UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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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 October 31, 2002, each
registrant had the following shares of common stock outstanding
Registrant Description Shares
---------- ----------- ------
Progress Energy, Inc. Common Stock (Without Par Value) 222,152,799
Carolina Power & Light Company Common Stock (Without Par Value) 159,608,055 (all of which were
held by Progress Energy, Inc.)
1
PROGRESS ENERGY, INC. AND CAROLINA POWER & LIGHT COMPANY
FORM 10-Q - For the Quarter Ended September 30, 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
Item 4. Controls and Procedures
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
Certifications
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
Code Internal Revenue Service Code
CP&L Carolina Power & Light Company
CR3 Florida Power's nuclear generating plant, Crystal River Unit No. 3
CVO Contingent value obligation
DEP Florida Department of Environment and Protection
DOE United States 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
EITF 98-10 Accounting for Contracts Involved in Energy Trading and Risk Management Activities
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 principles generally accepted in the United States of America
accounting principles
IBEW International Brotherhood of Electrical Workers
IRS Internal Revenue Service
KWh Kilowatt-hour
MGP Manufactured Gas Plant
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
PCH Progress Capital Holdings, Inc.
PLR Private Letter Ruling
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 non-regulated 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
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 Statements of Financial Accounting Standards No. 133, Accounting for Derivative and
Hedging Activities
SFAS No. 142 Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
SFAS No. 143 Statements of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations
SFAS No. 144 Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets
3
SFAS No. 145 Statements of Financial Accounting Standards No. 145, Rescission of FASB Statement Nos.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
SFAS No. 146 Statements of Financial Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities
SRS Strategic Resource Solutions Corp.
the Company Progress Energy, Inc. and subsidiaries
4
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This combined report contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. 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 (the Company) 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: the impact of fluid and complex government laws and regulations,
including those relating to the environment; the impact of recent events in the
energy markets that have increased the level of public and regulatory scrutiny
in the energy industry and in the capital markets; deregulation or restructuring
in the electric industry that may result in increased competition and
unrecovered (stranded) costs; the uncertainty regarding the timing, creation and
structure of regional transmission organizations; weather conditions that
directly influence the demand for electricity and natural gas; recurring
seasonal fluctuations in demand for electricity and natural gas; fluctuations in
the price of energy commodities and purchased power; economic fluctuations and
the corresponding impact on the Company's and CP&L's commercial and industrial
customers; the ability of the Company's subsidiaries to pay upstream dividends
or distributions to it; the impact on the facilities and the businesses of the
Company and CP&L from a terrorist attack; the inherent risks associated with the
operation of nuclear facilities, including environmental, health, regulatory and
financial risks; the ability to successfully access capital markets on favorable
terms; the impact that increases in leverage may have on the Company and CP&L;
the ability of the Company and CP&L to maintain their current credit ratings;
the impact of derivative contracts used in the normal course of business by the
Company and CP&L; the Company's continued ability to use Section 29 tax credits
related to its coal and synthetic fuels businesses; the continued depressed
state of the telecommunications industry and the Company's ability to realize
future returns from Progress Telecom and Caronet, Inc.; the Company's ability to
successfully integrate newly acquired businesses, including Westchester Gas
Company, into its operations as quickly or as profitably as expected; the
Company's ability to successfully complete the sale of North Carolina Natural
Gas and apply the proceeds therefrom to reduce outstanding indebtedness; the
Company's ability to manage the risks involved with the construction and
operation of its non-regulated plants, including construction delays, dependence
on third parties and related counter-party risks, and a lack of operating
history; the Company's ability to manage the risks associated with its energy
marketing and trading operations; the extent to which the Company is able to
reduce its 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. Many of
these risks similarly impact the Company's subsidiaries.
These and other risk factors are detailed from time to time in the Progress
Energy and CP&L SEC reports. You should closely read these SEC reports,
including, particularly, Progress Energy's current report on Form 8-K filed with
the SEC on August 9, 2002. 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
September 30, 2002
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(Unaudited) September 30, September 30,
(In thousands except per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 1,908,817 $ 1,879,934 $ 5,007,321 $ 5,077,928
Natural gas 60,568 51,671 211,171 258,820
Diversified businesses 383,141 398,942 1,060,613 1,217,532
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 2,352,526 2,330,547 6,279,105 6,554,280
- -----------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 459,293 446,309 1,205,731 1,194,453
Purchased power 269,108 268,794 675,066 698,218
Gas purchased for resale 47,505 36,282 150,277 203,060
Other operation and maintenance 324,880 290,651 1,011,096 890,148
Depreciation and amortization 211,088 268,475 642,979 849,395
Taxes other than on income 106,144 105,125 297,775 298,716
Diversified businesses 737,243 461,393 1,536,229 1,372,840
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,155,261 1,877,029 5,519,153 5,506,830
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income 197,265 453,518 759,952 1,047,450
- -----------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 3,002 5,549 11,317 24,997
Other, net (13,394) 16,671 (8,505) 7,214
- -----------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (10,392) 22,220 2,812 32,211
- -----------------------------------------------------------------------------------------------------------------------------
Interest Charges
Net interest charges 149,431 170,044 498,475 530,259
Allowance for borrowed funds used during construction (3,721) (4,206) (11,064) (9,559)
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Charges 145,710 165,838 487,411 520,700
- -----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 41,163 309,900 275,353 558,961
Income Tax Benefit (110,771) (56,543) (129,728) (73,187)
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 151,934 $ 366,443 $ 405,081 $ 632,148
- -----------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 216,079 205,866 214,700 201,925
Basic Earnings per Common Share $ 0.71 $ 1.78 $ 1.89 $ 3.13
Diluted Earnings per Common Share $ 0.70 $ 1.77 $ 1.88 $ 3.12
Dividends Declared per Common Share $ 0.545 $ 0.530 $ 1.635 $ 1.590
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
6
Progress Energy, Inc
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share data) September 30, December 31,
Assets 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 19,764,622 $ 19,176,021
Gas utility plant in service 540,693 491,903
Accumulated depreciation (10,522,018) (10,096,412)
- ---------------------------------------------------------------------------------------------------------------
Utility plant in service, net 9,783,297 9,571,512
Held for future use 15,027 15,380
Construction work in progress 806,922 1,065,154
Nuclear fuel, net of amortization 215,493 262,869
- ---------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 10,820,739 10,914,915
- ---------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 58,940 54,419
Accounts receivable 794,659 723,807
Unbilled accounts receivable 231,393 199,593
Taxes receivable - 32,325
Inventory 918,297 893,971
Deferred fuel cost 183,942 146,652
Prepayments 62,740 49,056
Other current assets 190,358 224,409
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 2,440,329 2,324,232
- ---------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 403,168 448,631
Nuclear decommissioning trust funds 790,858 822,821
Diversified business property, net 1,768,477 1,073,046
Miscellaneous other property and investments 515,613 464,589
Goodwill, net 3,785,073 3,690,210
Prepaid pension costs 503,357 489,600
Restricted cash 73,821 -
Other assets and deferred debits 479,321 513,099
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 8,319,688 7,501,996
- ---------------------------------------------------------------------------------------------------------------
Total Assets $ 21,580,756 $ 20,741,143
- ---------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ---------------------------------------------------------------------------------------------------------------
Capitalization
Common stock (without par value, 500,000,000 shares authorized,
221,933,138 and 218,725,352 shares issued and outstanding, respectively) $ 4,278,913 $ 4,107,493
Unearned ESOP common stock (101,560) (114,385)
Accumulated other comprehensive loss (39,102) (32,180)
Retained earnings 2,094,639 2,042,605
- ---------------------------------------------------------------------------------------------------------------
Total common stock equity 6,232,890 6,003,533
Preferred stock of subsidiaries-not subject to mandatory redemption 92,831 92,831
Long-term debt, net 9,735,025 8,618,960
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization 16,060,746 14,715,324
- ---------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 375,202 688,052
Accounts payable 657,572 725,977
Taxes accrued 123,645 -
Interest accrued 153,903 212,387
Dividends declared 120,001 117,857
Short-term obligations 1,060,267 942,314
Customer deposits 159,920 154,343
Other current liabilities 391,470 419,398
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 3,041,980 3,260,328
- ---------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,157,446 1,434,506
Accumulated deferred investment tax credits 211,446 226,382
Regulatory liabilities 292,544 287,239
Other liabilities and deferred credits 816,594 817,364
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,478,030 2,765,491
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 13)
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 21,580,756 $ 20,741,143
- ---------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
7
Progress Energy, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended
(Unaudited) September 30,
(In thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 405,081 $ 632,148
Adjustments to reconcile net income to net cash provided by
Operating activities
Impairment of long-lived assets and investments 329,997 -
Depreciation and amortization 801,157 997,680
Deferred income taxes (312,020) (78,987)
Investment tax credit (14,930) (18,479)
Deferred fuel cost (credit) (37,290) 25,616
Net increase in accounts receivable (96,005) (48,536)
Net increase in inventories (29,069) (252,505)
Net increase in prepaids and other current assets (23,169) (1,815)
Net increase (decrease) in accounts payable 13,605 (60,828)
Net increase in other current liabilities 99,521 65,630
Other 69,457 (24,281)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,206,335 1,235,643
- ----------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (738,559) (884,837)
Diversified business property additions and acquisitions (764,553) (194,661)
Proceeds from sale of assets 670 5,532
Nuclear fuel additions (56,102) (113,099)
Net contributions to nuclear decommissioning trust (13,367) (40,540)
Fuel acquisition, net of cash acquired (17,355) -
Net cash flow of company-owned life insurance program (4,086) (5,137)
Investments in non-utility activities (5,068) 3,390
Net increase in restricted cash (73,821) -
Other 388 -
- ----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,671,853) (1,229,352)
- ----------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 1,787,711 3,772,376
Net increase (decrease) in short-term indebtedness 117,953 (3,632,802)
Net decrease in cash provided by checks drawn in excess of bank (37,471) (78,816)
balances
Retirement of long-term debt (1,049,918) (186,295)
Issuance of common stock - 488,290
Dividends paid on common stock (350,903) (318,910)
Other 2,667 (47,567)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 470,039 (3,724)
- ----------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 4,521 2,567
Cash and Cash Equivalents at Beginning of the Period 54,419 101,296
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 58,940 $ 103,863
- ----------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 540,512 $ 507,284
income taxes $ 104,863 $ 31,664
See Note 2 for non-cash investing and financing activity.
- ----------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
8
Progress Energy, Inc.
SUPPLEMENTAL DATA SCHEDULE Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands)
Electric
Retail $ 1,602,600 $ 1,591,713 $ 4,176,454 $ 4,214,165
Wholesale 251,797 254,054 659,316 729,608
Unbilled 2,542 (7,493) 28,769 (54,272)
Miscellaneous revenue 51,878 41,660 142,782 188,427
- -----------------------------------------------------------------------------------------------------------------------------
Total Electric 1,908,817 1,879,934 5,007,321 5,077,928
Natural gas 60,568 51,671 211,171 258,820
Diversified businesses 383,141 398,942 1,060,613 1,217,532
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 2,352,526 $ 2,330,547 $ 6,279,105 $ 6,554,280
- -----------------------------------------------------------------------------------------------------------------------------
Energy Sales - Utility
Electric (millions of kWh)
Retail
Residential 9,988 9,385 25,810 25,310
Commercial 6,881 6,597 18,012 17,553
Industrial 4,552 4,473 12,776 13,068
Other retail 1,185 1,164 3,183 3,135
- -----------------------------------------------------------------------------------------------------------------------------
Total retail 22,606 21,619 59,781 59,066
Unbilled (3) (350) 716 (893)
Wholesale 5,550 5,087 14,331 13,946
- -----------------------------------------------------------------------------------------------------------------------------
Total Electric 28,153 26,356 74,828 72,119
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Natural Gas Delivered (thousands of dt) 19,965 13,080 52,463 39,022
- -----------------------------------------------------------------------------------------------------------------------------
Energy Supply - Utility (millions of kWh)
Generated - Steam 14,529 13,451 37,628 37,242
Nuclear 7,720 7,553 22,640 21,503
Hydro 51 83 297 200
Combustion turbines 3,121 2,461 6,868 5,270
Purchased 4,142 3,945 10,991 11,330
- -----------------------------------------------------------------------------------------------------------------------------
Total Energy Supply - (Company Share) (a) 29,563 27,493 78,424 75,545
- -----------------------------------------------------------------------------------------------------------------------------
Detail of Income Taxes (in thousands)
Income tax expense (credit) - current $ 163,024 $ (4,197) $ 197,212 $ 24,279
deferred (269,087) (47,082) (312,020) (78,987)
investment tax credit (4,708) (5,264) (14,920) (18,479)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income Tax Benefit $ (110,771) $ (56,543) $ (129,728) $ (73,187)
- -----------------------------------------------------------------------------------------------------------------------------
(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
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. Through its wholly owned subsidiaries,
Carolina Power & Light Company (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 non-regulated energy generation; coal, gas 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.
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. Effective
with the quarter ended September 30, 2002, the Company will no longer
reclassify commercial paper as long-term debt. 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. ACQUISITIONS
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 non-regulated energy operations and positions it
as a growing provider of energy in the Southeast.
The aggregate cash purchase price of approximately $348 million included
approximately $1.7 million of direct transaction costs. The purchase price
was primarily allocated 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. The excess of the purchase price over the
preliminary fair value of the net identifiable assets and liabilities
acquired has been recorded as goodwill. Based on this preliminary
allocation, goodwill of approximately $64.1 million has been recorded. The
preliminary purchase price allocation is subject to adjustment for changes
in the preliminary assumptions and analyses used, pending additional
information including final asset valuations.
10
In addition, Progress Ventures, Inc. 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 of acquisition were
approximately $167.6 million.
The pro forma results of operations would not be materially different than
the reported results of operations for the three and nine months ended
September 30, 2002, or for the comparable periods in the prior year.
Fuel Acquisition. On April 26, 2002, Progress Fuels Corporation, a
subsidiary of Progress Energy, acquired 100% of Westchester Gas Company.
The acquisition included approximately 215 producing natural gas wells, 52
miles of intrastate gas pipeline and 170 miles of gas-gathering systems
located within a 25-miles radius of Jonesville, Texas, on the
Texas-Louisiana border.
The aggregate purchase price of approximately $153 million consisted of
cash consideration of approximately $22 million and the issuance of 2.5
million shares of Progress Energy common stock valued at approximately $129
million. The purchase price included approximately $1.7 million of direct
transaction costs. The purchase price was primarily allocated to fixed
assets based on the preliminary fair values of the assets acquired. The
excess of the purchase price over the preliminary fair value of the net
identifiable assets and liabilities acquired has been recorded as goodwill.
Based on this preliminary allocation, goodwill of approximately $33 million
has been recorded. The preliminary purchase price allocation is subject to
adjustment for changes in the preliminary assumptions and analyses used,
pending additional information including final asset valuations and
allocations to gas properties.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations for Westchester have
been included in Progress Energy's consolidated financial statements since
the date of acquisition. The pro forma results of operations would not be
materially different than the reported results of operations for the three
and nine months ended September 30, 2002, or for the comparable periods in
the prior year.
3. IMPAIRMENT OF LONG-LIVED ASSETS, INVESTMENTS AND OTHER ONE-TIME CHARGES
Due to the decline of the telecommunications industry and continued
operating losses, the Company initiated a valuation study to assess the
recoverability of Progress Telecom's and Caronet's long-lived assets. Based
on this assessment, the Company recorded asset impairments and other
one-time charges totaling $330.4 million on a pre-tax basis in the third
quarter of 2002 ($208.5 million after-tax). The asset write-downs and other
one-time charges are included in diversified businesses expenses on the
Consolidated Statements of Income. The results of Progress Telecom and
Caronet are included in the Other segment (See Note 5). This write-down
constitutes a significant reduction in the book value of these long-lived
assets.
The long-lived asset write-downs of $305.0 million on a pre-tax basis
include an impairment of property, plant and equipment, construction work
in process and intangible assets. The impairment charge represents the
difference between the fair value and carrying amount of these long-lived
assets. The fair value of these assets was determined using a valuation
study heavily weighted on the discounted cash flow methodology and using
market approaches as supporting information. The other one-time charges of
$25.4 million on a pre-tax basis primarily relate to inventory adjustments.
Effective June 28, 2000, Caronet entered into an agreement with Bain
Capital where it contributed the net assets used in its application service
provider business to a newly formed company, for a 35% ownership interest
(15% voting interest), named Interpath Communications, Inc. (Interpath). In
May 2002, Interpath merged with Usinternetworking, Inc. Pursuant to the
terms of the merger agreement and additional funds being contributed by
Bain Capital, CP&L now owns approximately 19% of the company (7% voting
interest). As a result of the merger, the Company reviewed the Interpath
investment for impairment and wrote off the remaining amount of its
cost-basis investment in Interpath, recording a pre-tax impairment of $25.0
million in the third quarter of 2002 ($16.3 million after-tax). The
investment write-down is included in other, net on the Consolidated
Statements of Income.
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
11
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. Any amounts above the retail base revenue caps will be
refunded 100 percent to customers.
The Agreement also provides that beginning with the in-service date of
Florida Power's Hines Unit 2 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. Hines Unit 2 is a 516 MW combined-cycle
unit under construction and currently scheduled for completion in late
2003.
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. There was no accelerated
depreciation or amortization expense recorded for the three and nine months
ended September 30, 2002.
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 and will be returned to retail customers over an
eight-month period ending December 31, 2002. Any additional refunds under
the Agreement will be recorded as they become probable. No additional
refunds have been accrued at September 30, 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 non-regulated energy
generation and coal, gas and synthetic fuel operations. Management reviews
the operations of the Progress Ventures segment after the allocation of
12
energy marketing and trading activities which Progress Ventures performs on
behalf of the regulated utilities, CP&L and Florida Power. The marketing
activity refers to soliciting and managing wholesale power supply contracts
and to selling excess generation as available, all within the regulated
framework. Contracts within this activity are subject to review under SFAS
No. 133. The trading activity refers to trading as defined in EITF 98-10.
This trading activity has primarily consisted of entering into standardized
electric forward contracts. In addition, the trading activity has also
included purchasing power for immediate resale. This trading has been
conducted on behalf of CP&L and Florida Power, but is outside the regulated
framework (i.e., is a non-regulated activity). Progress Ventures also
enters into non-regulated trading transactions for its non-regulated plant
and fuel businesses.
The Rail Services segment operations include railcar repair, rail parts
reconditioning and sales, railcar leasing and sales, and scrap metal
recycling. These activities include maintenance and reconditioning of
salvageable scrap components of railcars, locomotive repair, right-of-way
maintenance and operating manufacturing facilities for new rail cars.
The Other segment is primarily made up of regulated 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, miscellaneous non-regulated
activities and elimination entries.
For reportable segments presented in the accompanying table, segment income
includes intersegment revenues accounted for at prices representative of
unaffiliated party transactions. Intersegment revenues that are not
eliminated represent natural gas sales to the CP&L Electric and the Florida
Power Electric segments.
Florida Power Progress Rail Services Segment
(in thousands) CP&L Electric Electric Ventures (b) (c) Other (d) Totals
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended 9/30/02
Revenues
Unaffiliated $1,045,180 $863,637 $168,777 $194,611 $70,902 $2,343,107
Intersegment - - 135,029 1,282 (126,892) 9,419
----------------------------------------------------------------------------------------
Total Revenues $1,045,180 $863,637 $303,806 $195,893 $(55,990) $2,352,526
Net Income (Loss) $179,308 $123,774 $72,976 $733 $(224,857) $151,934
Segment Income (Loss) After $167,974 $120,513 $87,571 $733 $(224,857) $151,934
Allocation (a)
Total Segment Assets $8,785,416 $5,079,719 $2,381,706 $579,947 $4,753,968 $21,580,756
==============================================================================================================================
Florida Power Progress Segment
CP&L Electric Electric Ventures Rail Services Other Totals
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended 9/30/01
Revenues
Unaffiliated $973,803 $906,131 $144,511 $219,554 $77,926 $2,321,925
Intersegment - - 88,014 478 (79,870) 8,622
----------------------------------------------------------------------------------------
Total Revenues $973,803 $906,131 $232,525 $220,032 $(1,944) $2,330,547
Net Income (Loss) $168,456 $114,079 $61,660 $(2,165) $24,413 $366,443
Segment Income (Loss) After $156,725 $107,397 $80,073 $(2,165) $24,413 $366,443
Allocation (a)
Total Segment Assets $9,101,248 $5,044,029 $1,005,962 $828,384 $4,693,366 $20,672,989
==============================================================================================================================
13
CP&L Electric Florida Power Progress Rail Services Other (d) Segment
Electric Ventures (b) (c) Totals
---------------------------------------------------------------------------------------------------------------------------
Nine Months Ended 9/30/02
Revenues
Unaffiliated $2,691,320 $2,316,001 $419,702 $574,514 $258,413 $6,259,950
Intersegment - - 394,848 2,632 (378,325) 19,155
-------------------------------------------------------------------------------------
Total Revenues $2,691,320 $2,316,001 $814,550 $577,146 $(119,912) $6,279,105
Net Income (Loss) $396,530 $258,271 $165,928 $2,979 $(418,627) $405,081
Segment Income (Loss) After $355,251 $248,741 $216,737 $2,979 $(418,627) $405,081
Allocation (a)
Total Segment Assets $8,785,416 $5,079,719 $2,381,706 $579,947 $4,753,968 $21,580,756
===========================================================================================================================
Florida Power Progress Segment
CP&L Electric Electric Ventures Rail Services Other Totals
---------------------------------------------------------------------------------------------------------------------------
Nine Months Ended 9/30/01
Revenues
Unaffiliated $2,577,664 $2,500,265 $395,767 $739,863 $327,211 $6,540,770
Intersegment - - 280,410 1,102 (268,002) 13,510
-------------------------------------------------------------------------------------
Total Revenues $2,577,664 $2,500,265 $676,177 $740,965 $59,209 $6,554,280
Net Income (Loss) $373,949 $269,996 $161,026 $(9,698) $(163,125) $632,148
Segment Income Loss) After $334,593 $251,601 $218,777 $(9,698) $(163,125) $632,148
Allocation (a)
Total Segment Assets $9,101,248 $5,044,029 $1,005,962 $828,384 $4,693,366 $20,672,989
===========================================================================================================================
(a) After 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 September 30, 2002, increased
from the prior year due to the addition of non-regulated generating assets
including Effingham, DeSoto, Walton and Washington, the transfer of the
Rowan plant from CP&L in the first quarter of 2002 and the acquisition of
Westchester Gas Company (See Note 2). The Effingham and Washington units
are still under construction.
(c) Rail Services total segment assets at September 30, 2002, decreased from
the prior year due to the final purchase price allocation being recorded in
the fourth quarter of 2001.
(d) All goodwill is included in the Other Segment herein (See Note 7).
6. IMPACT OF NEW ACCOUNTING STANDARDS
During the second quarter of 2001, the Financial Accounting Standards Board
(FASB) issued interpretations of Statements 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 significant 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 generally would be no income statement
effect of the mark-to-market because such contracts are generally reflected
in fuel adjustment clauses so that the contract's mark-to-market gain or
loss would be recorded as a regulatory asset or liability. Any
mark-to-market gains or losses in its non-regulated businesses would 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.
See Note 7 for more information on SFAS No. 142, "Goodwill and Other
Intangible Assets."
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in July 2001. This statement provides accounting and
disclosure requirements for retirement obligations associated with
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 liability
is then accreted over time by applying an interest method of allocation to
the beginning liability. The Company is in the process of identifying
retirement obligations. Areas that are being reviewed include electric
transmission and distribution, gas production and distribution, nuclear
decommissioning, all generating facilities, coal mines, synthetic fuel
facilities, terminals and telecommunication assets. The Company is also in
the process of quantifying the obligations that have been identified under
the measurement rules described in the standard. For regulated companies,
there is not expected to be any impact on earnings. For non-regulated
companies, the Company currently cannot predict the earnings impact.
14
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides
guidance for the accounting and reporting of impairment or disposal of
long-lived assets. The statement supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." It also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" related to the disposal
of a segment of a business. Adoption of this statement did not have a
material effect on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" This standard will require gains and losses from
extinguishment of debt to be classified as extraordinary items only if they
meet the criteria of unusual and infrequent in Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Any gain or loss on extinguishment will be recorded in the
most appropriate line item to which it relates within net income before
extraordinary items. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002; however, certain sections are effective for
transactions occurring after May 15, 2002. The Company does not have any
transactions that are affected by this statement as of September 30, 2002.
For regulated companies, any expenses or call premiums associated with the
reacquisition of debt obligations are amortized over the remaining life of
the original debt using the straight-line method consistent with ratemaking
treatment.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This statement supercedes Emerging
Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability is recognized at the date an entity commits to an exit plan. SFAS
No. 146 also establishes that the liability should initially be measured
and recorded at fair value. The provisions of SFAS No. 146 will be
effective for any exit and disposal activities covered under the scope of
this standard and initiated after December 31, 2002.
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 has completed the first step of the initial transitional
goodwill impairment test, which indicated that the Company's goodwill was
not impaired as of January 1, 2002. In addition, the Company performed the
annual goodwill impairment test for the CP&L Electric and Florida Power
Electric segments as of April 1, 2002, and for the Other segment as of July
1, 2002.
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002, by reportable segment, are as follows:
Florida
CP&L Power Progress
(in thousands) Electric Electric Ventures Other Total
-------- -------- -------- ----- -----
Balance as of January 1, 2002 $1,921,802 $1,733,448 $ - $34,960 $3,690,210
Acquisitions - - 96,583 - 96,583
Divestitures - - - (1,720) (1,720)
-----------------------------------------------------------------------------
Balance as of September 30, 2002 $1,921,802 $1,733,448 $96,583 $33,240 $3,785,073
The acquired goodwill relates to the acquisition of Westchester Gas Company
in April 2002 and the acquisition of generating assets from LG&E Energy
Corp in February 2002 (See Note 2).
As required by SFAS No. 142, the results for the prior year periods have
not been restated. A reconciliation of net income as if SFAS No. 142 had
been adopted is presented below for the three and nine months ended
September 30, 2001, and the years ending December 31, 2001, 2000 and 1999.
15
Three Months Ended Nine Months Ended Year Ended Year Ended Year Ended
(in thousands, except per share data) September 30, 2001 September 30, 2001 2001 2000 1999
------------------ ------------------ ---- ---- ----
Reported net income $ 366,443 $ 632,148 $ 541,610 $ 478,361 $ 379,288
Add back: Goodwill amortization 24,927 75,576 96,828 14,100 3,968
Adjusted net income $ 391,370 $ 707,724 $ 638,438 $ 492,461 $ 383,256
Basic earnings per common share:
Reported net income $ 1.78 $ 3.13 $ 2.65 $ 3.04 $ 2.56
Adjusted net income $ 1.90 $ 3.50 $ 3.12 $ 3.13 $ 2.58
Diluted earnings per common share:
Reported net income $ 1.77 $ 3.12 $ 2.64 $ 3.03 $ 2.55
Adjusted net income $ 1.89 $ 3.49 $ 3.11 $ 3.12 $ 2.58
The gross carrying amount and accumulated amortization of the Company's
intangible assets as of September 30, 2002 and December 31, 2001 are as
follows:
September 30, 2002 December 31, 2001
------------------------------------------- ------------------------------------------
(in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------------------------- --------------------- --------------------- --------------------- --------------------
Synthetic fuel intangibles (a) $ 140,469 $ (39,450) $ 140,469 $ (22,237)
Power sale agreements (b) 34,074 (3,912) - -
Customer contracts (c) 11,500 (6,200) 17,300 (5,600)
Other 21,546 (626) 18,771 (338)
-------------------------------- --------------------- --------------------- --------------------- --------------------
Total $ 207,589 $ (50,188) $ 176,540 $ (28,175)
(a) Represents intangibles for synthetic fuel technology. These intangibles
are being amortized on a straight-line basis over the period ending with
the expiration of tax credits under Section 29 of the Internal Revenue Code
on December 31, 2007.
(b) Relates to the power sale agreements recorded as part of the
acquisition of generating assets from LG&E Energy Corp. (See Note 2), which
are amortized on a straight-line basis beginning with the in-service date
of these plants through December 31, 2004.
(c) Decrease at September 30, 2002 relates to the write-down of Progress
Telecom assets (See Note 3).
Total net intangible assets of $157.4 million and $148.4 million at
September 30, 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 and nine
months ended September 30, 2002 was $8.3 million and $24.5 million,
respectively. The estimated amortization expense on intangible assets for
the next five years is as follows:
(in thousands)
2002 $32,822
2003 33,817
2004 36,542
2005 20,333
2006 19,864
8. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30,
2002, was $141.8 million and $398.2 million, respectively. Comprehensive
income for the three and nine months ended September 30, 2001, was $363.0
million and $594.5 million, respectively. Items of other comprehensive
income for the three-month and nine-month periods consisted primarily of
changes in the fair value of derivatives used to hedge cash flows related
to interest on long-term debt, the cumulative effect of implementing SFAS
No. 133 as of January 1, 2001 and reclassification of amounts into income.
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
16
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, a Progress Ventures, Inc. subsidiary, Progress Genco
Ventures, LLC, obtained a $440 million bank facility that was to 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, June 2002 and September 2002, Progress Genco
Ventures, LLC made draws under this facility of $120 million, $67 million
and $25 million, respectively. In September 2002, Progress Genco Ventures,
LLC terminated $130 million of the bank facility, reducing it from $440
million to $310 million. Borrowings under the facility are restricted for
the operations, construction, repayments and other related charges of the
credit facility for development projects, including DeSoto County
Generating Company, LLC, Effingham County Power, LLC, MPC Generating
Company, LLC and Rowan County Power, LLC. Cash held and restricted to
operations was $13.0 million at September 30, 2002, and is included in
other current assets. Cash held and restricted for long-term purposes was
$73.8 million at September 30, 2002 and is included in deferred debits and
other assets.
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 unsecured
notes due 2012 with a coupon of 6.85%. Proceeds from this issuance were
used to pay down commercial paper.
On June 27, 2002, CP&L announced the redemption of $500 million of CP&L
Extendible Notes due October 28, 2009, at 100% of the principal amount of
such notes. These notes were redeemed on July 29, 2002 and CP&L funded the
redemptions through the issuance of commercial paper. On July 30, 2002,
CP&L issued $500 million of senior unsecured notes due 2012 with a coupon
of 6.5%. Proceeds from this issuance were used to pay down commercial
paper.
On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54%
Series, matured. Florida Power funded this maturity through the issuance of
commercial paper.
On July 11, 2002, Florida Power announced the redemption of $108.55 million
principal amount of Citrus County Pollution Control Refunding Revenue
Bonds, Series 1992 A Due January 1, 2027, $90 million principal amount of
Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 B Due
February 1, 2022 and $10.115 million principal amount of Pasco County
Pollution Control Refunding Revenue Bonds, Series 1992A Due February 1,
2022, at 102% of the principal amount of such bonds and $32.2 million
principal amount of Pinellas County Pollution Control Refunding Revenue
Bonds, Series 1991 Due December 1, 2014 at 101% of the principal amount of
such bonds. These redemptions were finalized on August 12, 2002.
On July 16, 2002, Florida Power issued $108.55 million principal amount of
Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due
January 1, 2027, $100.115 million principal amount of Citrus County
Pollution Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022
and $32.2 million principal amount of Citrus County Pollution Control
Revenue Refunding Bonds, Series 2002C Due January 1, 2018. Proceeds from
this issuance were used to redeem Florida Power's pollution control revenue
refunding bonds above.
On August 5, 2002, CP&L announced the redemption of $150 million of First
Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the principal
amount of such bonds. CP&L redeemed these notes on September 4, 2002
through the issuance of commercial paper.
Progress Energy's 364-day revolving credit facility expired on November 12,
2002. In connection with the renewal, the facility was reduced in size from
$550 million to approximately $430 million. In addition, the permitted debt
to capital ratio was lowered from 70% to 68% effective June 30, 2003;
Progress Energy's debt to capital ratio as of September 30, 2002, was
65.3%. Finally, a minimum EBITDA to interest expense ratio of 2.5x to 1 was
imposed; for the twelve months ended September 30, 2002, Progress Energy's
ratio of EBITDA to interest expense was 3.28x to 1.
On November 13, 2002, Progress Energy issued 14.7 million shares of common
stock at $40.90 per share for net proceeds of $600.0 million. Proceeds from
the issuance will be used to retire commercial paper.
17
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, April and May 2002, Progress Energy converted $1.0 billion of fixed
rate debt into variable rate debt by executing interest rate derivative
agreements with a total notional amount of $1.0 billion with a group of
five banks. Under the terms of the agreements, which were scheduled to
mature in 2006 and 2007 and coincide with the maturity dates of the related
debt issuances, Progress Energy received a fixed rate and paid a floating
rate based on three-month LIBOR. These instruments were designated as fair
value hedges for accounting purposes. In June 2002, Progress Energy
terminated these agreements. The terminations resulted in a $21.2 million
deferred hedging gain reflected in long-term debt, which will be amortized
and recorded as a reduction to interest expense over the life of the
related debt issuances.
Progress Genco Ventures, LLC is required to hedge 75 percent of the amounts
outstanding under its bank facility through September 2005 and 50 percent
thereafter pursuant to the terms of the agreement for expansion of its
non-regulated generation portfolio. In May 2002, Progress Genco Ventures,
LLC entered into hedges that included a series of zero cost collars that
have been designated as cash flow hedges for accounting purposes. The fair
value of these instruments was a $10.9 million liability position at
September 30, 2002.
In April, May and June 2002, CP&L entered into a series of treasury rate
locks to hedge its exposure to interest rates with regard to a future
issuance of fixed-rate debt. These agreements had a computational period of
ten years. These instruments were designated as cash flow hedges for
accounting purposes. The agreements, with a total notional amount of $350
million, were terminated simultaneously with the pricing of the $500
million CP&L senior unsecured notes in July 2002. CP&L realized a $22.5
million hedging loss, which will be amortized and recorded as an increase
to interest expense over the life of the notes.
In August 2002, Progress Energy converted $800 million of fixed rate debt
into variable rate debt by executing interest rate derivative agreements
with four counterparties with a total notional amount of $800 million.
Under the terms of the agreements, which were scheduled to expire in 2006
and coincide with the maturity date of the related debt issuance, Progress
Energy received a fixed rate of 3.38% and paid a floating rate based on
three-month LIBOR. These instruments were designated as fair value hedges
for accounting purposes. The fair value of these instruments was a $14.2
million asset position at September 30, 2002. In November 2002, Progress
Energy terminated these agreements. The terminations resulted in a $14.0
million deferred hedging gain reflected in long-term debt, which will be
amortized and recorded as a reduction to interest expense over the life of
the related debt issuance.
Progress Ventures periodically enters into derivative instruments to hedge
its exposure to price fluctuations on natural gas sales. During 2002,
Progress Ventures has executed cash flow hedges on approximately 17.3 Bcf
of natural gas sales for the fourth quarter of 2002 and entire year 2003.
These instruments did not have a material impact on the Company's
consolidated financial position or results of operations.
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.
11. EARNINGS PER COMMON SHARE
Restricted stock awards and contingently issuable shares had a dilutive
effect on earnings per share for the three and nine months ended September
30, 2002 and 2001. At September 30, 2002, there were options outstanding to
purchase 2.5 million shares of common stock with a weighted average
exercise price of $43.81.
A reconciliation of the weighted average number of common shares
outstanding for basic and dilutive earnings per share purposes is as
follows (in thousands):
Three Months Ended, Nine Months Ended,
September 30, September 30, September 30, September 30,
-------------- -------------- -------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted Average Common Shares - Basic 216,079 205,866 214,700 201,925
Restricted Stock Awards 746 673 709 658
Stock Options 59 - 173 -
--------- --------- --------- ---------
Weighted Average Shares - Fully Dilutive 216,884 206,539 215,582 202,583
18
Employee Stock Ownership Plan shares that have not been committed to be
released to participants' accounts are not considered outstanding for the
determination of earnings per common share. Those shares totaled 4,616,400
and 5,223,387 at September 30, 2002 and September 30, 2001, respectively.
12. 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 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.
These Preferred Securities are classified as long-term debt on the
Company's consolidated balance sheets.
13. COMMITMENTS AND CONTINGENCIES
Contingencies and significant changes to the commitments discussed in Note
20 of the financial statements included in the Company's 2001 Annual Report
on Form 10-K are described below.
Commitments
Guarantees
During the first nine months of 2002, Progress Energy issued
approximately $363 million of guarantees on behalf of Progress
Ventures and its subsidiaries for obligations under power purchase
agreements, tolling agreements, construction agreements and trading
operations. Approximately $184 million of these commitments relate to
certain guarantee agreements issued to support obligations related to
Progress Ventures' expansion of its non-regulated generation
portfolio. These guarantees ensure performance under generation
construction and operating agreements.
The remaining $179 million of these new commitments are guarantees
issued to support Progress Ventures' energy trading and marketing
functions. The majority of the trading and marketing contracts
supported by the guarantees contain language regarding downgrade
events, ratings triggers, monthly netting of exposure and/or payments
and offset provisions in the event of a default. Based upon the amount
of trading positions outstanding at October 31, 2002, if Progress
Energy's ratings were to decline below investment grade, the Company
would have to deposit cash or provide letters of credit or other cash
collateral for approximately $17 million for the benefit of the
Company's counterparties.
19
Contingencies
1) IRS Audit
One of Progress Energy's synthetic fuel entities, Colona Synfuel
Limited Partnership, L.L.L.P., is being audited by the Internal
Revenue Service (IRS). The audit of Colona was not unexpected.
The Company is audited regularly in the normal course of business
as are most similarly situated companies. The Company (including
Florida Progress prior to its acquisition by the Company) has
been allocated approximately $241 million in tax credits to date
for this synthetic fuel entity. As provided for in contractual
arrangements pertaining to Progress Energy's purchase of Colona,
the Company has begun escrowing quarterly royalty payments owed
to an unaffiliated entity until final resolution of the audit.
In September 2002, all of Progress Energy's majority-owned
synthetic fuel entities were accepted into the IRS's Pre-Filing
Agreement (PFA) program. The PFA program allows taxpayers to
voluntarily accelerate the IRS exam process in order to seek
resolution of specific issues. Either the Company or the IRS can
withdraw from the program at any time, and issues not resolved
through the program may proceed to the next level of the IRS exam
process. While the ultimate outcome is uncertain, the Company
believes that participation in the PFA program will likely
shorten the tax exam process.
In management's opinion, Progress Energy is complying with all
the necessary requirements to be allowed such credits and
believes it is likely, although it cannot provide certainty, that
it will prevail if challenged by the IRS on any credits taken.
2) Franchise Taxes
CP&L, like other electric power companies in North Carolina, pays
a franchise tax levied by the State pursuant to North Carolina
General Statutes ss. 105-116, a state-level annual franchise tax
(State Franchise Tax). Part of the revenue generated by the State
Franchise Tax is required by North Carolina General Statutes ss.
105-116.1(b) to be distributed to North Carolina cities in which
CP&L maintains facilities. CP&L has paid and continues to pay the
State Franchise Tax to the state when such taxes are due.
However, pursuant to an Executive Order issued on February 5,
2002, by the Governor of North Carolina, the Secretary of Revenue
withheld distributions of State Franchise Tax revenues to cities
for two quarters of fiscal year 2001-2002 in an effort to balance
the state's budget.
In response to the state's failure to distribute the State
Franchise Tax proceeds, certain cities in which CP&L maintains
facilities adopted municipal franchise tax ordinances purporting
to impose on CP&L a local franchise tax. The local taxes are
intended to be collected for as long as the state withholds
distribution of the State Franchise Tax proceeds from the cities.
The first local tax payments were due August 15, 2002. On August
2, 2002, CP&L filed a lawsuit against the cities seeking to
enjoin the enforcement of the local taxes and to have the local
ordinances struck down because the ordinances are beyond the
cities' statutory authority and violate provisions of the North
Carolina and United States Constitutions.
On September 14, 2002, the Governor of North Carolina signed into
law a provision that prevents cities and counties from levying
local franchise taxes on electric utilities. The new law is also
intended to prevent a recurrence of the withholding of utility
franchise tax payments by the state. This new legislation makes
it likely that the lawsuit CP&L filed in August against certain
cities that were seeking to enforce local franchise tax
ordinances will become moot.
3) 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
20
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). In
addition, 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. A discussion of these sites by
legal entity follows.
CP&L. There are 12 former MGP sites and 14 other active waste
sites associated with CP&L that have required or are anticipated
to require investigation and/or remediation costs. As of
September 30, 2002, CP&L has not recorded any accruals for
investigation and/or remediation costs for these sites. CP&L
received insurance proceeds to address costs associated with CP&L
waste sites. All eligible expenses related to these waste costs
are charged against a centralized fund containing these proceeds.
As of September 30, 2002, approximately $8.3 million remains in
this centralized fund. As costs associated with CP&L's share of
investigation and remediation of these sites become known, the
fund is assessed to determine if additional accruals will be
required. CP&L does not believe that it can provide an estimate
of the reasonably possible total remediation costs beyond what
remains in the centralized fund. This is due to the fact that the
sites are at different stages: investigation has not begun at 15
sites, investigation has begun but remediation cannot be
estimated at 7 sites and 4 sites have begun remediation. CP&L
measures its liability for these sites based on available
evidence including its experience in investigation and
remediation of contaminated sites, which also involves assessing
and developing cost-sharing arrangements with other potentially
responsible parties. Once the centralized fund is depleted, CP&L
will accrue costs for the sites to the extent its liability is
probable and the costs can be reasonably estimated. Therefore,
CP&L cannot currently determine the total costs that may be
incurred in connection with the remediation of all sites.
According to current information, these future costs at the CP&L
sites are not expected to be material to the Company's financial
condition or results of operations. A rollforward of the balance
in this fund is not provided due to the immateriality of this
activity in the periods presented.
Florida Power. There are two former MGP sites and 10 other active
waste sites or categories of sites associated with Florida Power
that have required or are anticipated to require investigation
and/or remediation costs. As of September 30, 2002, Florida Power
has accrued approximately $11.1 million for probable and
reasonably estimable costs at these sites. Florida Power believes
that the maximum liability it can currently estimate on these
sites is $17.0 million. Florida Power has filed for recovery of
approximately $4.0 million of these costs. As more activity
occurs at these sites, Florida Power will assess the need to
adjust the accruals. These accruals have been recorded on an
undiscounted basis. Florida Power measures its liability for
these sites based on available evidence including its experience
in investigation and/or remediation of contaminated sites, which
includes assessing and developing cost-sharing arrangements with
other potentially responsible parties. A rollforward of the
balance in this accrual is not provided due to the immateriality
of this activity in the periods presented.
NCNG. There are 5 former MGP sites associated with NCNG that have
or are estimated to have investigation or remediation costs
associated with them. As of September 30, 2002, NCNG has accrued
approximately $2.7 million for probable and reasonably estimable
remediation costs at these sites. These accruals have been
recorded on an undiscounted basis. NCNG measures its liability
for these sites based on available evidence including its
experience in investigation and remediation of contaminated
sites, which also involves assessing and developing cost-sharing
arrangements with other potentially responsible parties. NCNG
will accrue costs for the sites to the extent its liability is
probable and the costs can be reasonably estimated. NCNG does not
believe it can provide an estimate of the reasonably possible
total remediation costs beyond the accrual because three of the
five sites associated with NCNG have not begun investigation
activities. Therefore, NCNG cannot currently determine the total
costs that may be incurred in connection with the investigation
and/or remediation of all sites. According to current
information, these future costs at the NCNG sites are not
expected to be material to the Company's financial condition or
results of operations. A rollforward of the balance in this
accrual is not provided due to the immateriality of this activity
for the periods presented. NCNG has received insurance proceeds
associated with pollution liability settlements. In addition,
NCNG is receiving approximately $5,000 per month in its rates to
fund expenses associated with its share of costs to investigate,
and if necessary, remediate these sites. On October 16, 2002, the
Company announced plans to sell NCNG to Piedmont Natural Gas
Company, Inc. See Note 14 for more information.
21
As part of the sale of the Inland Marine Transportation segment
to AEP Resources in 2001, Florida Progress established an accrual
to address liabilities which may result from known and unknown
environmental liabilities but primarily to address contamination
in soil and potentially groundwater at one site. The balance in
this accrual is $9.9 million at September 30, 2002. Florida
Progress estimates that its maximum contractual liability to AEP
Resources associated with Inland Marine Transportation segment is
$60 million. These accruals have been determined on an
undiscounted basis. Florida Progress measures its liability for
this site based on estimable and probable remediation scenarios.
A rollforward of the balance in this accrual is not provided due
to the immateriality of this activity for the periods presented.
The Company believes that it is reasonably possible that
additional costs, which cannot be currently estimated, may be
incurred related to the environmental indemnification provision
beyond the amounts accrued. The Company cannot predict the
outcome of this matter.
The Company is also currently in the process of assessing
potential costs and exposures at other sites it has been notified
of. As the assessments are developed and analyzed, the Company
will accrue costs for the sites to the extent the costs are
probable and can be reasonably estimated.
There has been and may be further proposed federal legislation
requiring reductions in air emissions for nitrogen oxides, sulfur
dioxide, carbon 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 the Company'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 that will be installed on North
Carolina fossil generating facilities as part of the North
Carolina legislation discussed 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 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. Designation of areas that do not attain the
standard is proceeding, and further litigation and rulemaking on
this and other aspects of the standard 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; however, further technical analysis
and rulemaking may result in a requirement for additional
controls at some units. The Company cannot predict the outcome of
this matter.
22
The EPA published a final rule approving petitions under Section
126 of the Clean Air Act. This rule as originally promulgated
required 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 June 20, 2002, legislation was enacted in North Carolina
requiring the state's electric utilities to further reduce the
emissions of nitrogen oxide and sulfur dioxide from coal-fired
power plants. These levels exceed requirements of Title IV of the
Clean Air Act pertaining to control of acid rain as well as the
requirements discussed above with regard to the NOx SIP Call,
8-hour ozone standard and Section 126 petitions. Progress Energy
expects its capital costs to meet these emission targets will be
approximately $813 million. CP&L currently has approximately
5,100 MW of coal-fired generation in North Carolina that is
affected by this legislation. The legislation requires the
emissions reductions to be completed in phases by 2013, and
applies to each utilities' total system rather than setting
requirements for individual power plants. The legislation also
freezes the utilities' base rates for five years unless there are
extraordinary events beyond the control of the utility or unless
the utility persistently earns a return substantially in excess
of the rate of return established and found reasonable by the
NCUC in the utility's last general rate case. Further, the
legislation allows the utilities to recover from their retail
customers the projected capital costs during the first seven
years of the 10-year compliance period beginning on January 1,
2003. The utilities must recover at least 70% of their projected
capital costs during the five-year rate freeze period. Pursuant
to the new law, CP&L entered into an agreement with the state of
North Carolina to transfer to the state all future emissions
allowances it generates from over-complying with the new federal
emission limits when these units are completed. The new law also
requires the state to undertake a study of mercury and carbon
dioxide emissions in North Carolina. Progress Energy cannot
predict the future regulatory interpretation, implementation or
impact of this new law.
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.
14. SUBSEQUENT EVENT
On October 16, 2002, the Company announced the Board of Directors' approval
to sell NCNG, and the Company's ownership interest in EasternNC, to
Piedmont Natural Gas Company, Inc., for approximately $425 million in gross
cash proceeds. The sale is expected to close in mid-2003 and must be
approved by North Carolina and federal regulatory agencies. The Company
expects to report NCNG as a discontinued operation in the fourth quarter of
23
2002. The carrying amounts for the assets and liabilities of the
discontinued operations disposal group included in the Consolidated Balance
Sheets, are as follows:
September 30, December 31,
(in thousands) 2002 2001
---------------------------------------------- ------------- ------------
Total Utility plant, net $ 393,889 $ 393,149
Total Current Assets 58,952 118,378
Total Deferred Debits and Other Assets 42,474 42,419
Total Capitalization 389,715 387,981
Total Current Liabilities 66,813 129,027
Total Deferred Credits and Other Liabilities 38,787 36,938
24
CAROLINA POWER & LIGHT COMPANY
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
September 30, 2002
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(Unaudited) September 30, September 30,
(In thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 1,045,180 $ 973,803 $ 2,691,320 $ 2,577,664
Diversified businesses 4,304 3,088 11,127 9,208
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,049,484 976,891 2,702,447 2,586,872
- ---------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 222,273 186,546 569,295 497,687
Purchased power 123,365 113,837 287,593 291,038
Other operation and maintenance 181,007 167,153 564,011 515,241
Depreciation and amortization 130,530 143,720 405,375 421,513
Taxes other than on income 43,502 40,872 118,345 115,130
Diversified businesses 108,756 2,286 114,571 7,756
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 809,433 654,414 2,059,190 1,848,365
- ---------------------------------------------------------------------------------------------------------------------
Operating Income 240,051 322,477 643,257 738,507
- ---------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 330 2,660 5,198 13,686
Other, net (30,562) 4,610 (28,881) 16,530
- ---------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (30,232) 7,270 (23,683) 30,216
- ---------------------------------------------------------------------------------------------------------------------
Interest Charges
Net interest charges 49,390 63,010 167,289 193,189
Allowance for borrowed funds used during
construction 276 (3,777) (5,597) (8,125)
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Charges 49,666 59,233 161,692 185,064
- ---------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 160,153 270,514 457,882 583,659
Income Taxes 66,014 102,640 147,471 210,033
- ---------------------------------------------------------------------------------------------------------------------
Net Income 94,139 167,874 310,411 373,626
Preferred Stock Dividend Requirements (741) (741) (2,223) (2,223)
- ---------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 93,398 $ 167,133 $ 308,188 $ 371,403
- ---------------------------------------------------------------------------------------------------------------------
See notes to Carolina Power & Light Company Interim Financial Statements.
25
Carolina Power & Light Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands) September 30, December31,
Assets 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 12,390,340 $ 12,024,291
Accumulated depreciation (6,272,139) (5,952,206)
- -----------------------------------------------------------------------------------------------------------------
Utility plant in service, net 6,118,201 6,072,085
Held for future use 7,105 7,105
Construction work in progress 463,408 711,129
Nuclear fuel, net of amortization 169,806 200,332
- -----------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 6,758,520 6,990,651
- -----------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 13,911 21,250
Accounts receivable 331,214 302,781
Unbilled accounts receivable 145,047 136,514
Receivables from affiliated companies 75,314 26,182
Notes receivable from affiliated companies 67,722 998
Taxes receivable - 17,543
Inventory 351,520 372,725
Deferred fuel cost 154,101 131,505
Prepayments 21,170 11,863
Other current assets 68,956 66,193
- -----------------------------------------------------------------------------------------------------------------
Total Current Assets 1,228,955 1,087,554
- -----------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 260,651 277,550
Nuclear decommissioning trust funds 413,620 416,721
Diversified business property, net 8,437 111,802
Miscellaneous other property and investments 238,647 239,034
Other assets and deferred debits 97,253 135,373
- -----------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,018,608 1,180,480
- -----------------------------------------------------------------------------------------------------------------
Total Assets $ 9,006,083 $ 9,258,685
- -----------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- -----------------------------------------------------------------------------------------------------------------
Capitalization
Common stock $ 1,926,999 $ 1,904,246
Unearned ESOP common stock (101,560) (114,385)
Retained earnings 1,320,829 1,312,641
Accumulated other comprehensive loss (9,574) (7,046)
- -----------------------------------------------------------------------------------------------------------------
Total common stock equity 3,136,694 3,095,456
Preferred stock - not subject to mandatory redemption 59,334 59,334
Long-term debt, net 3,047,857 2,698,318
- -----------------------------------------------------------------------------------------------------------------
Total Capitalization 6,243,885 5,853,108
- -----------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 100,000 600,000
Accounts payable 230,292 300,829
Payables to affiliated companies 120,998 106,114
Notes payable affiliated companies - 47,913
Taxes accrued 91,265 -
Interest accrued 48,584 61,124
Short-term obligations 252,285 260,535
Other current liabilities 165,016 208,645
- -----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,008,440 1,585,160
- -----------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,238,114 1,316,823
Accumulated deferred investment tax credits 161,017 170,302
Regulatory liabilities 7,774 7,494
Other liabilities and deferred credits 346,853 325,798
- -----------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 1,753,758 1,820,417
- -----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 8)
- -----------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 9,006,083 $ 9,258,685
- -----------------------------------------------------------------------------------------------------------------
See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements.
26
Carolina Power & Light Company
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended
(Unaudited) September 30,
(In thousands) 2002
2001
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 310,411 $ 373,626
Adjustments to reconcile net income to net cash provided by
operating activities
Impairment of long-lived assets and investments 126,262 -
Depreciation and amortization 489,581 494,996
Deferred income taxes (73,640) (93,073)
Investment tax credit (9,285) (12,518)
Deferred fuel cost (credit) (22,596) (12,217)
Net decrease in accounts receivable 159,263 84,570
Net (increase) decrease in inventories 11,893 (95,209)
Net (increase) decrease in prepaids and other current assets (9,173) 2,607
Net decrease in accounts payable (4,547) (198,543)
Net increase in other current liabilities 89,205 137,804
Other 52,874 45,704
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,120,248 727,747
- ------------------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (405,179) (615,554)
Diversified business property additions (10,840) (5,311)
Nuclear fuel additions (55,982) (70,316)
Contributions to nuclear decommissioning trust (25,573) (25,564)
Net cash flow of company-owned life insurance program (9,998) (5,137)
Investments in non-utility activities (10,701) (18,827)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (518,273) (740,709)
- ------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 543,967 296,124
Net decrease in short-term obligations (8,250) (181,860)
Net decrease in intercompany notes (114,638) (6,543)
Retirement of long-term debt (705,681) (217)
Payment for termination of hedge (22,489) -
Equity contribution from parent - 115,000
Dividends paid to parent (300,000) (197,664)
Dividends paid on preferred stock (2,223) (2,223)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities (609,314) 22,617
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (7,339) 9,655
Cash and Cash Equivalents at Beginning of the Period 21,250 30,070
- ------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 13,911 $ 39,725
- ------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 169,092 $ 178,463
income taxes $ 181,444 $ 118,206
See Note 2 for non-cash investing activity.
- ------------------------------------------------------------------------------------------------------------------
See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements.
27
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
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 (PUHCA) of 1935, as amended. Both the
Company and its subsidiaries are subject to the regulatory provisions of
PUHCA.
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 CP&L's financial position and results of
operations for the interim periods. Due to seasonal weather variations and
the timing of outages of electric generating units, especially
nuclear-fueled units, the results of operations for interim periods are not
necessarily indicative of amounts expected for the entire year. Effective
with the quarter ended September 30, 2002, CP&L will no longer reclassify
commercial paper as long-term debt. 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 and nine months ended September 30, 2002 and 2001 is as follows:
(In thousands) Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------
Revenues $1,045,180 $973,803 $2,691,320 $2,577,664
Segment Income $179,308 $168,456 $396,530 $373,949
Total Segment Assets (a) $8,785,416 $9,101,248 $8,785,416 $9,101,248
============================================================================================================
(a) CP&L Electric's total segment assets at September 30, 2002,
decreased from the prior year due to the transfer of the Rowan plant
to Progress Ventures in February 2002 in the amount of approximately
$245 million.
The primary differences between the CP&L Electric and CP&L consolidated
financial information relate to other non-electric operations and
elimination entries. For the three and nine months ended September 30,
2002, the primary difference relates to asset impairments and other
one-time charges recorded in the third quarter related to its Caronet, Inc.
(Caronet) subsidiary and its investment in Interpath (See Note 3).
28
3. IMPAIRMENT OF LONG-LIVED ASSETS, INVESTMENTS AND ONE-TIME CHARGES
Due to the decline of the telecommunications industry and continued
operating losses, CP&L initiated a valuation study to assess the
recoverability of Caronet's long-lived assets. Based on this assessment,
CP&L recorded asset impairments and other one-time charges totaling $108.3
on a pre-tax basis in the third quarter of 2002 ($71.1 million after-tax).
The asset write-downs and other one-time charges are included in
diversified business expenses on the Consolidated Statements of Income.
This write-down constitutes a significant reduction in the book value of
these long-lived assets.
The long-lived asset write-downs of $101.3 million on a pre-tax basis
include an impairment of property, plant and equipment and construction
work in process. The impairment charge represents the difference between
the fair value and carrying amount of these long-lived assets. The fair
value of these assets was determined using a valuation study heavily
weighted on the discounted cash flow methodology and using market
approaches as supporting information. The other one-time charges of $7.0
million on a pre-tax basis primarily relate to inventory adjustments.
Effective June 28, 2000, Caronet entered into an agreement with Bain
Capital where it contributed the net assets used in its application service
provider business to a newly formed company, for a 35% ownership interest
(15% voting interest) named Interpath Communications, Inc. (Interpath). In
May 2002, Interpath merged with Usinternetworking, Inc. Pursuant to the
terms of the merger agreement and additional funds being contributed by
Bain Capital, CP&L now owns approximately 19% of the company (7% voting
interest). As a result of the merger, CP&L reviewed the Interpath
investment for impairment and wrote off the remaining amount of its
cost-basis investment in Interpath, recording a pre-tax impairment of $25.0
million in the third quarter of 2002 ($16.3 million after-tax). The
investment write-down is included in other, net on the Consolidated
Statements of Income.
4. IMPACT OF NEW ACCOUNTING STANDARDS
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 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 significant 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 generally would be no income statement
effect of the mark-to-market because such contracts are generally reflected
in fuel adjustment clauses so that the contract's mark-to-market gain or
loss would be recorded as a regulatory asset or liability. Any
mark-to-market gains or losses in its non-regulated businesses would 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 and
disclosure requirements for retirement obligations associated with
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. The liability is
then accreted over time by applying an interest method of allocation to the
beginning liability. CP&L is in the process of identifying retirement
obligations. Areas that are being reviewed include electric transmission
and distribution, nuclear decommissioning, all generating facilities and
telecommunication assets. CP&L is also in the process of quantifying the
obligations that have been identified under the measurement rules described
in the standard. For CP&L's regulated operations, there is not expected to
be any impact on earnings. CP&L currently cannot predict the earnings
impact, if any, on its non-regulated companies.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides
guidance for the accounting and reporting of impairment or disposal of
29
long-lived assets. The statement supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." It also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" related to the disposal
of a segment of a business. Adoption of this statement did not have a
material effect on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" This standard will require gains and losses from
extinguishment of debt to be classified as extraordinary items only if they
meet the criteria of unusual and infrequent in Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Any gain or loss on extinguishment will be recorded in the
most appropriate line item to which it relates within net income before
extraordinary items. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002; however, certain sections are effective for
transactions occurring after May 15, 2002. CP&L does not have any
transactions that are affected by this statement as of September 30, 2002.
For CP&L, any expenses or call premiums associated with the reacquisition
of debt obligations are amortized over the remaining life of the original
debt using the straight-line method consistent with ratemaking treatment.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This statement supercedes Emerging
Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability is recognized at the date an entity commits to an exit plan. SFAS
No. 146 also establishes that the liability should initially be measured
and recorded at fair value. The provisions of SFAS No. 146 will be
effective for any exit and disposal activities covered under the scope of
this standard and initiated after December 31, 2002.
5. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 2002
was $89.7 million and $307.9 million, respectively. Comprehensive income
for the three and nine months ended September 30, 2001 was $164.1 million
and $365.2 million, respectively. Items of other comprehensive income for
the three-month and nine-month periods consisted primarily of changes in
fair value of derivatives used to hedge cash flows related to interest on
long-term debt, the cumulative effect of adopting SFAS No. 133 as of
January 1, 2001 and reclassification of amounts into income.
6. 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.
On June 27, 2002, CP&L announced the redemption of $500 million of CP&L
Extendible Notes due October 28, 2009, at 100% of the principal amount of
such notes. These notes were redeemed on July 29, 2002 and CP&L funded the
redemptions through the issuance of commercial paper. On July 30, 2002,
CP&L issued $500 million of senior unsecured notes due 2012 with a coupon
of 6.5%. Proceeds from this issuance were used to pay down commercial
paper.
On August 5, 2002, CP&L announced the redemption of $150 million of First
Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the principal
amount of such bonds. CP&L redeemed these notes on September 4, 2002
through the issuance of commercial paper.
7. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
In April, May and June 2002, CP&L entered into a series of treasury rate
locks to hedge its exposure to interest rates with regard to a future
issuance of fixed-rate debt. These agreements had a computational period of
30
ten years. These instruments were designated as cash flow hedges for
accounting purposes. The agreements, with a total notional amount of $350
million, were terminated simultaneously with the pricing of the $500
million CP&L senior unsecured notes in July 2002. CP&L realized a $22.5
million hedging loss, which will be amortized and recorded as an increase
to interest expense over the life of the notes.
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.
8. 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) Franchise Taxes
CP&L, like other electric power companies in North Carolina, pays
a franchise tax levied by the State pursuant to North Carolina
General Statutes ss. 105-116, a state-level annual franchise tax
(State Franchise Tax). Part of the revenue generated by the State
Franchise Tax is required by North Carolina General Statutes ss.
105-116.1(b) to be distributed to North Carolina cities in which
CP&L maintains facilities. CP&L has paid and continues to pay the
State Franchise Tax to the state when such taxes are due.
However, pursuant to an Executive Order issued on February 5,
2002, by the Governor of North Carolina, the Secretary of Revenue
withheld distributions of State Franchise Tax revenues to cities
for two quarters of fiscal year 2001-2002 in an effort to balance
the state's budget.
In response to the state's failure to distribute the State
Franchise Tax proceeds, certain cities in which CP&L maintains
facilities adopted municipal franchise tax ordinances purporting
to impose on CP&L a local franchise tax. The local taxes are
intended to be collected for as long as the state withholds
distribution of the State Franchise Tax proceeds from the cities.
The first local tax payments were due August 15, 2002. On August
2, 2002, CP&L filed a lawsuit against the cities seeking to
enjoin the enforcement of the local taxes and to have the local
ordinances struck down because the ordinances are beyond the
cities' statutory authority and violate provisions of the North
Carolina and United States Constitutions.
On September 14, 2002, the Governor of North Carolina signed into
law a provision that prevents cities and counties from levying
local franchise taxes on electric utilities. The new law is also
intended to prevent a recurrence of the withholding of utility
franchise tax payments by the state. This new legislation makes
it likely that the lawsuit CP&L filed in August against certain
cities that were seeking to enforce local franchise tax
ordinances will become moot.
2) Claims and Uncertainties
a) CP&L is subject to federal, state and local regulations
addressing air and water quality, hazardous and solid waste
management and other environmental matters.
Various organic materials associated with the production of
manufactured gas, generally referred to as coal tar, are
regulated under federal and state laws. The lead or sole
regulatory agency that is responsible for a particular former
coal tar site depends largely upon the state in which the site is
located. There are several manufactured gas plant (MGP) sites to
which CP&L has some connection. In this regard, CP&L, with other
potentially responsible parties, are participating in
investigating and, if necessary, remediating former coal tar
sites with several regulatory agencies, including, but not
limited to, the U.S. Environmental Protection Agency (EPA) and
the North Carolina Department of Environment and Natural
Resources, Division of Waste Management (DWM). In addition, 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.
31
There are 12 former MGP sites and 14 other active waste sites
associated with CP&L that have required or are anticipated to
require investigation and/or remediation costs. As of September
30, 2002, CP&L has not recorded any accruals for investigation
and/or remediation costs for these sites. CP&L received insurance
proceeds to address costs associated with CP&L waste sites. All
eligible expenses related to these waste costs are charged
against a centralized fund containing these proceeds. As of
September 30, 2002, approximately $8.3 million remains in this
centralized fund. As costs associated with CP&L's share of
investigation and remediation of these sites become known, the
fund is assessed to determine if additional accruals will be
required. CP&L does not believe that it can provide an estimate
of the reasonably possible total remediation costs beyond what
remains in the centralized fund. This is due to the fact that the
sites are at different stages: investigation has not begun at 15
sites, investigation has begun but remediation cannot be
estimated at 7 sites and 4 sites have begun remediation. CP&L
measures its liability for these sites based on available
evidence including its experience in investigation and
remediation of contaminated sites, which also involves assessing
and developing cost-sharing arrangements with other potentially
responsible parties. Once the centralized fund is depleted, CP&L
will accrue costs for the sites to the extent its liability is
probable and the costs can be reasonably estimated. Therefore,
CP&L cannot currently determine the total costs that may be
incurred in connection with the remediation of all sites.
According to current information, these future costs at the CP&L
sites are not expected to be material to its financial condition
or results of operations. A rollforward of the balance in this
fund is not provided due to the immateriality of this activity in
the periods presented.
CP&L is also currently in the process of assessing potential
costs and exposures at other sites of which it has been notified.
As the assessments are developed and analyzed, CP&L will accrue
costs for the sites to the extent the costs are probable and can
be reasonably estimated.
There has been and may be further proposed federal legislation
requiring reductions in air emissions for nitrogen oxides, sulfur
dioxide, carbon 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 that will be installed on North Carolina fossil
generating facilities as part of the North Carolina legislation
discussed 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. Designation of areas that do not attain the
standard is proceeding, and further litigation and rulemaking on
this and other aspects of the standard are anticipated. North
Carolina adopted the federal eight-hour ozone standard and is
proceeding with the implementation process. North Carolina has
32
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; however, further technical analysis
and rulemaking may result in a requirement for additional
controls at some units. CP&L cannot predict the outcome of this
matter.
The EPA published a final rule approving petitions under Section
126 of the Clean Air Act. This rule as originally promulgated
required 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 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.
CP&L cannot predict the outcome of this matter.
On June 20, 2002, legislation was enacted in North Carolina
requiring the state's electric utilities to further reduce the
emissions of nitrogen oxide and sulfur dioxide from coal-fired
power plants. These levels exceed requirements of Title IV of the
Clean Air Act pertaining to control of acid rain as well as the
requirements discussed above with regard to the NOx SIP Call,
8-hour ozone standard and Section 126 petitions. CP&L expects its
capital costs to meet these emission targets will be
approximately $813 million. CP&L currently has approximately
5,100 MW of coal-fired generation in North Carolina that is
affected by this legislation. The legislation requires the
emissions reductions to be completed in phases by 2013, and
applies to each utilities' total system rather than setting
requirements for individual power plants. The legislation also
freezes the utilities' base rates for five years unless there are
extraordinary events beyond the control of the utility or unless
the utility persistently earns a return substantially in excess
of the rate of return established and found reasonable by the
NCUC in the utility's last general rate case. Further, the
legislation allows the utilities to recover from their retail
customers the projected capital costs during the first seven
years of the 10-year compliance period beginning on January 1,
2003. The utilities must recover at least 70% of their projected
capital costs during the five-year rate freeze period. Pursuant
to the new law, CP&L entered into an agreement with the state of
North Carolina to transfer to the state all future emissions
allowances it generates from over-complying with the new federal
emission limits when these units are completed. The new law also
requires the state to undertake a study of mercury and carbon
dioxide emissions in North Carolina. CP&L cannot predict the
future regulatory interpretation, implementation or impact of
this new law.
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.
33
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2002, as compared to
the corresponding periods in the prior year
Progress Energy, Inc.
Operating Results
Progress Energy's consolidated earnings for the three and nine months ended
September 30, 2002, were $151.9 million ($0.71 basic earnings per common
share) and $405.1 million ($1.89 per share), respectively, compared to
earnings of $366.4 million ($1.78 per share) and $632.1 million ($3.13 per
share) for the same periods ended September 30, 2001. Current year earnings
for the three and nine months ended September 30, 2002 were negatively
impacted by the recognition of an impairment of the long-lived assets in
the telecommunications business, decreases in revenues as part of Florida
Power's retail rate settlement and increases in operations and maintenance
expenses related to increased benefit costs and decreased pension credits.
In addition, the common stock issuance in August 2001 (12.5 million shares)
and purchase of Westchester Gas Company in April 2002 (2.5 million shares)
resulted in dilution. Offsetting these negative factors were customer
growth and improved weather which increased retail and wholesale sales,
decreases in depreciation expense for the CP&L Electric and Florida Power
Electric segments, decreases in interest charges resulting from lower
average interest rates and additional capitalized interest as well as the
elimination of goodwill amortization.
Management tracks, monitors, and evaluates financial results based on
reported earnings and ongoing earnings basis. The following reconciles
reported earnings to ongoing earnings.
----------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------------------------------------------------
($ millions, except per share figures) 2002 2001 2002 2001
---- ---- ---- ----
Reported Earnings $151.9 $366.4 $405.1 $632.1
Intra-period tax allocation adjustment (39.0) (72.8) 40.5 (27.4)
Contingent Value Obligations (CVO) mark to market (9.4) (16.8) (22.2) (7.9)
Florida Retroactive Retail Rate Refund - - 21.0 -
Progress Telecom/Caronet Asset Impairment and One-time
Charges 224.8 - 224.8 -
----------------------------------------------------------------------------------------------------------------
Ongoing Earnings $328.3 $276.8 $669.2 $596.8
====== ====== ====== ======
Ongoing Earnings Per Share $1.53 $1.34 $3.12 $2.96
===== ===== ===== =====
----------------------------------------------------------------------------------------------------------------
Each of the adjustments to reported earnings and the key business drivers
are discussed in more detail in the business segment reviews that follow.
CP&L Electric
CP&L Electric contributed net income for the three and nine months ended
September 30, 2002 of $179.3 million and $396.5 million, respectively,
compared to net income of $168.5 million and $373.9 million, respectively,
for the same periods in the prior year. 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 for the three and nine
months ended September 30, 2002 of $11.3 million and $41.3 million,
respectively, compared to net income of $11.7 million and $39.4 million,
respectively, for the same periods in the prior year.
Factors contributing to CP&L Electric's results include favorable electric
revenue and margins driven by favorable weather compared to 2001 ($20.5
million and $22.7 million margin gain for the three and nine months ended
September 30, 2002, respectively); a decrease in accelerated depreciation
expense related to the nuclear plants ($16.8 million and $35.1 million
decrease for the three and nine months ended September 30, 2002,
respectively); and a decrease in interest expense resulting from lower debt
and an average interest rate reduction (interest decreased by $13.6 million
and $25.9 million for the three and nine months ended September 30, 2002,
respectively). Additionally, CP&L Electric's results for the nine months
ended September 30, 2002 were favorably impacted by a $25.7 million tax
benefit reallocation from the holding company to CP&L. See Other Businesses
section below for additional information on the tax benefit reallocation.
34
CP&L's electric revenues for the three and nine months ended September 30,
2002 and 2001 and the percentage change by customer class are as follows
(in millions):
------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------------------------------------------
Customer Class 2002 % Change 2001 2002 % Change 2001
------------------------------------------------------------------------------------------------------------------
Residential $384.6 12.6% $341.7 $952.4 4.5% $911.6
Commercial 244.6 8.0 226.5 630.7 5.4 598.5
Industrial 183.0 0.3 182.4 488.9 (1.8) 497.9
Governmental 23.5 4.0 22.6 58.9 3.7 56.8
---------------------------------------------- ------------------------ -----------------
Total Retail Revenues 835.7 8.1 773.2 2,130.9 3.2 2,064.8
Wholesale 193.9 6.6 181.9 493.2 (0.9) 497.6
Unbilled (5.8) 28.0 (0.2) 8.5 - (42.3)
Miscellaneous 21.4 13.2 18.9 58.7 1.9 57.6
---------------------------------------------- ------------------------ -----------------
Total Electric Revenues $1,045.2 7.3% $973.8 $2,691.3 4.4% $2,577.7
------------------------------------------------------------------------------------------------------------------
CP&L electric energy sales for the three and nine months ended September
30, 2002 and 2001 and the percentage change by customer class are as
follows (in thousands of mWh):
------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended June 30,
--------------------------------------------------------------------------------
Customer Class 2002 % Change 2001 2002 % Change 2001
------------------------------------------------------------------------------------------------------------------
Residential 4,485 11.7% 4,015 11,732 2.3% 11,469
Commercial 3,675 7.0 3,433 9,493 3.3 9,186
Industrial 3,569 0.8 3,540 9,917 (2.2) 10,145
Governmental 425 2.7 414 1,087 (0.4) 1,093
---------------------------------------------- ------------------------ -----------------
Total Retail Energy Sales 12,154 6.6 11,402 32,229 1.1 31,893
Wholesale 4,530 20.3 3,766 11,356 10.5 10,280
Unbilled (218) 29.0 (169) 27 - (771)
---------------------------------------------- ------------------------ -----------------
Total mWh sales 16,466 9.8% 14,999 43,612 5.3% 41,402
------------------------------------------------------------------------------------------------------------------
Sales of energy to retail and wholesale customers increased for the three
and nine months ended September 30, 2002, when compared to the same period
in the prior year primarily due to the impacts of favorable weather in the
current year and customer growth. In addition, an increase in the fuel
factor for electric retail rates caused retail revenues to increase over
the prior year. For the nine months ended, this was partially offset by a
decrease in sales in the industrial customer class, primarily due to a
decline in the industrial customer base (largely textiles customers) and
the continued overall softness in the industrial markets driven by the weak
economic environment. Wholesale energy sales growth rates for the three and
nine months ended September 30, 2002 exceeded wholesale energy revenue
growth rates as sales to other utilities were negatively impacted by a
depressed market in 2002 and higher market prices in 2001.
CP&L Electric's fuel expense increased $35.7 million for the three months
ended September 30, 2002, when compared to $186.5 million in 2001,
primarily due to an increase in volume and a change in generation mix,
which was partially offset by a decrease in price. Purchased power expense
increased $9.5 million for the three months ended September 30, 2002, when
compared to $113.8 million in 2001, due to increases in volume and price.
CP&L Electric's fuel expense increased $71.6 million for the nine months
ended September 30, 2002, when compared to $497.7 million in 2001,
primarily due to an increase in volume and a change in generation mix,
which was partially offset by a decrease in price. Purchased power expense
decreased $3.4 million for the nine months ended September 30, 2002, when
compared to $291.0 million in 2001, primarily due to decreases in volume
attributable to favorable market conditions and prices that existed in the
first quarter of 2001. Fuel 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 by $13.9
million and $48.8 million for the three and nine months ended September 30,
2002, respectively, when compared to operations and maintenance expense of
$167.2 million and $515.2 million, respectively, for the same periods in
the prior year. The increase for the three and nine months ended September
30, 2002 was primarily due to increased salary and benefit costs ($6.3
million and $15.0 million for the three and nine months ended September 30,
35
2002); increased insurance costs combined with a lower NEIL refund ($2.0
million and $4.2 million for the three and nine months ended September 30,
2002); costs incurred to prepare for a nuclear outage ($4.5 million for the
three and nine months ended September 30, 2002); costs related to a boiler
overhaul ($9.4 million for the nine months ended September 30, 2002) and
increased support charges from the Service Company as a result of higher
vacancy rates in the prior year.
Depreciation expense decreased $13.2 million and $16.1 million for the
three and nine months ended September 30, 2002, when compared to
depreciation expense of $143.7 million and $421.5 million, respectively,
for the same periods in the prior year. CP&L's accelerated cost recovery
program for nuclear generating assets allows flexibility in recording
accelerated depreciation expense. The decrease for these periods relates to
CP&L Electric's election to depreciate the nuclear assets at the lower end
of the allowable range as set by the state utility commissions. See OTHER
MATTERS below for additional information on CP&L's accelerated cost
recovery program. For the three and nine months ended September 30, 2002,
CP&L recorded accelerated depreciation expense of $13.2 million and $54.9
million, respectively. For the three and nine months ended September 30,
2001, CP&L recorded accelerated depreciation expense of $30.0 million and
$90.0 million, respectively. These reductions are partially offset by
increased depreciation costs resulting from the first phase of the Richmond
units being placed into service in May 2001.
Florida Power Electric
Florida Power Electric contributed net income for the three and nine months
ended September 30, 2002 of $123.8 million and $258.3 million,
respectively, compared to net income of $114.1 million and $270.0 million,
respectively for the same periods in the prior year. 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 for the
three and nine months ended September 30, 2002 of $3.3 million and $9.5
million, respectively, compared to net income of $6.7 million and $18.4
million, respectively, for the same periods in the prior year.
Additionally, Florida Power Electric's results for the three and nine
months ended September 30, 2002 were favorably impacted by a $13.4 million
tax benefit reallocation from the holding company to Florida Power
Electric. See Other Businesses section below for additional information on
the tax benefit reallocation.
Florida Power Electric's earnings for the three and nine months ended
September 30, 2002, were negatively affected by the outcome of the Florida
Power rate case settlement, which included a one-time retroactive revenue
refund of $35.0 million, $21.0 million after tax, recorded in the first
quarter of 2002 and a decrease in retail rates, which was partially offset
by reductions in depreciation in accordance with the settlement. See Note 3
to the Progress Energy, Inc. Consolidated Interim Financial Statements for
additional information on the settlement. In addition, Florida Power
Electric results for the three months and nine months ended were negatively
affected by increases in operations and maintenance expense as described
more fully below.
Florida Power's electric revenues for the three and nine months ended
September 30, 2002 and 2001 and the percentage change by customer class are
as follows (in millions):
---------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------------------------------------
Customer Class 2002 % Change 2001 2002 % Change 2001
---------------------------------------------------------------------------------------------------------------
Residential $469.8 (5.7)% $498.2 $1,244.7 (3.0)% $1,283.2
Commercial 199.5 (8.0) 216.9 549.7 (3.3) 568.2
Industrial 52.6 (4.0) 54.8 157.7 (5.8) 167.5
Governmental 45.1 (7.2) 48.6 128.5 (1.6) 130.6
Retroactive Retail Revenue Refund - - - (35.0) - -
---------------------------------------------- ------------------------ ------------
Total Retail Revenues 767.0 (6.3) 818.5 2,045.6 (4.8) 2,149.5
Wholesale 57.8 (19.9) 72.2 166.1 (28.4) 232.0
Unbilled 8.4 - (7.3) 20.2 - (12.1)
Miscellaneous 30.4 33.9 22.7 84.1 (35.8) 130.9
---------------------------------------------- ------------------------ ------------
Total Electric Revenues $863.6 (4.7)% $906.1 $2,316.0 (7.4)% $2,500.3
---------------------------------------------------------------------------------------------------------------
36
Florida Power's electric energy sales for the three and nine months ended
September 30, 2002 and 2001, and the percentage change by customer class
are as follows (in thousands of mWh):
---------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------------------------------------
2002 % Change 2001 2002 % Change 2001
---------------------------------------------------------------------------------------------------------------
Residential 5,503 2.5% 5,370 14,078 1.7% 13,841
Commercial 3,207 1.4 3,164 8,519 1.8 8,367
Industrial 983 5.3 934 2,859 (2.2) 2,923
Governmental 759 1.2 750 2,095 2.6 2,042
---------------------------------------------- ------------------------ ------------
Total Retail Energy Sales 10,452 2.3 10,218 27,551 1.4 27,173
Wholesale 1,020 (22.7) 1,320 2,975 (18.8) 3,666
Unbilled 214 - (181) 689 - (122)
---------------------------------------------- ------------------------ ------------
Total mWh sales 11,686 2.9% 11,357 31,215 1.6% 30,717
---------------------------------------------------------------------------------------------------------------
As a result of the settlement of the Florida Power rate case, effective May
1, 2002, Florida Power reduced its rates by 9.25%. The effect of this
reduction was to reduce revenue by $30.9 million for the third quarter of
2002 and $51.4 million for the nine months ended September 30, 2002, when
compared to the same periods in the prior year. Partially offsetting the
decrease in rates and the one-time refund from the settlement detailed
above were the impacts of favorable weather and customer growth. In
addition, revenues for the first nine months of 2002 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. In 2001, the deferred
revenues were offset by accelerated amortization of the Tiger Bay
regulatory asset, discussed below, and therefore, had no net earnings
impact. Wholesale electric revenues and sales decreased from the prior year
due to the expiration of specific contracts.
Fuel used in generation and purchased power decreased $32.0 million and
$80.0 million for the three and nine months ended September 30, 2002,
respectively, when compared to $414.7 million and $1,103.9 million,
respectively, for the same periods in the prior year, primarily due to
lower oil and gas prices and purchased power costs, partially offset by an
increase in coal prices and volume from higher system requirements. In
addition, the decrease for the three months ended September 30, 2002, was
due to the lowered recovery of fuel expense as a result of the mid-course
correction of Florida Power's fuel cost recovery clause as part of the
settlement. Fuel and purchased power expenses are recovered primarily
through cost recovery clauses and, as such, have no material impact on
operating results.
Operations and maintenance expense increased by $19.2 million and $69.9
million for the three and nine months ended September 30, 2002,
respectively, when compared to operations and maintenance expense of $119.9
million and $350.6 million, respectively, for the same periods in the prior
year. These amounts have increased due to a decreased pension credit in the
current year ($6.5 million and $22.8 million lower for the three and nine
months ended September 30, 2002); increased other employee benefit costs,
primarily driven by medical costs (approximately $6.1 million and $15.6
million for the three and nine months ended September 30, 2002); increased
spending related to Florida Power's Commitment to Excellence Program which
is aimed at improving system reliability and customer satisfaction ($2.9
million and $8.5 million for the three and nine months ended September 30,
2002); and increased support charges from the Service Company as a result
of higher vacancy rates in the prior year.
Depreciation and amortization expense decreased by $21.7 million and $123.8
million for the three and nine months ended September 30, 2002,
respectively, when compared to expense of $95.1 million and $341.8 million,
respectively, for the same periods in the prior year. The Florida Power
rate case settlement provides for ongoing reductions in depreciation,
nuclear decommissioning and fossil dismantlement costs that reduced the
amount of depreciation recorded by $19.5 million and $58.9 million for the
three and nine months ended September 30, 2002, respectively. In addition,
the first half of 2001 depreciation and amortization 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 natural gas exploration
and production; coal fuel extraction, manufacturing and delivery, which
includes synthetic fuels production; non-regulated generation; and energy
marketing and trading activities on behalf of the utility operating
37
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 $87.6 million and $216.7 million for
the three and nine months ended September 30, 2002, respectively, compared
to net income of $80.1 million and $218.8 million, respectively, for the
same periods in the prior year. For the three months ended September 30,
2002, the majority of the increase relates to the addition of non-regulated
plants in the current year. For the nine months ended September 30, 2002,
the majority of the decrease relates to minor reductions in the net income
related to energy marketing and trading, and in both the coal and gas fuel
extraction, manufacturing and delivery operations, partially offset by the
additions of non-regulated plants during the year.
Progress Ventures' energy marketing and trading activities, including
activities on behalf of CP&L and Florida Power, generated net income of
$13.1 million and $49.1 million for the three and nine months ended
September 30, 2002, respectively, compared to net income of $18.4 million
and $57.8 million, respectively, for the same periods in the prior year.
See Note 5 to the Progress Energy, Inc. Consolidated Interim Financial
Statements for additional information on trading and marketing activities.
Earnings for the three and nine months ended September 30, 2002, have
decreased primarily due to the expiration of specific contracts and the
impact of lower natural gas prices on the pricing of certain contracts.
Progress Ventures' non-regulated generation operations generated net income
of $16.5 million and $23.3 million for the three and nine months ended
September 30, 2002, respectively, when compared to net income of $2.3
million and $3.4 million, respectively, for the same periods in the prior
year. This increase is due to the completion of construction of additional
non-regulated plants, transfer of generation assets from CP&L and the
acquisitions of non-regulated plants in the current year. See Note 2 to the
Progress Energy, Inc. Consolidated Interim Financial Statements for
additional information on this acquisition.
Progress Ventures, Inc.'s subsidiary, MPC Generating, LLC, currently has
two tolling agreements for output on one of its non-regulated plants with
Dynegy, Inc. through June 2008. These contracts are not subject to mark to
market accounting under SFAS No. 133. If Dynegy, Inc., was to default on
this contract and Progress Ventures was required to replace the contract on
this non-regulated plant, this could negatively impact Progress Ventures'
cash flows. Progress Energy does not expect these developments to have a
material impact on the Company's consolidated results of operations,
financial position or cash flows.
Progress Ventures' natural gas exploration and production operations
include the operations of Mesa Hydrocarbons, Inc. (Mesa), which owns
natural gas reserves and operates wells in Colorado and sells natural gas.
These operations also include the activities of the recently acquired
Westchester Gas Company. See Note 2 to the Progress Energy, Inc.
Consolidated Interim Financial Statements for additional information on
this acquisition. These operations generated net income of $2.5 million and
$3.7 million for the three and nine months ended September 30, 2002,
respectively, when compared to net income of $0.7 million and $5.1 million,
respectively, for the same periods in the prior year. Due to the
acquisition of Westchester Gas Company in April 2002, the results of these
operations are not comparative. However, the current year results have been
negatively affected by the decreases in sales price of gas over the prior
year.
Progress Ventures periodically enters into derivative instruments to hedge
its exposure to price fluctuations on natural gas sales. During 2002,
Progress Ventures has entered into cash flow hedges for approximately 81
percent and 56 percent, respectively, of Mesa and Westchester's total
projected natural gas sales for the fourth quarter of 2002 and the entire
year 2003. See Note 10 to the Progress Energy consolidated interim
financial statements for more information on these instruments.
Progress Ventures' coal fuel extraction, manufacturing and delivery
operations generated net income of $55.1 million and $139.9 million for the
three and nine months ended September 30, 2002, when compared to net income
of $57.3 million and $147.9 million, respectively, for the same periods in
the prior year. The Progress Ventures segment sold 3.0 million and 9.4
million tons of synthetic fuel for the three and nine months ended
September 30, 2002, respectively, compared to 4.0 million and 10.4 million
tons, respectively, for the same periods in the prior year. The sales
resulted in tax credits of $78.7 million and $253.8 million being recorded
for the three and nine months ended September 30, 2002, respectively,
compared to tax credits of $102.9 million and $271.8 million, respectively,
for the same periods in the prior year. The synthetic fuel production and
related tax credits are lower in 2002 than in 2001 because the production
schedule in 2002 has been evenly distributed based on anticipated full-year
production whereas in 2001 excess production in the first nine months of
the year mandated lower fourth quarter production. 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. Results for the three and nine
months ended September 30, 2002 were also favorably impacted from $10.2
million of interest being capitalized in accordance with SFAS No. 34.
38
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. 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. Progress Energy recorded an
after-tax charge of $10.1 million in the second quarter of 2001 reflecting
the reallocation of the purchase price and the reversal of the effect of
net assets held for sale accounting. In the third quarter of 2001 and 2002,
Rail Services was accounted for as an ongoing operation. As a result of the
classification to net assets held for sale in November 2000 and the
reversal of that designation in 2001, Rail Services year to date 2001
activity includes activity from December 2000.
Rail Services contributed earnings for the three and nine months ended
September 30, 2002 of $0.7 million and $3.0 million, respectively, compared
to losses of $2.2 million and $9.7 million for the comparable periods in
2001. Rail Service's year to year results were impacted by a weak business
environment, which resulted in $24.1 million decreased revenues for the
quarter and a decrease of $93.5 million for the nine months ended September
30, 2002 when compared to 2001. In addition, Rail Services' transition from
acting as a scrap reseller in 2001 to acting as a scrap resale agent in
2002 and asset sales in 2001 contributed to the revenue decrease.
Corresponding decreases in operating costs and the impact of targeted cost
cutting measures offset the revenue reductions.
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 $224.9 million and $418.6 million for the three and
nine months ended September 30, 2002, respectively, compared to net income
of $24.4 million and a net loss of $163.1 million, respectively, for the
same periods in the prior year. The decrease in earnings for the three and
nine months ended September 30, 2002, when compared to the same periods in
the prior year, was primarily due to the recognition of long-lived asset
impairments and one time charges in the telecommunications businesses
(total impairment and one-time charges of $355.4 million offset by $130.6
million tax benefit for a $224.8 million after-tax impact), partially
offset by the elimination of goodwill amortization in 2002. Other segment
earnings for the three and nine months ended September 30, 2002 were also
positively impacted from $11.8 million of interest being capitalized in
accordance with SFAS No. 34.
In accordance with SFAS No. 142, effective January 1, 2002, Progress Energy
no longer amortizes goodwill. For the three and nine months ended September
30, 2001, the Company amortized goodwill of $24.9 million and $75.6
million, respectively. At September 30, 2002, the Company had approximately
$3.8 billion of unamortized goodwill. See Note 7 to the Progress Energy,
Inc. Consolidated Interim Financial Statements for additional information
on SFAS No. 142.
NCNG recorded a net loss of $5.3 million and net income of $1.7 million for
the three and nine months ended September 30, 2002, respectively, compared
to net losses of $3.2 million and $1.0 million, respectively, for the same
periods in the prior year. NCNG's margin on gas sales decreased by $2.3
million and increased by $5.2 million for the three and nine months ended
September 30, 2002, respectively, when compared to margin on sales of $15.4
million and $55.8 million for the same periods in the prior year. The third
quarter margin decrease resulted primarily from a retroactive rate
reduction for one customer. The year-to-date margin increase resulted
primarily from an increase in industrial volumes related to a decline in
gas prices.
NCNG's operations and maintenance expense decreased $0.2 million for the
three months and increased $3.7 million for the nine months ended September
30, 2002, respectively. The increase for the nine months ended September
30, 2002 was primarily due to increased staffing and increased operations
and maintenance expense associated with an increase in its fleet.
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. On
May 16, 2002, NCNG filed a request to increase its margin rates and
rebalance its rates with the NCUC, requesting an annual rate increase of
39
$4.1 million to recover costs associated with specific system improvements.
On September 23, 2002, the NCUC issued its order approving the $4.1 million
rate increase. The rate increase was effective October 1, 2002.
On October 16, 2002, the Company announced plans to sell NCNG, and the
Company's ownership interest in EasternNC, to Piedmont Natural Gas Company,
Inc. for approximately $425 million in gross cash proceeds. See Note 14 to
the Progress Energy, Inc. Consolidated Interim Financial Statements for
further discussion on the planned sale.
Generally accepted accounting principles require companies to apply a
levelized effective tax rate to interim periods that is consistent with the
estimated annual effective tax rate. Income tax expense was decreased by
$39.0 million for the three months and increased $40.5 million for the nine
months ended September 30, 2002, respectively, in order to maintain an
effective tax rate consistent with the estimated annual rate. Income tax
expense was decreased by $72.6 million and $27.2 million for the three and
nine months ended September 30, 2001, respectively. The tax credits
associated with Progress Energy's synthetic fuel operations lower the
overall effective tax rate. Fluctuations in estimated annual 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 is subject to regulation under the Public Utility Holding
Company Act (PUHCA) of 1935, as amended, of the SEC. According to a recent
SEC order, Progress Energy's tax benefit not related to acquisition
interest expense is to be allocated to profitable subsidiaries. Therefore,
the tax benefit that was previously held in the holding company, included
in the Other segment, was allocated on a preliminary basis to the
profitable subsidiaries effective with the second quarter of 2002. The
allocation has no impact on consolidated tax expense or earnings. However,
in the nine months ended September 30, 2002, the allocation increased the
holding company's tax expense $40.6 million with offsetting decreases in
other segments.
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 September 30, 2002, the CVOs had
a fair market value of approximately $19.7 million. Progress Energy
recorded a gain of $9.4 million and $22.2 million for the three and nine
months ended September 30, 2002, respectively, compared to a gain of $16.8
million and $7.9 million, respectively, for the same periods in the prior
year to record the changes in fair value of CVOs.
Progress Telecom, including Caronet's operations, had net losses of $225.3
million and $234.6 million for the three and nine months ended September
30, 2002, respectively. This compares to net losses of $2.4 million and
$4.6 million for the same periods in 2001. The decrease in earnings in
2002, when compared to 2001, is primarily due to long-lived asset
impairments and other one-time after tax charges of $208.5 million that
resulted from a valuation study of the unit's long-lived assets. See Note 3
to the Progress Energy, Inc. Consolidated Interim Financial Statements for
further discussion of these charges. This write-down constitutes a
significant reduction in the book value of these assets and the ongoing
operations are expected to have a negligible impact on Progress Energy's
net income.
Effective June 28, 2000, Caronet entered into an agreement with Bain
Capital where it contributed the net assets used in its application service
provider business to a newly formed company, for a 35% ownership interest
(15% voting interest), named Interpath Communications, Inc. (Interpath). In
May 2002, Interpath merged with USinternetworking, Inc. Pursuant to the
terms of the merger agreement and additional funds being contributed by
Bain Capital, CP&L now owns approximately 19% of the company (7% voting
interest). As a result of the merger, the Company reviewed the Interpath
investment for impairment and wrote off the remaining amount of its
cost-basis investment in Interpath, recording a pre-tax impairment of $25.0
million in the third quarter of 2002 ($16.3 million after-tax).
Excluding the asset impairments and one-time charges, Progress Telecom's
(including Caronet's operations) third quarter 2002 loss of $0.5 million
compares to the prior year's comparable period loss of $2.4 million. The
reduced loss resulted primarily from lower depreciation charges as a
consequence of the asset writedown. A loss for the nine months ended
September 30, 2002 (excluding the one-time charges) of $9.7 million
compares to a loss of $4.6 million for the comparable period in 2001. The
depreciation reduction related to the asset writedown was more than offset
by depreciation on additional fiber optics that were placed into service in
the first half of the year.
40
LIQUIDITY AND CAPITAL RESOURCES
Progress Energy, Inc.
Statement of Cash Flows and Financing Activities
Cash provided by operating activities decreased $29.3 million for the nine
months ended September 30, 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. 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 $442.5 million for the nine
months ended September 30, 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 and fuel
portfolio (see Note 2 to the Progress Energy, Inc. Consolidated Interim
Financial Statements). During the first nine months of 2002, $738.6 million
was spent on its utility subsidiaries' construction program and $764.6
million was spent in diversified business property additions. The
acquisition of Westchester Gas Company resulted in a net cash outflow of
$17.4 million.
Net cash provided by financing activities increased $473.8 million for the
nine months ended September 30, 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, a Progress Ventures, Inc. subsidiary, Progress Genco
Ventures, LLC, obtained a $440 million bank facility that was to 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, June and September 2002, Progress Genco Ventures, LLC
made draws under this facility of $120 million, $67 million and $25
million, respectively. In September 2002, Progress Genco Ventures, LLC
terminated $130 million of the bank facility, reducing it from $440 million
to $310 million.
Progress Genco Ventures, LLC is required to hedge 75 percent of the amounts
outstanding under its bank facility through September 2005 and 50 percent
thereafter pursuant to the terms of the agreement for expansion of its
non-regulated generation portfolio. In May 2002, Progress Genco Ventures,
LLC entered into hedges that included a series of zero cost collars that
have been designated as cash flow hedges for accounting purposes. The fair
value of these instruments was a $10.9 million liability position at
September 30, 2002.
Progress Energy uses interest rate derivative instruments to adjust the
fixed and variable rate debt components of its debt portfolio. During
March, April and May 2002, Progress Energy converted $1.0 billion of fixed
rate debt into variable rate debt by executing interest rate derivative
agreements with a total notional amount of $1.0 billion with a group of
five banks. Under the terms of the agreements, which were scheduled to
mature in 2006 and 2007 and coincide with the maturity dates of the related
debt issuances, Progress Energy received a fixed rate and paid a floating
rate based on three-month LIBOR. These instruments were designated as fair
value hedges for accounting purposes. In June 2002, Progress Energy
terminated these agreements. The terminations resulted in a $21.2 million
deferred hedging gain reflected in long-term debt, which will be amortized
and recorded as a reduction to interest expense over the life of the
related debt issuances.
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 all three entities 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
41
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 September 4, 2002, S&P reaffirmed Progress Energy's credit
ratings and maintained the negative outlook.
On April 10, 2002, Moody's Investors Services 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. On
October 18, 2002, Moody's announced that it had placed Progress Energy's
senior unsecured debt rating (Baa1) on review for possible downgrade. As
its basis for review, Moody's cited primarily Progress Energy's recent
writedown of the value of its long-lived telecommunications assets and the
related delay in its deleveraging plan. Moody's further indicated that it
did not expect its review to result in more than a one notch downgrade of
Progress Energy's senior unsecured debt rating. Moody's confirmed its
ratings of Progress Energy's commercial paper (P-2) and the ratings of its
two operating utilities, CP&L (senior secured--A-3, commercial paper--P-2,
stable outlook) and Florida Power (senior secured--A-1, commercial
paper--P-1, stable outlook).
The change in outlook by the rating agencies has not materially affected
Progress Energy's access to liquidity nor the cost of its short-term
borrowings.
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 unsecured
notes due 2012 with a coupon of 6.85%. Proceeds from this issuance were
used to pay down commercial paper.
In April, May and June 2002, CP&L entered into a series of treasury rate
locks to hedge its exposure to interest rates with regard to a future
issuance of fixed-rate debt. These agreements had a computational period of
ten years. These instruments were designated as cash flow hedges for
accounting purposes. The agreements, with a total notional amount of $350
million, were terminated simultaneously with the pricing of the $500
million CP&L senior unsecured notes in July 2002. CP&L realized a $22.5
million hedging loss, which will be amortized and recorded as an increase
to interest expense over the life of the notes.
On June 20, 2002, legislation was enacted in North Carolina requiring the
state's electric utilities to reduce the emissions of nitrogen oxide and
sulfur dioxide from coal-fired power plants. CP&L expects its capital costs
to meet these emission targets will be approximately $813 million. See Note
13 to the Progress Energy, Inc. Consolidated Interim Financial Statements
and OTHER MATTERS below for more information on this legislation.
On June 27, 2002, CP&L announced the redemption of $500 million of CP&L
Extendible Notes due October 28, 2009, at 100% of the principal amount of
such notes. These notes were redeemed on July 29, 2002 and CP&L funded the
redemptions through the issuance of commercial paper. On July 30, 2002,
CP&L issued $500 million of senior unsecured notes due 2012 with a coupon
of 6.5%. Proceeds from this issuance were used to pay down commercial
paper.
On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54%
Series, matured. Florida Power funded this maturity through the issuance of
commercial paper.
On July 11, 2002, Florida Power announced the redemption of $108.55 million
principal amount of Citrus County Pollution Control Refunding Revenue
Bonds, Series 1992 A Due January 1, 2027, $90 million principal amount of
Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 B Due
February 1, 2022 and $10.115 million principal amount of Pasco County
Pollution Control Refunding Revenue Bonds, Series 1992A Due February 1,
2022, at 102% of the principal amount of such bonds and $32.2 million
principal amount of Pinellas County Pollution Control Refunding Revenue
Bonds, Series 1991 Due December 1, 2014 at 101% of the principal amount of
such bonds. These redemptions were finalized on August 12, 2002.
On July 16, 2002, Florida Power issued $108.55 million principal amount of
Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due
January 1, 2027, $100.115 million principal amount of Citrus County
Pollution Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022
and $32.2 million principal amount of Citrus County Pollution Control
Revenue Refunding Bonds, Series 2002C Due January 1, 2018. Proceeds from
this issuance were used to redeem Florida Power's pollution control revenue
refunding bonds above.
42
On August 5, 2002, CP&L announced the redemption of $150 million of First
Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the principal
amount of such bonds. CP&L redeemed these notes on September 4, 2002
through the issuance of commercial paper.
In August 2002, Progress Energy converted $800 million of fixed rate debt
into variable rate debt by executing interest rate derivative agreements
with four counterparties with a total notional amount of $800 million.
Under the terms of the agreements, which were scheduled to expire in 2006
and coincide with the maturity date of the related debt issuance, Progress
Energy received a fixed rate of 3.38% and paid a floating rate based on
three-month LIBOR. These instruments were designated as fair value hedges
for accounting purposes. In November 2002, Progress Energy terminated these
agreements. The terminations resulted in a $14.0 million deferred hedging
gain reflected in long-term debt, which will be amortized and recorded as a
reduction to interest expense over the life of the related debt issuance.
Progress Energy's 364-day revolving credit facility expired on November 12,
2002. In connection with the renewal, the facility was reduced in size from
$550 million to approximately $430 million. In addition, the permitted debt
to capital ratio was lowered from 70% to 68% effective June 30, 2003;
Progress Energy's debt to capital ratio as of September 30, 2002, was
65.3%. Finally, a minimum EBITDA to interest expense ratio of 2.5x to 1 was
imposed; for the twelve months ended September 30, 2002, Progress Energy's
ratio of EBITDA to interest expense was 3.28x to 1.
On November 13, 2002, Progress Energy issued 14.7 million shares of common
stock at $40.90 per share for net proceeds of $600.0 million. Proceeds from
the issuance will be used to retire commercial paper.
Future Commitments
As of September 30, 2002, Progress Energy's contractual cash obligations
have not changed materially from what was reported in the 2001 Annual
Report on Form 10-K. The only changes in Progress Energy's contractual cash
obligations involve the additional long-term debt issuances made through
the third quarter of 2002 that are detailed above, and the finalization of
Progress Ventures' purchase obligations related to generation and fuel
acquisitions, as detailed in Note 2 to the Progress Energy, Inc.
Consolidated Interim Financial Statements.
As of September 30, 2002, Progress Energy's other commercial commitments
have changed from what was reported in the 2001 Annual Report on Form 10-K.
During the first nine months of 2002, Progress Energy issued approximately
$363 million of guarantees on behalf of Progress Ventures for obligations
under power purchase agreements, tolling agreements, construction
agreements and trading operations. Approximately $184 million of these
commitments relate to certain guarantee agreements issued to support
obligations related to Progress Ventures' expansion of its non-regulated
generation portfolio. These guarantees ensure performance under generation
construction and operating agreements.
The remaining $179 million of these new commitments are guarantees issued
to support Progress Ventures' energy trading and marketing functions. The
majority of the trading and marketing contracts supported by the guarantees
contain language regarding downgrade events, ratings triggers, netting of
exposure and/or payments and offset provisions in the event of a default.
Based upon the amount of trading positions outstanding at October 31, 2002,
if Progress Energy's ratings were to decline below investment grade, the
Company would have to deposit cash or provide letters of credit or other
cash collateral for approximately $17 million for the benefit of the
Company's counterparties.
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, Inc. Consolidated Interim Financial
Statements for additional information on the Agreement.
43
North Carolina Clean Air Legislation
On June 20, 2002, legislation was enacted in North Carolina requiring the
state's electric utilities to reduce the emissions of nitrogen oxide and
sulfur dioxide from coal-fired power plants. Progress Energy expects its
capital costs to meet these emission targets will be approximately $813
million. CP&L currently has approximately 5,100 MW of coal-fired generation
in North Carolina that is affected by this legislation. The legislation
requires the emissions reductions to be completed in phases by 2013, and
applies to each utilities' total system rather than setting requirements
for individual power plants. The legislation also freezes the utilities'
base rates for five years unless there are extraordinary events beyond the
control of the utility or unless the utility persistently earns a return
substantially in excess of the rate of return established and found
reasonable by the NCUC in the utility's last general rate case. Further,
the legislation allows the utilities to recover from their retail customers
the projected capital costs during the first seven years of the 10-year
compliance period beginning on January 1, 2003. The utilities must recover
at least 70% of their projected capital costs during the five-year rate
freeze period. Pursuant to the new law, CP&L entered into an agreement with
the state of North Carolina to transfer to the state all future emissions
allowances it generates from over-complying with the new federal emission
limits when these units are completed. The new law also requires the state
to undertake a study of mercury and carbon dioxide emissions in North
Carolina. Progress Energy cannot predict the future regulatory
interpretation, implementation or impact of this new law.
On June 14, 2002, the NCUC approved modification of CP&L's ongoing
accelerated cost recovery of its nuclear generating assets. Effective
January 1, 2003, the NCUC will no longer require a minimum annual
depreciation. The aggregate minimum and maximum amounts of accelerated
depreciation, $415 million and $585 million respectively, are unchanged
from the original NCUC order. The date by which the minimum amount must be
depreciated was extended from December 31, 2004 to December 31, 2009. On
October 29, 2002, the SCPSC approved a similar modification. The order is
effective as of November 1, 2002, and the aggregate minimum and maximum of
$115 million and $165 million established for accelerated cost recovery by
the SCPSC is unaffected by the order. As of September 30, 2002, CP&L has
recorded cumulative accelerated depreciation expense of approximately $405
million.
Franchise Taxes
CP&L, like other electric power companies in North Carolina, pays a
franchise tax levied by the State pursuant to North Carolina General
Statutes ss. 105-116, a state-level annual franchise tax (State Franchise
Tax). Part of the revenue generated by the State Franchise Tax is required
by North Carolina General Statutes ss. 105-116.1(b) to be distributed to
North Carolina cities in which CP&L maintains facilities. CP&L has paid and
continues to pay the State Franchise Tax to the state when such taxes are
due. However, pursuant to an Executive Order issued on February 5, 2002, by
the Governor of North Carolina, the Secretary of Revenue withheld
distributions of State Franchise Tax revenues to cities for two quarters of
fiscal year 2001-2002 in an effort to balance the state's budget.
In response to the state's failure to distribute the State Franchise Tax
proceeds, certain cities in which CP&L maintains facilities adopted
municipal franchise tax ordinances purporting to impose on CP&L a local
franchise tax. The local taxes are intended to be collected for as long as
the state withholds distribution of the State Franchise Tax proceeds from
the cities. The first local tax payments were due August 15, 2002. On
August 2, 2002, CP&L filed a lawsuit against the cities seeking to enjoin
the enforcement of the local taxes and to have the local ordinances struck
down because the ordinances are beyond the cities' statutory authority and
violate provisions of the North Carolina and United States Constitutions.
On September 14, 2002, the Governor of North Carolina signed into law a
provision that prevents cities and counties from levying local franchise
taxes on electric utilities. The new law is also intended to prevent a
recurrence of the withholding of utility franchise tax payments by the
state. This new legislation makes it likely that the lawsuit CP&L filed in
August against certain cities that were seeking to enforce local franchise
tax ordinances will become moot.
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
44
December 31, 2004. The aggregate cash purchase price of approximately $348
million included approximately $1.7 million of direct transaction costs.
See Note 2 to the Progress Energy, Inc. 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.
The aggregate purchase price of approximately $153 million consisted of
cash consideration of approximately $22 million and the issuance of 2.5
million shares of Progress Energy common stock valued at approximately $129
million. The purchase price included approximately $1.7 million of direct
transaction costs. 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. See Note 2 to the Progress Energy, Inc. Consolidated
Interim Financial Statements for additional information on this
acquisition.
Synthetic Fuels Tax Credits
Progress Energy, through the Progress Ventures business unit, produces
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 Progress Energy's
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 Progress Energy
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 nine months ended September 30, 2002 and 2001, were $253.8 million
and $271.8 million, respectively, offset by operating losses, net of tax,
of $121.9 million and $128.1 million, respectively, for the same periods.
One synthetic fuel entity, Colona Synfuel Limited Partnership, L.L.L.P.,
from which the Company (and Florida Progress prior to its acquisition by
the Company) has been allocated approximately $241 million in tax credits
to date, is being audited by the IRS. The audit of Colona was not
unexpected. The Company is audited regularly in the normal course of
business as are most similarly situated companies. Total Section 29 credits
generated to date (including Florida Progress prior to its acquisition by
the Company) are approximately $963 million.
In September 2002, all of Progress Energy's majority-owned synthetic fuel
entities were accepted into the Internal Revenue Service's (IRS) Pre-Filing
Agreement (PFA) program. The PFA program allows taxpayers to voluntarily
accelerate the IRS exam process in order to seek resolution of specific
issues. Either the Company or the IRS can withdraw from the program at any
time, and issues not resolved through the program may proceed to the next
level of the IRS exam process. While the ultimate outcome is uncertain, the
Company believes that participation in the PFA program will likely shorten
the tax exam process.
In management's opinion, Progress Energy is complying with the private
letter rulings and all the necessary requirements to be allowed such
credits under Section 29 and believes it is likely, although it cannot
provide certainty, that it will prevail if challenged by the IRS on any
credits taken. The current Section 29 tax credit program expires in 2007.
Nuclear Matters
Spent Fuel Storage
On December 21, 2000, CP&L received permission from the NRC to increase its
storage capacity for spent fuel rods in Wake County, North Carolina. The
NRC's decision came two years after CP&L asked for permission to open two
unused storage pools at the Shearon Harris Nuclear Plant (Harris Plant).
The approval means CP&L can complete cooling systems and install storage
racks in its third and fourth storage pools at the Harris Plant.
Orange County, North Carolina appealed the NRC license amendment to expand
spent fuel storage capacity at the Harris Plant. On May 31, 2001, Orange
County filed a petition for review in the U.S. Court of Appeals for the
District of Columbia, and on June 1, 2001, filed a request for stay and
expedition of the case with the court.
45
On June 29, 2001, the U.S. Court of Appeals denied Orange County's motion
for a stay and rejected the request for an expedited schedule for the
appeal. The parties filed briefs, and the court heard oral arguments on
September 5, 2002. The court issued its ruling on September 19, 2002,
denying Orange County's petitions for review of NRC orders, finding no
error in the NRC's determinations.
Pressurized Water Reactors
On March 18, 2002 the Nuclear Regulatory Commission (NRC) sent a bulletin
to companies that hold licenses for pressurized water reactors (PWRs)
requiring information on the structural integrity of the reactor vessel
head and a basis for concluding that the vessel head will continue to
perform its function as a coolant pressure boundary. The Company filed
responses as required. Inspections of the vessel heads at the Company's PWR
plants have been performed during previous outages. In October 2001 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 in April 2001 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 in the fourth quarter of 2001 to conclude there is no
degradation of the reactor vessel head. The Company's Brunswick plant has a
different design and is not affected by the issue.
On August 9, 2002, the NRC issued an additional Bulletin dealing with head
leakage due to cracks near the control rod nozzles. The NRC has asked
licensees to commit to high inspection standards to ensure the more
susceptible plants have no cracks. The Robinson plant is in this category
and had a refueling outage in October 2002. The Company completed a series
of examinations in October 2002 of the entire reactor pressure vessel head
and found no indications of control rod drive mechanism cracking and no
corrosion of the head itself. During the outage, a boric acid leakage
walkdown of the reactor coolant pressure boundary was completed and no
corrosion was found. For CR3, the Company has responded to the NRC that
previous inspections are sufficient until the reactor head is replaced in
the fall of 2003. For the Harris plant, the Company does not plan further
inspections until its next regularly scheduled outage in Spring 2003.
Security
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. These interim security measures were
required to be completed at each nuclear site by August 31, 2002. The
Company completed the requirements by the deadline and expects the NRC to
perform an inspection for compliance in the near future.
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.
Standard Market Design
On July 31, 2002, the Federal Energy Regulatory Commission (FERC) issued
its Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying
Undue Discrimination through Open Access Transmission Service and Standard
Electricity Market Design (SMD NOPR). The proposed rules set forth in the
SMD NOPR would require, among other things, that 1) all transmission owning
utilities transfer control of their transmission facilities to an
independent third party; 2) transmission service to bundled retail
customers be provided under the FERC-regulated transmission tariff, rather
than state-mandated terms and conditions; 3) new terms and conditions for
transmission service be adopted nationwide, including new provisions for
pricing transmission in the event of transmission congestion; 4) new energy
markets be established for the buying and selling of electric energy; and
5) load serving entities be required to meet minimum criteria for
generating reserves. If adopted as proposed, the rules set forth in the SMD
NOPR would materially alter the manner in which transmission and generation
services are provided and paid for. Progress Energy is reviewing the SMD
NOPR and expects to file comments thereto, portions of which are due on
November 15, 2002 and January 10, 2003. FERC also has indicated that it
expects to issue final rules during the third quarter of 2003. The Company
cannot predict the outcome of this rulemaking or the possible outcome of
any further proceedings, including appeals, related to this matter.
46
Regional Transmission Organizations
On June 18, 2002, the GridSouth RTO sponsors (CP&L, Duke Energy and South
Carolina Electric and Gas) announced that they will delay filing
applications with their state commissions and will suspend the GridSouth
implementation project. Postponing the filings will allow GridSouth time to
review the effects of state and federal regulatory initiatives that are
ongoing and continuing through the end of 2002. GridSouth will determine
the appropriate time to file new applications with the state commissions
based on the results of these regulatory developments.
The GridFlorida applicants filed a revised RTO proposal with the FPSC on
March 20, 2002 incorporating certain changes required by the FPSC's
December 2001 order. The FPSC then conducted a series of workshops and
meetings to allow parties an opportunity to comment on the applicants'
March 20 compliance filing. As a result of these comments, the GridFlorida
applicants filed modifications to certain aspects of the compliance filing
on June 21, 2002. On September 3, 2002, the FPSC issued an order addressing
the compliance of the applicants' modified filing with the FPSC's December
2001 order through final agency action, requiring additional revisions to
the applicants' modified filing through proposed agency action, and
scheduling an expedited hearing for late October 2002 to consider the
applicants' revised market design proposal and other proposed agency action
revisions protested by the parties. On October 3, 2002, the Office of
Public Counsel filed a Notice of Appeal to the Florida Supreme Court
regarding the FPSC's September 3rd order. At a public meeting on October
15, 2002, the FPSC voted to hold further proceedings in the GridFlorida
docket in abeyance pending the outcome of the Office of Public Counsel's
appeal.
The actual structure of GridSouth, GridFlorida or any alternative combined
transmission structure, as well as the date it may become operational,
depends upon the resolution of all regulatory approvals and technical
issues. Given the regulatory uncertainty of the ultimate timing, structure
and operations of GridSouth, GridFlorida or an alternate combined
transmission structure, the Company cannot predict whether their creation
will have any material adverse effect on its future consolidated results of
operations, cash flows or financial condition.
Franchise Litigation
Six cities, with a total of approximately 49,000 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. Two
appellate courts have upheld those circuit court decisions and authorized
cities to determine the value of Florida Power's facilities within the
cities through arbitration. To date, no city has attempted to actually
exercise the right to purchase any portion of Florida Power's electric
distribution system. An arbitration in one of the cases was held in August
2002 and an award was issued in October 2002 setting the value of Florida
Power's distribution system within one city at approximately $22 million.
At this time, whether and when there will be further proceedings following
this award cannot be determined. Additional arbitrations have been
scheduled to occur in the fourth quarter of 2002 and second quarter of
2003. Progress Energy cannot predict the outcome of these matters.
Union Contract
Approximately 2,100 employees at Florida Power are represented by the
International Brotherhood of Electrical Workers (IBEW). The current union
contract was ratified in December 1999 and expires on December 1, 2002.
Florida Power is currently in negotiations with the IBEW, but the Company
cannot predict the outcome or impact of this matter.
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
47
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. For the three and nine months ended
September 30, 2002, the operations for CP&L's non-utility subsidiaries
primarily relate to asset impairments and one-time charges recorded in the
third quarter of 2002 related to its Caronet, Inc. subsidiary and its
investment in Interpath (See Note 3 to the CP&L Consolidated Interim
Financial Statements). The results of operations for CP&L's non-utility
subsidiaries for the three and nine months ended September 30, 2001 are not
material to CP&L's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2002, $405.2 million was spent on CP&L's
construction program and $10.8 million was spent on diversified business
property additions.
As of September 30, 2002, CP&L's liquidity, contractual cash obligations
and other commercial commitments have 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, a Progress Ventures, Inc. subsidiary, Progress Genco
Ventures, LLC, obtained a $440 million bank facility that was to be used
exclusively for expansion of its non-regulated generation portfolio. In
March, June and September 2002, Progress Genco Ventures, LLC made draws
under this facility of $120 million, $67 million and $25 million,
respectively. In September 2002, Progress Genco Ventures, LLC terminated
$130 million of the bank facility, reducing it from $440 million to $310
million.
Progress Genco Ventures, LLC is required to hedge 75 percent of the amounts
outstanding under its bank facility through September 2005 and 50%
thereafter pursuant to the terms of the agreement for expansion of its
non-regulated generation portfolio. In May 2002, Progress Genco Ventures,
LLC entered into hedges that included a series of zero cost collars that
have been designated as cash flow hedges for accounting purposes. The fair
value of these instruments was a $10.9 million liability position at
September 30, 2002.
During March, April and May 2002, Progress Energy converted $1.0 billion of
fixed rate debt into variable rate debt by executing interest rate
derivative agreements with a total notional amount of $1.0 billion with a
group of five banks. Under the terms of the agreements, which were
scheduled to mature in 2006 and 2007 and coincide with the maturity dates
of the related debt issuances, Progress Energy received a fixed rate and
paid a floating rate based on three-month LIBOR. These instruments were
designated as fair value hedges for accounting purposes. In June 2002,
Progress Energy terminated these agreements. As a result of the agreements,
at June 30, 2002, Progress Energy had a $21.2 million deferred hedging gain
reflected in long-term debt, which will be amortized and recorded as a
reduction to interest expense over the life of the related debt issuances.
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 unsecured
notes due 2012 with a coupon of 6.85%. Proceeds from this issuance were
used to pay down commercial paper.
48
In April, May and June 2002, CP&L entered into a series of treasury rate
locks to hedge its exposure to interest rates with regard to a future
issuance of fixed-rate debt. These agreements had a computational period of
ten years. These instruments were designated as cash flow hedges for
accounting purposes. The agreements, with a total notional amount of $350
million, were terminated simultaneously with the pricing of the $500
million CP&L senior unsecured notes in July 2002 described below. CP&L
realized a $22.5 million hedging loss, which will be amortized and recorded
as an increase to interest expense over the life of the notes.
On June 27, 2002, CP&L announced the redemption of $500 million of CP&L
Extendible Notes due October 28, 2009, at 100% of the principal amount of
such notes. These notes were redeemed on July 29, 2002 and CP&L funded the
redemptions through the issuance of commercial paper. On July 30, 2002,
CP&L issued $500 million of senior unsecured notes due 2012 with a coupon
of 6.5%. Proceeds from this issuance were used to pay down commercial
paper.
On August 5, 2002, CP&L announced the redemption of $150 million of First
Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the principal
amount of such bonds. CP&L redeemed these notes on September 4, 2002
through the issuance of commercial paper.
In August 2002, Progress Energy converted $800 million of fixed rate debt
into variable rate debt by executing interest rate derivative agreements
with four counterparties with a total notional amount of $800 million.
Under the terms of the agreements, which were scheduled to expire in 2006
and coincide with the maturity date of the related debt issuance, Progress
Energy received a fixed rate of 3.38% and paid a floating rate based on
three-month LIBOR. These instruments were designated as fair value hedges
for accounting purposes. The fair value of these instruments was a $14.2
million asset position at September 30, 2002. In November 2002, Progress
Energy terminated these agreements. The terminations resulted in a $14.0
million deferred hedging gain reflected in long-term debt, which will be
amortized and recorded as a reduction to interest expense over the life of
the related debt issuance.
Progress Ventures periodically enters into derivative instruments to hedge
its exposure to price fluctuations on natural gas sales. During 2002,
Progress Ventures has executed cash flow hedges on approximately 17.3 Bcf
of natural gas sales for the fourth quarter of 2002 and entire year 2003.
These instruments did not have a material impact on the Company's
consolidated financial position or results of operations.
As a result of these issuances and redemptions, the exposure to changes in
interest rates from the Company's fixed rate and variable rate long-term
debt at September 30, 2002, has changed from December 31, 2001. The total
fixed rate long-term debt at September 30, 2002, was $8.9 billion, with an
average interest rate of 6.85% and fair market value of $9.9 billion. The
total variable rate long-term debt at September 30, 2002, was $1.1 billion,
with an average interest rate of 1.78% and fair market value of $1.1
billion.
The exposure to changes in interest rates from FPC mandatorily redeemable
securities of trust at September 30, 2002, was not materially different
than at December 31, 2001.
Effective with the quarter ended September 30, 2002, the Company will no
longer reclassify commercial paper as long-term debt. At December 31, 2001,
the Company had reclassified $865 million of commercial paper to long-term
debt. At September 30, 2002, the exposure to changes in interest rates from
the Company's commercial paper facilities 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.
On June 27, 2002, CP&L announced the redemption of $500 million of CP&L
Extendible Notes due October 28, 2009, at 100% of the principal amount of
such notes. These notes were redeemed on July 29, 2002 and CP&L funded the
redemptions through the issuance of commercial paper. On July 30, 2002,
CP&L issued $500 million of senior unsecured notes due 2012 with a coupon
of 6.5%. Proceeds from this issuance were used to pay down commercial
paper.
49
In April, May and June 2002, CP&L entered into a series of treasury rate
locks to hedge its exposure to interest rates with regard to a future
issuance of fixed-rate debt. These agreements had a computational period of
ten years. These instruments were designated as cash flow hedges for
accounting purposes. The agreements, with a total notional amount of $350
million, were terminated simultaneously with the pricing of the $500
million CP&L senior unsecured notes in July 2002. CP&L realized a $22.5
million hedging loss, which will be amortized and recorded as an increase
to interest expense over the life of the notes.
On August 5, 2002, CP&L announced the redemption of $150 million of First
Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the principal
amount of such bonds. CP&L redeemed these notes on September 4, 2002
through the issuance of commercial paper.
The exposure to changes in interest rates from CP&L's fixed rate long-term
debt and variable rate long-term debt at September 30, 2002, was not
materially different than at December 31, 2001.
Effective with the quarter ended September 30, 2002, CP&L will no longer
reclassify commercial paper as long-term debt. At December 31, 2001, CP&L
had reclassified $261 million of commercial paper to long-term debt. At
September 30, 2002, the exposure to changes in interest rates from CP&L's
commercial paper facilities was not materially different than at December
31, 2001.
Item 4. Controls and Procedures
------- -----------------------
Progress Energy, Inc.
Within the 90 days prior to the filing date of this report, Progress Energy
carried out an evaluation, under the supervision and with the participation
of its management, including Progress Energy's chief executive officer and
chief financial officer, of the effectiveness of the design and operation
of Progress Energy's disclosure controls and procedures pursuant to Rule
13a-14 under the Securities Exchange Act of 1934. Based upon that
evaluation, Progress Energy's chief executive officer and chief financial
officer concluded that its disclosure controls and procedures are effective
in timely alerting them to material information relating to Progress Energy
(including its consolidated subsidiaries) required to be included in its
periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in
Progress Energy's internal controls or in other factors that could
significantly affect these controls.
Carolina Power & Light Company
Within the 90 days prior to the filing date of this report, CP&L carried
out an evaluation, under the supervision and with the participation of its
management, including CP&L's chief executive officer and chief financial
officer, of the effectiveness of the design and operation of CP&L's
disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934. Based upon that evaluation, CP&L's chief
executive officer and chief financial officer concluded that its disclosure
controls and procedures are effective in timely alerting them to material
information relating to CP&L (including its consolidated subsidiaries)
required to be included in its periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in
CP&L's internal controls or in other factors that could significantly
affect these controls.
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 8 to the CP&L Consolidated Interim Financial Statements.
Strategic Resource Solutions Corp. (SRS) was charged in a criminal
complaint filed on October 9, 2002 by the San Francisco District Attorney's
50
office. Working with the San Francisco District Attorney's office, SRS has
pled guilty to two charges, taking responsibility for the misconduct of one
of its former employees. This proceeding occurred on October 15, 2002.
SRS has agreed to pay a fine of $500,000. Although SRS did not receive any
funds, because of the involvement of a former employee, SRS has accepted
corporate criminal responsibility and agreed to pay an additional $500,000
as restitution. SRS will also be placed on probation and continue
cooperating with the District Attorney's investigation and prosecution of
other defendants.
Item 2. Changes in Securities and Use of Proceeds
------- -----------------------------------------
RESTRICTED STOCK AWARDS:
(a) Securities Delivered. On September 9, 2002 and October 1, 2002, 3,600
and 180,000 restricted shares, respectively, of the Company's Common Shares
were granted to certain key employees pursuant to the terms of the
Company's 2002 Equity Incentive Plan (Plan), which was approved by the
Company's shareholders on May 8, 2002. Section 9 of the Plan provides for
the granting of Restricted Stock by the Organization and Compensation
Committee of the Company's Board of Directors, (the Committee) to key
employees of the Company, including its Affiliates or any successor, and to
outside directors of the Company. 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 employee" as an officer or other employee of the Company who
is selected for participation in the Plan.
(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
Exhibit Description Progress CP&L
Number ----------- Energy, Inc. ----
------ ------------
10(i) Amendment and Restatement dated July 26, 2002 to Progress X
Energy Inc.'s $450,000,000 3-Year Revolving Credit
Agreement dated November 13, 2001, as amended
February 13, 2002.
10(ii) Assumption Agreement from Barclays Bank PLC dated
December X 17, 2001 for an additional commitment of
$50 million, increasing the amount of the Progress
Energy, Inc. 364-Day Revolving Credit Agreement,
dated November 13, 2001, to $550 million.
10(iii) Carolina Power & Light Company $272,500,000 364-Day X
Revolving Credit Agreement dated as of July 31, 2002.
10(iv) Carolina Power & Light Company $272,500,000 3-Year X
Revolving Credit Agreement dated as of July 31, 2002.
10(v) Assumption Agreement from the Bank of New York dated August X
5, 2002 for a total commitment of $25 million, increasing
the amount of the CP&L 364-Day and 3-Year Revolving Credit
Agreements dated as of July 31, 2002, to $285,000,000 each.
51
10(vi) Progress Energy, Inc. 2002 Equity Incentive Plan (Amended X X
and Restated Effective July 10, 2002)
10(vii) 2002 Performance Share Sub-Plan (effective July 9, 2002), X X
Exhibit A to the Progress Energy, Inc. 2002 Equity
Incentive Plan
(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
5 No August 9, 2002 August 9, 2002
9 No August 13, 2002 August 13, 2002
9 No August 29, 2002 August 29, 2002
5 Yes October 16, 2002 November 6, 2002
5 No November 7, 2002 November 7, 2002
5 No November 6, 2002 November 13, 2002
Carolina Power & Light Company
Financial
Item Statements
Reported Included Date of Event Date Filed
9 No August 13, 2002 August 13, 2002
52
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROGRESS ENERGY, INC.
CAROLINA POWER & LIGHT COMPANY
Date: November 14, 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
53
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William Cavanaugh III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Progress Energy,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ William Cavanaugh III
-------------------------
William Cavanaugh III
Chairman and Chief Executive Officer
54
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter M. Scott III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Progress Energy,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Peter M. Scott III
----------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
55
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William Cavanaugh III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Carolina Power &
Light Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ William Cavanaugh III
-------------------------
William Cavanaugh III
Chairman and Chief Executive Officer
56
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter M. Scott III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Carolina Power &
Light Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Peter M. Scott III
----------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
57