39,725 $ 214,820
----------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 178,463 $ 158,940
income taxes $ 118,206 $ 187,340
==========================================================================================================
See Notes to Carolina Power & Light Company Consolidated Interim Financial
Statements.
21
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
A. Organization. Carolina Power & Light Company (CP&L) is a public
------------
service corporation primarily engaged in the generation, transmission,
distribution and sale of electricity in portions of North Carolina and
South Carolina. CP&L is a wholly-owned subsidiary of Progress Energy,
Inc. (Progress Energy), which was formed as a result of the
reorganization of CP&L into a holding company structure on June 19,
2000. All shares of common stock of CP&L were exchanged for an equal
number of shares of CP&L Energy. On December 4, 2000, CP&L Energy
changed its name to Progress Energy, Inc. Progress Energy is a
registered holding company under the Public Utility Holding Company
Act of 1935, as amended (PUCHA). Both Progress Energy and its
subsidiaries are subject to the regulatory provisions of PUCHA.
On July 1, 2000, CP&L distributed its ownership interest in the stock
of North Carolina Natural Gas (NCNG), Strategic Resource Solutions
Corp. (SRS), Monroe Power Company (Monroe Power) and Progress
Ventures, Inc. (formerly Progress Energy Ventures, Inc.) to Progress
Energy. As a result, those companies are direct subsidiaries of the
Progress Energy, Inc. and are not included in CP&L's results of
operations and financial position since that date.
B. Basis of Presentation. These financial statements have been prepared
---------------------
in accordance with accounting principles generally accepted in the
United States of America (generally accepted accounting principles)
for interim financial information and with the instructions to Form
10-Q and Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Because the accompanying
consolidated interim financial statements do not include all of the
information and footnotes required by generally accepted accounting
principles, they should be read in conjunction with the audited
financial statements for the period ended December 31, 2000 and notes
thereto included in CP&L's Form 10-K for the year ended December 31,
2000.
The amounts included in the consolidated interim financial statements
are unaudited but, in the opinion of management, reflect all
adjustments necessary to fairly present CP&L's financial position and
results of operations for the interim periods. Due to seasonal weather
variations 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 2000 have been reclassified to
conform to the 2001 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. FINANCIAL INFORMATION BY BUSINESS SEGMENT
-----------------------------------------
As described in Note 1A, on July 1, 2000, CP&L distributed its ownership
interest in the stock of NCNG, SRS, Monroe Power and Progress Ventures,
Inc. to Progress Energy. As a result, those companies are direct
subsidiaries of Progress Energy and are not included in CP&L's results of
operations and financial position since that date.
Subsequent to July 1, 2000, CP&L's operations consist primarily of the CP&L
Utility segment with no other material segments. The CP&L Utility segment
includes both retail and wholesale electric operations and trading
activities.
22
The financial information by business segment for CP&L Utility for the
three and nine months ended September 30, 2001, and 2000 is as
follows:
Three Months Ended
(in thousands) September 30, 2001 September 30, 2000
--------------------------------------------------------------------------------------
Revenues
Unaffiliated $ 973,803 $ 919,547
Intersegment - -
---------------------------------------------
Total Revenues $ 973,803 $ 919,547
Segment Income $ 165,807 $ 178,136
Total Segment Assets $9,101,248 $8,886,769
========================================================================================
Nine Months Ended
(in thousands) September 30, 2001 September 30, 2000
----------------------------------------------------------------------------------------
Revenues
Unaffiliated $2,577,664 $2,474,847
Intersegment - -
---------------------------------------------
Total Revenues $2,577,664 $2,474,847
Segment Income $ 368,856 $ 386,927
Total Segment Assets $9,101,248 $8,886,769
========================================================================================
The primary differences between the CP&L Utility and CP&L consolidated
financial information relate to other non-electric operations,
elimination entries, and the $121.1 million after-tax gain on the sale
of the limited partnership interest in BellSouth Carolinas PCS in
September 2000.
3. IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
Effective January 1, 2001, CP&L adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 138. SFAS
No. 133, as amended, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as assets or
liabilities in the consolidated balance sheet and measure those
instruments at fair value.
The adoption of SFAS No. 133 did not result in a significant
transition adjustment affecting accumulated other comprehensive loss.
Additionally, there was no transition adjustment affecting the
consolidated statement of income as a result of the adoption of SFAS
No. 133.
During the second quarter of 2001, the Financial Accounting Standards
Board (FASB) issued interpretations of SFAS No. 133 indicating that
options in general cannot qualify for the normal purchases and sales
exception, but provided an exception that allows certain electricity
contracts, including certain capacity-energy contracts, to be excluded
from the mark-to-market requirements of SFAS No. 133. These
interpretations were effective July 1, 2001. Those interpretations
would not result in mark-to-market effects on CP&L's financial
statements based on contracts currently outstanding. In October 2001,
the FASB revised criteria related to the exception for certain
electricity contracts, with the revision to be effective January 1,
2002. It is unclear whether or not that revision will be sustained
and, if so, what effects the revision would have on CP&L's financial
statements. If an electricity or fuel supply contract in its regulated
business is subject to mark-to-market accounting, there would be no
income statement effect of the mark to market because the contract's
mark-to-market gain or loss will be recorded as a regulatory asset or
liability. Any mark-to-market gains or losses on contracts outside its
regulated business will affect income unless those contracts qualify
for hedge accounting treatment.
The application of the new rules is still evolving and further
guidance from the FASB is expected, which could additionally impact
CP&L's financial statements.
On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations"
and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141
requires business combinations initiated after June 30, 2001, to be
accounted for using the purchase method of accounting and clarifies
the criteria for recording of other intangible assets separately from
goodwill. SFAS No. 142 requires that, effective January 1, 2002, a
company cease amortization of goodwill. CP&L does not have any
goodwill recorded on its records, and therefore the adoption of these
statements will not impact CP&L's financial statements.
23
On August 15, 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" that provides accounting guidance for the costs of
retiring long-lived assets and is effective for fiscal years beginning
after June 15, 2002. CP&L is currently assessing the impact adoption of
this statement will have on the financial statements.
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 provides
accounting guidance for financial accounting and reporting for the
impairment or disposal of long-lived assets. The statement supercedes FASB
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". It also supercedes the accounting and
reporting provisions of APB Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" related to the disposal of a segment of a business. The
Statement is effective for fiscal years beginning after December 15, 2001,
with early adoption encouraged. CP&L is currently assessing the impact
adopting this statement will have on the financial statements.
4. COMPREHENSIVE INCOME
--------------------
Comprehensive income for the three and nine months ended September 30, 2001
was $164.1 and $365.2 million, respectively. Items of other comprehensive
income for the three and nine month periods consisted of derivatives used
to hedge cash flows related to interest on long term debt. Prior to the
adoption of SFAS No. 133 (see Note 3) CP&L had no other comprehensive
income items and therefore comprehensive income for the three and nine
months ended September 30, 2000 is equal to net income for those periods.
5. FINANCING ACTIVITIES
--------------------
On April 9, 2001, CP&L issued $300 million of Medium-Term Notes, 6.65%
Series D due April 1, 2008. Proceeds from the issuance were primarily used
to retire commercial paper.
On October 16, 2001, CP&L announced the redemption on November 15, 2001, of
$125 million principal amount of 8.55% Quarterly Income Capital Securities
(Series A Subordinated Deferrable Interest Debentures), at 100% of the
principal amount of such securities.
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
Contingencies existing as of the date of these statements are described
below. No significant changes have occurred since December 31, 2000, with
respect to the commitments discussed in Note 16 of the financial statements
included in CP&L's 2000 Annual Report on Form 10-K.
Contingencies
1) Insurance. CP&L is a member of Nuclear Electric Insurance
---------
Limited (NEIL), which provides primary and excess insurance
coverage against property damage to members' nuclear generating
facilities. Under the primary program, CP&L is insured for $500
million at each of its nuclear plants. In addition to primary
coverage, NEIL also provides decontamination, premature
decommissioning and excess property insurance with limits of $2.0
billion on the Brunswick and Harris Plants, and $1.1 million on
the Robinson Plant.
Insurance coverage against incremental costs of replacement power
resulting from prolonged accidental outages at nuclear generating
units is also provided through membership in NEIL. CP&L is
insured thereunder, following a twelve week deductible period,
for 52 weeks in the amount of $3.5 million per week at each of
its nuclear units. An additional 104 weeks of coverage is
provided at 80% of the above weekly amount. For the current
policy period, CP&L is subject to retrospective premium
assessments of up to approximately $11.6 million with respect to
the primary coverage, $13.3 million with respect to the
decontamination, decommissioning and excess property coverage and
$8.9 million for the incremental replacement power costs
coverage, in the event covered losses at insured facilities
exceed premiums, reserves, reinsurance and other NEIL resources.
Pursuant to regulations of the Nuclear Regulatory Commission,
CP&L's property damage insurance policies provide that all
proceeds from such insurance be applied, first, to place the
plant in a safe and stable condition after an accident and,
second, to decontamination costs, before any proceeds can be used
for decommissioning, plant repair or restoration. CP&L is
responsible to the extent losses may exceed limits of the
coverage described above.
24
CP&L is insured against public liability for a nuclear incident
up to $9.54 billion per occurrence. Under the provisions of the
Price Anderson Act, which limits liability for accidents at
nuclear power plants, CP&L, as an owner of nuclear plants, can be
assessed for a portion of any third-party liability claims
arising from an accident at any commercial nuclear power plant in
the United States. In the event that public liability claims from
an insured nuclear incident exceed $200 million (currently
available through commercial insurance), CP&L would be subject to
a pro rata assessment of up to $88.1 million for each reactor
owned per occurrence. Payment of such assessments would be made
over time as necessary to limit the payment in any one year to no
more than $10 million per reactor owned.
CP&L self-insures its transmission and distribution lines against
loss due to storm damage and other natural disasters.
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 federal and state laws. The lead or sole
regulatory agency that is responsible for a particular former
coal tar site depends largely upon the state in which the site is
located. There are several manufactured gas plant (MGP) sites to
which CP&L has some connection. In this regard, CP&L, with other
potentially responsible parties, are participating in
investigating and, if necessary, remediating former coal tar
sites with several regulatory agencies, including, but not
limited to, the U.S. Environmental Protection Agency (EPA) and
the North Carolina Department of Environment and Natural
Resources, Division of Waste Management (DWM). Although CP&L may
incur costs at these sites about which it has been notified,
based upon current status of these sites, CP&L does not expect
those costs to be material to its consolidated financial position
or results of operations.
CP&L is periodically notified by regulators such as the EPA and
various state agencies of their 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 they have been notified, based upon the
current status of these sites, CP&L does not expect those costs
to be material to its consolidated financial position or results
of operations.
The EPA has been conducting an enforcement initiative related to
a number of coal-fired 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 civil enforcement actions against other unaffiliated
utilities as part of this initiative, some of which have resulted
in settlement agreements calling for expenditures, ranging from
$1.0 billion to $1.4 billion. These settlement agreements have
generally called for expenditures to be made over extended time
periods, and some of the companies may seek recovery of the
related cost through rate adjustments or similar mechanisms. 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 level
by May 31, 2004. CP&L is evaluating necessary measures to comply
with the rule and estimates its related capital expenditures to
meet these measures in North and South Carolina 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 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
25
eight-hour ozone standard. The U.S. Supreme Court has upheld, in
part, the District of Columbia Circuit Court of Appeals decision.
Further litigation and rulemaking are anticipated. 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. The cost of
those controls are included in the cost estimate of $370 million
set forth above.
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 by May 1, 2003. The final
rule also includes a set of regulations that affect nitrogen
oxide emissions from sources included in the petitions. The North
Carolina fossil-fueled electric generating plants are included in
these petitions. Acceptable state plans under the NOx SIP Call
can be approved in lieu of the final rules the EPA approved as
part of the 126 petitions. CP&L, other utilities, trade
organizations and other states are participating in litigation
challenging the EPA's action. On May 15, 2001, the District of
Columbia Circuit Court of Appeals ruled in favor of the EPA which
will require North Carolina to make reductions in nitrogen oxide
emissions by May 1, 2003. However, the Court in its May 15th
decision rejected the EPA's methodology for estimating the future
growth factors the EPA used in calculating the emissions limits
for utilities. In August 2001, the court granted a request by
CP&L and other utilities to delay the implementation of the 126
Rule for electric generating units pending resolution by the EPA
of the growth factor issue. The court's order tolls the
three-year compliance period (originally set to end on May 1,
2003) for electric generating units as of May 15, 2001. CP&L
cannot predict the outcome of this matter.
CP&L has filed claims with its general liability insurance
carriers to recover costs arising out of actual or potential
environmental liabilities. Some claims have settled and others
are still pending. While management cannot predict the outcome of
these matters, the outcome is not expected to have a material
effect on the consolidated financial position or results of
operations.
b) As required under the Nuclear Waste Policy Act of 1982, CP&L
entered into a contract with the 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 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 found
that the delay was not unavoidable, but 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 filed a motion with the
Court of Appeals to enforce the mandate in NSP v. DOE.
----------
Specifically, this group of 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 DOE. CP&L
is in the process of evaluating whether they 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.
26
With certain modifications, CP&L's spent nuclear fuel storage
facilities will be sufficient to provide storage space for spent
fuel generated on its system through the expiration of the
current operating licenses for all of its nuclear generating
units. Subsequent to the expiration of these licenses, dry
storage may be necessary. CP&L obtained NRC approval to use
additional storage space at the Harris Plant in December 2000.
c) CP&L is involved in various litigation matters in the ordinary
course of business, some of which involve substantial amounts.
Where appropriate, accruals have been made in accordance with
SFAS No. 5, "Accounting for Contingencies," to provide for such
matters. In the opinion of management, the final disposition of
pending litigation would not have a material adverse effect on
CP&L's consolidated results of operations or financial position.
27
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, 2001, as compared to the
corresponding periods in the prior year
Progress Energy, Inc.
Operating Results
-----------------
Progress Energy's consolidated earnings for the three months ended September 30,
2001, were $366.4 million, or $1.78 per share, compared to earnings of $297.1
million, or $1.94 per share, for the same period in 2000. Earnings for the nine
months ended September 30, 2001 were $632.1 million, $3.13 per share, compared
to earnings of $489.8 million, or $3.20 per share for the same period in 2000.
Earnings for the prior year include a $121.1 million after-tax gain on the sale
of the 10% limited partnership interest in BellSouth Carolinas PCS in September
2000. The increase in Progress Energy's earnings for the three and nine-month
period is primarily related to Florida Progress being included in Progress
Energy's results of operations since the acquisition date of November 30, 2000.
Operating results for the three and nine months ended September 30, 2001 were
also favorably impacted by expanded operations in the Progress Ventures business
segment.
Business segment earnings and the factors affecting them are discussed below.
CP&L Electric
-------------
CP&L Electric contributed net income of $153.4 million and $327.8 million for
the three and nine months ended September 30, 2001, respectively, and $154.4
million and $322.5 million for the same periods in 2000, respectively. Wholesale
sales are reported in the Progress Ventures segment.
The components of retail electric megawatt-hour sales for the three and nine
months ended September 30, 2001, and 2000 were as follows:
(In millions of mWh)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- --------
Residential 4,015 3,924 2.3% 11,469 10,875 5.5%
Commercial 3,433 3,353 2.4 9,186 8,712 5.5
Industrial 3,540 3,892 (9.1) 10,145 10,969 (7.5)
Governmental 414 416 (0.5) 1,093 1,079 1.3
----------------------------------------------- --------------------------
Total Retail mWh Sales 11,402 11,585 (1.6)% 31,893 31,635 0.8%
For the year to date, residential and commercial mWh sales reflect continued
growth in the number of customers served by CP&L and increased usage. Weather
has had a positive impact for the quarter and nine months ended September 30,
2001, compared to the same periods in the prior year. For the third quarter, the
residential sales increased when compared to the same period last year due to
customer growth and usage and favorable weather. Industrial sales experienced an
overall decrease for the quarter and year to date primarily related to the
textile, paper and chemical industries, which continue to be negatively affected
by the economic downturn that is expected to continue.
Fuel used for electric generation, excluding fuel related to wholesale sales,
increased for the quarter mainly due to increases in price. For the year to
date, fuel related to retail sales increased primarily due to price increases in
the current year, partially offset by a deferred fuel write-off in June 2000 and
a decrease in generation.
Purchased power, excluding that purchased for wholesale sales, increased for the
year to date period primarily due to increases in price and volume, offset by
decreases in purchases from co-generators. The decrease in co-generator
28
purchases was due to the termination of two contracts in the fourth quarter of
2000. For the quarter, purchased power increased due to price and volume.
Fuel and purchased power expenses are recovered primarily through cost recovery
clauses and, as such, have no material impact on operating results.
Other operation and maintenance expense decreased for the nine months ended
September 30, 2001, due to the absence of restoration costs associated with the
severe winter storm and record breaking snowfall in January 2000. Operation and
maintenance expenses in the third quarter, as compared to the prior year,
increased primarily due to the timing of planned nuclear plant outage costs, and
higher transmission expenses.
Florida Power Electric
----------------------
The results shown in the Progress Energy consolidated financial statements for
the Florida Power Electric segment are not comparable to the prior year as the
operating results of Florida Power have only been included in Progress Energy's
results of operations since the date of acquisition on November 30, 2000.
Florida Power Electric contributed net income of $107.4 million and $251.6
million for the three and nine months ended September 30, 2001, respectively.
Wholesale sales are being reported in the Progress Ventures segment. The
components of retail electric megawatt-hour sales for the three and nine months
ended September 30, 2001, and 2000 were as follows:
(In millions of mWh)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- --------
Residential 5,370 5,467 (1.8)% 13,842 13,267 4.3%
Commercial 3,164 3,184 (0.6) 8,367 8,215 1.9
Industrial 934 1,078 (13.4) 2,923 3,244 (9.9)
Governmental 751 738 1.8 2,041 1,988 2.7
------------------------------------------------- -------------------------
Total Retail mWh Sales 10,219 10,467 (2.4)% 27,173 26,714 1.7%
Florida Power's retail megawatt-hour sales decreased slightly during the third
quarter of 2001 and increased slightly for the year to date compared with 2000.
Residential and commercial sectors increased year to date due to continued
customer growth, partially offset by cooler weather, which is a key factor
influencing usage among residential customers. Cooler weather also negatively
influenced retail sales for the quarter, but was partially offset by customer
growth. Industrial sales declined due to weakness in the manufacturing sector
and phosphate industry, which continue to be affected by the economic downturn
that is expected to continue.
Fuel used in generation and purchased power increased for the third quarter and
first nine months of 2001 when compared to the same periods last year. The
increase is due mainly to the increased price of coal in the third quarter, and
coal, oil and gas for the year compared to the same periods in 2000. Fuel and
purchased power expenses are recovered primarily through cost recovery clauses
and, as such, have no material impact on operating results. Operations and
maintenance expense increased slightly during the quarter but decreased year to
date. The decrease is due primarily to lower plant maintenance costs, partially
offset by a prior year refund of transmission charges from a supplier.
Natural Gas
-----------
Natural Gas operations had a net loss of $3.2 million and $0.9 million for the
three and nine months ended September 30, 2001, respectively. For the same
periods in 2000, this segment contributed a net loss of $0.5 million and net
income of $8.4 million, respectively. The decreased earnings is mainly due to
reduced sales to certain large industrial customers with fuel switching
capabilities and declines in sales due to economic conditions, primarily in the
textile industry. Natural gas revenues increased for the nine months ended
September 30, 2001, when compared to the same period in the prior year, mainly
due to increases in the market price of natural gas, which are recovered
primarily through cost recovery clauses. Revenues decreased for the three-month
period due to industrial sales, which are down due to lower consumption because
gas prices are higher than alternative fuel prices and a shift from sales to
transportation service.
29
Depreciation expense increased in the current year primarily due to the
Sandhills Pipeline, which went into operation in March of 2001.
Operation and maintenance expenses increased slightly for the three and nine
months ended September 30, 2001 when compared to the same period in the prior
year due to increases in bad debt expense associated with increases in natural
gas revenues, increases in staffing levels and associated overhead.
Progress Ventures
-----------------
Progress Ventures, formerly reported as Energy Ventures, contributed net income
of $80.1 million and $218.8 million, respectively, for the three and nine months
ended September 30, 2001, and $35.1 million and $76.8 million, respectively, for
the same periods in 2000. The Progress Ventures segment operations include fuel
extraction, manufacturing and delivery, synthetic fuels production, merchant
generation, and energy marketing and trading activities on behalf of the utility
operating companies. Energy marketing and trading activities include wholesale
sales on behalf of the utilities. Due to the creation of Progress Ventures in
2000 and the acquisition of Electric Fuels' subsidiaries through the FPC
acquisition, the results of operations for the Progress Ventures segment are not
comparable to the prior year.
The increase in earnings for this segment is primarily due to the tax credits
generated by Progress Energy's synthetic fuel operations (see "Other Matters"
below). The Progress Ventures segment sold 4.1 million and 10.3 million tons of
synthetic fuel for the three and nine months ended September 30, 2001,
respectively, and 1.0 million and 1.2 million tons for the quarter and year to
date periods ended September 30, 2000, respectively.
Progress Ventures' energy marketing and trading activities on behalf of CP&L
generated net income of $12.4 million and $41.0 million, for the three and nine
months ended September 30, 2001, respectively, compared to net income of $23.7
million and $60.4 million, respectively, for the same periods in the prior year.
Earnings from the trading operations decreased over these periods due to
softness in the energy market in the current year and mark-to-market adjustments
on open trading positions. Earnings from the term marketing operations were
relatively flat compared with the prior year. Progress Ventures' energy
marketing and trading activities on behalf of Florida Power for the nine months
ended September 30, 2001 of $18.4 million increased over the prior year
primarily due to increased sales to Seminole Electric Cooperative, Florida
Power's largest wholesale customer.
The fuel extraction, manufacturing and delivery operations were owned by
Progress Fuels and therefore results are not comparable due to the acquisition
of FPC in November 2000. Merchant generation operations for the current year
were consistent with the prior period results. Progress Energy expects earnings
in merchant generation to increase through the addition of a plant in Florida,
transfer of generating assets in Rowan County from CP&L to Progress Ventures and
an additional acquisition of electric generating projects. See "Company
Activities" below for a detail of Progress Energy's plant developments.
Rail Services
-------------
Rail Services' operations represent the activities of Progress Rail Services
Corporation (Progress Rail) and include railcar repair, rail parts
reconditioning and sales, scrap metal recycling and other rail related services.
Rail Service's results for the nine months ended September 30, 2001, include
Rail Service's cumulative revenues and net loss from the date of acquisition,
November 30, 2000.
Due to the acquisition of Progress Rail through the FPC acquisition, the results
of operations for the Rail Services segment are not comparable to the prior
year. Current year net losses of $2.2 million and $9.7 million for the three and
nine months ended September 30, 2001, respectively, were negatively affected by
the significant downturn in the domestic scrap market and a decrease in rail
service procurement by major railroads.
Other
-----
The Other segment contributed net income of $30.9 million and a net loss of
$155.5 million for the three and nine months ended September 30, 2001, and net
income of $108.1 million and $82.1 million, respectively, for the same periods
in 2000. The Other segment primarily includes certain holding company results
and the operations of Strategic Resource Solutions Corp. (SRS), Progress
Telecommunications Corporation (Progress Telecom) and Caronet, Inc. The decrease
in earnings for the three and nine months ended September 30, 2001, when
compared to
30
the same periods in the prior year, is primarily due to a $121.1 million
after-tax gain on the sale of Caronet, Inc.'s 10% limited partnership interest
in BellSouth Carolinas PCS in September 2000. Increases in interest expense for
holding company debt and goodwill amortization resulting from the acquisition of
Florida Progress increased current year expenses. See "New Accounting Standards"
below for information on recent developments related to goodwill amortization.
The decrease in earnings was partially offset by intra-period tax allocation
adjustments and Contingent Value Obligation (CVO) mark-to market.
Generally accepted accounting principles require companies to apply a levelized
effective tax rate to interim periods that is consistent with the estimated
annual rate. Income tax expense was decreased by $72.6 million and $27.2 million
for the third quarter and year to date, respectively, in order to maintain an
effective tax rate consistent with the estimated annual rate. The tax credits
associated with Progress Energy's synthetic fuel operations lower the overall
effective tax rate. Fluctuations in estimated earnings and tax credits can also
cause large swings in the effective tax rate for interim periods. Therefore,
this adjustment will vary each quarter, but will have no effect on net income
for the year.
Progress Energy issued 98.6 million CVOs in connection with the Florida Progress
acquisition. Each CVO represents the right to receive contingent payments based
on the performance of four synthetic fuel facilities owned by Progress Energy.
The payments, if any, are based on the net after-tax cash flows the facilities
generate. These CVOs are valued at fair value and unrealized gains and losses
from changes in fair value are recognized in earnings. At September 30, 2001,
the CVOs had a fair market value of approximately $32.5 million. Progress Energy
recorded gains of $16.8 million and $7.9 million for the three and nine-month
periods ended September 30, 2001, respectively, to record the change in fair
value of CVOs.
The operations of SRS, Progress Telecom and Caronet did not have a material
impact on Progress Energy's results for the three and nine months ended
September 30, 2001.
Due to the historical losses at SRS, which include net losses of $2.1 million
and $5.6 million for the three and nine months ended September 30, 2001,
respectively, and the decline of the market value for technology companies,
Progress Energy is assessing the recoverability of SRS's long-lived assets,
which totaled approximately $43 million at September 30, 2001. Progress Energy
expects to conclude the assessment in the fourth quarter.
As of September 30, 2001, Progress Energy's cost basis investment in Interpath
was approximately $150 million. Due to the overall conditions in the technology
industry, and in the Application Service Provider segment in particular,
Progress Energy has initiated a valuation study to help assess the
recoverability of its investment in Interpath. Progress Energy expects to
receive the results in the fourth quarter.
The results of these assessments may require a writedown of a major portion of
these assets.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Progress Energy, Inc.
During the nine months ended September 30, 2001, $874.9 million was spent on the
utility subsidiaries' construction program and $185.2 million was spent in
diversified business property additions. These amounts are not comparable to the
prior year due to the acquisition of FPC on November 30, 2000.
In February 2001, Progress Energy issued $3.2 billion of senior unsecured notes
with maturities ranging from three to thirty years. These notes were issued with
a weighted average coupon of 7.06%. Proceeds from this issuance were primarily
used to retire commercial paper and other short-term indebtedness issued in
connection with the FPC acquisition. As a result of the issuance of $3.2 billion
of senior notes, availability under Progress Energy's line of credit, which is
used to support its commercial paper borrowings, was reduced to $550 million
During the first quarter of 2001, Progress Capital Holdings retired $31 million
of Medium-Term Notes. The $6 million of medium-term notes that were retired in
January had a 9.95% coupon rate, and the $25 million of medium-term notes that
were retired in February had a 6.13% coupon rate. Progress Energy issued
commercial paper to fund the maturing medium-term notes.
On April 9, 2001, CP&L issued $300 million of Medium-Term Notes, 6.65% Series D
due April 1, 2008. Proceeds from the issuance were primarily used to retire
commercial paper.
31
On July 1, 2001, $80 million of Florida Power's Medium-Term Notes, 6.47% Series
matured. Florida Power issued commercial paper to fund the maturing medium-term
notes.
On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds,
6.650% Series due July 15, 2011. Proceeds from the issuance were primarily used
to retire commercial paper.
During the third quarter of 2001, Progress Capital Holdings retired $70 million
of Medium-Term Notes. The $10 million of medium-term notes that were retired in
July had a 9.55% coupon rate, and the $60 million of medium-term notes that were
retired in August had a 6.88% coupon rate. Progress Energy issued commercial
paper to fund the maturing medium-term notes.
On August 20, 2001, Progress Energy issued 11 million shares of common stock at
$40 per share for gross proceeds of $440 million. On August 24, 2001, Progress
Energy issued an additional 1.65 million shares of common stock at $40 per share
for gross proceeds of $66 million. Proceeds from the issuance were primarily
used to retire commercial paper.
On October 16, 2001, CP&L announced the redemption on November 15, 2001, of $125
million principal amount of 8.55% Quarterly Income Capital Securities (Series A
Subordinated Deferrable Interest Debentures), at 100% of the principal amount of
such securities.
On October 30, 2001, Progress Energy issued $400 million of Senior Notes, 5.85%
Series due 2008 and $400 million of Senior Notes, 7.00% Series due 2031.
Proceeds from the issuance were primarily used to retire commercial paper.
OTHER MATTERS
-------------
Company Activities
------------------
In July 2001, Progress Energy announced that it is building a plant to include
two 160 MW combustion turbine peaking generators at a site in DeSoto County,
Fla., about 50 miles east of Sarasota. Plant capacity has been pre-sold to
another utility. Environmental permits and zoning have been approved for the
plant site, and construction is under way. The plant is expected to be completed
in June 2002, to coincide with the start of the contract.
In June 2001, the NCUC held a hearing concerning Progress Energy's application
to transfer certificates granted for eleven generating units in Richmond and
Rowan counties, N.C., from the regulated electric utility, CP&L, to Progress
Ventures. In September 2001, the NCUC approved the transfer of three 160 MW
combustion turbine generators and related generation infrastructure at the Rowan
County facility from CP&L to Progress Ventures. The transfer of these assets is
expected to occur in the fourth quarter of 2001. These generating units were
completed in May 2001 and the majority of their output is sold under long term
wholesale contracts. CP&L's initial application had also requested the transfer
of a total of 1,280 MW of current and planned capacity in Richmond County, all
of which was expected to have been sold back to CP&L for up to five years. The
NCUC did not approve the Richmond County portion of the application due to
concerns that the Richmond County capacity was needed to serve CP&L's native
load obligations.
On November 6, 2001, Progress Ventures, Inc. announced that it had entered into
a definitive agreement with LG&E Energy Corp., a subsidiary of Powergen plc, to
acquire two electric generating projects totaling 1,182 megawatts in Georgia for
a total cash consideration of $345 million. The two projects consist of 1) the
Monroe project in Monroe, Georgia, a 496 MW natural gas-fired pant placed in
service in June 2001 and 2) the Tiger Creek project in Washington County,
Georgia, a planned 686 MW natural gas-fired plant expected to be operational by
June 2003. The transaction includes a power-purchase agreement with LG&E
Marketing for both projects through December 31, 2004. In addition, there is a
project-management completion agreement with LG&E whereby Progress Ventures has
assumed certain liabilities to facilitate buildout of the Tiger Creek project.
The transaction is subject to approval by FERC and other regulatory agencies,
and is expected to be completed by early 2002.
Natural Gas Activities
----------------------
The Eastern North Carolina Natural Gas Co. (EasternNC) is a corporation formed
equally between the Albemarle Pamlico Economic Development Corporation (APEC)
and Progress Energy to build an 800-mile natural gas pipeline
32
system to serve 14 eastern North Carolina counties. EasternNC has begun
surveying, designing, engineering and environmental permitting for the first
phase of the project. The initial phase consists of about 125 miles of
transmission (6- to 12-inch diameter) pipeline and about 75 miles of
distribution (2- to 6-inch diameter) pipe. Construction of the first phase began
in October 2001 and is scheduled to be completed by mid-summer 2002. The entire
project should be completed by the end of 2004.
Progress Energy has agreed to fund a portion of the project, currently estimated
to be approximately $22 million. EasternNC plans to obtain additional capital
through funding from general obligation bonds issued by the State of North
Carolina. The NCUC approved $38.7 million from bond funds for Phase I of the
project in July 2000. On March 20, 2001, EasternNC filed its amended application
for approval of the route design for Phases 2-7 of the project and additional
bond funds of $149.6 million to construct this system. By order dated June 7,
2001 the NCUC approved EasternNC's proposed route design for the remaining 8
counties which constitutes Phases 2-7 of the project and awarded EasternNC an
additional $149.6 million in bond funds to construct the project.
On August 23, 2001, the Internal Revenue Service issued a Private Letter Ruling
(PLR) holding that the receipt of bond funds by EasternNC will not be considered
income subject to federal income tax.
Regulatory Developments
-----------------------
Florida Power previously operated under an agreement committing several parties
not to seek any reduction in its base rates or authorized return on equity. That
agreement expired on June 30, 2001. On May 3, 2001, the staff of the Florida
Public Service Commission, or FPSC, recommended that the FPSC require Florida
Power to submit, by September 14, 2001, minimum filing requirements, based on a
2002 projected calendar year, to initiate a rate proceeding regarding its future
base rates. The FPSC staff also recommended to the FPSC that, pending completion
of Florida Power's rate case, annual revenues of $114 million should be held
subject to refund to its customers. On June 20, 2001, the FPSC issued an order
that Florida Power be required to hold $114 million of revenue subject to refund
and to file, by September 14, 2001, minimum filing requirements based on a
projected 2002 test year. On July 2, 2001, Florida Power filed a request for
rehearing of the portion of the FPSC's order requiring that it hold $114 million
of revenues subject to refund on the grounds that the order contradicted FPSC
precedent, was inconsistent with the applicable statutory requirements and
violated Florida Power's due process rights. On October 16, 2001, the Commission
approved Florida Power's motion for reconsideration and reduced the revenue
subject to refund by $16 million to $98 million. The Commission also allowed
Florida Power to reduce the amount subject to refund if it is successful in
recovering certain expenses incurred during 2001, thus potentially reducing the
amount subject to refund.
On September 14, 2001, Florida Power submitted its required rate filing,
including its revenue requirements and supporting testimony. Under the filing,
Florida Power customers would receive a $5 million annual credit rate for 15
years, or $75 million in total, from net synergies of its merger with Progress
Energy. Additionally, the filing provides that the regulatory asset related to
the purchase of Tiger Bay cogeneration facility in 1997 would be fully amortized
by the end of 2003, which would provide customers with a further rate reduction
of $37 million annually beginning in 2004. Also included in the filing is an
incentive regulatory plan, which would provide for additional rate reductions
through efficiencies derived as a result of Florida Power's ability to lower the
future costs of its utility operations. Florida Power expects to satisfy an
additional filing requirement due November 15, 2001. Hearings are scheduled to
begin March 20, 2002, with a final decision expected in July 2002. The FPSC has
encouraged its staff, Florida Power, and other parties to negotiate a
settlement, if possible, before the hearings begin. Progress Energy cannot
predict the outcome or impact of these matters.
In its May 3, 2001, recommendation, the FPSC staff expressed concerns related to
Florida Power's plans to participate in the creation of the GridFlorida regional
transmission organization, or GridFlorida RTO, along with Florida Power & Light
Company and Tampa Electric Company. The FPSC staff raised questions about the
prudence of establishing the new system and costs associated with the process.
Florida Power is continuing to evaluate the concerns that the FPSC staff has
raised about the GridFlorida RTO and the impact those concerns might have on the
implementation of the GridFlorida RTO plan this year.
On May 16, 2001, the FPSC initiated dockets to review the prudence of the
GridFlorida applicants' decision to form and participate in the GridFlorida RTO.
The GridFlorida applicants have announced that they will hold GridFlorida
development activities in abeyance. On June 27, 2001, the FPSC issued an order
establishing a two-phase process for addressing these GridFlorida RTO issues in
the context of Florida Power's pending rate case. In the first phase, the FPSC
will address the general issues associated with the prudence of the GridFlorida
RTO on an expedited basis.
33
A hearing on Phase I was held on October 3 through October 5, 2001, with a final
FPSC order scheduled for November 26, 2001. The second phase will address
ratemaking issues and will be decided as part of the general rate proceeding.
Progress Energy cannot predict the outcome or impact of these matters.
Regional Transmission Organizations
-----------------------------------
In October 2000, Florida Power, along with Florida Power & Light Company and
Tampa Electric Company filed with the Federal Energy Regulatory Commission, or
FERC, an application for approval of a regional transmission organization, or
RTO, for peninsular Florida, currently named GridFlorida. On March 28, 2001,
FERC issued an order provisionally granting GridFlorida RTO status and directing
the GridFlorida applicants to make certain changes in the RTO documents and to
file such changes within 60 days. On May 29, 2001, the GridFlorida applicants
made the compliance filing as directed by FERC, but FERC has not yet issued an
order on that compliance filing.
In October 2000, CP&L, along with Duke Energy Corporation and South Carolina
Electric & Gas Company filed with FERC an application for approval of a
for-profit transmission company, currently named GridSouth. On July 12, 2001,
FERC issued an order granting GridSouth RTO status and directing that certain
modifications to the RTO documents be made and filed within 90 days.
CP&L has applied to the North Carolina Utilities Commission, or NCUC, and the
South Carolina Public Service Commission, or SCPSC, for permission to transfer
operational control of its transmission assets to GridSouth. On June 21, 2001,
the Public Staff of the NCUC filed a motion asking the NCUC to hold the
GridSouth docket in abeyance until the U.S. Supreme Court had ruled on the
appeal of FERC's Order No. 888. That appeal addresses the scope of FERC's
jurisdiction over transmission service used to serve retail customers. The
appeal of Order No. 888 was heard by the Court on October 3, 2001, with a
decision anticipated in the summer of 2002. The NCUC issued an order holding
that CP&L's and Duke Energy Corporation's petition to transfer operational
control of their transmission assets to GridSouth shall be held in abeyance
pending further order. Progress Energy cannot predict the outcome of this
matter.
On July 12, 2001, FERC issued an order requiring certain parties, including
CP&L, Duke Energy Corporation, South Carolina Electric & Gas Company, Southern
Company and Entergy to engage in a mediation to develop a plan for a single RTO
for the southeast. The GridFlorida applicants and the parties to the GridFlorida
docket before FERC were encouraged to participate, but were not required to do
so. Florida Power and CP&L participated in the mediation. On September 10, 2001,
the presiding administrative law judge of the mediation submitted a mediation
report to FERC. The report, which has not yet been acted on by FERC, recommended
adoption of a for-profit transmission company RTO model. FERC intends to issue
an order regarding the mediation report in November 2001. Progress Energy cannot
predict the outcome of this mediation or the effect that it may have on the
GridFlorida proceedings currently ongoing before the FERC and the FPSC or the
GridSouth proceedings currently ongoing before FERC, the SCPSC or the NCUC.
Franchise Litigation
--------------------
Five cities, with a total of approximately 36,000 customers, have sued Florida
Power in various circuit courts in Florida. The lawsuits principally seek (1) a
declaratory judgment that the cities have the right to purchase Florida Power's
electric distribution system located within the municipal boundaries of the
cities, (2) a declaratory judgment that the value of the distribution system
must be determined through arbitration, and (3) injunctive relief requiring
Florida Power to continue to collect from Florida Power's customers and remit to
the cities, franchise fees during the pendency of the litigation, and as long as
Florida Power continues to occupy the cities' rights-of-way to provide electric
service, notwithstanding the expiration of the franchise ordinances under which
Florida Power had agreed to collect such fees. Two circuit courts have entered
orders requiring arbitration to establish the purchase price of Florida Power's
electric distribution facilities within two cities. One appellate court has held
that one city has the right to determine the value of Florida Power's facilities
within the city through arbitration. To date, no city has attempted to actually
exercise the right to purchase any portion of Florida Power's electric
distribution system, nor has there been any proceeding to determine the value at
which such a purchase could be made. One court has ordered Florida Power to
continue to collect franchise fees of the city of Winter Park, Florida, and hold
these fees in escrow, pending resolution of the litigation. Progress Energy
cannot predict the outcome of these matters.
34
Synthetic Fuels Tax Credits
---------------------------
On April 20, 2001, and May 4, 2001, the Internal Revenue Service (IRS) released
Revenue Procedure 2001-30 and Revenue Procedure 2001-34, respectively, that
outline the conditions that must be met to receive a PLR for Section 29 tax
credits from the IRS. PLRs represent advance rulings from the IRS applying its
interpretation of the tax law to the facts surrounding an entity that desires to
qualify for Section 29 tax credits. Progress Energy continues to pursue PLRs for
its four majority-owned facilities that have not received PLRs. In management's
opinion, Progress Energy is complying with all the necessary requirements to be
allowed such credits under Section 29, although it cannot provide certainty that
it will receive PLRs or prevail, if challenged by the IRS, on any credits taken.
Nuclear
-------
Orange County, North Carolina appealed the Nuclear Regulatory Commission (NRC)
license amendment to expand spent fuel storage capacity at CP&L's Shearon Harris
Nuclear Plant (Harris Plant). On May 31, 2001, Orange County filed a petition
for review in the U.S. Court of Appeals for the District of Columbia, and on
June 1, 2001, filed a request for stay and expedition of the case with the
court.
On June 29, 2001, U.S. Court of Appeals denied Orange County's motion for a stay
and rejected the request for an expedited schedule for the appeal. The court is
expected to issue a briefing schedule for the case in the fourth quarter.
Progress Energy cannot predict the outcome of this matter.
NEW ACCOUNTING STANDARDS
------------------------
During the second quarter of 2001, the Financial Accounting Standards Board
(FASB) issued interpretations of Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities",
as amended by SFAS No. 138. These interpretations indicate that options in
general cannot qualify for the normal purchases and sales exception, but provide
an exception that allows certain electricity contracts, including certain
capacity-energy contracts, to be excluded from the mark-to-market requirements
of SFAS No. 133. These interpretations were effective July 1, 2001. Those
interpretations would not result in mark-to-market effects on Progress Energy's
financial statements based on contracts currently outstanding. In October 2001,
the FASB revised criteria related to the exception for certain electricity
contracts, with the revision to be effective January 1, 2002. It is unclear
whether or not that revision will be sustained, and, if so, what effects the
revision would have on Progress Energy's financial statements. If an electricity
or fuel supply contract in its regulated businesses is subject to mark-to-market
accounting, there would be no income statement effect of the mark to market
because the contract's mark-to-market gain or loss will be recorded as a
regulatory asset or liability. Any mark-to-market gains or losses in its
non-regulated businesses will affect income unless those contracts qualify for
hedge accounting treatment.
The application of the new rules is still evolving, and further guidance from
the FASB is expected, which could additionally impact Progress Energy's
financial statements.
On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" and No.
142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and clarifies the criteria for recording of other
intangible assets separately from goodwill. SFAS No. 142 requires that,
effective January 1, 2002, Progress Energy cease amortization of goodwill. It
also requires Progress Energy to evaluate goodwill for impairment at least
annually, which could result in periodic impairment charges. Goodwill
amortization was $24.9 million and $72.6 million for the three and nine months
ended September 30, 2001, and is expected to be approximately $96.8 million for
the year. Progress Energy is still reviewing all impacts of the statement,
including impairment testing and allocation to business units, and is currently
assessing the impact adoption of these statements will have on the financial
statements. CP&L has no goodwill recorded as of September 30, 2001.
On August 15, 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" that provides accounting guidance for the costs of
retiring long-lived assets and is effective for fiscal years beginning after
June 15, 2002. Progress Energy and CP&L are currently assessing the impact
adoption of this statement will have on the financial statements.
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 provides accounting guidance for
financial accounting and reporting for the impairment or
35
disposal of long-lived assets. The statement supercedes FASB No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". It also supercedes the accounting and reporting provisions of
APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" related to the disposal of a
segment of a business. The Statement is effective for fiscal years beginning
after December 15, 2001, with early adoption encouraged. Progress Energy and
CP&L are currently assessing the impact adopting this statement will have on the
financial statements.
Carolina Power & Light Company
The information required by this item is incorporated herein by reference from
the following portions of Progress Energy's Management's Discussion and Analysis
of Financial Condition and Results of Operations, insofar as they relate to
CP&L: RESULTS OF OPERATIONS; LIQUIDITY AND CAPITAL RESOURCES; OTHER MATTERS and
NEW ACCOUNTING STANDARDS.
RESULTS OF OPERATIONS
---------------------
On July 1, 2000, CP&L distributed its ownership interest in the stock of NCNG,
SRS, Monroe Power and Progress Ventures, Inc. to Progress Energy. Prior to that
date, the consolidated operations of CP&L and Progress Energy were substantially
the same. Subsequent to that date, the operations of these subsidiaries are no
longer included in CP&L's results of operations and financial position.
The CP&L Utility segment includes both retail and wholesale electric operations
and trading activities. The results of operations for the CP&L Utility segment
are identical to the CP&L Electric segment at the Progress Energy level, except
for the energy marketing and trading activities performed by Progress Ventures
on behalf of CP&L. The energy marketing and trading activity is included in the
Progress Ventures segment at the Progress Energy level. The results of
operations for CP&L's non-utility subsidiaries are not material to CP&L's
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The statement of cash flows for CP&L does not include amounts related to NCNG,
SRS, Monroe Power and Progress Ventures, Inc. after July 1, 2000. Additionally,
the CP&L statement of cash flows for the nine months ended September 30, 2001
does not reflect any amounts related to the acquisition of FPC, issuance of
long-term debt as part of the transaction, and capital expenditures made for
other Progress Energy subsidiaries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------ ----------------------------------------------------------
Progress Energy, Inc.
Market risk represents the potential loss arising from adverse changes in market
rates and prices. Certain market risks are inherent in Progress Energy's
financial instruments, which arise from transactions entered into in the normal
course of business. Progress Energy'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. Progress Energy manages its market risk in accordance with its
established risk management policies, which may include entering into various
derivative transactions.
Progress Energy's exposure to return on marketable securities for the
decommissioning trust funds has not changed materially since December 31, 2000.
The fair value of the CVOs issued in connection with the FPC acquisition
decreased from $40.4 million at December 31, 2000 to $32.5 million at September
30, 2001.
In February 2001, Progress Energy issued $3.2 billion of fixed-rate senior
unsecured notes with maturities ranging from three to thirty years. The proceeds
from this issuance were primarily used to retire commercial paper and other
short-term indebtedness issued in connection with the FPC acquisition.
Additionally, as part of this transaction, Progress Energy terminated the $1.125
billion notional amount of interest rate forward contracts that were issued in
36
anticipation of the debt issuance. Progress Energy recognized a $45.3 million
loss on these contracts that is deferred through accumulated other comprehensive
loss and amortized over the life of the associated debt instruments.
On April 9, 2001, CP&L issued $300 million of Medium-Term Notes, 6.65% Series D
due April 1, 2008. Proceeds from the issuance were primarily used to retire
commercial paper.
On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds,
6.65% Series due July 15, 2011. Proceeds from the issuance were primarily used
to retire commercial paper.
As a result of these issuances, the exposure to changes in interest rates from
Progress Energy's long-term debt and commercial paper at September 30, 2001, has
changed from December 31, 2000. The total fixed rate long-term debt at September
30, 2001, was $7.3 billion, with an average interest rate of 6.97% and fair
market value of $7.6 billion. The total commercial paper reclassified as
long-term debt at September 30, 2001 was $663 million, with an average interest
rate of 3.72% and fair market value of $663 million.
The exposure to changes in interest rates from Progress Energy's variable rate
long-term debt, extendible notes and FPC mandatorily redeemable securities of
trust at September 30, 2001, was not materially different than at December 31,
2000. The total variable rate long-term debt outstanding at September 30, 2001,
was $620 million, with an average interest rate of 2.30%. The total extendible
notes and FPC mandatorily redeemable securities of trust outstanding at
September 30, 2001, was $500 million, with an average interest rate of 4.23%,
and $300 million, with a fixed interest rate of 7.10%, respectively.
Progress Energy's exposure on the $500 million notional amount of interest rate
swap agreements used to hedge its exposure on variable rate debt positions was
not materially different than at December 31, 2000. The fair value of the swaps
was a $20.9 million liability position at September 30, 2001.
Carolina Power & Light Company
CP&L has certain market risks inherent in its 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 decommission trust funds has not changed
materially since December 31, 2000.
On April 9, 2001, CP&L issued $300 million of Medium-Term Notes, 6.65% Series D
due April 1, 2008. Proceeds from the issuance were primarily used to retire
commercial paper.
As a result of this issuance, the exposure to changes in interest rates from
CP&L's long-term debt and commercial paper at September 30, 2001, has changed
from December 31, 2000. The total fixed rate long-term debt at September 30,
2001, was $2.3 billion, with an average interest rate of 7.04% and fair market
value of $2.4 billion. The total commercial paper reclassified as long-term debt
at September 30, 2001 was $304 million, with an average interest rate of 3.88%
and fair market value of $304 million.
The exposure to changes in interest rates from CP&L's variable rate debt at
September 30, 2001, was not materially different than at December 31, 2000. The
total variable rate debt outstanding at September 30, 2001, was $1.1 billion,
with an average interest rate of 3.16%.
CP&L's exposure on the $500 million notional amount of interest rate swap
agreements used to hedge its exposure on variable rate debt positions was not
materially different than at December 31, 2000. The fair value of the swaps was
a $20.9 million liability position at September 30, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
------ -----------------
Legal aspects of certain matters are set forth in Part I, Item 1. See Note 10 to
the Progress Energy, Inc. Consolidated Interim Financial Statements and Note 6
to the CP&L Consolidated Interim Financial Statements.
37
Item 2. Changes in Securities and Use of Proceeds
------ -----------------------------------------
RESTRICTED STOCK AWARDS
(a) Securities Delivered. On August 24, 2001, 7,100 restricted shares of
--------------------
Progress Energy's Common Shares were granted to a certain key employee
pursuant to the terms of Progress Energy's 1997 Equity Incentive Plan
(Plan), which was approved by Progress Energy's shareholders on May 7,
1997. (Sponsorship of the Plan was transferred from CP&L to Progress Energy
effective August 1, 2000.) 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 Progress Energy,
including its Affiliates and Subsidiaries. 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
Progress 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 Progress Energy. The Plan defines
"key employees" as an officer or other employee of Progress Energy who, in
the opinion of the Committee, can contribute significantly to the growth
and profitability of, or perform services of major importance to, Progress
Energy.
(c) Consideration. The Common Shares were delivered to provide an incentive to
-------------
the employee recipient to exert his utmost efforts on Progress Energy's
behalf and thus enhance Progress Energy's performance while aligning the
employee's interest with those of Progress Energy'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 recipient. All award
decisions were made by the Committee, which consists entirely of
non-employee directors.
INSTALLMENT PAYMENT OF CONSIDERATION FOR ACQUISITION OF CAROLINA ENVIRONMENTAL
SYSTEMS, INC. AND PALMETTO CONTROLS GROUP, INC.
(a) Securities Delivered. On July 19, 2001, 4,592 shares of the Company's
--------------------
Common Stock (Common Shares) that were purchased in the open market by the
Company's wholly-owned subsidiary, Strategic Resource Solutions Corp., a
North Carolina Enterprise Corporation (SRS) were delivered to the former
shareholder of Carolina Environmental Systems, Inc. (CES) and Palmetto
Controls Group, Inc. (Palmetto) pursuant to an asset purchase agreement
dated April 14, 2000, by and between SRS, CES and Palmetto. The asset
purchase agreement provides that within a year of the closing of SRS'
acquisition of CES and Palmetto, SRS is to deliver to CES and Palmetto
Common Shares having a market value of $200,000, subject to claims or
reductions in the purchase price described in the provisions of the asset
purchase agreement that establish a contingent reserve of $200,000 with
which to pay such claims and reductions. These Common Shares delivered by
SRS pursuant to the asset purchase agreement were acquired in market
transactions, and do not represent newly-issued shares of the Company.
(b) Underwriters and Other Purchasers. No underwriters were used in connection
---------------------------------
with the issuance of Common Shares described above. An individual was the
only recipient of the Common Shares.
(c) Consideration. The consideration for the Common Shares was the delivery of
-------------
certain assets of CES and Palmetto pursuant to the asset purchase
agreement.
(d) Exemption from Registration Claimed. The Common Shares described in this
-----------------------------------
Item were delivered on the basis of an exemption from registration under
Section 4(2) of the Securities Act of 1933. The Common Shares were received
by one individual and are subject to restrictions on resale typical for
private placements. Appropriate disclosure was made to the recipients of
the Common Shares.
38
Item 6. Exhibits and Reports on Form 8-K
------ --------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K filed during or with respect to the quarter:
Progress Energy, Inc.
---------------------
Financial
Item Statements
Reported Included Date of Event Date Filed
-------- -------- ------------- ----------
9 No July 30, 2001 July 31, 2001
9 Yes July 25, 2001 August 6, 2001
9 No August 6, 2001 August 7, 2001
9 No August 27, 2001 August 27, 2001
5 No August 14, 2001 August 30, 2001
5 Yes November 30, 2000 October 23, 2001
5 Yes October 24, 2001 October 24, 2001
5 No October 24, 2001 October 24, 2001
9 No October 30, 2001 October 30, 2001
5 No October 30, 2001 November 2, 2001
Carolina Power & Light Company
------------------------------
None
39
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.
PROGRESS ENERGY, INC.
---------------------
CAROLINA POWER & LIGHT COMPANY
------------------------------
Date: November 7, 2001 (Registrants)
By: /s/ Peter M. Scott III
----------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
By: /s/ Robert H. Bazemore, Jr.
---------------------------
Robert H. Bazemore, Jr.
Vice President and Controller
Chief Accounting Officer
40