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 March 31, 2002
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. Each registrant makes no representation as
to information relating exclusively to the other registrant.
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 April 30, 2002, each
registrant had the following shares of common stock outstanding
Registrant Description Shares
---------- ----------- ------
Progress Energy, Inc. Common Stock (Without Par Value) 221,235,262
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 March 31, 2002
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
DEP Florida Department of Environment and Protection
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, formerly referred to as ENCNG
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Florida Power Florida Power Corporation
FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Generally accepted accounting Accounting principles generally accepted in the United States of America
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
PCH Progress Capital Holdings, Inc.
PLRs Private Letter Rulings
Progress Energy Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly referred to as Electric Fuels Corporation
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
Progress Ventures, Inc. Legal entity holding certain non-regulated operations and part of Progress Ventures
business segment (formerly referred to as CPL Energy Ventures, Inc.)
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
Service Company Progress Energy Service Co., LLC
SFAS No. 133 Statement of Financial Accounting Standards No. 133, Accounting for Derivative and
Hedging Activities
SFAS No. 142 Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
3
SFAS No. 143 Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations
SRS Strategic Resource Solutions Corp.
the Company Progress Energy, Inc. and subsidiaries
4
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
------------------------------------------
The matters discussed throughout this combined Form 10-Q that are not historical
facts are forward-looking and, accordingly, involve estimates, projections,
goals, forecasts, assumptions, risks and uncertainties that could cause actual
results or outcomes to differ materially from those expressed in the
forward-looking statements.
In addition, forward-looking statements are discussed 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 neither Progress Energy nor CP&L undertakes any obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: 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 regarding the restructuring of the
electricity industry or potential national deregulation legislation; the outcome
of legal and administrative proceedings, including proceedings before our
principal regulators, and the impact of the settlement of Florida Power's rate
case; risks associated with operating nuclear power facilities, availability of
nuclear waste storage facilities, and nuclear decommissioning costs; terrorist
threats and activities, economic uncertainty caused by such activities 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 Power 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 and future acquisitions and successfully integrate them
with the remainder of our business; the extent to which we are able to realize
the potential benefits of our conversion to a non-regulated holding company
structure and the success of our direct and indirect subsidiaries; the extent to
which we are able to continue 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 and CP&L. 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 and CP&L.
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------- --------------------
Progress Energy, Inc.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2002
STATEMENTS OF INCOME
Three Months Ended
(Unaudited) March 31,
(In thousands except per share amounts) 2002 2001
- ---------------------------------------------------------------------
Operating Revenues
Electric $1,497,923 $1,632,048
Natural gas 86,105 138,573
Diversified businesses 304,287 137,469
- ---------------------------------------------------------------------
Total Operating Revenues $1,888,315 1,908,090
- ---------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 366,849 369,856
Purchased power 188,618 217,548
Gas purchased for resale 52,923 109,593
Other operation and maintenance 334,690 295,097
Depreciation and amortization 216,612 316,789
Taxes other than on income 97,195 99,646
Diversified businesses 372,111 189,706
- ---------------------------------------------------------------------
Total Operating Expenses $1,628,998 1,598,235
- ---------------------------------------------------------------------
Operating Income 259,317 309,855
- ---------------------------------------------------------------------
Other Income (Expense)
Interest income 2,063 9,943
Other, net 5,406 2,923
- ---------------------------------------------------------------------
Total Other Income (Expense) 7,469 12,866
- ---------------------------------------------------------------------
Net Interest Charges 169,375 159,665
- ---------------------------------------------------------------------
Income before Income Taxes 97,411 163,056
Income Tax Expense (Benefit) (35,116) 9,053
- ---------------------------------------------------------------------
Net Income $ 132,527 $ 154,003
=====================================================================
Average Common Shares Outstanding 212,979 199,799
Basic and Diluted Earnings per Common Share $ 0.62 $ 0.77
Dividends Declared per Common Share $ 0.545 $ 0.530
=====================================================================
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
6
Progress Energy, Inc
BALANCE SHEETS
(Unaudited)
(In thousands except share data) March 31, December 31,
Assets 2002 2001
- --------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 19,166,593 $ 19,176,021
Gas utility plant in service 515,048 491,903
Accumulated depreciation (10,267,483) (10,096,412)
- --------------------------------------------------------------------------------------------------------
Utility plant in service, net 9,414,158 9,571,512
Held for future use 15,027 15,380
Construction work in progress 987,255 1,065,154
Nuclear fuel, net of amortization 238,359 262,869
- --------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 10,654,799 10,914,915
- --------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 361,309 54,419
Accounts receivable 969,203 944,753
Taxes receivable 57,602 32,325
Inventory 921,194 886,747
Deferred fuel cost 119,442 146,652
Prepayments 44,335 36,150
Other current assets 205,995 226,947
- --------------------------------------------------------------------------------------------------------
Total Current Assets 2,679,080 2,327,993
- --------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory Assets 420,195 455,325
Nuclear decommissioning trust funds 839,604 822,821
Diversified business property, net 1,721,755 1,073,046
Miscellaneous other property and investments 466,201 456,880
Goodwill, net 3,690,210 3,690,210
Prepaid pension costs 491,377 489,600
Other assets and deferred debits 544,061 509,001
- --------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 8,173,403 7,496,883
- --------------------------------------------------------------------------------------------------------
Total Assets $ 21,507,282 $ 20,739,791
========================================================================================================
Capitalization and Liabilities
- --------------------------------------------------------------------------------------------------------
Capitalization
Common stock (without par value, 500,000,000 shares authorized,
218,712,088 and 218,725,352 shares issued and outstanding, respectively) $ 4,109,099 $ 4,107,493
Unearned ESOP common stock (107,285) (114,385)
Accumulated other comprehensive loss (27,932) (32,180)
Retained earnings 2,058,583 2,042,605
- --------------------------------------------------------------------------------------------------------
Total common stock equity 6,032,465 6,003,533
Preferred stock of subsidiaries-not subject to mandatory redemption 92,831 92,831
Long-term debt, net 9,822,005 9,483,745
- --------------------------------------------------------------------------------------------------------
Total Capitalization 15,947,301 15,580,109
- --------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 703,374 688,052
Accounts payable 597,613 709,906
Interest accrued 149,381 212,387
Dividends declared 118,031 117,857
Short-term obligations 680,151 77,529
Customer deposits 161,719 154,343
Other current liabilities 398,297 431,522
- --------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,808,566 2,391,596
- --------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,420,951 1,434,506
Accumulated deferred investment tax credits 220,894 226,382
Regulatory liabilities 279,734 287,138
Other liabilities and deferred credits 829,836 820,060
- --------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,751,415 2,768,086
- --------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- --------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 21,507,282 $ 20,739,791
========================================================================================================
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
7
Progress Energy, Inc.
STATEMENTS OF CASH FLOWS Three Months Ended
(Unaudited) March 31,
(In thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 132,527 $ 154,003
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 248,018 336,810
Deferred income taxes 12,356 (19,182)
Investment tax credit (5,483) (6,973)
Deferred fuel cost 57,714 27,040
Net (increase) decrease in accounts receivable (24,450) 28,568
Net increase in inventories (35,693) (115,188)
Net decrease in prepaids and other current assets 12,110 32,273
Net decrease in accounts payable (47,585) (59,630)
Net decrease in other current liabilities (100,319) (16,060)
Other 45,229 3,344
- -----------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 294,424 365,005
- -----------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (267,018) (270,922)
Nuclear fuel additions (33,458) (61,161)
Contributions to nuclear decommissioning trust (12,226) (15,220)
Diversified business property additions (456,131) (35,554)
Investments in non-utility activities (9,191) (19,220)
- -----------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (778,024) (402,077)
- -----------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 167,419 3,176,010
Net increase in commercial paper reclassified to long-term debt 289,680 191,555
Net increase (decrease) in short-term indebtedness 602,622 (3,105,396)
Net decrease in cash provided by checks drawn in excess of bank balances (40,046) (89,015)
Retirement of long-term debt (112,329) (31,110)
Dividends paid on common stock (116,375) (106,163)
Other (481) (46,532)
- -----------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 790,490 (10,651)
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 306,890 (47,723)
Cash and Cash Equivalents at Beginning of the Period 54,419 101,296
- -----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 361,309 $ 53,573
=====================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 231,067 $ 159,269
income taxes $ 4,334 $ 8,307
=====================================================================================================
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
8
Progress Energy, Inc.
SUPPLEMENTAL DATA SCHEDULE Three Months Ended
March 31,
(Unaudited) 2002 2001
- ---------------------------------------------------------------------------------
Operating Revenues (in thousands)
Electric
Retail $1,260,809 $1,326,805
Wholesale 194,946 260,645
Unbilled (3,259) (61,878)
Miscellaneous revenue 45,427 106,476
- ---------------------------------------------------------------------------------
Total Electric 1,497,923 1,632,048
Natural gas 86,105 138,573
Diversified businesses 304,287 137,469
- ---------------------------------------------------------------------------------
Total Operating Revenues $1,888,315 $1,908,090
=================================================================================
Energy Sales - Utility
Electric (millions of kWh)
Retail
Residential 8,045 8,722
Commercial 5,246 5,274
Industrial 3,869 4,194
Other retail 946 962
- ---------------------------------------------------------------------------------
Total retail 18,106 19,152
Unbilled (156) (1,168)
Wholesale 4,311 4,779
- ---------------------------------------------------------------------------------
Total Electric 22,261 22,763
- ---------------------------------------------------------------------------------
=================================================================================
Natural Gas Delivered (thousands of dt) 17,108 14,845
=================================================================================
Energy Supply - Utility (millions of kWh)
Generated - steam 11,414 11,913
Nuclear 7,228 7,138
Hydro 139 53
Combustion turbines 1,585 1,137
Purchased 2,993 3,674
- ---------------------------------------------------------------------------------
Total Energy Supply - (Company Share) (a) 23,359 23,915
=================================================================================
Detail of Income Taxes (in thousands)
Income tax expense (credit) - current $ (41,989) $ 35,208
Deferred 12,356 (19,182)
investment tax credit (5,483) (6,973)
- ---------------------------------------------------------------------------------
Total Income Tax Expense (Benefit) $ (35,116) $ 9,053
=================================================================================
(a) Excludes co-owner's share of the energy supplied from the five generating
facilities that are jointly owned.
9
Progress Energy, Inc.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
A. Organization. Progress Energy, Inc. (the Company) is a registered
------------
holding company under the Public Utility Holding Company Act (PUHCA)
of 1935, as amended. Both the Company and its subsidiaries are subject
to the regulatory provisions of PUHCA. The Company 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
the Company. On December 4, 2000, the Company changed its name from
CP&L Energy, Inc. to Progress Energy, Inc. Through its wholly owned
subsidiaries, CP&L, Florida Power Corporation (Florida Power) and
North Carolina Natural Gas Corporation (NCNG), the Company 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
unit, the Company is involved in merchant energy generation, coal and
synthetic fuel operations and energy marketing and trading. Through
other business units, the Company 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, 2001 and notes
thereto included in Progress Energy's Form 10-K for the year ended
December 31, 2001.
The amounts included in the consolidated interim financial statements
are unaudited but, in the opinion of management, reflect all
adjustments necessary to fairly present the Company's financial
position and results of operations for the interim periods. Due to
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 2001 have
been reclassified to conform to the 2002 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, the Company completed its acquisition of Florida
Progress Corporation (FPC) for an aggregate purchase price of approximately
$5.4 billion. The Company paid cash consideration of approximately $3.5
billion and issued 46.5 million common shares valued at approximately $1.9
billion. In addition, the Company issued 98.6 million contingent value
obligations (CVO) valued at approximately $49.3 million. The excess of the
purchase price over the fair value of the net identifiable assets and
liabilities acquired has been recorded as goodwill. The goodwill, of
approximately $3.6 billion, was being amortized on a straight-line basis
over a period of 40 years. Effective January 1, 2002, goodwill is no longer
subject to amortization (See Note 7).
During 2000, the Company began the implementation of a plan to combine
operations of the companies resulting in an original non-executive
involuntary termination cost accrual of approximately $52.2 million.
Approximately $41.8 million was attributable to Florida Power employees and
was reflected as part of the purchase price allocation, while approximately
$10.4 million attributable to the acquiring company's employees was charged
to operating results in
10
2000. During 2001, the Company finalized the plan to combine operations of
the companies with final termination payments occurring in 2002.
The first quarter activity for the non-executive involuntary termination
costs is detailed in the table below:
(in millions)
Balance at January 1, 2002 $ 8.2
Payments (4.4)
Adjustments 0.3
-----
Balance at March 31, 2002 $ 4.1
=====
3. GENERATION ACQUISITION
----------------------
On February 15, 2002, Progress Ventures, Inc. acquired 100% of two electric
generating projects located in Georgia from LG&E Energy Corp., a subsidiary
of Powergen plc. The two projects consist of 1) Walton County Power, LLC in
Monroe, Georgia, a 460 megawatt natural gas-fired plant placed in service
in June 2001 and 2) Washington County Power, LLC in Washington County,
Georgia, a planned 600 megawatt natural gas-fired plant expected to be
operational by June 2003. The Walton and Washington projects have been
included in the consolidated financial statements since the acquisition
date. The acquisition furthers Progress Ventures' expansion into merchant
energy operations and positions it as a growing provider of wholesale
energy in the Southeast.
The aggregate purchase price of approximately $358 million was allocated
primarily to fixed assets based on the preliminary fair values of the
assets acquired. The transaction also included tolling and power sale
agreements with LG&E Energy Marketing, Inc. for each project through
December 31, 2004. In addition, Progress Ventures entered into a project
management and completion agreement whereby LG&E has agreed to manage the
completion of the Washington site construction for Progress Ventures. The
estimated costs to complete the Washington project at the time the
acquisition was completed were approximately $167.6 million.
The preliminary purchase price allocation is subject to adjustment for
changes in the Company's preliminary assumptions and analyses, pending
additional information including asset valuations.
The pro forma results of operations would not be materially different than
the reported results of operations for the three months ended March 31,
2002.
4. FLORIDA POWER RATE CASE SETTLEMENT
----------------------------------
On March 27, 2002, the parties in Florida Power's rate case entered into a
Stipulation and Settlement Agreement (the Agreement) related to retail rate
matters. The Agreement was approved by the Florida Public Service
Commission (FPSC) on April 23, 2002. The Agreement is generally effective
from May 1, 2002 through December 31, 2005; provided, however, that if
Florida Power's base rate earnings fall below a 10% return on equity,
Florida Power may petition the FPSC to amend its base rates.
The Agreement provides that Florida Power will reduce its retail revenues
from the sale of electricity by an annual amount of $125 million. The
Agreement also provides that Florida Power will operate under a Revenue
Sharing Incentive Plan (the Plan) through 2005, and thereafter until
terminated by the FPSC, that establishes annual revenue caps and sharing
thresholds. The Plan provides that retail base rate revenues between the
sharing thresholds and the retail base rate revenue caps will be divided
into two shares - a 1/3 share to be received by Florida Power's
shareholders, and a 2/3 share to be refunded to Florida Power's retail
customers; provided, however, that for the year 2002 only, the refund to
customers will be limited to 67.1% of the 2/3 customer share. The retail
base rate revenue sharing threshold amounts for 2002 will be $1,296 million
and will increase $37 million each year thereafter. The Plan also provides
that all retail base rate revenues above the retail base rate revenue caps
established for each year will be refunded to retail customers on an annual
basis. For 2002, the refund to customers will be limited to 67.1% of the
retail base rate revenues that exceed the 2002 cap. The retail base revenue
caps for 2002 will be $1,356 million and will increase $37 million each
year thereafter.
The Agreement also provides that beginning with the in-service date of
Florida Power's Hines Unit 2, currently expected to be late 2003, and
continuing through December 31, 2005, Florida Power will be allowed to
recover through the fuel cost recovery clause a return on average
investment and depreciation expense for Hines Unit 2, to the extent such
costs do not exceed the Unit's cumulative fuel savings over the recovery
period.
11
Additionally, the Agreement provides that Florida Power will effect a
mid-course correction of its fuel cost recovery clause to reduce the fuel
factor by $50 million for the remainder of 2002. The fuel cost recovery
clause will operate as it normally does, including, but not limited to any
additional mid-course adjustments that may become necessary, and the
calculation of true-ups to actual fuel clause expenses.
Florida Power will suspend accruals on its reserves for nuclear
decommissioning and fossil dismantlement through December 31, 2005.
Additionally, for each calendar year during the term of the Agreement,
Florida Power will record a $62.5 million depreciation expense reduction,
and may, at its option, record up to an equal annual amount as an
offsetting accelerated depreciation expense. In addition, Florida Power is
authorized, at its discretion, to accelerate the amortization of certain
regulatory assets over the term of the Agreement.
Under the terms of the Agreement, Florida Power agreed to continue the
implementation of its four-year Commitment to Excellence Reliability Plan
and expects to achieve a 20% improvement in its annual System Average
Interruption Duration Index by no later than 2004. If this improvement
level is not achieved for calendar years 2004 or 2005, Florida Power will
provide a refund of $3 million for each year the level is not achieved to
10% of its total retail customers served by its worst performing
distribution feeder lines.
The Agreement also provides that Florida Power will refund to customers $35
million of revenues Florida Power collected during the interim period since
March 13, 2001. This one-time retroactive revenue refund was recorded in
the first quarter of 2002.
5. FINANCIAL INFORMATION BY BUSINESS SEGMENT
-----------------------------------------
The Company currently provides services through the following business
segments: CP&L Electric, Florida Power Electric, Progress Ventures, Rail
Services and Other. The prior period has been restated to reflect the
current reportable segments.
The CP&L Electric and Florida Power Electric segments are engaged in the
generation, transmission, distribution, and sale of electric energy in
portions of North Carolina, South Carolina and Florida. Electric operations
are subject to the rules and regulations of FERC, the NCUC, the SCPSC and
the FPSC.
The Progress Ventures segment is primarily engaged in merchant energy
generation and coal and synthetic fuel operations. Management reviews the
operations of the Progress Ventures segment after the allocation of energy
marketing and trading activities which Progress Ventures performs on behalf
of the regulated utilities, CP&L and Florida Power. These activities
include 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 natural gas, other diversified
businesses and holding company operations, which includes the
transportation, distribution and sale of natural gas in portions of North
Carolina, telecommunication services, energy management services,
miscellaneous non-regulated activities and elimination entries.
12
For reportable segments presented in the accompanying table, segment income
includes intersegment revenues accounted for at prices representative of
unaffiliated party transactions. Intersegment revenues that are not
eliminated represent natural gas sales to the CP&L Electric and the Florida
Power Electric segments.
Florida Power Progress Segment
(in thousands) CP&L Electric Electric Ventures(b) Rail Services (c) Other Totals
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended 3/31/02
Revenues
Unaffiliated $ 811,482 $ 686,441 $ 113,404 $169,369 $ 102,430 $ 1,883,126
Intersegment -- -- 131,930 495 (127,236) 5,189
-----------------------------------------------------------------------------------------
Total Revenues $ 811,482 $ 686,441 $ 245,334 $169,864 $ (24,806) $ 1,888,315
Net Income (Loss) $ 85,534 $ 57,743 $ 39,484 $ (701) $ (49,533) $ 132,527
Segment Income (Loss) After
Allocation (a) $ 77,940 $ 55,159 $ 49,662 $ (701) $ (49,533) $ 132,527
Total Segment Assets $9,092,069 $5,039,094 $1,900,752 $596,765 $4,878,602 $21,507,282
=========================================================================================================================
Florida Power Progress Segment
CP&L Electric Electric Ventures Rail Services (c) Other Totals
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended 3/31/01
Revenues
Unaffiliated $ 821,574 $ 810,474 $111,220 -- $ 164,604 $ 1,907,872
Intersegment -- -- 76,465 -- (76,247) 218
-------------------------------------------------------------------------------------
Total Revenues $ 821,574 $ 810,474 $187,685 -- $ 88,357 $ 1,908,090
Net Income (Loss) $ 121,470 $ 71,606 $ 41,717 -- $ (80,790) $ 154,003
Segment Income (Loss) After
Allocation (a) $ 107,897 $ 63,206 $ 63,690 -- $ (80,790) $ 154,003
Total Segment Assets $8,713,177 $4,829,168 $701,024 -- $5,808,683 $20,052,052
=====================================================================================================================
(a) Includes allocation of energy trading and marketing net income managed by
Progress Ventures on behalf of the electric utilities.
(b) Progress Ventures total segment assets at March 31, 2002, increased from
the prior year due to the addition of non-regulated generating assets
including Effingham, DeSoto, Walton and Washington, as well as the transfer
of Rowan from CP&L in the first quarter of 2002.
(c) As of March 31, 2001, the Rail Services segment was included as Net Assets
Held for Sale and therefore no operations or assets are reflected for this
segment for this period.
6. IMPACT OF NEW ACCOUNTING STANDARD
---------------------------------
During the second quarter of 2001, the Financial Accounting Standards Board
(FASB) issued interpretations of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative and Hedging Activities,"
(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. The
interpretations were effective July 1, 2001. Those interpretations did not
require the Company to mark-to-market any of its electricity
capacity-energy contracts currently outstanding. In December 2001, the FASB
revised the criteria related to the exception for certain electricity
contracts, with the revision to be effective April 1, 2002. The revised
interpretation did not result in any changes to the Company's assessment of
mark-to-market requirements for its current contracts. 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 the Company's
financial statements.
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." This statement clarifies the criteria for
recording of other intangible assets separately from goodwill. See Note 7
for more information.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in July 2001. This statement provides accounting requirements
for retirement obligations associated with tangible long-lived assets and
is effective January 1, 2003. This statement requires that the present
value of retirement costs for which the Company has a legal obligation be
recorded as liabilities with an equivalent amount added to the asset cost
and depreciated over an appropriate period. The Company is currently
assessing the effects this statement may ultimately have on the Company's
accounting for decommissioning, dismantlement and other retirement costs.
13
7. GOODWILL AND OTHER INTANGIBLE ASSETS
------------------------------------
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." This statement clarifies the criteria for
recording of other intangible assets separately from goodwill. Effective
January 1, 2002, goodwill is no longer subject to amortization over its
estimated useful life. Instead, goodwill is subject to at least an annual
assessment for impairment by applying a two-step fair-value based test.
This assessment could result in periodic impairment charges.
The Company is in the process of performing the first step of the initial
transitional goodwill impairment test. This test will be as of January 1,
2002, and will be completed by June 30, 2002. The Company has not yet
determined the impact, if any, to the Company's consolidated financial
position or results of operations.
There were no changes in the carrying amount of goodwill for the three
months ended March 31, 2002. The Company's $3.7 billion of goodwill is
assigned to the following three reportable segments: CP&L Electric, Florida
Power Electric and Other.
As required by SFAS No. 142, the results for the prior year's quarter have
not been restated. A reconciliation of net income as if SFAS No. 142 had
been adopted is presented below for the three months ended March 31, 2001.
(in thousands, except per share data) Three Months Ended
March 31, 2001
------------------
Reported net income $154,003
Add back: Goodwill amortization 22,887
--------
Adjusted net income $176,890
Basic earnings per common share:
Reported net income $ 0.77
Adjusted net income $ 0.89
Diluted earnings per common share:
Reported net income $ 0.77
Adjusted net income $ 0.88
The gross carrying amount and accumulated amortization of the Company's
intangible assets as of March 31, 2002 and December 31, 2001 are as
follows:
March 31, 2002 December 31, 2001
----------------------------- -----------------------------
(in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------- -----------------------------
Synthetic fuel intangibles 140,469 (27,975) 140,469 (22,237)
Customer contracts 17,300 (6,725) 17,300 (5,600)
Other 51,338 (1,529) 18,771 (338)
----------------------------- -----------------------------
Total 209,107 (36,229) 176,540 (28,175)
Total net intangible assets of $172.9 million and $148.4 million at March
31, 2002, and December 31, 2001, respectively, are included in other assets
and deferred debits in the accompanying balance sheets. Amortization
expense recorded on intangible assets for the three months ended March 31,
2002 was $8.1 million. The estimated amortization expense on intangible
assets for the next five years is as follows:
(in thousands)
2002 34,236
2003 34,390
2004 36,061
2005 20,838
2006 20,169
14
8. COMPREHENSIVE INCOME
--------------------
Comprehensive income for the three months ended March 31, 2002 and 2001 was
$136.8 million and $119.0 million, respectively. Items of other
comprehensive income for the three month periods consisted primarily of
changes in the fair value of derivatives used to hedge cash flows related
to interest on long-term debt.
9. FINANCING ACTIVITIES
--------------------
On February 6, 2002, CP&L issued $48.5 million principal amount of First
Mortgage Bonds, Pollution Control Series W, Wake County Pollution Control
Revenue Refunding Bonds, 5.375% Series 2002 Due February 1, 2017. On March
1, 2002, CP&L redeemed $48.5 million principal amount of Pollution Control
Revenue Bonds, Wake County (Carolina Power & Light Company Project)
Adjustable Rate Option Bond 1983 Series Due April 1, 2019, at 101.5% of the
principal amount of such bonds.
In February 2002, $50 million of Progress Capital Holdings, Inc. (PCH)
medium-term notes, 5.78% Series, matured. Progress Energy funded this
maturity through the issuance of commercial paper.
In March 2002, Progress Ventures, Inc. obtained a $440 million bank
facility that will be used exclusively for expansion of its non-regulated
generation portfolio. Borrowings under this facility are secured by the
assets in the generation portfolio. In March 2002, Progress Ventures, Inc.
made draws under this facility of $120 million.
On April 17, 2002, Progress Energy issued $350 million of senior unsecured
notes due 2007 with a coupon of 6.05% and $450 million of senior secured
notes due 2012 with a coupon of 6.85%. Proceeds from this issuance were
used to pay down commercial paper.
10. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
------------------------------------------------------
Progress Energy uses interest rate derivative instruments to adjust the
fixed and variable rate debt components of its debt portfolio. During March
2002, Progress Energy converted $800 million of fixed rate debt into
variable rate debt by executing interest rate derivative agreements with a
total notional amount of $800 million with a group of five banks. Under the
terms of the agreements, which mature in 2006, Progress Energy will receive
a fixed rate of 4.87% and will pay a floating rate based on three-month
LIBOR (pay rate of 2.03% at March 31, 2002). These instruments were
designated as fair value hedges for accounting purposes. The fair value of
these instruments was a $3.3 million liability position at March 31, 2002.
On April 30, 2002, Progress Energy converted $100 million of fixed rate
debt into variable rate debt by executing an interest rate derivative
agreement with a counterparty with a total notional amount of $100 million.
Under the terms of the agreement, which expires in 2007, Progress Energy
will receive a fixed rate of 4.869% and will pay a floating rate based on
three-month LIBOR (pay rate of 1.92% at April 30, 2002). This instrument
was designated as a fair value hedge for accounting purposes.
The notional amount of the above contracts is not exchanged and does not
represent exposure to credit loss. In the event of default by a
counterparty, the risk in the transaction is the cost of replacing the
agreements at current market rates. Progress Energy only enters into swap
agreements with strong creditworthy counterparties.
11. FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A 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 (Preferred
Securities) due 2039, with an aggregate liquidation value of $300 million
and an annual 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
15
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.
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.
12. COMMITMENTS AND CONTINGENCIES
-----------------------------
Contingencies existing as of the date of these statements are described
below. No significant changes have occurred since December 31, 2001, with
respect to the commitments discussed in Note 20 of the financial statements
included in the Company's 2001 Annual Report on Form 10-K.
Contingencies
1) Claims and Uncertainties.
------------------------
a) The Company is subject to federal, state and local regulations
addressing air and water quality, hazardous and solid waste management
and other environmental matters.
Various organic materials associated with the production of
manufactured gas, generally referred to as coal tar, are regulated
under 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 Environmental
Protection (FDEP) and the North Carolina Department of Environment and
Natural Resources, Division of Waste Management (DWM). Although the
electric utilities and gas utility may incur costs at these sites
about which it has been notified, based upon current status of these
sites, the Company does not expect those costs to be material to its
consolidated financial position or results of operations. The Company
has accrued probable costs at certain of these sites.
Both electric utilities, the gas utility and Progress Ventures 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 the Company's subsidiaries may incur costs at the sites about
which they have been notified, based upon the current status of these
sites, the Company does not expect those costs to be material to the
consolidated financial position or results of operations of the
Company.
There has been and may be further proposed federal legislation
requiring reductions in air emissions for nitrogen oxides, sulfur
dioxide and mercury setting forth national caps and emission levels
over an extended period of time. This national multi-pollutant
approach would have significant costs which could be material to
CP&L's consolidated financial position or results of operations. Some
companies may seek recovery of the related cost through rate
adjustments or similar mechanisms. Control equipment which may be
installed on North Carolina fossil generating facilities as part of
the Governor's proposal below may address some of the issues outlined
above. The Company cannot predict the outcome of this matter.
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
16
Power were asked to provide information to the EPA as part of this
initiative and 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. A utility that was not subject to a civil
enforcement action settled its New Source Review issues with the EPA
for $300 million. 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. The Company 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
Carolina, South Carolina and 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 the Company's results of
operations. Further controls are anticipated as electricity demand
increases. The Company 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 participated 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. On April 30, 2002, the EPA published a final rule
harmonizing the dates for the Section 126 Rule and the NOx SIP Call.
In addition, the EPA determined in this rule that the future growth
factor estimation methodology was appropriate. The new compliance date
for all affected sources is now May 31, 2004, rather than May 1, 2003.
The Company cannot predict the outcome of this matter.
On April 25, 2002, North Carolina Governor Mike Easley announced a
framework for a reduction in emissions for the state's coal-burning
electric plants. The proposal would require lower sulfur dioxide and
nitrogen oxide emissions from CP&L's fossil generating facilities. To
finance the capital expenditures utilities would be required to make,
electric utility rates would be frozen for at least a 5-year period
beginning on an enactment of the legislation. In addition, compliance
costs would be amortized on an accelerated basis, replacing certain
existing expenses as they expire. The Company cannot predict the final
outcome or impact of this matter.
On November 1, 2001, the Company completed the sale of the Inland
Marine Transportation segment to AEP Resources, Inc. In connection
with the sale, the Company entered into environmental indemnification
provisions covering both unknown and known sites. The Company has
recorded an accrual to cover estimated probable future environmental
expenditures. The Company believes that it is reasonably possible that
additional costs, which cannot be currently estimated, may be incurred
related to the environmental
17
indemnification provision beyond the amounts accrued. The Company
cannot predict the outcome of this matter.
CP&L, Florida Power, Progress Ventures and NCNG have filed claims with
the Company's general liability insurance carriers to recover costs
arising out of actual or potential environmental liabilities. Some
claims have been 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) The Company 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 the
Company's consolidated results of operations or financial position.
13. SUBSEQUENT EVENT
----------------
On April 26, 2002, Progress Energy finalized the acquisition of Westchester
Gas Company, which includes approximately 215 producing natural gas wells,
52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems.
Total consideration of $148 million included $128 million in Company common
stock and $20 million in cash. The properties are located within a 25-mile
radius of Jonesville, Texas, on the Texas-Louisiana border.
18
CAROLINA POWER & LIGHT COMPANY
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2002
STATEMENTS OF INCOME
Three Months Ended
(Unaudited) March 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
Operating Revenues
Electric $811,482 $821,574
Diversified businesses 3,389 5,029
- --------------------------------------------------------------------------------
Total Operating Revenues 814,871 826,603
- --------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 173,902 153,470
Purchased power 73,309 91,929
Other operation and maintenance 191,260 168,654
Depreciation and amortization 141,386 137,960
Taxes other than on income 38,768 38,436
Diversified businesses 3,061 4,513
- --------------------------------------------------------------------------------
Total Operating Expenses 621,686 594,962
- --------------------------------------------------------------------------------
Operating Income 193,185 231,641
- --------------------------------------------------------------------------------
Other Income (Expense)
Interest income 1,666 4,685
Other, net (2,973) 9,357
- --------------------------------------------------------------------------------
Total Other Income (Expense) (1,307) 14,042
- --------------------------------------------------------------------------------
Net Interest Charges 58,551 62,082
- --------------------------------------------------------------------------------
Income before Income Taxes 133,327 183,601
Income Taxes 48,208 62,756
- --------------------------------------------------------------------------------
Net Income 85,119 120,845
Preferred Stock Dividend Requirements (741) (741)
- --------------------------------------------------------------------------------
Earnings for Common Stock $ 84,378 $120,104
================================================================================
See Notes to Carolina Power & Light Company Consolidated Interim Finanial
Statements.
19
Carolina Power & Light Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, December 31,
Assets 2002 2001
- ------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $11,984,417 $12,024,291
Accumulated depreciation (6,064,191) (5,952,206)
- ------------------------------------------------------------------------------------
Utility plant in service, net 5,920,226 6,072,085
Held for future use 7,105 7,105
Construction work in progress 619,488 711,129
Nuclear fuel, net of amortization 181,468 200,332
- ------------------------------------------------------------------------------------
Total Utility Plant, Net 6,728,287 6,990,651
- ------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 116,403 21,250
Accounts receivable 447,077 454,228
Receivables from affiliated companies 409,823 31,707
Taxes receivable -- 17,543
Inventory 374,583 365,501
Deferred fuel cost 119,442 131,505
Prepayments 22,358 11,863
Other current assets 69,322 66,193
- ------------------------------------------------------------------------------------
Total Current Assets 1,559,008 1,099,790
- ------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 267,810 277,550
Nuclear decommissioning trust funds 422,320 416,721
Diversified business property, net 118,578 111,802
Miscellaneous other property and investments 228,789 231,325
Other assets and deferred debits 130,209 135,373
- ------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,167,706 1,172,771
- ------------------------------------------------------------------------------------
Total Assets $ 9,455,001 $ 9,263,212
====================================================================================
Capitalization and Liabilities
- ------------------------------------------------------------------------------------
Capitalization
Common stock $ 1,914,999 $ 1,904,246
Unearned ESOP common stock (107,285) (114,385)
Retained earnings 1,266,019 1,312,641
Accumulated other comprehensive loss (3,631) (7,046)
- ------------------------------------------------------------------------------------
Total common stock equity 3,070,102 3,095,456
Preferred stock - not subject to mandatory redemption 59,334 59,334
Long-term debt, net 3,203,078 2,958,853
- ------------------------------------------------------------------------------------
Total Capitalization 6,332,514 6,113,643
- ------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 600,000 600,000
Accounts payable 235,165 300,829
Payables to affiliated companies 179,551 157,423
Taxes accrued 60,619 --
Interest accrued 59,412 61,124
Other current liabilities 156,329 209,776
- ------------------------------------------------------------------------------------
Total Current Liabilities 1,291,076 1,329,152
- ------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,319,537 1,316,823
Accumulated deferred investment tax credits 166,805 170,302
Regulatory liabilities 7,479 7,494
Other liabilities and deferred credits 337,590 325,798
- ------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 1,831,411 1,820,417
- ------------------------------------------------------------------------------------
Commitments and Contingencies (Note 6)
- ------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 9,455,001 $ 9,263,212
====================================================================================
See Notes to Carolina Power & Light Company Consolidated Interim Financial
Statements.
20
Carolina Power & Light Company
STATEMENTS OF CASH FLOWS Three Months Ended
(Unaudited) March 31,
(In thousands) 2002 2001
- ------------------------------------------------------------------------------------------
Operating Activities
Net income $ 85,119 $ 120,845
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 166,194 159,878
Deferred income taxes (12,891) (31,051)
Investment tax credit (3,496) (4,984)
Deferred fuel cost (credit) 12,063 (3,838)
Net (increase) decrease in accounts receivable (65,535) 132,481
Net increase in inventories (18,394) (37,743)
Net (increase) decrease in prepaids and other current assets (13,622) 5,925
Net increase (decrease) in accounts payable 76,909 (317,332)
Net increase (decrease) in other current liabilities (61,337) 78,610
Other 43,591 4,759
- ------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 208,601 107,550
- ------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (176,230) (204,266)
Nuclear fuel additions (33,336) (25,142)
Contributions to nuclear decommissioning trust (10,225) (10,228)
Net cash flow of company-owned life insurance program 540 417
Diversified business property additions (8,350) (1,225)
Investments in non-utility activities 3,177 (3,406)
- ------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (224,424) (243,850)
- ------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 47,419 185
Net increase in commercial paper reclassified to long-term debt 243,930 191,555
Retirement of long-term debt (48,632) (109)
Dividends paid to parent (131,000) (69,854)
Dividends paid on preferred stock (741) (741)
- ------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 110,976 121,036
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 95,153 (15,264)
Cash and Cash Equivalents at Beginning of the Period 21,250 30,070
- ------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 116,403 $ 14,806
==========================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the period - interest $ 58,410 $ 69,016
income taxes $ (31,307) $ (6,382)
==========================================================================================
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. (the Company or Progress Energy). The Company is a registered
holding company under the Public Utility Holding Company Act (PUCHA)
of 1935, as amended. Both the Company and its subsidiaries are subject
to the regulatory provisions of PUCHA.
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, 2001 and notes
thereto included in CP&L's Form 10-K for the year ended December 31,
2001.
The amounts included in the consolidated interim financial statements
are unaudited but, in the opinion of management, reflect all
adjustments necessary to fairly present the Company's financial
position and results of operations for the interim periods. Due to
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 2001 have
been reclassified to conform to the 2002 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
-----------------------------------------
CP&L's operations consist primarily of the CP&L Electric segment with no
other material segments.
The financial information by business segment for CP&L Electric for the
three months ended March 31, 2002 and 2001 is as follows:
(In thousands) March 31, 2002 March 31, 2001
------------------------------------------------------
Revenues $ 811,482 $ 821,574
Segment Income $ 85,534 $ 121,470
Total Segment Assets $9,092,069 $8,713,177
======================================================
The primary differences between the CP&L Electric and CP&L consolidated
financial information relate to other non-electric operations and
elimination entries.
3. IMPACT OF NEW ACCOUNTING STANDARD
---------------------------------
During the second quarter of 2001, the Financial Accounting Standards Board
(FASB) issued interpretations of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative and Hedging Activities,"
(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. The
interpretations were effective July 1, 2001. Those
22
interpretations did not require CP&L to mark-to-market any of its
electricity capacity-energy contracts currently outstanding. In December
2001, the FASB revised the criteria related to the exception for certain
electricity contracts, with the revision to be effective April 1, 2002. The
revised interpretation did not result in any changes to CP&L's assessment
of mark-to-market requirements for its current contracts. 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 CP&L's financial
statements.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in July 2001. This statement provides accounting requirements
for retirement obligations associated with tangible long-lived assets and
is effective January 1, 2003. This statement requires that the present
value of retirement costs for which CP&L has a legal obligation be recorded
as liabilities with an equivalent amount added to the asset cost and
depreciated over an appropriate period. CP&L is currently assessing the
effects this statement may ultimately have on accounting for
decommissioning, dismantlement and other retirement costs.
4. COMPREHENSIVE INCOME
--------------------
Comprehensive income for the three months ended March 31, 2002 and 2001 was
$88.5 million and $116.3 million, respectively. Items of other
comprehensive income for the three month periods consisted primarily of
changes in fair value of derivatives used to hedge cash flows related to
interest on long-term debt.
5. FINANCING ACTIVITIES
--------------------
On February 6, 2002, CP&L issued $48.5 million principal amount of First
Mortgage Bonds, Pollution Control Series W, Wake County Pollution Control
Revenue Refunding Bonds, 5.375% Series 2002 Due February 1, 2017. On March
1, 2002, CP&L redeemed $48.5 million principal amount of Pollution Control
Revenue Bonds, Wake County (Carolina Power & Light Company Project)
Adjustable Rate Option Bond 1983 Series Due April 1, 2019, at 101.5% of the
principal amount of such bonds.
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
Contingencies existing as of the date of these statements are described
below. No significant changes have occurred since December 31, 2001, with
respect to the commitments discussed in Note 15 of the financial statements
included in CP&L's 2001 Annual Report on Form 10-K.
Contingencies
1) 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.
23
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.
There has been and may be further proposed federal legislation
requiring reductions in air emissions for nitrogen oxides, sulfur
dioxide and mercury setting forth national caps and emission
levels over an extended period of time. This national
multi-pollutant approach would have significant costs which could
be material to CP&L's consolidated financial position or results
of operations. Some companies may seek recovery of the related
cost through rate adjustments or similar mechanisms. Control
equipment which may be installed on North Carolina fossil
generating facilities as part of the Governor's proposal below
may address some of the issues outlined above. CP&L cannot
predict the outcome of this matter.
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 cooperated
in providing the requested information. The EPA has initiated
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. A utility that was not subject to a civil
enforcement action settled its New Source Review issues with the
EPA for $300 million. These settlement agreements have generally
called for expenditures to be made over extended time periods,
and some of the utilities may seek recovery of the related cost
through rate adjustments. 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 Carolina 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 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 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 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. On April
30, 2002, the EPA published a final rule harmonizing the dates
for the Section 126 Rule and the NOx SIP Call. In addition, the
EPA determined in this rule that the future growth factor
estimation
24
methodology was appropriate. The new compliance date for all
affected sources is now May 31, 2004, rather than May 1, 2003.
CP&L cannot predict the outcome of this matter.
On April 25, 2002, North Carolina Governor Mike Easley announced
a framework for a reduction in emissions for the state's
coal-burning electric plants. The proposal would require lower
sulfur dioxide and nitrogen oxide emissions from CP&L's fossil
generating facilities. To finance the capital expenditures
utilities would be required to make, electric utility rates would
be frozen for at least a 5-year period beginning on an enactment
of the legislation. In addition, compliance costs would be
amortized on an accelerated basis, replacing certain existing
expenses as they expire. CP&L cannot predict the final outcome or
impact 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) 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.
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
---------------------
For the three months ended March 31, 2002, as compared to the corresponding
period in the prior year
Progress Energy, Inc.
Operating Results
-----------------
Progress Energy's consolidated earnings for the three months ended March
31, 2002 were $132.5 million, or $0.62 per share, compared to earnings of
$154.0 million, or $0.77 per share, for the same period in 2001. Earnings
for the quarter were negatively affected by a $35 million one-time
retroactive revenue refund ($21 million after-tax) resulting from Florida
Power's rate settlement, milder weather in the first quarter of 2002, when
compared to 2001, that resulted in lower retail and wholesale sales, and
unfavorable economic conditions that resulted in reduced sales to
industrial customers in 2002. In addition, other operation and maintenance
(O&M) expense increased in 2002 when compared to the prior year due to
lower staffing levels that existed at the time of the merger with Florida
Progress. The common stock issuance in August 2001 also resulted in
dilution of basic earnings per share in the current period. Partially
offsetting these items were the elimination of goodwill amortization and
certain ongoing depreciation expense reductions as part of Florida Power's
rate settlement.
Business segment earnings and the factors affecting them are discussed
below.
CP&L Electric
-------------
CP&L Electric contributed net income of $85.5 and $121.5 million for the
three months ended March 31, 2002 and 2001, respectively. Included in these
amounts are energy marketing and trading activities, which are managed by
Progress Ventures on behalf of CP&L, that had net income of $7.6 million
and $13.6 million for the three months ended March 31, 2002 and 2001,
respectively. Factors contributing to this quarter's results were higher
O&M expenses over the first quarter of 2001, mild weather and continued
weakness in industrial and wholesale sales, as detailed in the tables
below.
CP&L's electric revenues for the three months ended March 31, 2002 and 2001
and the percentage change by customer class are as follows (in millions):
-------------------------------------------------------
Customer Class 2002 % Change 2001
-------------------------------------------------------
Residential $309.3 (4.7)% $324.5
Commercial 187.3 1.8 184.0
Industrial 145.7 (4.3) 152.3
Governmental 17.5 3.6 16.9
----------------------------------- ------
Total Retail Revenues 659.8 (2.6) 677.7
Wholesale 142.6 (12.5) 163.0
Unbilled (9.7) 75.6 (39.6)
Miscellaneous 18.8 (8.3) 20.5
----------------------------------- ------
Total Electric Revenues $811.5 (1.2)% $821.6
-------------------------------------------------------
CP&L electric energy sales for the three months ended March 31, 2002 and
2001 and the percentage change by customer class are as follows (in
thousands of mWh):
----------------------------------------------------------
Customer Class 2002 % Change 2001
----------------------------------------------------------
Residential 3,985 (7.6)% 4,313
Commercial 2,790 (2.2) 2,852
Industrial 2,987 (7.1) 3,214
Governmental 325 (6.3) 347
------------------------------------- ------
Total Retail Energy Sales 10,087 (6.0) 10,726
Wholesale 3,331 (4.6) 3,493
Unbilled (187) 72.2 (672)
------------------------------------- ------
Total mWh sales 13,231 (2.3)% 13,547
----------------------------------------------------------
26
Sales of energy to retail customers were down for the first quarter of 2002
when compared to 2001 primarily due to the impacts of a weaker economy on
the industrial customer class. Mild weather caused decreased usage by both
the residential and commercial customer classes, which was partially offset
by an increase in customer growth of both these customer classes. Sales to
wholesale customers decreased in 2002 when compared to the prior year,
primarily due to the impact of weather and decreases in supplemental energy
sales.
CP&L Electric's fuel expense increased $20.4 million for the three months
ended March 31, 2002, when compared to $153.5 million in 2001, primarily
due to increased deferred fuel expense resulting from fuel cost collections
that reduce previously deferred fuel costs. Purchased power expense
decreased $18.6 million for the three months ended March 31, 2002, when
compared to $91.9 million in 2001, primarily due to volume decreases
attributable to favorable market conditions that existed in the first
quarter of 2001. Fuel and purchased power expenses are recovered primarily
through cost recovery clauses and, as such, have no material impact on
operating results.
CP&L Electric's operations and maintenance expense increased $22.6 million
for the three months ended March 31, 2002, when compared to $168.7 million
in 2001, primarily due to an increase in Service Company costs from an
increase in employee headcount in the current quarter when compared to the
prior quarter. In addition, higher benefit costs and the timing of the
Nuclear Electric Insurance Limited (NEIL) refund contributed to the
increase. The current year NEIL refund was not received until April 2002;
however, the prior year refund was received in March 2001. CP&L Electric's
earnings for the three months ended March 31, 2002, were also unfavorably
impacted by lower AFUDC credits in 2002 when compared to the same period in
the prior year.
Florida Power Electric
----------------------
Florida Power Electric contributed net income of $57.7 million and $71.6
million for the three months ended March 31, 2002 and 2001, respectively.
Included in these amounts are energy marketing and trading activities,
which are managed by Progress Ventures on behalf of Florida Power, that had
net income of $2.6 million and $8.4 million for the three months ended
March 31, 2002, and 2001, respectively. Quarterly earnings were negatively
affected by the outcome of the Florida Power rate case settlement, which
included a one-time retroactive revenue refund of $35 million, as well as
the impact of mild weather. See Note 4 to the Progress Energy Consolidated
Interim Financial Statements for additional information on the settlement.
Earnings for the three months ended March 31, 2002, were positively
impacted by lower ongoing depreciation expense in accordance with the rate
case settlement and increased revenues from customer growth and usage. The
tables below detail Florida Power's sales by customer class.
Florida Power's electric revenues for the three months ended March 31, 2002
and 2001 and the percentage change by customer class are as follows (in
millions):
---------------------------------------------------------------
Customer Class 2002 % Change 2001
---------------------------------------------------------------
Residential $379.2 (4.9)% $398.9
Commercial 166.8 5.0 158.9
Industrial 50.0 (6.5) 53.5
Governmental 39.9 5.6 37.8
Retroactive Retail Revenue Refund (35.0) -- --
------------------------------------------ ------
Total Retail Revenues 600.9 (7.4) 649.1
Wholesale 52.4 (46.4) 97.7
Unbilled 6.5 129.2 (22.3)
Miscellaneous 26.6 (69.1) 86.0
------------------------------------------ ------
Total Electric Revenues $686.4 (15.3)% $810.5
---------------------------------------------------------------
27
Florida Power's electric energy sales for the three months ended March 31,
2002 and 2001, and the percentage change by customer class are as follows
(in thousands of mWh):
-------------------------------------------------------
Customer Class 2002 % Change 2001
-------------------------------------------------------
Residential 4,060 (7.9)% 4,409
Commercial 2,456 1.4 2,422
Industrial 882 (9.9) 979
Governmental 621 0.8 616
------------------------------------ -----
Total Retail Energy Sales 8,019 (4.8) 8,426
Wholesale 979 (23.9) 1,286
Unbilled 32 106.5 (495)
------------------------------------ -----
Total mWh sales 9,030 (2.0)% 9,217
-------------------------------------------------------
As a result of the settlement of the Florida Power rate case, Florida Power
Electric recognized a one-time retroactive revenue refund of $35 million to
its retail customers in the first quarter of 2002. In addition, the first
quarter 2002 revenues decreased when compared to the same period in the
prior year due to the recognition of $63 million of deferred revenue in the
first quarter of 2001, which is included in miscellaneous revenues in the
table above. Milder weather conditions in the first quarter of 2002, when
compared to the same period in the prior year, negatively affected energy
sales, which was partially offset by an increase in Florida Power's
customer base. A weaker economy negatively impacted the industrial customer
class.
Fuel used in generation and purchased power decreased $33.7 million for the
three months ended March 31, 2002, when compared to $342.0 million in the
prior year, primarily due to lower oil and gas prices and a decrease in
system requirements. 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 increased $20.5 million for the
three months ended March 31, 2002, when compared to $110.9 million in the
prior year, primarily due to a decrease in pension credits and increases in
other benefit costs and Service Company costs due to an increase in
employee headcount in the current quarter when compared to the prior
quarter.
Depreciation and amortization expense decreased $82.8 million for the three
months ended March 31, 2002, when compared to $152.1 million in the prior
year. The Florida Power rate case settlement provides for ongoing
reductions in depreciation which reduced the amount of depreciation
recorded in the first quarter of 2002 by $15.6 million. In addition, the
first quarter of 2001 depreciation includes $63 million of accelerated
amortization on the Tiger Bay regulatory asset associated with deferred
revenue from 2000.
Progress Ventures
-----------------
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 as well as for its non-regulated plants.
Progress Ventures contributed segment income, including allocation of
energy marketing and trading on behalf of the utilities, of $49.7 million
for the three months ended March 31, 2002 and $63.7 million for the same
period in 2001. The majority of the decrease in segment income is due to
the energy marketing and trading function.
Progress Ventures' energy marketing and trading activities on behalf of
CP&L and Florida Power generated net income of $7.6 million and $2.6
million, respectively, for the quarter ended March 31, 2002, compared to
net income of $13.6 million and $8.4 million, respectively, for the
comparable period in 2001. Earnings from the trading operations decreased
over these periods due to the impact of mild weather conditions, the
completion of certain contracts, and the impact of lower natural gas prices
on the pricing of certain contracts.
Progress Ventures operates facilities that produce synthetic fuel, as
defined under the Internal Revenue Service Code (Code). The production and
sale of the synthetic fuel from these facilities qualifies for tax credits
under Section 29 of the Code. See "Synthetic Fuels" under OTHER MATTERS
below for additional discussion of these tax credits. The Progress Ventures
segment sold 3.0 million and 2.9 million tons of synthetic fuel for the
three months ended March 31, 2002 and 2001, respectively, that resulted in
tax credits of $83.8 million and $76.6 million being recorded for the first
quarter of 2002 and 2001, respectively.
28
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 Services had a net loss of $0.7 million for the three months
ended March 31, 2002. In the first quarter of 2001, Progress Rail was
recorded as net assets held for sale. Therefore, the operations of Rail
Services had no impact on the first quarter 2001 earnings. In the second
quarter of 2001, Rail Services was reclassified from net assets held for
sale and the cumulative Rail Services' operations since the acquisition
date of November 30, 2000, were included in Progress Energy's consolidated
results of operations.
Rail Services' first quarter 2002 revenues of $169.9 million decreased from
the prior year due to the sale of the Louisville Scrap and Metal operations
in November 2001 and the transition from acting as a scrap reseller in 2001
to acting as a scrap resale agent in 2002. Rail Services results for the
three months ended March 31, 2002, have been favorably impacted by the
implementation of cost control programs.
Other Businesses
----------------
The Other segment primarily includes the operations of North Carolina
Natural Gas Corporation (NCNG), Strategic Resource Solutions Corp. (SRS),
Progress Telecommunications Corporation (Progress Telecom) and Caronet,
Inc. (Caronet). This segment also includes other non-regulated operations
of CP&L and FPC as well as holding company results. The Other segment
generated a net loss of $49.5 million for the three months ended March 31,
2002, and a net loss of $80.8 million for the same period in 2001. The
increase in earnings for the first quarter of 2002, when compared to the
same period in the prior year, was primarily due to the elimination of the
goodwill amortization in 2002.
In accordance with SFAS No. 142, effective January 1, 2002, Progress Energy
no longer amortizes goodwill. The Company amortized $22.9 million of
goodwill in the first quarter of 2001. At March 31, 2002, the Company had
$3.7 billion of unamortized goodwill. See Note 7 to the Progress Energy
Consolidated Interim Financial Statements for additional information on
SFAS No. 142.
NCNG had net income of $8.4 million and $7.5 million for the three months
ended March 31, 2002 and 2001, respectively, and the increase in net income
is primarily due to an increase in margin. NCNG's margin on gas sales
increased $4.2 million for the three months ended March 31, 2002, when
compared to $29.0 million in the prior year, due to an increase in natural
gas sale volumes. Natural gas sales of $86.1 million decreased $52.5
million from $138.6 million in the prior year primarily due to the sharp
decline in natural gas prices when compared to the prior year, which also
decreased gas purchased for resale.
In February 2002, NCNG filed a general rate case with the North Carolina
Utilities Commission (NCUC) requesting an annual rate increase of $47.6
million. On May 3, 2002, NCNG withdrew the application, based upon the NCUC
Public Staff's and other parties' interpretation of the order approving the
merger of CP&L and NCNG that such a case was not permitted until 2003. NCNG
plans to file an application with the NCUC in the near future, consistent
with the other parties' interpretation of the NCUC's order. Progress Energy
cannot predict the outcome of this matter.
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 increased by $21.2 for the
first quarter of 2002 and $20.0 million for the first quarter of 2001 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 recorded at fair value
based on published prices and unrealized gains and losses from changes in
fair value are recognized in earnings. At March 31, 2002, the CVOs had a
fair market value of approximately $30.6 million. Progress Energy recorded
a gain of $11.3 million for the three months ended March 31, 2002 to record
the change in fair value of CVOs. A loss of $3.0 million was recorded for
the same period in 2001.
29
The operations of SRS, Progress Telecom and Caronet did not have a material
impact on Progress Energy's results for the three months ended March 31,
2002 or 2001.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Progress Energy, Inc.
Statement of Cash Flows and Financing Activities
------------------------------------------------
Cash provided by operating activities decreased $70.6 million for the three
months ended March 31, 2002, when compared to the corresponding period in
the prior year. The decrease in cash from operating activities for the 2002
period is due to a decrease in operating income from the impact of the
Florida Power rate case settlement and the impact of unfavorable weather in
the current quarter. In addition, changes in the balances of certain
current assets and liabilities due to operational fluctuations decreased
cash provided by operating activities.
Net cash used in investing activities increased $375.9 million for the
three months ended March 31, 2002, when compared to the corresponding
period in the prior year. The increase in cash used in investing activities
is primarily due to an expansion of Progress Ventures' generation portfolio
(See Note 3 to the Progress Energy Consolidated Interim Financial
Statements). During the first three months of 2002, $267.0 million was
spent on its utility subsidiaries' construction program and $456.1 million
was spent in diversified business property additions.
Net cash provided by financing activities increased $801.1 million for the
three months ended March 31, 2002, when compared to the corresponding
period in the prior year. The increase in cash provided by financing
activities is primarily due to an increase in short-term obligations as
well as an increase in long-term debt, the details of which are described
below.
On February 6, 2002, CP&L issued $48.5 million principal amount of First
Mortgage Bonds, Pollution Control Series W, Wake County Pollution Control
Revenue Refunding Bonds, 5.375% Series 2002 Due February 1, 2017. On March
1, 2002, CP&L redeemed $48.5 million principal amount of Pollution Control
Revenue Bonds, Wake County (Carolina Power & Light Company Project)
Adjustable Rate Option Bond 1983 Series Due April 1, 2019, at 101.5% of the
principal amount of such bonds.
In February 2002, $50 million of Progress Capital Holdings, Inc. (PCH)
medium-term notes, 5.78% Series, matured. Progress Energy funded this
maturity through the issuance of commercial paper.
In March 2002, Progress Ventures, Inc. obtained a $440 million bank
facility that will be used exclusively for expansion of its non-regulated
generation portfolio. Borrowings under this facility are secured by the
assets in the generation portfolio. In March 2002, Progress Ventures, Inc.
made draws under this facility of $120 million.
During March 2002, Progress Energy converted $800 million of fixed rate
debt into variable rate debt by executing interest rate derivative
agreements with a group of five banks. Under the terms of the agreements,
Progress Energy will receive a fixed rate of 4.87% and will pay a floating
rate based on three-month LIBOR (pay rate of 2.03% at March 31, 2002).
These instruments were designated as fair value hedges for accounting
purposes.
On March 28, 2002, Standard & Poor's affirmed Progress Energy's corporate
credit rating of BBB+ and the ratings of Florida Power and CP&L but revised
the outlook for Progress Energy to negative from stable. S&P stated that
its change in outlook reflects the increased business risk at Progress
Ventures and lower-than-projected credit protection measures. S&P stated
that Progress Energy's plan to divest of non-core assets and use the
proceeds to pay down acquisition-related debt is moving slower than S&P had
expected.
On April 10, 2002, Moody's revised its outlook to negative from stable on
Progress Energy's senior unsecured debt rating of Baa1. Moody's maintained
a stable outlook for both Florida Power and CP&L. Moody's stated that its
change in outlook to negative was in response to the increased level of
debt incurred by the company, primarily to finance the expansion of its
Progress Ventures unregulated generation portfolio.
The change in outlook by the rating agencies has not affected Progress
Energy's access to liquidity nor the cost of its short-term borrowings.
Progress Energy is committed to maintaining its current ratings and is
currently assessing the
30
situation with both rating agencies to determine an appropriate course of
action, if necessary, to address their concerns.
On April 17, 2002, Progress Energy issued $350 million of senior unsecured
notes due 2007 with a coupon of 6.05% and $450 million of senior secured
notes due 2012 with a coupon of 6.85%. Proceeds from this issuance were
used to pay down commercial paper.
On April 25, 2002, North Carolina Governor Mike Easley announced a
framework for a reduction in emissions for the state's coal-burning
electric plants. The proposal would require lower sulfur dioxide and
nitrogen oxide emissions from CP&L's fossil generating facilities. To
finance the capital expenditures utilities would be required to make,
electric utility rates would be frozen for at least a 5-year period
beginning on an enactment of the legislation. In addition, compliance costs
would be amortized on an accelerated basis, replacing certain existing
expenses as they expire. Progress Energy cannot predict the final outcome
or impact of this matter.
On April 30, 2002, Progress Energy converted $100 million of fixed rate
debt into variable rate debt by executing an interest rate derivative
agreement with a counterparty with a total notional amount of $100 million.
Under the terms of the agreement, which expires in 2007, Progress Energy
will receive a fixed rate of 4.869% and will pay a floating rate based on
three-month LIBOR (pay rate of 1.92% at April 30, 2002). This instrument
was designated as a fair value hedge for accounting purposes.
Future Commitments
------------------
As of March 31, 2002, Progress Energy's contractual cash obligations and
other commercial commitments has not changed materially from what was
reported in the 2001 Annual Report on Form 10-K. The only changes in
Progress Energy's future commitments involve the additional first quarter
2002 long-term debt issuances that are detailed above and the finalization
of Progress Ventures' purchase obligation related to generation
acquisition, as detailed in Note 3 to the Progress Energy Consolidated
Interim Financial Statements
OTHER MATTERS
-------------
Florida Power Rate Case Settlement
----------------------------------
On March 27, 2002, the parties in Florida Power's rate case entered into a
Stipulation and Settlement Agreement (the Agreement) related to retail rate
matters. The Agreement was approved by the FPSC on April 23, 2002. The
Agreement is generally effective from May 1, 2002 through December 31,
2005; provided, however, that if Florida Power's base rate earnings fall
below a 10% return on equity, Florida Power may petition the FPSC to amend
its base rates.
See Note 4 to the Progress Energy Consolidated Interim Financial Statements
for additional information on the Agreement.
Generation Acquisition
----------------------
During February 2002, Progress Ventures, Inc. completed the acquisition of
two electric generating projects located in Georgia from LG&E Energy Corp.,
a subsidiary of Powergen plc. The two projects consist of 1) the Walton
project in Monroe, Georgia, a 460 megawatt natural gas-fired plant placed
in service in June 2001 and 2) the Washington project in Washington County,
Georgia, a planned 600 megawatt natural gas-fired plant expected to be
operational by June 2003. The transaction included tolling and power sale
agreements with LG&E Energy Marketing, Inc. for both projects through
December 31, 2004. See Note 3 to the Progress Energy Consolidated Interim
Financial Statements for additional information on this acquisition.
Fuel Acquisition
----------------
On April 26, 2002, Progress Energy finalized the acquisition of Westchester
Gas Company, which includes approximately 215 producing natural gas wells,
52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems.
Total consideration of $148 million included $128 million in Company common
stock and $20 million in cash. The properties are located within a 25-mile
radius of Jonesville, Texas, on the Texas-Louisiana border. This
transaction added 140 billion cubic feet (Bcf) of gas reserves to Progress
Ventures' growing energy portfolio.
31
EasternNC 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 750-mile natural gas
pipeline system to serve 14 eastern North Carolina counties. On March 21,
2002, EasternNC filed a request with the NCUC to lay natural gas pipelines
in more than one phase of the project simultaneously and to adjust the
sequence of the phases of the project. The NCUC approved this request and
issued an order to that effect on April 17, 2002.
Synthetic Fuels Tax Credits
---------------------------
Progress Energy, through its subsidiaries, is a majority owner in five
entities and a minority owner in one entity that own facilities that
produce synthetic fuel, as defined under the Internal Revenue Service Code
(Code). The production and sale of the synthetic fuel from these facilities
qualifies for tax credits under Section 29 of the Code (Section 29) if
certain requirements are satisfied, including a requirement that the
synthetic fuel differs significantly in chemical composition from the coal
used to produce such synthetic fuel. All entities have received private
letter rulings (PLRs) from the Internal Revenue Service (IRS) with respect
to their synthetic fuel operations. The PLRs do not limit the production on
which synthetic fuel tax credits may be claimed. These tax credits are
scheduled to expire in 2007.
Should the tax credits be denied on future audits, and Progress Energy
fails to prevail through the audit/legal process, there could be a
significant tax liability owed for previously taken Section 29 credits,
with a significant impact on earnings and cash flows. In management's
opinion, Progress Energy is complying with all the necessary requirements
to be allowed such credits under Section 29 and believes it is probable,
although it cannot provide certainty, that it will prevail if challenged by
the IRS on any credits taken.
Nuclear Matters
---------------
On April 1, 2002, the Company filed a response to an industry-wide request
from the Nuclear Regulatory Commission (NRC) concerning potential
degradation of the reactor vessel heads of pressurized water reactors
(PWRs). Inspections of the vessel heads at the Company's PWR plants have
been performed during previous outages. At the Crystal River plant (CR3),
one nozzle was found to have a crack and was repaired; however, no
degradation of the reactor vessel head was identified. Current plans are to
replace the vessel head at CR3 during its next regularly scheduled
refueling outage in 2003. At the Robinson plant, an inspection was
completed and no penetration nozzle cracking was identified and there was
no degradation of the reactor vessel head. At the Harris plant, sufficient
inspections were completed during the last refueling outage to conclude
there is no degradation of the reactor vessel head.
On February 25, 2002, the NRC issued orders formalizing many of the
security enhancements made at the Company's nuclear plants since September
2001. These orders include additional restrictions on access, increased
security presence and closer coordination with the Company's partners in
intelligence, military, law enforcement and emergency response at the
federal, state and local levels. The Company is currently reviewing the new
requirements to determine the cost to implement these orders. The Company
does not expect those costs to be material to the Company's consolidated
financial position or results of operations. As the NRC, other governmental
entities, and the industry continue to consider security issues, it is
possible that more extensive security plans could be required.
Franchise Litigation
--------------------
Seven cities, with a total of approximately 59,000 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 pending 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. Three circuit courts have
entered orders requiring arbitration to establish the purchase price of
Florida Power's electric distribution facilities within three 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
32
any proceeding to determine the value at which such a purchase could be
made. Arbitration in one of the cases is scheduled to occur in the third
quarter of 2002. Progress Energy cannot predict the outcome of these
matters.
Carolina Power & Light Company
The information required by this item is incorporated herein by reference
to 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 and
OTHER MATTERS.
RESULTS OF OPERATIONS
---------------------
The results of operations for the CP&L Electric segment are identical
between CP&L and Progress Energy. 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
-------------------------------
During the first three months of 2002, $176.2 million was spent on CP&L's
construction program and $8.4 million was spent on diversified business
property additions.
As of March 31, 2002, CP&L's contractual cash obligations and other
commercial commitments has not changed materially from what was reported in
the 2001 Annual Report on Form 10-K.
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 the Company's
financial instruments, which arise from transactions entered into in the
normal course of business. The Company's primary exposures are changes in
interest rates with respect to its long-term debt and commercial paper, and
fluctuations in the return on marketable securities with respect to its
nuclear decommissioning trust funds. The Company manages its market risk in
accordance with its established risk management policies, which may include
entering into various derivative transactions.
The Company's exposure to return on marketable securities for the
decommissioning trust funds has not changed materially since December 31,
2001. The Company's exposure to market value risk with respect to the CVOs
has also not changed materially since December 31, 2001.
In March 2002, Progress Ventures, Inc. obtained a $440 million bank
facility that will be used exclusively for expansion of its non-regulated
generation portfolio. In March 2002, Progress Ventures, Inc. made draws
under this facility of $120 million.
During March 2002, Progress Energy converted $800 million of fixed rate
debt into variable rate debt by executing interest rate derivative
agreements with a group of five banks. Under the terms of the agreements,
Progress Energy will receive a fixed rate of 4.87% and will pay a floating
rate based on three-month LIBOR (pay rate of 2.03% at March 31, 2002).
These instruments were designated as fair value hedges for accounting
purposes. The fair value of these instruments was a $3.3 million liability
position at March 31, 2002.
As a result of these issuances, the exposure to changes in interest rates
from the Company's fixed rate and variable rate long-term debt at March 31,
2002, has changed from December 31, 2001. The total fixed rate long-term
debt at March 31, 2002, was $7.9 billion, with an average interest rate of
6.89% and fair market value of $8.2 billion. The total variable rate
long-term debt at March 31, 2002, was $740 million, with an average
interest rate of 4.98% and fair market value of $741 million.
The exposure to changes in interest rates from the Company's commercial
paper reclassified as long-term debt, extendible notes and FPC mandatorily
redeemable securities of trust at March 31, 2001, was not materially
different than at December 31, 2001. In addition, the Company's exposure on
the $500 million notional amount of interest
33
rate swap agreements used to hedge its exposure on variable rate debt
positions at March 31, 2002, was not materially different than at December
31, 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 reclassified as long-term debt, 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, 2001. The exposure to changes in interest
rates from the Company's fixed rate long-term debt, variable rate long-term
debt, commercial paper reclassified as long-term debt and extendible notes
at March 31, 2002, was not materially different than at December 31, 2001.
In addition, 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 at March 31, 2002, was not materially different than at
December 31, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ------ -----------------
Legal aspects of certain matters are set forth in Part I, Item 1. See Note
12 to the Progress Energy, Inc. Consolidated Interim Financial Statements
and Note 6 to the CP&L Consolidated Interim Financial Statements.
Item 2. Changes in Securities and Use of Proceeds
- ------ -----------------------------------------
RESTRICTED STOCK AWARDS:
(a) Securities Delivered. On January 14, 2002, February 22, 2002, March 11,
--------------------
2002, March 20, 2002 and April 8, 2002, 13,920, 20,800, 4,500, 76,200 and
4,500 restricted shares, respectively, of the Company's Common Shares were
granted to certain key employees pursuant to the terms of the Company's
1997 Equity Incentive Plan (Plan), which was approved by the Company's
shareholders on May 7, 1997. (Sponsorship of the Plan was transferred from
CP&L to the Company 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 the
Company, including its Affiliates and Subsidiaries. The Common Shares
delivered pursuant to the Plan were acquired in market transactions
directly for the accounts of the recipients and do not represent newly
issued shares of the Company.
(b) Underwriters and Other Purchasers. No underwriters were used in
---------------------------------
connection with the delivery of Common Shares described above. The Common
Shares were delivered to certain key employees of the Company. The Plan
defines "key employees" as an officer or other employee of the Company who,
in the opinion of the Committee, can contribute significantly to the growth
and profitability of, or perform services of major importance to, the
Company.
(c) Consideration. The Common Shares were delivered to provide an incentive
-------------
to the employee recipients to exert their utmost efforts on the Company's
behalf and thus enhance the Company's performance while aligning the
employee's interest with those of the Company's shareholders.
(d) Exemption from Registration Claimed. The Common Shares described in
-----------------------------------
this Item were delivered on the basis of an exemption from registration
under Section 4(2) of the Securities Act of 1933. Receipt of the Common
Shares required no investment decision on the part of the recipients. All
award decisions were made by the Committee, which consists entirely of
non-employee directors.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
None
34
(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 January 11, 2002 January 11, 2002
5 No December 12, 2001 January 17, 2002
5 Yes January 23, 2002 February 6, 2002
7 Yes February 26, 2002 February 26, 2002
5 No April 17, 2002 April 22, 2002
5 No April 24, 2002 April 25, 2002
9 No May 3, 2002 May 3, 2002
Carolina Power & Light Company
------------------------------
None
35
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: May 15, 2002 (Registrants)
By: /s/ Peter M. Scott III
-----------------------------
Executive Vice President and
Chief Financial Officer
By: /s/ Robert H. Bazemore, Jr.
-----------------------------
Vice President and Controller
Chief Accounting Officer
36