As filed with the Securities and Exchange Commission on August 9, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of report (date of earliest event reported): August 9, 2002
Commission File Exact name of registrant as specified in its charter, I.R.S. Employer
Number state of incorporation, address of principal executive Identification Number
offices, and telephone number
1-15929 Progress Energy, Inc. 56-2155481
410 S. Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6411
State of Incorporation: North Carolina
The address of the registrant has not changed since the last report.
ITEM 5. OTHER EVENTS
Safe Harbor For Forward-Looking Statements
We have included in this 8-K, statements containing "forward-looking
information," as defined by the Private Securities Litigation Reform Act of
1995. We have used the words "anticipate," "intend," "may," "expect," "believe,"
"plan," "will," "estimate," "should" and variations of such words and similar
expressions in this 8-K to identify such forward-looking statements.
Forward-looking information, by its nature, involves estimates, projections,
goals, forecasts, assumptions, risks and uncertainties that could cause actual
results or outcomes to differ materially from those expressed in a statement
that contains forward-looking information. Any statement containing
forward-looking information speaks only as of the date on which it is made; and,
except to fulfill our obligations under the U.S. securities laws, we undertake
no obligation to update any such statement to reflect events or circumstances
after the date on which it is made. Examples of factors that can affect our
expectations, beliefs, plans, goals, objectives and future financial or other
performance are discussed under the heading "Risk Factors." All such factors are
difficult to predict, contain uncertainties that may materially affect actual
results, and may be beyond our control. It is not possible for our management to
predict all of such factors or to assess the effect of each such factor on our
business. New factors emerge from time to time, and may be found in the future
SEC filings incorporated by reference in this prospectus. All of our
forward-looking statements should be considered in light of these factors.
Risk Factors
Before purchasing shares of Progress Energy common stock you should carefully
consider the following risk factors as well as the other information contained
in this prospectus and the information incorporated by reference in order to
evaluate an investment in Progress Energy common stock.
Risks Related to the Energy Industry
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We are subject to complex government regulation, which may have a negative
impact on our business and our results of operations.
We are subject to comprehensive regulation by several federal, state and local
regulatory agencies, which significantly influence our operating environment and
may affect our ability to recover costs from utility customers. We are required
to have numerous permits, approvals and certificates from the agencies that
regulate our business. We believe the necessary permits, approvals and
certificates have been obtained for our existing operations and that our
business is conducted in accordance with applicable laws, however, we are unable
to predict the impact on our operating results from the future regulatory
activities of any of these agencies. Changes in regulations or the imposition of
additional regulations could have an adverse impact on our results of
operations.
The Federal Energy Regulatory Commission ("FERC"), the Nuclear Regulatory
Commission ("NRC"), the Environmental Protection Agency ("EPA"), the North
Carolina Utilities Commission ("NCUC"), the Florida Public Service Commission
("FPSC"), and the South Carolina Public Service Commission ("SCPSC") regulate
many aspects of our utility operations including siting and construction of
facilities, customer service and the rates that we can charge customers. Our
system also is subject to the jurisdiction of the SEC under PUHCA. The rules and
regulations promulgated under PUHCA impose a number of restrictions on the
operations of registered utility holding companies and their subsidiaries. These
restrictions include a requirement that, subject to a number of exceptions, the
SEC approve in advance securities issuances, acquisitions and dispositions of
utility assets or of securities of utility companies, and acquisitions of other
businesses. PUHCA also generally limits the operations of a registered holding
company like ours to a single integrated public utility system, plus additional
energy-related businesses. PUHCA rules require that transactions between
affiliated companies in a registered holding company system be performed at
cost, with limited exceptions.
2
We are unable to predict the impact on our business and operating results from
future regulatory activities of these federal, state and local agencies. Changes
in regulations or the imposition of additional regulations could have a negative
impact on our business and results of operations.
We are subject to numerous environmental laws and regulations which may increase
the cost of operations, impact our business plans, or expose us to environmental
liabilities.
We are subject to numerous environmental regulations affecting many aspects of
our present and future operations, including air emissions, water quality,
wastewater discharges, solid waste, and hazardous waste. These laws and
regulations can result in increased capital, operating, and other costs,
particularly with regard to enforcement efforts focused on power plant emissions
obligations. These laws and regulations generally require us to obtain and
comply with a wide variety of environmental licenses, permits, inspections and
other approvals. Both public officials and private individuals may seek to
enforce applicable environmental laws and regulations. We cannot predict the
outcome (financial or operational) of any related litigation that may arise.
In addition, we may be a responsible party for environmental clean up at sites
identified by a regulatory body. We cannot predict with certainty the amount and
timing of all future expenditures related to environmental matters because of
the difficulty of estimating clean up costs. There is also uncertainty in
quantifying liabilities under environmental laws that impose joint and several
liability on all potentially responsible parties.
We cannot assure you that existing environmental regulations will not be revised
or that new regulations seeking to protect the environment will not be adopted
or become applicable to us. Revised or additional regulations, which result in
increased compliance costs or additional operating restrictions, particularly if
those costs are not fully recoverable from our customers, could have a material
adverse effect on our results of operations.
Recent events in the energy markets that are beyond our control may have
negative impacts on our business.
As a result of the energy crisis in California during the summer of 2001, the
recent volatility of natural gas prices in North America, the filing of
bankruptcy by the Enron Corporation, and investigations by governmental
authorities into energy trading activities, companies generally in the regulated
and unregulated utility businesses have been under an increased amount of public
and regulatory scrutiny. The capital markets and ratings agencies also have
increased their level of scrutiny. Allegations against various energy trading
companies of "round trip" transactions, may have a negative affect on the
industry. We believe that we are complying with all applicable laws and we have
taken steps to avoid these events, but it is difficult or impossible to predict
or control what effect these types of disruptions in the energy markets may have
on our business or our access to the capital markets.
Deregulation or restructuring in the electric industry may result in increased
competition and unrecovered costs which could adversely affect our utilities'
businesses.
Increased competition resulting from restructuring efforts could have a
significant adverse financial impact on us and our utility subsidiaries and
consequently on our results of operations. Increased competition could result in
increased pressure to lower costs, including the cost of electricity. Retail
competition and the unbundling of regulated energy and gas service could have a
significant adverse financial impact on us and our subsidiaries due to an
impairment of assets, a loss of retail customers, lower profit margins or
increased costs of capital. Because we have not previously operated in a
competitive retail environment, we cannot predict the extent and timing of entry
by additional competitors into the electric markets. Movement toward
deregulation in North Carolina, South Carolina and Florida has slowed as a
result of recent developments, including developments related to electric
deregulation in California and other states. We cannot predict when we will be
subject to changes in legislation or regulation, nor can we predict the impact
of these changes on our financial position, results of operations or cash flows.
3
One of the major issues to be resolved from deregulation is who would pay for
stranded costs. Stranded costs are those costs and investments made by utilities
in order to meet their statutory obligation to provide electric service, but
which could not be recovered through the market price of electricity following
industry restructuring. The amount of such stranded costs that we might
experience would depend on the timing of, and the extent to which, direct
competition is introduced, and the then-existing market price of energy. If both
our electric utilities and our gas utility were no longer subject to cost-based
regulation and it was not possible to recover stranded costs, our financial
position and results of operations could be adversely affected.
Additionally, the electric utility industry has experienced a substantial
increase in competition at the wholesale level, caused by changes in federal law
and regulatory policy. As a result of the Public Utilities Regulatory Policies
Act of 1978 and the Energy Policy Act of 1992, competition in the wholesale
electricity market has greatly increased due to a greater participation by
traditional electricity suppliers, non-utility generators, independent power
producers, wholesale power marketers and brokers, and due to the trading of
energy futures contracts on various commodities exchanges. This increased
competition could affect our load forecasts, plans for power supply and
wholesale energy sales and related revenues. The impact could vary depending on
the extent to which additional generation is built to compete in the wholesale
market, new opportunities are created for us to expand our wholesale load, or
current wholesale customers elect to purchase from other suppliers after
existing contracts expire. In 1996, the FERC issued new rules on transmission
service to facilitate competition in the wholesale market on a nationwide basis.
The rules give greater flexibility and more choices to wholesale power
customers. As a result of the changing regulatory environment and the relatively
low barriers to entry, we expect competition to steadily increase. As
competition continues to increase, our financial position and results of
operations could be adversely affected.
The uncertain outcome regarding the creation of regional transmission
organizations, or RTOs, may materially impact our operations, cash flows or
financial position.
On December 20, 1999, FERC issued Order No. 2000 on RTOs. This order required
public utilities that own, operate or control interstate electricity
transmission facilities to file either a proposal to participate in an RTO or an
alternative filing describing efforts and plans to participate in an RTO. To
date, our electric utilities have responded to the order as follows:
o CP&L and other investor owned utilities filed applications with the
FERC, NCUC, and SCPSC for approval of an RTO, currently named
GridSouth.
o Florida Power and other investor owned utilities filed applications
with the FERC and the FPSC for approval of an RTO, currently named
GridFlorida.
On November 7, 2001, FERC issued an order providing guidance on continued
processing of RTO filings. In this order, FERC recognized that it would not be
possible for all RTOs to be operational by December 15, 2001 as set forth in
Order No. 2000, therefore, FERC stated that they would address in future orders
the establishment of a timeline for the RTO progress in each region of the
country.
Florida Power is continuing to make progress towards the development of its RTO.
CP&L and the other GridSouth Companies withdrew their RTO application before the
NCUC and SCPSC pending the review of FERC's Standard Market Design NOPR released
on July 31, 2002. A determination about refiling will be made at a later date.
The actual structure of GridSouth, GridFlorida or any alternative combined
transmission structure and the date it will become operational depends upon the
resolution of all regulatory approvals and technical issues. Given the
uncertainty of the ultimate timing, structure and operations of GridSouth,
GridFlorida or an alternate combined transmission structure, we cannot predict
whether their creation will have any material adverse effect on our future
consolidated results of operations, cash flows or financial position.
4
Our results of operations can be affected by changes in the weather.
Our results of operation can be affected by changing weather conditions. Weather
conditions in our service territories, primarily North Carolina, South Carolina,
and Florida, directly influence the demand for electricity and natural gas and
affect the price of energy commodities. Furthermore, severe weather in these
states, such as hurricanes, thunder storms and snow storms, can be destructive,
causing outages, downed power lines and property damage, and requiring us to
incur additional and unexpected expenses.
Our operating results may fluctuate with the economy or on a seasonal or
quarterly basis.
Our business is impacted by fluctuations in the macroeconomy. For the year ended
December 31, 2001 and the three months ended March 31, 2002, commercial and
industrial customers represented approximately 37% of our electric revenues. As
a result, changes in the macroeconomy can have negative impacts on our revenues.
As our commercial and industrial customers experience economic hardships, our
revenues can be negatively impacted.
Electric power demand is generally a seasonal business. In many parts of the
country, demand for power peaks during the hot summer months, with market prices
also peaking at that time. In other areas, power demand peaks during the winter.
As a result, our overall operating results in the future may fluctuate
substantially on a seasonal basis. The pattern of this fluctuation may change
depending on the nature and location of facilities we acquire and the terms of
power sale contracts we enter into. In addition, we have historically sold less
power, and consequently earned less income, when weather conditions are milder.
While we believe that our North Carolina, South Carolina, and Florida markets
complement each other during normal seasonal fluctuations, unusually mild
weather could diminish our results of operations and harm our financial
condition.
Risks Related to Us and Our Business
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As a holding company, we are dependent on upstream cash flows from our
subsidiaries to meet our ongoing financial obligations.
We are a holding company and as such, we have no operations of our own. Our
ability to meet our financial obligations is primarily dependent on the earnings
and cash flows of our operating subsidiaries and their ability to pay upstream
dividends or to repay funds to us. Prior to funding us, our subsidiaries have
financial obligations that must be satisfied, including among others, debt
service, preferred stock dividends and obligations to trade creditors.
There are inherent potential risks in the operation of nuclear facilities.
We own and operate five nuclear units through our subsidiaries, CP&L (four
units) and Florida Power (one unit), that represent approximately 4,048
megawatts, or 19% of our generation capacity. Our nuclear facilities are subject
to environmental, health and financial risks such as the ability to dispose of
spent nuclear fuel, the ability to maintain adequate reserves for
decommissioning, potential liabilities arising out of the operation of these
facilities, and the costs of securing the facilities against possible terrorist
attacks. We maintain decommissioning trusts and external insurance coverage to
minimize the financial exposure to these risks, however, it is possible that
damages could exceed the amount of our insurance coverage.
The NRC has broad authority under federal law to impose licensing and
safety-related requirements for the operation of nuclear generation facilities.
In the event of non-compliance, the NRC has the authority to impose fines or
shut down a unit, or both, depending upon its assessment of the severity of the
situation, until compliance is achieved. Revised safety requirements promulgated
by the NRC could require us to make substantial capital expenditures at our
nuclear plants. In addition, although we have no reason to anticipate a serious
nuclear incident at our plants, if an incident did occur, it could materially
and adversely affect our results of operations or financial condition. A major
incident at a nuclear facility anywhere in the world could cause the NRC to
limit or prohibit the operation or licensing of any domestic nuclear unit.
5
Our facilities require licenses that need to be renewed/extended in order to
continue operating. We do not anticipate any problems renewing these licenses.
However, as a result of potential terrorist threats and increased public
scrutiny of utilities, the licensing process could result in increased licensing
or compliance costs that are difficult or impossible to predict.
Our business is dependent on our ability to successfully access capital markets.
We rely on access to both short-term money markets and longer-term capital
markets as a significant source of liquidity for capital requirements not
satisfied by the cash flow from our operations. If we are not able to access
capital at competitive rates, our ability to implement our strategy will be
adversely affected. We believe that we will maintain sufficient access to these
financial markets based upon current credit ratings. However, certain market
disruptions or a downgrade of our credit rating may increase our cost of
borrowing or adversely affect our ability to access one or more financial
markets. Such disruptions could include:
o an economic downturn;
o the bankruptcy of an unrelated energy company;
o capital market conditions generally;
o market prices for electricity and gas;
o terrorist attacks or threatened attacks on our facilities or unrelated
energy companies; or
o the overall health of the utility industry.
Restrictions on our ability to access financial markets may affect our ability
to execute our business plan as scheduled. An inability to access capital may
limit our ability to pursue improvements or acquisitions that we may otherwise
rely on for future growth.
Increases in our leverage could adversely affect our financial condition.
Our cash requirements arise primarily from the capital intensive nature of our
electric utilities, as well as the expansion of our diversified businesses,
primarily those of Progress Ventures. In addition to operating cash flows, we
rely heavily on our commercial paper and long-term debt. Portions of our
commercial paper are backed by our credit facilities and have, accordingly, been
reclassified as long-term debt. As of March 31, 2002, commercial paper and
long-term debt balances for Progress Energy and its subsidiaries were as follows
(in millions):
Commercial Paper
Reclassified as Total Long-Term
Company Outstanding Commercial Paper Long-Term Debt Debt, Net
------- ------ -------------- ---------
- ----------------------------------------- ------------------------------- ----------------------- ----------------------
Progress Energy, unconsolidated (b) $1,098.2 $ 450.0 $4,421.0
- ----------------------------------------- ------------------------------- ----------------------- ----------------------
CP&L $ 504.5 $ 504.5 $3,203.1
- ----------------------------------------- ------------------------------- ----------------------- ----------------------
Florida Power $ 231.9 $ 200.0 $1,595.1
- ----------------------------------------- ------------------------------- ----------------------- ----------------------
Other Subsidiaries (c) $ -- $ -- $ 602.8
------------ ------------ ---------
- ----------------------------------------- ------------------------------- ----------------------- ----------------------
Progress Energy, consolidated $1,834.6 (d) $1,154.5 $9,822.0 (a)
- ----------------------------------------- ------------------------------- ----------------------- ----------------------
(a) Net of current portion, which at March 31, 2002, was $703.4 million on a
consolidated basis.
(b) Represents solely the outstanding indebtedness of the holding company.
(c) Includes the following subsidiaries: Progress Ventures, Inc. ($120.0),
Florida Progress Funding Corporation ($260.9), and Progress Capital Holdings,
Inc. ($221.9).
(d) Of this amount, $680.1 million is classified as short-term debt.
6
Progress Energy and its subsidiaries have an aggregate of six committed credit
lines that support our commercial paper programs totaling $1.945 billion. While
our financial policy precludes us from issuing commercial paper in excess of our
credit lines, as of March 31, 2002, we had an aggregate of approximately $110.4
million available for future borrowing under our credit lines. Progress Energy
and Florida Power have two uncommitted credit lines for up to $300 million and
$100 million, respectively. As of March 31, 2002, Progress Energy had $125
million outstanding under its uncommitted line of credit. In addition, as of
March 31, 2002, Progress Energy, CP&L and Florida Power each have shelf
registration statements on file with the SEC that permit the issuance of various
debt securities up to an additional $2.494 billion (of which $800 million was
issued in April 2002), $1 billion (of which $500 million was issued in July
2002) and $700 million, respectively.
Our credit lines impose various limitations that could impact our liquidity. Our
credit facilities include defined maximum total debt to total capital ratios. As
of March 31, 2002, the maximum and actual ratios were as follows:
Company Maximum Ratio Actual Ratio
- --------------------------------------------------------------------------
Progress Energy 70% 65.6%
- --------------------------------------------------------------------------
CP&L 65% 55.2%
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Florida Power 65% 46.3%
- --------------------------------------------------------------------------
In the event our capital structure changes such that we approach the maximums,
our access to capital and additional liquidity will decrease. A limitation in
our liquidity would have a material adverse impact on our business strategy and
our ongoing financing needs. Furthermore, the two Progress Energy credit lines
and the two Florida Power credit lines include provisions that allow the lenders
to refuse to advance funds in the event of a material adverse change in the
respective company's financial condition.
Our indebtedness also includes several cross-default provisions which could
significantly impact our financial condition. Progress Energy's and Florida
Power's credit facilities include cross-default provisions for defaults of
indebtedness in excess of $10 million. CP&L's credit facilities include
cross-default provisions for defaults of indebtedness in excess of $10 million;
these provisions only apply to other obligations of CP&L and its subsidiaries,
not other affiliates of CP&L. Additionally, certain of Progress Energy's
long-term debt indentures contain cross-default provisions for defaults of
indebtedness in excess of $25 million; these provisions apply only to other
obligations of Progress Energy, not its subsidiaries. In the event that either
of these cross-default provisions were triggered, the lenders could accelerate
payment of any outstanding debt. Any such acceleration would cause a material
adverse change in the respective company's financial condition. Certain
agreements underlying our indebtedness also limit our ability to incur
additional liens or engage in certain types of sale and leaseback transactions.
Changes in economic conditions could result in higher interest rates, which
would increase our interest expense on our floating rate debt and reduce funds
available to us for our current plans. Additionally, an increase in our leverage
could adversely affect us by:
o increasing the cost of future debt financing;
o making it more difficult for us to satisfy our existing financial
obligations;
o limiting our ability to obtain additional financing, if we need it,
for working capital, acquisitions, debt service requirements or other
purposes;
o increasing our vulnerability to adverse economic and industry
conditions;
7
o requiring us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which would reduce funds available
to us for operations, future business opportunities or other purposes;
o limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we compete; and
o placing us at a competitive disadvantage compared to our competitors
that have less debt.
Any reduction in our credit ratings could materially and adversely affect our
business, financial condition and results of operations.
Our senior unsecured debt has been assigned a rating by Standard & Poor's
Ratings Group, a division of The McGraw-Hill Companies, Inc., of "BBB" (negative
outlook) and by Moody's Investors Service, Inc. of "Baa1" (negative outlook).
CP&L's senior unsecured debt has been assigned a rating by S&P of "BBB+"
(negative outlook) and by Moody's of "Baa1" (stable outlook). Florida Power's
senior unsecured debt has been assigned a rating by S&P of "BBB+" (negative
outlook) and by Moody's of "A-2" (stable outlook). While our non-regulated
operations, including those conducted through our Progress Ventures business
unit, have a higher level of risk than our regulated utility operations, we will
seek to maintain a solid investment grade rating through prudent capital
management and financing structures. However, we cannot assure you that any of
our current ratings, or those of CP&L and Florida Power, will remain in effect
for any given period of time or that a rating will not be lowered or withdrawn
entirely by a rating agency if, in its judgment, circumstances in the future so
warrant. Any downgrade could increase our borrowing costs which would diminish
our financial results. We would likely be required to pay a higher interest rate
in future financings, and our potential pool of investors and funding sources
could decrease. A downgrade would require substantial support from letters of
credit or cash collateral and otherwise have a material adverse effect on our
business, financial condition and results of operations. If our short-term
rating were to fall below A-2 or P-2, the current ratings assigned by S&P and
Moody's, respectively, it would significantly limit our access to the commercial
paper market. We note that the ratings from credit agencies are not
recommendations to buy, sell or hold our securities or those of CP&L or Florida
Power and that each rating should be evaluated independently of any other
rating.
The use of derivative contracts in the normal course of our business could
result in financial losses that negatively impact our results of operations.
We use derivatives including futures, forwards and swaps, to manage our
commodity and financial market risks. In the future, we could recognize
financial losses on these contracts as a result of volatility in the market
values of the underlying commodities or if a counterparty fails to perform under
a contract. In the absence of actively quoted market prices and pricing
information from external sources, the valuation of these financial instruments
can involve management's judgment or use of estimates. As a result, changes in
the underlying assumptions or use of alternative valuation methods could affect
the value of the reported fair value of these contracts.
8
Our results of operations and cash flows may be materially and adversely
affected if the Internal Revenue Service ("IRS") denies or otherwise makes
unusable the Section 29 tax credits related to our coal and synthetic fuels
businesses.
Through Progress Ventures, we produce synthetic fuel from coal. The production
and sale of the synthetic fuel qualifies for tax credits under Section 29 of the
Internal Revenue 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 of
our synthetic fuel facilities have received favorable private letter rulings
from the Internal Revenue Service (IRS) with respect to their operations. These
tax credits are subject to review by the IRS, and if we failed to prevail
through the administrative or 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. Tax credits for the year ended December 31,
2001 and the six months ended June 30, 2002, were $349.3 million and $175.1
million, respectively, offset by operating losses, net of tax, of $163.8 million
and $91.9 million, respectively, for the same periods. One synthetic fuel
entity, Colona Synfuel Limited Partnership, L.L.L.P., from which we (and Florida
Progress prior to our acquisition) have been allocated approximately $220
million in tax credits to date, is being audited by the IRS. Total Section 29
credits generated to date are approximately $781 million. In management's
opinion, we are complying with the private letter rulings and all the necessary
requirements to be allowed such credits under Section 29 and believe it is
likely, although we cannot be certain, that we will prevail if challenged by the
IRS on any credits taken. The current Section 29 tax credit program will expire
in 2007.
Changes in the telecommunications business may affect the future returns we
expected from our Progress Telecom and Caronet, Inc. ventures.
Our current strategy in the telecommunications business is based upon our
ability to deliver broadband telecommunication services to our customers in
markets from Miami, Florida to New York City. The market for these services,
like the telecommunications industry in general, is rapidly changing and a
number of participants in this segment have had substantial financial problems.
We cannot assure that growth in demand for these services will occur as
expected. If the market for these services fails to grow as quickly as
anticipated or becomes more saturated with competitors, the telecommunications
business may be adversely affected. Furthermore, due to the recent decline of
the telecommunications industry, we have initiated a valuation study to assess
the recoverability of Progress Telecom's and Caronet's long-lived assets, which
totaled approximately $288 and $111 million, respectively, at June 30, 2002. We
expect to record an impairment in the third quarter.
There is a risk that we will not successfully integrate newly acquired
businesses into our operations as quickly or as profitably as expected.
Our ability to successfully make strategic acquisitions and investments will
depend on:
o the extent to which acquisitions and investment opportunities become
available;
o our success in bidding for the opportunities that do become available;
o regulatory approval of the acquisitions on favorable terms; and
o our access to capital and the terms upon which we obtain capital.
If we are unable to make strategic investments and acquisitions we may be unable
to realize the growth we anticipate. Our ability to successfully integrate
acquired businesses into our operations will depend on the adequacy of our
implementation plans and our ability to achieve desired operating efficiencies.
If we are unable to successfully integrate new businesses into our operations,
we could experience increased costs and losses on our investments.
There are risks involved with the construction and operation of our wholesale
plants.
As of June 1, 2002, we had approximately 1500 megawatts of wholesale generation
in commercial operation. We intend to expand our wholesale generation to
approximately 3,100 megawatts by 2003. We will add a significant portion of this
future capacity through construction by Progress Ventures. We also may transfer
generating assets from our regulated subsidiaries to our unregulated wholesale
portfolio. We currently have flexible plans to add wholesale generation capacity
as market conditions warrant after 2003.
9
The construction and operation of wholesale generation facilities is subject to
many risks including those listed below. During the execution and completion of
our wholesale generation expansion strategy, these risks will intensify. These
risks include:
o Construction delays that may impact our ability to generate sufficient
cash flow and may have an adverse effect on our operations. If we
encounter significant construction delays, any liquidated damages,
contingency funds, or insurance proceeds may not be sufficient to
service our related project debt.
o Our wholesale facilities will be dependent on third parties under
construction agreements, power purchase agreements, fuel supply and
transportation agreements, and transmission grid connection
agreements. If such third parties breach their obligations to us, our
cash flow and ability to make payments of interest and principal on
our outstanding debts may be impaired. Any material breach by any of
these parties of their obligations under the project contracts could
adversely affect our cash flows and could impair our ability to make
payments of principal of and interest on our indebtedness.
o Agreements with our counter-parties frequently will include the right
to terminate and/or withhold payments or performance under the
contracts if specific events occur. If a project contract were to be
terminated due to nonperformance by us or by the other party to the
contract, our ability to enter into a substitute agreement having
substantially equivalent terms and conditions is uncertain.
o Because many of our facilities are new construction and have no
operating history, various unexpected events may increase our expenses
or reduce our revenues and impair our ability to service the related
project debt. As with any new business venture of this size and
nature, operation of our facility could be affected by many factors,
including start-up problems, the breakdown or failure of equipment or
processes, the performance of our facility below expected levels of
output or efficiency, failure to operate at design specifications,
labor disputes, changes in law, failure to obtain necessary permits or
to meet permit conditions, government exercise of eminent domain power
or similar events and catastrophic events including fires, explosions,
earthquakes and droughts.
o Frequently our facilities will enter into power purchase agreements to
sell all or a portion of the facility's generating capacity. Following
the expiration of a power purchase agreement, the facility will
generally become a merchant facility. Our merchant facilities may not
be able to find adequate purchasers or otherwise compete effectively
in the wholesale market. Additionally, numerous legal and regulatory
limitations restrict our ability to operate a facility on a wholesale
basis.
As our energy marketing and trading operations expand, we will become
increasingly subject to risks that impact our revenues and results of
operations, many of which are beyond our control.
As our fleet of wholesale unregulated plants grow, we expect to sell energy into
the spot market or other competitive power markets or on a contractual basis. We
also will enter into contracts to purchase and sell electricity, natural gas and
coal as part of our power marketing and energy trading operations. These
contracts do not guarantee us any rate of return on our capital investments
through mandated rates, and our revenues and results of operations from these
contracts are likely to depend, in large part, upon prevailing market prices for
power in our regional markets and other competitive markets. These market prices
can fluctuate substantially over relatively short periods of time. Trading
margins may erode as markets mature and should volatility decline, we can have
diminished opportunities for gain. In addition, the FERC, which has jurisdiction
over wholesale power rates, as well as independent system operators that oversee
some of these markets, may impose price limitations, bidding rules and other
mechanisms to address some of the volatility in these markets. Fuel prices also
may be volatile, and the price we can obtain for power sales may not change at
the same rate as fuel costs changes. These factors could reduce our margins and
therefore diminish our revenues and results of operations.
10
Volatility in market prices for fuel and power may result from:
o weather conditions;
o seasonality;
o power usage;
o illiquid markets;
o transmission or transportation constraints or inefficiencies;
o availability of competitively priced alternative energy sources;
o demand for energy commodities;
o natural gas, crude oil and refined products, and coal production
levels; o natural disasters, wars, embargoes and other catastrophic
events; and o federal, state and foreign energy and environmental
regulation and legislation.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PROGRESS ENERGY, INC.
Registrant
By: /s/ Robert H. Bazemore, Jr.
-----------------------------------
Robert H. Bazemore, Jr.
Vice President and Controller
(Chief Accounting Officer)
Date: August 9, 2002