UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
---------------
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
d/b/a Progress Energy Carolinas, Inc.
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 .
Indicate by check mark whether Progress Energy, Inc. is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X. No __.
Indicate by check mark whether Carolina Power & Light Company is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes __. No X .
This combined Form 10-Q is filed separately by two registrants: Progress Energy,
Inc. (Progress Energy) and Carolina Power & Light Company. 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.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of April 30, 2003, each
registrant had the following shares of common stock outstanding:
Registrant Description Shares
---------- ----------- ------
Progress Energy, Inc. Common Stock (Without Par Value) 240,800,322
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 PROGRESS ENERGY CAROLINAS, INC.
FORM 10-Q - For the Quarter Ended March 31, 2003
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
d/b/a Progress Energy Carolinas, Inc.
------------------------------------------
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
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement
Bcf Billion cubic feet
the Code Internal Revenue Service Code
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company Progress Energy, Inc. and subsidiaries
CP&L Carolina Power & Light Company, currently referred to as Progress Energy Carolinas or PEC
CR3 Progress Energy Florida's nuclear generating plant, Crystal River Unit No. 3
CVO Contingent value obligation
DIG Derivatives Implementation Group
DOE United States Department of Energy
Dt Dekatherm
DWM North Carolina Department of Environment and Natural Resources, Division of Waste
Management
EBITDA Earnings before interest, taxes, and depreciation and amortization
EITF Emerging Issues Task Force
ENCNG Eastern North Carolina Natural Gas Company, formerly referred to as Eastern NC
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FDEP Florida Department of Environment and Protection
FERC Federal Energy Regulatory Commission
FIN No. 45 FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements"
FIN No. 46 FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51"
FPC Florida Progress Corporation
FPSC Florida Public Service Commission
GAAP Accounting principles generally accepted in the United States of America
Genco Progress Genco Ventures, LLC
IRS Internal Revenue Service
Jackson Jackson Electric Membership Corp.
KWh Kilowatt-hour
MACT Maximum Available Control Technology
MGP Manufactured Gas Plant
MW Megawatt
NCNG North Carolina Natural Gas Corporation
NCUC North Carolina Utilities Commission
NOx SIP Call EPA rule which requires 23
jurisdictions including North and South
Carolina and Georgia to further reduce
nitrogen oxide emissions
NRC United States Nuclear Regulatory Commission
PCH Progress Capital Holdings, Inc.
PEC Progress Energy Carolinas, Inc., formerly referred to as Carolina Power & Light Company
PEF Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation
PES Progress Energy Solutions, formerly referred to as Strategic Resource Solutions Corp. or
SRS
PFA IRS Prefiling Agreement
the Plan Revenue Sharing Incentive Plan
PLRs Private Letter Rulings
Progress Energy Progress Energy, Inc.
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
3
PUHCA Public Utility Holding Company Act of 1935, as amended
PVI Legal entity of Progress Ventures, Inc., formerly referred to as CPL Energy Ventures, Inc.
PWR Pressurized water reactor
RAFT Railcar Asset Financing Trust
RTO Regional Transmission Organization
SCPSC Public Service Commission of South Carolina
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
Service Company Progress Energy Service Company, LLC
SFAS No. 5 Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies"
SFAS No. 71 Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation"
SFAS No. 131 Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information"
SFAS No. 133 Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and
Hedging Activities"
SFAS No. 142 Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets"
SFAS No. 143 Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations"
SFAS No. 148 Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123"
SFAS No. 149 Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities"
SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination
through Open Access Transmission and Standard Market Design
SRS Strategic Resource Solutions Corp.
the Trust FPC Capital I
4
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The matters discussed throughout this Form combined 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"
about the effects of new environmental regulations, nuclear decommissioning
costs and the effect of electric utility industry restructuring.
Any forward-looking statement speaks only as of the date on which such statement
is made, and neither Progress Energy, Inc. (Progress Energy) nor Progress Energy
Carolinas, Inc. (PEC) 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 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 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; the
ability of the Company to maintain its current credit ratings; the impact of
derivative contracts used in the normal course of business by the Company; 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 Telecommunications Corporation and Caronet, Inc.; the Company's
ability to successfully integrate newly acquired assets, properties or
businesses 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 nonregulated 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; 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 PEC SEC reports. Many, but not all of the factors that may impact
actual results are discussed in the Risk Factors sections of Progress Energy's
and PEC's annual report on Form 10-K for the year ended December 31, 2002, which
was filed with the SEC on March 21, 2003. 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 PEC. 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 PEC.
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Progress Energy, Inc.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2003
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(Unaudited) March 31,
- --------------------------------------------------------------------------------------
(In thousands except per share data) 2003 2002
- --------------------------------------------------------------------------------------
Operating Revenues
Utility $ 1,653,887 $ 1,497,923
Diversified business 362,117 289,379
- --------------------------------------------------------------------------------------
Total Operating Revenues 2,016,004 1,787,302
- --------------------------------------------------------------------------------------
Operating Expenses
Utility
Fuel used in electric generation 411,622 370,588
Purchased power 202,742 181,273
Operation and maintenance 334,313 328,438
Depreciation and amortization 220,088 211,888
Taxes other than on income 102,832 95,922
Diversified business
Cost of sales 306,941 300,525
Depreciation and amortization 28,268 27,335
Other 50,258 29,352
- --------------------------------------------------------------------------------------
Total Operating Expenses 1,657,064 1,545,321
- --------------------------------------------------------------------------------------
Operating Income 358,940 241,981
- --------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 2,767 1,952
Other, net (2,450) 6,058
- --------------------------------------------------------------------------------------
Total Other Income 317 8,010
- --------------------------------------------------------------------------------------
Income before Interest Charges and Income Taxes 359,257 249,991
- --------------------------------------------------------------------------------------
Interest Charges
Net interest charges 156,248 170,168
Allowance for borrowed funds used during construction (2,886) (3,553)
- --------------------------------------------------------------------------------------
Total Interest Charges, Net 153,362 166,615
- --------------------------------------------------------------------------------------
Income from Continuing Operations before Income Tax 205,895 83,376
Income Tax Expense (Benefit) 9,029 (40,686)
- --------------------------------------------------------------------------------------
Income from Continuing Operations 196,866 124,062
Discontinued Operations, Net of Tax 11,290 8,465
- --------------------------------------------------------------------------------------
Net Income $ 208,156 $ 132,527
- --------------------------------------------------------------------------------------
Average Common Shares Outstanding 233,438 212,979
- --------------------------------------------------------------------------------------
Basic and Fully Diluted Earnings per Common Share
Income from Continuing Operations $ 0.84 $ 0.58
Discontinued Operations, Net of Tax $ 0.05 $ 0.04
Net Income $ 0.89 $ 0.62
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Dividends Declared per Common Share $ 0.560 $ 0.545
- --------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
6
Progress Energy, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share data) March 31, December 31,
Assets 2003 2002
- -------------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 20,803,671 $ 20,152,787
Accumulated depreciation (9,866,434) (10,480,880)
- -------------------------------------------------------------------------------------------------------------
Utility plant in service, net 10,937,237 9,671,907
Held for future use 15,109 15,109
Construction work in progress 826,674 752,336
Nuclear fuel, net of amortization 254,771 216,882
- -------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 12,033,791 10,656,234
- -------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 35,487 61,358
Accounts receivable 780,655 737,369
Unbilled accounts receivable 187,451 225,011
Inventory 844,919 875,485
Deferred fuel cost 229,522 183,518
Assets of discontinued operations 494,485 490,429
Prepayments and other current assets 255,233 283,036
- -------------------------------------------------------------------------------------------------------------
Total Current Assets 2,827,752 2,856,206
- -------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 658,828 393,215
Nuclear decommissioning trust funds 788,766 796,844
Diversified business property, net 2,074,373 1,884,271
Miscellaneous other property and investments 472,642 463,776
Goodwill 3,719,327 3,719,327
Prepaid pension costs 58,669 60,169
Other assets and deferred debits 538,744 522,662
- -------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 8,311,349 7,840,264
- -------------------------------------------------------------------------------------------------------------
Total Assets $ 23,172,892 $ 21,352,704
- -------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- -------------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value, 500,000,000 shares authorized,
239,816,121 and 237,992,513 shares issued and outstanding,
respectively $ 5,007,203 $ 4,929,104
Unearned ESOP common stock (90,890) (101,560)
Accumulated other comprehensive loss (238,290) (237,762)
Retained earnings 2,163,431 2,087,227
- -------------------------------------------------------------------------------------------------------------
Total Common Stock Equity 6,841,454 6,677,009
- -------------------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption 92,831 92,831
Long-Term Debt 9,597,948 9,747,293
- -------------------------------------------------------------------------------------------------------------
Total Capitalization 16,532,233 16,517,133
- -------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 880,164 275,397
Accounts payable 718,814 756,287
Interest accrued 162,817 220,400
Dividends declared 133,475 132,232
Short-term obligations 489,675 694,850
Customer deposits 159,780 158,214
Liabilities of discontinued operations 117,471 124,767
Other current liabilities 368,474 372,161
- -------------------------------------------------------------------------------------------------------------
Total Current Liabilities 3,030,670 2,734,308
- -------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 901,258 932,813
Accumulated deferred investment tax credits 202,160 206,221
Regulatory liabilities 451,769 119,766
Asset retirement obligations 1,209,587 -
Other liabilities and deferred credits 845,215 842,463
- -------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 3,609,989 2,101,263
- -------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 15)
- -------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 23,172,892 $ 21,352,704
- -------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
7
Progress Energy, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended
(Unaudited) March 31,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 208,156 $ 132,527
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations (11,290) (8,466)
Depreciation and amortization 281,380 271,029
Deferred income taxes (2,608) 12,194
Investment tax credit (4,061) (5,435)
Deferred fuel cost (credit) (46,004) 49,442
Net increase in accounts receivable (14,982) (16,082)
Net (increase) decrease in inventories 29,831 (33,766)
Net (increase) decrease in prepayments and other current assets 10,184 (10,137)
Net increase (decrease) in accounts payable 42,621 (71,494)
Net decrease in accrued interest (57,311) (64,004)
Net decrease in other current liabilities (16,776) (24,053)
Other 14,256 28,113
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 433,396 259,868
- -------------------------------------------------------------------------------------------------------------------------
Investing Activities
Gross utility property additions (291,318) (253,739)
Diversified business property additions and acquisitions (222,626) (495,144)
Nuclear fuel additions (67,954) (33,386)
Net contributions to nuclear decommissioning trust (10,262) (12,226)
Investments in non-utility activities (3,383) (6,088)
Other 3,369 (100,313)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (592,174) (900,896)
- -------------------------------------------------------------------------------------------------------------------------
Financing Activities
Issuance of common stock, net 73,901 -
Purchase of restricted shares (6,560) (5,393)
Issuance of long-term debt, net 655,136 152,660
Net increase (decrease) in short-term indebtedness (205,175) 892,302
Net decrease in cash provided by checks drawn in excess of bank balances (36,847) (40,046)
Retirement of long-term debt (225,608) (104,533)
Dividends paid on common stock (133,286) (119,206)
Other 11,240 68,597
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 132,801 844,381
- -------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used in) Discontinued Operations 106 (542)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (25,871) 202,811
Cash and Cash Equivalents at Beginning of the Period 61,358 53,708
- -------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 35,487 $ 256,519
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 209,194 $ 231,067
income taxes (net of refunds) $ 3,345 $ 4,334
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
8
Progress Energy, Inc.
SUPPLEMENTAL DATA SCHEDULE Three Months Ended
March 31,
(Unaudited) 2003 2002
- ------------------------------------------------------------------------------------------
Operating Revenues (in thousands)
Utility
Retail $ 1,344,132 $ 1,260,810
Wholesale 280,723 194,945
Unbilled (31,673) (3,259)
Miscellaneous revenue 60,705 45,427
- ----------------------------------------------------------------------------------------
Total Utility 1,653,887 1,497,923
Diversified business 362,117 289,379
- ----------------------------------------------------------------------------------------
Total Operating Revenues $ 2,016,004 $ 1,787,302
- ----------------------------------------------------------------------------------------
Energy Sales - Utility
Utility (millions of kWh)
Retail
Residential 9,140 8,045
Commercial 5,425 5,246
Industrial 3,921 3,869
Other retail 999 946
- ----------------------------------------------------------------------------------------
Total Retail 19,485 18,106
Wholesale 5,895 4,311
Unbilled (425) (156)
- ----------------------------------------------------------------------------------------
Total Utility 24,955 22,261
- ----------------------------------------------------------------------------------------
Energy Supply - Utility (millions of kWh)
Generated - Steam 12,982 11,414
Nuclear 7,612 7,228
Hydro 254 139
Combustion turbines 1,732 1,585
Purchased 3,446 2,993
- ----------------------------------------------------------------------------------------
Total Energy Supply - (Company Share) 26,026 23,359
- ----------------------------------------------------------------------------------------
Detail of Income Taxes (in thousands)
Income tax expense (credit) - Current $ 15,698 $ (47,445)
Deferred (2,608) 12,194
Investment tax credit (4,061) (5,435)
- ----------------------------------------------------------------------------------------
Total Income Tax Expense (Benefit) $ 9,029 $ (40,686)
- ----------------------------------------------------------------------------------------
9
Progress Energy, Inc.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
A. Organization
Progress Energy, Inc. (Progress Energy or the Company) is a registered
holding company under the Public Utility Holding Company Act of 1935
(PUHCA), as amended. Both the Company and its subsidiaries are subject to
the regulatory provisions of PUHCA. Effective January 1, 2003, Carolina
Power & Light Company, Florida Power Corporation and Progress Ventures,
Inc. (PVI) began doing business under the names Progress Energy Carolinas,
Inc., Progress Energy Florida, Inc. and Progress Energy Ventures, Inc.,
respectively. The legal names of these entities have not changed, and there
was no restructuring of any kind related to the name change. The current
corporate and business unit structure remains unchanged.
Through its wholly owned subsidiaries, Progress Energy Carolinas, Inc.
(PEC) and Progress Energy Florida, Inc. (PEF), the Company is engaged in
the generation, purchase, transmission, distribution and sale of
electricity primarily in portions of North Carolina, South Carolina and
Florida. The Progress Ventures business unit consists of the Fuels and
Competitive Commercial Operations (CCO) operating segments. The Fuels
operating segment includes natural gas drilling and production, coal mining
and synthetic fuels production. The CCO operating segment includes
nonregulated generation and energy marketing and limited trading
activities. Through other business units, the Company engages in other
nonregulated 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 unit. Whether, and
when, the legal and functional structures will converge depends upon
legislative and regulatory action, which cannot currently be anticipated.
B. Basis of Presentation
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) 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 GAAP for complete financial statements. Because the
accompanying consolidated interim financial statements do not include all
of the information and footnotes required by GAAP, they should be read in
conjunction with the audited financial statements for the period ended
December 31, 2002 and notes thereto included in Progress Energy's Form 10-K
for the year ended December 31, 2002.
The amounts included in the consolidated interim financial statements are
unaudited but, in the opinion of management, reflect all adjustments
necessary to fairly present the Company's financial position and results of
operations for the interim periods. Due to seasonal weather variations and
the timing of outages of electric generating units, especially
nuclear-fueled units, the results of operations for interim periods are not
necessarily indicative of amounts expected for the entire year. Certain
amounts for 2002 have been reclassified to conform to the 2003
presentation.
In preparing financial statements that conform with GAAP, 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
A. Acquisition of Natural Gas Reserves
During the first quarter of 2003, Progress Fuels Corporation, a wholly
owned subsidiary of Progress Energy, entered into three independent
transactions to acquire approximately 162 natural gas-producing wells with
proven reserves of approximately 195 billion cubic feet (Bcf) from Republic
Energy, Inc. and two other privately-owned companies, all headquartered in
Texas. The primary assets in the acquisition have been contributed to
10
Progress Fuels North Texas Gas, L.P., a wholly owned subsidiary of Progress
Fuels Corporation. The total cash purchase price for the transactions was
$148 million.
B. Wholesale Energy Contract Acquisition
On March 20, 2003, PVI entered into a definitive agreement with Williams
Energy Marketing and Trading, a subsidiary of The Williams Companies, Inc.,
to acquire a long-term full-requirements power supply agreement at fixed
prices with Jackson Electric Membership Corp. (Jackson), located in
Jefferson, Georgia. The agreement calls for a $188 million cash payment to
Williams Energy Marketing and Trading in exchange for assignment of the
Jackson supply agreement. The power supply agreement terminates in 2015,
with a first refusal option to extend for five years. The agreement
includes the use of 640 megawatts (MW) of contracted Georgia System
generation comprised of nuclear, coal, gas and pumped-storage hydro
resources. PVI expects to supplement the acquired resources with its own
intermediate and peaking assets in Georgia to serve Jackson's forecasted
1,100 MW peak demand in 2005 growing to a forecasted 1,700 MW demand by
2015. The transaction is expected to close in the second quarter of 2003,
subject to customary closing conditions.
3. DIVESTITURES
A. NCNG Divestiture
On October 16, 2002, the Company announced the Board of Directors' approval
to sell North Carolina Natural Gas Corporation (NCNG) and the Company's
equity investment in Eastern North Carolina Natural Gas Company (ENCNG) to
Piedmont Natural Gas Company, Inc., for approximately $400 million in net
proceeds. The sale is expected to close during the summer of 2003 and must
be approved by the NCUC and federal regulatory agencies.
The accompanying consolidated interim financial statements have been
restated for all periods presented for the discontinued operations of NCNG.
The net income of these operations is reported as discontinued operations
in the Consolidated Statements of Income. Interest expense of $3.7 million
and $4.0 million for the three months ended March 31, 2003 and 2002,
respectively, has been allocated to discontinued operations based on the
net assets of NCNG, assuming a uniform debt-to-equity ratio across the
Company's operations. The Company ceased recording depreciation upon
classification of the assets as discontinued operations. After-tax
depreciation expense recorded by NCNG during the first quarter of 2002 was
$2.9 million. The asset group, including goodwill, has been recorded at
fair value less cost to sell, resulting in an estimated loss on disposal of
approximately $29.4 million, which was recorded in the fourth quarter of
2002 until the disposition is complete and the actual loss can be
determined. Results of discontinued operations for the three months ended
March 31, were as follows:
(in thousands) 2003 2002
---------------- ---------------
Revenues $ 154,226 $ 86,115
================ ===============
Earnings before income taxes $ 18,483 $ 14,035
Income tax expense 7,193 5,570
---------------- ---------------
Net earnings from discontinued operations $ 11,290 $ 8,465
================ ===============
The major balance sheet classes included in assets and liabilities of
discontinued operations in the Consolidated Balance Sheets are as follows:
March 31, December 31,
(in thousands) 2003 2002
--------------- ----------------
Utility plant, net $ 401,035 $ 398,931
Current assets 75,338 72,821
Deferred debits and other assets 18,112 18,677
--------------- ----------------
Assets of discontinued operations $ 494,485 $ 490,429
=============== ================
Current liabilities $ 68,185 $ 76,372
Deferred credits and other liabilities 49,286 48,395
--------------- ----------------
Liabilities of discontinued operations $ 117,471 $ 124,767
=============== ================
The Company's equity investment in ENCNG of $7.7 million as of March 31,
2003 and December 31, 2002 is included in miscellaneous other property and
investments in the Consolidated Balance Sheets.
11
B. Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a
resolution to sell the assets of Railcar Ltd., a leasing subsidiary
included in the Rail Services segment. A series of sales transactions is
expected to take place throughout 2003. An estimated impairment on assets
held for sale was recognized in December 2002 for the write-down of the
assets to be sold to fair value less the costs to sell.
The assets of Railcar Ltd. have been grouped as assets held for sale and
are included in other current assets on the Consolidated Balance Sheets as
of March 31, 2003. The assets are recorded at $23.8 million and $23.6
million as of March 31, 2003 and December 31, 2002, respectively.
On March 12, 2003, the Company signed a letter of intent to sell the
majority of Railcar Ltd. assets to The Andersons, Inc. The majority of the
proceeds from the sale will be used by the Company to pay off certain
Railcar Ltd. off balance sheet lease obligations for railcars that will be
transferred to The Andersons, Inc. as part of the sales transaction. The
transaction is subject to various closing conditions including financing,
due diligence and the completion of a definitive purchase agreement.
4. FIANANCIAL INFORMATION BY BUSINESS SEGMENT
The Company currently has the following business segments: Progress Energy
Carolinas Electric (PEC Electric), Progress Energy Florida (PEF), Fuels,
Competitive Commercial Operations (CCO), Rail Services (Rail) and Other
Businesses (Other). Prior to 2003, Fuels and CCO were reported together as
the Progress Ventures business segment and corporate costs were included in
the Other segment. These reportable segment changes reflect the current
management structure. Additionally, earnings from wholesale customers of
the regulated plants have previously been reported in both the regulated
utilities' results and the results of Progress Ventures. With the
realignment of the reportable business segments, these results are now
included in each of the respective regulated utilities' results only. The
prior period has been restated to reflect these changes.
The PEC Electric and PEF segments are engaged in the generation, purchase,
transmission, distribution and sale of electric energy primarily in
portions of North Carolina, South Carolina and Florida. These electric
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC), the North Carolina Utility Commission (NCUC),
the Public Service Commission of South Carolina (SCPSC), the Florida Public
Service Commission (FPSC) and the U.S. Nuclear Regulatory Commission (NRC).
Fuels' operations include natural gas drilling and production, coal mining
and terminals and synthetic fuels production.
CCO operations include nonregulated electric generation operations and
energy marketing and limited trading activities on behalf of its
nonregulated plants. The increase in revenue and income from continuing
operations in 2003 is primarily due to a tolling agreement termination
payment from Dynegy.
Rail 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 and right-of-way maintenance.
The Other segment primarily includes the operations of Progress
Telecommunications Corporation (Progress Telecom) and nonregulated
subsidiaries that do not meet the disclosure requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
The Company's corporate operations include the operations of the holding
company, the Progress Energy Service Company, LLC (Service Company) and
intercompany elimination transactions. The operating business segments
combined with the corporate operations represent the total continuing
operations of the Company. In prior periods, Corporate was reported as a
component of the Other segment.
The discontinued operations related to the sale of NCNG are not included as
an operating segment.
12
The following summarizes the revenues, income from continuing operations
and assets for the business segments, corporate and total Progress Energy.
The 2002 information has been restated to align with the 2003 segment
structure.
Revenues
-----------------------------------------------
Income
from
Continuing
(in thousands) Unaffiliated Intersegment Total Operations Assets
------------ --------------- ---------------- ------------ -------------
FOR THE THREE MONTHS ENDED
MARCH 31, 2003
PEC Electric $ 925,470 $ - $ 925,470 $ 134,577 $ 9,616,357
PEF 728,417 - 728,417 70,757 5,716,828
Fuels 129,874 117,396 247,270 26,565 1,151,361
CCO 37,152 - 37,152 8,526 1,504,197
Rail 177,687 122 177,809 (3,396) 504,533
Other 17,352 - 17,352 335 50,091
Corporate 52 (117,518) (117,466) (40,498) 4,135,040
------------ --------------- ---------------- ------------ -------------
Consolidated totals $ 2,016,004 $ 0 $ 2,016,004 $ 196,866 $ 22,678,407
------------ --------------- ---------------- ------------ -------------
FOR THE THREE MONTHS ENDED
MARCH 31, 2002
PEC Electric $ 811,482 $ - $ 811,482 $ 85,533 $ 9,092,069
PEF 686,441 - 686,441 57,743 5,039,094
Fuels 102,312 133,976 236,288 41,596 743,686
CCO 9,046 - 9,046 (2,112) 1,157,066
Rail 154,469 496 154,965 (701) 596,765
Other 23,552 - 23,552 (4,938) 618,796
Corporate - (134,472) (134,472) (53,059) 3,858,691
------------ --------------- ---------------- ------------ -------------
Consolidated totals $ 1,787,302 $ 0 $ 1,787,302 $ 124,062 $ 21,106,167
------------ --------------- ---------------- ------------ -------------
5. IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 148, "Accounting for Stock-Based Compensation"
For purposes of Company's stock the pro forma disclosures required by SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123," the estimated fair
value of the Company's stock options is amortized to expense over the
options' vesting period. The Company's information related to the pro forma
impact on earnings and earnings per share assuming stock options were
expensed for the three months ended March 31 is as follows:
(in thousands except per share data) 2003 2002
---------------- ---------------
Net income, as reported $ 208,156 $ 132,527
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 2,579 1,792
---------------- ---------------
Pro forma net income $ 205,577 $ 130,735
================ ===============
Basic and fully diluted earnings per share
As reported $0.89 $0.62
Pro forma $0.88 $0.61
In April 2003, the Financial Accounting Standards Board (FASB) approved
certain decisions on its stock-based compensation project. Some of the key
decisions reached by the FASB were that stock-based compensation should be
recognized in the income statement as an expense and that the expense
should be measured as of the grant date at fair value. A significant issue
yet to be addressed by the FASB is the determination of the appropriate
fair value measure. The FASB has not yet scheduled when it will deliberate
additional issues in this project; however, the FASB plans to issue an
exposure draft in 2003 that could become effective in 2004.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities"
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies SFAS No. 133 on accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The new guidance incorporates decisions made as part of the
Derivatives Implementation Group (DIG) process, as well as decisions
13
regarding implementation issues raised in relation to the application of
the definition of a derivative. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003. The Company is
currently evaluating what effects, if any, this statement will have on its
results of operations and financial position.
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others"
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others - an Interpretation of FASB Statements
No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34" (FIN No.
45). This interpretation clarifies the disclosures to be made by a
guarantor in its interim and annual financial statements about obligations
under certain guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of certain guarantees,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of
this interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The applicable disclosures
required by FIN No. 45 have been made in Notes 12 and 15. The adoption of
FIN No. 45 did not have a material effect on the Company's results of
operations or financial condition.
FIN No. 46, "Consolidation of Variable Interest Entities"
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46).
This interpretation provides guidance related to identifying variable
interest entities (previously known as special purpose entities or SPEs)
and determining whether such entities should be consolidated. Certain
disclosures are required if it is reasonably possible that a company will
consolidate or disclose information about a variable interest entity when
it initially applies FIN No. 46. This interpretation must be applied
immediately to variable interest entities created or obtained after January
31, 2003. During the first quarter of 2003, the Company did not participate
in the creation of, or obtain a new variable interest in, any variable
interest entity. For those variable interest entities created or obtained
on or before January 31, 2003, the Company must apply the provisions of FIN
No. 46 in the third quarter of 2003.
The Company is currently evaluating what effects, if any, this
interpretation will have on its results of operations and financial
position. During this evaluation process, several arrangements through its
Railcar Ltd. subsidiary have been identified to which this interpretation
may apply. These arrangements include an agreement with Railcar Asset
Financing Trust (RAFT), a receivables securitization trust, and seven
synthetic leases. Because the Company expects to sell the majority of
Railcar Ltd. during 2003 (See Note 3B) and divest of its interests in these
arrangements, the application of FIN No. 46 is not expected to have a
material impact with respect to these arrangements. If these interests are
not divested as currently planned, the maximum cash obligations under these
arrangements total approximately $54.3 million. However, management
believes the maximum cash obligations would be significantly reduced based
on the current fair values of the underlying assets related to these
arrangements.
6. ASSET RETIREMENT OBLIGATIONS
SFAS No. 143, "Accounting for Asset Retirement Obligations," provides
accounting and disclosure requirements for retirement obligations
associated with long-lived assets and was adopted by the Company 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 liability.
Cumulative accretion and accumulated depreciation were recognized for the
time period from the date the liability would have been recognized had the
provisions of this statement been in effect, to the date of adoption of
this statement. For assets acquired through acquisition, the cumulative
effect was based on the acquisition date.
Upon adoption of SFAS No. 143, the Company recorded asset retirement
obligations (AROs) totaling $1,182.5 million for nuclear decommissioning of
radiated plant at PEC and PEF. The Company used an expected cash flow
approach to measure these obligations. This amount includes accruals
recorded prior to adoption totaling $775.2 million, which were previously
recorded in accumulated depreciation. The related asset retirement costs,
net of accumulated depreciation, recorded upon adoption totaled $367.5
million for regulated operations. The adoption of this statement had no
impact on the income of the regulated entities, as the effects were offset
by the establishment of a regulatory asset and a regulatory liability
pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation." A regulatory asset was recorded related to PEC in the amount
of $271.1 million, representing the cumulative accretion and accumulated
depreciation for the time period from the date the liability would have
been recognized had the provisions of this statement been in effect to the
15
date of adoption, less amounts previously recorded. A regulatory liability
was recorded related to PEF in the amount of $231.3 million, representing
the amount by which previously recorded accruals exceeded the cumulative
accretion and accumulated depreciation for the time period from the date
the liability would have been recognized had the provisions of this
statement been in effect at the date of the acquisition of the assets by
Progress Energy to the date of adoption.
Funds set aside in the Company's nuclear decommissioning trust fund for the
nuclear decommissioning liability totaled $788.8 million at March 31, 2003
and $796.8 million at December 31, 2002.
The Company also recorded AROs totaling $10.3 million for synthetic fuel
operations of PVI and coal mine operations, synthetic fuel operations and
gas production of Progress Fuels Corporation. The Company used an expected
cash flow approach to measure these obligations. This amount includes
accruals recorded prior to adoption totaling $4.6 million, which was
previously recorded in other liabilities and deferred credits. The related
asset retirement costs, net of accumulated depreciation, recorded upon
adoption totaled $7.0 million for nonregulated operations. The cumulative
effect of initial adoption of this statement related to nonregulated
operations was $1.3 million of pre-tax income. The ongoing impact on
earnings related to accretion and depreciation was not significant for the
three months ended March 31, 2003.
Pro forma net income has not been presented for prior years because the pro
forma application of SFAS No. 143 to prior years would result in pro forma
net income not materially different from the actual amounts reported.
The Company has identified but not recognized AROs related to electric
transmission and distribution, gas distribution and telecommunications
assets as the result of easements over property not owned by the Company.
These easements are generally perpetual and only require retirement action
upon abandonment or cessation of use of the property for the specified
purpose. The ARO liability is not estimable for such easements as the
Company intends to utilize these properties indefinitely. In the event the
Company decides to abandon or cease the use of a particular easement, an
ARO liability would be recorded at that time.
The utilities have previously recognized removal costs as a component of
depreciation in accordance with regulatory treatment. As of March 31, 2003,
the portion of such costs not representing AROs under SFAS No. 143 was
$893.2 million for PEC, $931.4 million for PEF and $38.3 million for NCNG.
The amounts for PEC and PEF are included in accumulated depreciation on the
accompanying Consolidated Balance Sheets. The amount for NCNG is included
as an offset to assets of discontinued operations on the accompanying
Consolidated Balance Sheets. PEC and PEF have collected amounts for
non-radiated areas at nuclear facilities, which do not represent asset
retirement obligations. The amounts at March 31, 2003 were $63.8 million
for PEC and $61.5 million for PEF, which are included in accumulated
depreciation on the accompanying Consolidated Balance Sheets. PEF
previously collected amounts for dismantlement of its fossil generation
plants. As of March 31, 2003, this amounted to $142.0 million, which is
included in accumulated depreciation on the accompanying Consolidated
Balance Sheets. This collection was suspended pursuant to the rate case
settlement discussed in Note 13A.
PEC filed a request with the NCUC requesting deferral of the difference
between expense pursuant to SFAS No. 143 and expense as previously
determined by the NCUC. The NCUC granted the deferral of the January 1,
2003 cumulative adjustment, but denied the deferral of the ongoing effects,
citing a lack of information concerning the ongoing effects that would
support the granting of such a deferral. The Company is in the process of
providing additional information to the NCUC that it believes will
demonstrate that deferral of the ongoing effects should also be allowed.
Accordingly, for the quarter ended March 31, 2003, PEC deferred the ongoing
effects. If PEC had not deferred the ongoing effects, pre-tax income for
the quarter would have increased by approximately $5.7 million, which
represents a decrease in non-ARO cost of removal expense, partially offset
by an increase in decommissioning expense.
On April 8, 2003, the SCPSC approved a joint request by PEC, Duke Energy
and South Carolina Electric and Gas Company for an accounting order to
authorize the deferral of all cumulative and prospective effects related to
the adoption of SFAS No. 143.
On January 23, 2003, the Staff of the FPSC issued a notice of proposed rule
development to adopt provisions relating to accounting for asset retirement
obligations under SFAS No. 143. Accompanying the notice was a draft rule
presented by the Staff which adopts the provisions of SFAS No. 143 along
with the requirement to record the difference between amounts prescribed by
15
the FPSC and those used in the application of SFAS No. 143 as regulatory
assets or regulatory liabilities, which was accepted by all parties. The
adoption and acceptance of this draft rule is subject to FPSC approval.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
SFAS No. 142, "Goodwill and Other Intangible Assets," requires that
goodwill be tested for impairment at least annually and more frequently
when indicators of impairment exist. SFAS No. 142 requires a two-step fair
value-based test. The first step, used to identify potential impairment,
compares the fair value of the reporting unit with its carrying amount,
including goodwill. The second step, used to measure the amount of the
impairment loss if step one indicates a potential impairment, compares the
implied fair value of the reporting unit goodwill with the carrying amount
of the goodwill. This assessment could result in periodic impairment
charges.
During 2002, the Company completed the acquisition of two electric
generating projects, Walton County Power, LLC and Washington County Power,
LLC. The acquisition resulted in goodwill of $64.1 million. The Company
performed the annual goodwill impairment test in the first quarter of 2003,
which indicated no impairment.
During 2002, the Company also acquired Westchester Gas Company. The
purchase price was finalized during the first quarter 2003 with all of the
purchase price allocated to fixed assets including oil and gas properties.
No goodwill was recorded.
The carrying amounts of goodwill at March 31, 2003, by reportable segment,
are $1.9 billion, $1.7 billion, and $64.1 million for PEC Electric, PEF and
CCO, respectively.
The gross carrying amount and accumulated amortization of the Company's
intangible assets as of March 31, 2003 and December 31, 2002 are as
follows:
March 31, 2003 December 31, 2002
------------------------------------------- ------------------------------------------
(in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------------- --------------------- --------------------- --------------------
Synthetic fuel intangibles $ 140,469 $ (49,953) $ 140,469 $ (45,189)
Power sale agreements 33,000 (7,265) 33,000 (5,593)
Other 42,005 (8,531) 40,968 (7,792)
--------------------- --------------------- --------------------- --------------------
Total $ 215,474 $ (65,749) $ 214,437 $ (58,574)
--------------------- --------------------- --------------------- --------------------
All of the Company's intangibles are subject to amortization. Synthetic
fuel intangibles represent intangibles for synthetic fuel technology. These
intangibles are being amortized on a straight-line basis until the
expiration of tax credits under Section 29 of the Internal Revenue Service
Code (the Code) in December 2007. The power sale agreements were recorded
as part of the acquisition of generating assets from LG&E Energy Corp. and
are amortized on a straight-line basis beginning with the in-service date
of these plants through December 31, 2004. Other intangibles are primarily
customer contracts and permits that are amortized over their respective
lives.
Net intangible assets are included in other assets and deferred debits in
the accompanying Consolidated Balance Sheets. Amortization expense recorded
on intangible assets for the three months ended March 31, 2003 and 2002,
respectively, was $7.2 million and $8.1 million. The estimated amortization
expense for intangible assets for 2003 through 2007, in millions, is
approximately $33.5, $36.5, $20.3, $19.8 and $19.8, respectively.
8. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2003 and 2002 was
$207.6 million and $136.8 million, respectively. Items of other
comprehensive income for the three month periods consisted primarily of
changes in the fair value of derivatives used to hedge cash flows related
to interest on long-term debt and gas sales.
9. FINANCING ACTIVITIES
On February 21, 2003, PEF issued $425 million of First Mortgage Bonds,
4.80% Series, Due March 1, 2013 and $225 million of First Mortgage Bonds,
5.90% Series, Due March 1, 2033.
On March 1, 2003, $70 million of PEF First Mortgage Bonds, 6.125% Series,
matured and were retired.
16
On March 24, 2003, PEF redeemed $150 million of First Mortgage Bonds, 8%
Series, Due December 1, 2022 at 103.75% of the principal amount of such
bonds.
On April 1, 2003, PEF entered into a new $200 million 364-day credit
agreement and a new $200 million three-year credit agreement, replacing its
prior credit facilities (which had been a $90 million 364-day facility and
a $200 million five-year facility). The new PEF credit facilities contain a
defined maximum total debt to total capital ratio of 65%; as of March 31,
2003 the calculated ratio was 50.9%. The new credit facilities also contain
a requirement that the ratio of EBITDA, as defined in the facilities, to
interest expense to be at least 3 to 1; as of March 31, 2003 the calculated
ratio was 8.7 to 1.
Also on April 1, 2003, PEC reduced the size of its existing 364-day credit
facility from $285 million to $165 million. The other terms of this
facility were not changed. PEC's $285 million three-year credit agreement
entered into in July 2002 remains in place, for total facilities of $450
million.
On April 25, 2003, PEC announced the redemption of $150 million of First
Mortgage Bonds, 7.5% Series, Due March 1, 2023 at 103.22% of the principal
amount of such bonds. The date of the redemption will be May 27, 2003; PEC
will fund the redemption through commercial paper.
In March 2003, Progress Genco Ventures, LLC (Genco), a wholly owned
subsidiary of PVI, terminated its $50 million working capital credit
facility. The remaining $260 million of Genco's credit facility was not
changed.
The Company issued approximately 1.8 million shares representing
approximately $74 million in proceeds from its Dividend Reinvestment and
Stock Purchase Plan and its employee benefit plans during the three months
ended March 31, 2003.
10. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
Progress Energy and its subsidiaries are exposed to various risks related
to changes in market conditions. The Company has a risk management
committee that is chaired by the Chief Financial Officer and includes
senior executives from various business groups. The risk management
committee is responsible for administering risk management policies and
monitoring compliance with those policies by all subsidiaries.
The Company manages its market risk in accordance with its established risk
management policies, which may include entering into various derivative
transactions.
Progress Energy uses interest rate derivative instruments to adjust the
fixed and variable rate debt components of its debt portfolio and to hedge
interest rates with regard to future fixed rate debt issuances. Treasury
rate lock agreements were terminated in conjunction with the pricing of the
PEF First Mortgage Bonds in February 2003. The loss on the agreements was
deferred and is being amortized over the life of the bonds as these
agreements had been designated as cash flow hedges for accounting purposes.
Progress Energy currently has $950 million of fixed rate debt swapped to
floating rate debt by executing interest rate derivative agreements. Under
terms of these swap rate agreements, Progress Energy will receive a fixed
rate and will pay a floating rate based on 3-month LIBOR. These agreements
expire in March of 2006, April 2007 and October 2008.
In March and April of 2003, PEC entered into treasury rate locks to hedge
its exposure to interest rates with regard to a future issuance of debt.
These agreements have a computational period of ten years and are
designated as cash flow hedges for accounting purposes. The agreements have
a total notional amount of $35 million.
Progress Fuels Corporation periodically enters into derivative instruments
to hedge its exposure to price fluctuations on natural gas sales. As of
March 31, 2003, Progress Fuels Corporation had approximately 22.6 Bcf of
cash flow hedges in place for its natural gas production. These positions
span the remainder of 2003 and extend through December 2004. These
instruments did not have a material impact on the Company's consolidated
financial position or results of operations.
Genco has a series of interest rate collars to hedge floating rate exposure
associated with the construction credit facility. These collars hedge 75%
of the drawn facility balance through March of 2007.
17
The notional amounts of the above contracts are not exchanged and do not
represent exposure to credit loss. In the event of default by a
counterparty, the risk in the transaction is the cost of replacing the
agreements at current market rates. Progress Energy only enters into
derivative agreements with banks with credit ratings of single A or better.
In connection with the January 2003 FASB Emerging Issues Task Force (EITF)
meeting, the FASB was requested to reconsider an interpretation of SFAS No.
133. The interpretation, which is contained in the Derivatives
Implementation Group's C11 guidance, relates to the pricing of contracts
that include broad market indices (e.g., CPI). In particular, that guidance
discusses whether the pricing in a contract that contains broad market
indices could qualify as a normal purchase or sale (the normal purchase or
sale term in a defined accounting term, and may not, in all cases, indicate
whether the contract would be "normal" from an operating entity viewpoint).
In April 2003, the FASB issued tentative superceding guidance (DIG Issue
C20) on this issue that is expected to be finalized in the second or third
quarter of 2003.
PEC has determined that it has one existing "normal" contract that could be
affected by this revised guidance, and PEC is in the process of evaluating
the revised guidance to determine if that contract will be required to be
recorded at fair value if the revised guidance is approved in its present
form.
11. EARNINGS PER COMMON SHARE
Restricted stock awards and stock options did not have a significant
dilutive effect on earnings per share.
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
March 31, March 31,
2003 2002
-------------- ------------
Weighted-average common shares - basic 233,438 212,979
Restricted stock awards 931 646
Stock options - 119
-------------- ------------
Weighted-average shares - fully dilutive 234,369 213,744
-------------- ------------
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.
18
These Preferred Securities are classified as long-term debt on the
Company's Consolidated Balance Sheets.
13. REGULATORY MATTERS
A. Retail Rate Matters
In conjunction with the acquisition of NCNG, PEC agreed to cap base retail
electric rates in North Carolina and South Carolina through December 2004.
The cap on base retail electric rates in South Carolina was extended to
December 2005 in conjunction with regulatory approval to form a holding
company. NCNG also agreed to cap its North Carolina margin rates for gas
sales and transportation services, with limited exceptions, through
November 1, 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 $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. NCNG filed a general rate case with the NCUC on March 31,
2003. NCNG anticipates that new rates, if approved, will go into effect in
November 2003, after the terms of the joint stipulation agreement expire.
On March 27, 2002, the parties in PEF'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 provides that PEF will operate under a Revenue Sharing Incentive
Plan (the Plan) through 2005 and thereafter until terminated by the FPSC.
The Plan establishes annual revenue caps and sharing thresholds. The Plan
provides that all retail base revenues between an established threshold and
cap will be shared - a 2/3 share to be refunded to PEF's retail customers,
and a 1/3 share to be received by PEF's shareholders. All retail base rate
revenues above the retail base rate revenue caps established for each year
will be refunded 100% to retail customers on an annual basis. For 2002, the
refund to customers was limited to 67.1% of the retail base rate revenues
that exceeded the 2002 cap. The retail base rate revenue sharing threshold
amounts for 2003 are $1.333 billion and will increase $37 million each year
thereafter. The retail base revenue cap for 2003 is $1.393 billion and will
increase $37 million each year thereafter. As of December 31, 2002, $4.7
million was accrued and was refunded to customers in March 2003. On
February 24, 2003, the parties to the Agreement filed a motion seeking an
order from the FPSC to enforce the Agreement. In this motion, the parties
dispute PEF's calculation of retail revenue subject to refund and contend
that the refund should be approximately $23 million. This issue will be
addressed by the FPSC in the near future. PEF cannot predict the outcome of
this matter.
On March 4, 2003, the FPSC approved PEF's petition to increase its fuel
factors due to continuing increases in oil and natural gas commodity
prices. The crisis in the Middle East along with the Venezuelan oil
workers' strike have put upward pressure on commodity prices that was not
anticipated by PEF when fuel factors for 2003 were approved by the FPSC in
November 2002. New rates became effective on March 28, 2003.
B. Regional Transmission Organizations
In early 2000, the FERC issued Order 2000 regarding regional transmission
organizations (RTOs). This Order set minimum characteristics and functions
that RTOs must meet, including independent transmission service. As a
result of Order 2000, PEF, along with Florida Power & Light Company and
Tampa Electric Company, filed with the FERC, in October 2000, an
application for approval of a GridFlorida RTO. In March 2001, the FERC
issued an order provisionally approving GridFlorida. PEC, along with Duke
Energy Corporation and South Carolina Electric & Gas Company, filed with
the FERC, for approval of a GridSouth RTO. On July 12, 2001, the FERC
issued an order provisionally approving GridSouth. However, in July 2001,
FERC issued orders recommending that companies in the Southeast engage in a
mediation to develop a plan for a single RTO for the Southeast. PEF and PEC
participated in the mediation. The FERC has not issued an order
specifically on this mediation. In July 2002, the 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). 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. PEF and
PEC, as subsidiaries of Progress Energy, filed comments on November 15,
2002 and supplement comments on January 10, 2003. On April 28, 2003, the
FERC released a White Paper on the Wholesale Market Platform. The White
Paper provides an overview of what the FERC currently intends to include in
a final rule in the SMD NOPR docket. The White Paper retains the
fundamental and most protested aspects of SMD NOPR, including mandatory
19
RTOs and the FERC's assertion of jurisdiction over certain aspects of
retail service. PEF and PEC, as subsidiaries of Progress Energy, plan to
file comments on the White Paper. The FERC has also indicated that it
expects to issue final rules during the summer 2003. The Company cannot
predict the outcome of these matters or the effect that they may have on
the GridFlorida and GridSouth proceedings currently ongoing before the
FERC. The Company has $29.4 million and an insignificant amount invested in
GridSouth and GridFlorida, respectively, at March 31, 2003. It is unknown
what impact the future proceedings will have on the Company's earnings,
revenues or prices.
On October 15, 2002, the FPSC abated its proceedings regarding its review
of the proposed GridFlorida RTO. The FPSC action to abate the proceedings
came in response to the Florida Office at Public Counsel's appeal before
the State Supreme Court requesting review of the FPSC's order approving the
transfer of operational control of electric transmission assets to an RTO
under the jurisdiction of the FERC. Oral argument before the Florida
Supreme Court occurred on May 6, 2003. It is unknown what the outcome of
this appeal will be at this time. It is unknown when the FERC or the FPSC
will take final action with regard to the status of GridFlorida or what the
impact of further proceedings will have on the Company's earnings, revenues
or prices.
14. OTHER INCOME AND OTHER EXPENSE
Other income and expense includes interest income, gain on the sale of
investments, impairment of investments and other income and expense items
as discussed below. The components of other, net as shown on the
Consolidated Statements of Income for the three months ended March 31, 2003
and 2002 are as follows:
(in thousands) 2003 2002
----------------- ------------------
Other income
Net financial trading loss $ (2,698) $ (2,541)
Net energy purchased for resale 1,525 62
Nonregulated energy and delivery services income 5,590 6,598
Contingent value obligation unrealized gain 1,677 11,342
Investment gains 370 969
AFUDC equity 1,879 2,244
Other 4,576 597
----------------- ------------------
Total other income $ 12,919 $ 19,271
----------------- ------------------
Other expense
Nonregulated energy and delivery services expenses 4,217 3,138
Donations 3,490 5,343
Other 7,662 4,732
----------------- ------------------
Total other expense $ 15,369 $ 13,213
----------------- ------------------
Other, net $ (2,450) $ 6,058
================= ==================
Net financial trading loss represents non-asset-backed trades of
electricity and gas. Net energy purchased for resale represents electricity
purchased for sale to a third party. Nonregulated energy and delivery
services include power protection services and mass market programs (surge
protection, appliance services and area light sales) and delivery,
transmission and substation work for other utilities.
15. COMMITMENTS AND CONTINGENCIES
Contingencies and significant changes to the commitments discussed in Note
24 of the financial statements included in the Company's 2002 Annual Report
on Form 10-K are described below.
Commitments
Guarantees
As a part of normal business, Progress Energy and certain subsidiaries
enter into various agreements providing financial or performance
assessments to third parties. Such agreements include guarantees, standby
letters of credit and surety bonds. These agreements are entered into
primarily to support or enhance the creditworthiness otherwise attributed
to a subsidiary on a stand-alone basis, thereby facilitating the extension
of sufficient credit to accomplish the subsidiaries' intended commercial
purposes.
At March 31, 2003, outstanding guarantees are summarized as follows:
20
(in millions)
Guarantees supporting nonregulated portfolio expansion
and energy marketing and trading activities $ 331.6
Guarantees supporting nuclear decommissioning 276.0
Standby letters of credit 48.2
Surety bonds 104.7
Other guarantees 23.4
------------
Total $ 783.9
============
Each of these guarantees is discussed more fully below.
Guarantees Supporting Nonregulated Portfolio Expansion and Energy Marketing
and Trading Activities
Progress Energy has issued approximately $319.6 million of guarantees on
behalf of PVI and its subsidiaries for obligations under power purchase
agreements, tolling agreements, gas agreements, construction agreements and
trading operations. In addition, PVI issued a $12.0 million guarantee
related to expansion of its nonregulated generation portfolio, which
ensures performance under generation construction and operating agreements.
Approximately $74.4 million of the $319.6 million of guarantees issued by
Progress Energy relate to certain guarantee agreements issued to support
obligations related to PVI's expansion of its nonregulated generation
portfolio. No new guarantees of this type were issued during the quarter.
The remaining $245.2 million of these commitments issued by Progress Energy
are guarantees issued to support PVI's energy marketing and trading
functions. Approximately $23.0 million of these guarantees were issued
during the quarter. The majority of the marketing and trading 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 March 31, 2003, if the Company's ratings were to
decline below investment grade, the Company would have to deposit cash or
provide letters of credit or other cash collateral of approximately $14.7
million for the benefit of the Company's counterparties.
Guarantees Supporting Nuclear Decommissioning
In 2003, PEC determined that its external funding levels did not fully meet
the nuclear decommissioning financial assurance levels required by the NRC.
Therefore, PEC met the financial assurance requirements by obtaining a
parent company guarantee.
Standby Letters of Credit
The Company has issued standby letters of credit to financial institutions
for the benefit of third parties that have extended credit to the Company
and certain subsidiaries. These letters of credit have been issued
primarily for the purpose of supporting payments of trade payables,
securing performance under contracts and lease obligations and
self-insurance for workers' compensation. If a subsidiary does not pay
amounts when due under a covered contract, the counterparty may present its
claim for payment to the financial institution, which will in turn request
payment from the Company. Any amounts owed by the Company's subsidiaries
are reflected in the accompanying Consolidated Balance Sheets.
Surety Bonds
At March 31, 2003, the Company had $104.7 million in surety bonds purchased
primarily for purposes such as providing workers' compensation coverage,
obtaining licenses, permits and rights-of-way and project performance. To
the extent liabilities are incurred as a result of the activities covered
by the surety bonds, such liabilities are included in the accompanying
Consolidated Balance Sheets.
Other Guarantees
The Company has other guarantees outstanding related primarily to prompt
performance payments, lease obligations and other payments subject to
contingencies.
21
On March 20, 2003, PVI entered into a definitive agreement with Williams
Energy Marketing and Trading, a subsidiary of The Williams Companies, Inc.,
to acquire a long-term full-requirements power supply agreement at fixed
prices with Jackson. The power supply agreement includes a performance
guarantee by Progress Energy. In the event that Progress Energy's credit
ratings fall below investment grade, Progress Energy will be required to
provide additional security for its guarantee in form and amount (not to
exceed $285 million) acceptable to Jackson. Because this transaction has
not closed, the amount of this guarantee is not included in the table
above.
As of March 31, 2003, management does not believe conditions are likely for
performance under these agreements.
Contingencies
Claims and uncertainties
a) The Company is subject to federal, state and local regulations
addressing hazardous and solid waste management, air and water quality and
other environmental matters.
Hazardous and Solid Waste Management
Various organic materials associated with the production of manufactured
gas, generally referred to as coal tar, are regulated under federal and
state laws. The principal regulatory agency that is responsible for a
specific former manufactured gas plant (MGP) site depends largely upon the
state in which the site is located. There are several MGP sites to which
both electric utilities and the gas utility have some connection. In this
regard, both electric utilities and the gas utility and other potentially
responsible parties are participating in investigating and, if necessary,
remediating former MGP 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, the Company and its subsidiaries 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.
PEC There are 12 former MGP sites and 14 other sites associated with PEC
that have required or are anticipated to require investigation and/or
remediation costs. PEC received insurance proceeds to address costs
associated with environmental liabilities related to its involvement with
MGP sites. All eligible expenses related to these are charged against a
specific fund containing these proceeds. As of March 31, 2003,
approximately $5.7 million remains in this centralized fund with a related
accrual of $5.7 million recorded for the associated expenses of
environmental issues. As PEC's share of costs for investigating and
remediating these sites becomes known, the fund is assessed to determine if
additional accruals will be required. PEC does not believe that it can
provide an estimate of the reasonably possible total remediation costs
beyond what remains in the environmental insurance recovery 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 seven sites and four sites have begun remediation. PEC
measures its liability for these sites based on available evidence
including its experience in investigating and remediating environmentally
impaired sites. The process often involves assessing and developing
cost-sharing arrangements with other potentially responsible parties. Once
the environmental insurance recovery fund is depleted, PEC will accrue
costs for the sites to the extent its liability is probable and the costs
can be reasonably estimated. Presently, PEC cannot 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 PEC sites are
not expected to be material to the Company's financial condition or results
of operations.
PEF There are two former MGP sites and 11 other active sites associated
with PEF that have required or are anticipated to require investigation
and/or remediation costs. As of March 31, 2003, PEF has accrued
approximately $10.8 million, for probable and reasonably estimable costs at
these sites. PEF does not believe that it can provide an estimate of the
reasonably possible total remediation costs beyond what is currently
accrued. In 2002, PEF filed a petition for annual recovery of approximately
$4.0 million in environmental costs through the Environmental Cost Recovery
Clause with the FPSC. PEF was successful with this filing and will recover
costs through rates for investigation and remediation associated with
transmission and distribution substations and transformers. As more
activity occurs at these sites, PEF will assess the need to adjust the
accruals. These accruals have been recorded on an undiscounted basis. PEF
measures its liability for these sites based on available evidence
including its experience in investigating and remediating environmentally
impaired sites. This process often includes assessing and developing
cost-sharing arrangements with other potentially responsible parties.
22
Presently, PEF cannot 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 PEF sites are not expected to be
material to the Company's financial condition or results of operations.
NCNG There are five former MGP sites associated with NCNG that have or are
anticipated to have investigation or remediation costs associated with
them. As of March 31, 2003, NCNG has accrued approximately $2.3 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 investigating and remediating environmentally impaired sites.
This process often involves assessing and developing cost-sharing
arrangements with other potentially responsible parties. NCNG does not
believe it can provide an estimate of the reasonably possible total
remediation costs beyond the accrual because two 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. Based
upon current information, the Company does not expect the future costs at
the NCNG sites to be material to the Company's financial condition or
results of operations. In October 2002, the Company announced plans to sell
NCNG to Piedmont Natural Gas Company, Inc. The Company will retain the
environmental liability associated with the five former MGP sites.
Florida Progress Corporation In 2001, FPC sold its Inland Marine
Transportation business operated by MEMCO Barge Line, Inc. to AEP
Resources, Inc. FPC established an accrual to address indemnities and
retained an environmental liability associated with the transaction. The
balance in this accrual is $9.9 million at March 31, 2003. FPC estimates
that its maximum contractual liability to AEP Resources, Inc., associated
with Inland Marine Transportation is $60 million. This accrual has been
determined on an undiscounted basis. FPC measures its liability for this
site based on estimable and probable remediation scenarios. The Company
believes that it is reasonably probable that additional costs, which cannot
be currently estimated, may be incurred related to the environmental
indemnification provision beyond the amount accrued. The Company cannot
predict the outcome of this matter.
Certain historical waste sites exist that are being addressed voluntarily
by Fuels. The Company cannot determine the total costs that may be incurred
in connection with these sites. According to current information, these
future costs are not expected to be material to the Company's financial
condition or results of operations.
Rail Services is voluntarily addressing certain historical waste sites. The
Company cannot determine the total costs that may be incurred in connection
with these sites. According to current information, these future costs are
not expected to be material to the Company's financial condition or results
of operations.
PEC, PEF, Fuels 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 the Company 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.
The Company is also currently in the process of assessing potential costs
and exposures at other environmentally impaired sites. 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.
Air and Water Quality
There has been and may be further proposed federal legislation requiring
reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon
dioxide and mercury. Some of these proposals establish nationwide caps and
emission rates over an extended period of time. This national
multi-pollutant approach to air pollution control could involve significant
capital 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. However, the
Company cannot predict the outcome of this matter.
The EPA is 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.
23
Both PEC and PEF were asked to provide information to the EPA as part of
this initiative and cooperated in providing the requested information.
During the first quarter of 2003, PEC responded to a supplemental
information request from the EPA. PEF has received a similar supplemental
information request, and will respond to it in the second quarter. The EPA
initiated civil enforcement actions against other unaffiliated utilities as
part of this initiative. Some of these actions 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 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 pre-set state NOx emission levels by May 31, 2004. PEC is
currently installing controls necessary to comply with the rule. Capital
expenditures needed to meet these measures in North and South Carolina
could reach 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 PEC to install nitrogen oxide
controls under the state's eight-hour standard. The costs of those controls
are included in the $370 million cost estimate 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.
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
coal-fired 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 Section 126 petitions. PEC,
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 PEC and other utilities to delay the implementation of
the Section 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 EPA
has approved North Carolina's NOx SIP Call rule and has formally proposed
to rescind the Section 126 rule. This rulemaking is expected to become
final during the summer of 2003. The Company expects a favorable outcome of
this matter.
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 by 2013. PEC currently has approximately 5,100 MW of coal-fired
generation capacity 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 utility's 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 utilities or unless the utilities persistently
earn a return substantially in excess of the rate of return established and
found reasonable by the NCUC in the utilities' 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
ten-year compliance period beginning on January 1, 2003. The utilities must
24
recover at least 70% of their projected capital costs during the five-year
rate freeze period. Pursuant to the new law, PEC entered into an agreement
with the state of North Carolina to transfer to the state any future
emissions allowances acquired as a result of compliance with the new law.
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. PEC has recorded $20 million of clean air amortization to date and
clean air expenditures to date are $2.5 million.
Other Environmental Matters
The Kyoto Protocol was adopted in 1997 by the United Nations to address
global climate change by reducing emissions of carbon dioxide and other
greenhouse gases. The United States has not adopted the Kyoto Protocol;
however, a number of carbon dioxide emissions control proposals have been
advanced in Congress and by the Bush administration. The Bush
administration favors voluntary programs. Reductions in carbon dioxide
emissions to the levels specified by the Kyoto Protocol and some
legislative proposals could be materially adverse to Company financials and
operations if associated costs cannot be recovered from customers. The
Company favors the voluntary program approach recommended by the
administration, and is evaluating options for the reduction, avoidance and
sequestration of greenhouse gases. However, the Company cannot predict the
outcome of this matter.
In 1997, the EPA's Mercury Study Report and Utility Report to Congress
conveyed that mercury is not a risk to the average American and expressed
uncertainty about whether reductions in mercury emissions from coal-fired
power plants would reduce human exposure. Nevertheless, the EPA determined
in 2000 that regulation of mercury emissions from coal-fired power plants
was appropriate. Pursuant to a Court Order, the EPA is developing a Maximum
Available Control Technology (MACT) standard, which is expected to become
final in December 2004, with compliance in 2008. Achieving compliance with
the MACT standard could be materially adverse to the Company's financial
condition and results of operations. However, the Company cannot predict
the outcome of this matter.
b) As required under the Nuclear Waste Policy Act of 1982, PEC and PEF each
entered into a contract with the U.S. Department of Energy (DOE) under
which the DOE agreed to begin taking spent nuclear fuel by no later than
January 31, 1998. All similarly situated utilities were required to sign
the same standard contract.
In April 1995, the DOE issued a final interpretation that it did not have
an unconditional obligation to take spent nuclear fuel by January 31, 1998.
In Indiana & Michigan Power v. DOE, the Court of Appeals vacated the DOE's
final interpretation and ruled that the DOE had an unconditional obligation
to begin taking spent nuclear fuel. The Court did not specify a remedy
because the DOE was not yet in default.
After the DOE failed to comply with the decision in Indiana & Michigan
Power v. DOE, a group of utilities petitioned the Court of Appeals in
Northern States Power (NSP) v. DOE, seeking an order requiring the DOE to
begin taking spent nuclear fuel by January 31, 1998. The DOE took the
position that their delay was unavoidable, and the DOE was excused from
performance under the terms and conditions of the contract. The Court of
Appeals found that the delay was not unavoidable, but did not order the DOE
to begin taking spent nuclear fuel, stating that the utilities had a
potentially adequate remedy by filing a claim for damages under the
contract.
After the DOE failed to begin taking spent nuclear fuel by January 31,
1998, a group of utilities filed a motion with the Court of Appeals to
enforce the mandate in NSP v. DOE. Specifically, this group of utilities
asked the Court to permit the utilities to escrow their waste fee payments,
to order the DOE not to use the waste fund to pay damages to the utilities,
and to order the DOE to establish a schedule for disposal of spent nuclear
fuel. The Court denied this motion based primarily on the grounds that a
review of the matter was premature, and that some of the requested remedies
fell outside of the mandate in NSP v. DOE.
Subsequently, a number of utilities each filed an action for damages in the
Federal Court of Claims. In a recent decision, the U.S. Circuit Court of
Appeals (Federal Circuit) ruled that utilities may sue the DOE for damages
in the Federal Court of Claims instead of having to file an administrative
claim with the DOE. PEC and PEF are in the process of evaluating whether
they should each file a similar action for damages.
On July 9, 2002, Congress passed an override resolution to Nevada's veto of
DOE's proposal to locate a permanent underground nuclear waste storage
facility at Yucca Mountain, Nevada. DOE plans to submit a license
application for the Yucca Mountain facility by the end of 2004. PEC and PEF
cannot predict the outcome of this matter.
25
With certain modifications and additional approval by the NRC, PEC's spent
nuclear fuel storage facilities will be sufficient to provide storage space
for spent fuel generated on PEC's system through the expiration of the
current operating licenses for all of PEC's nuclear generating units.
Subsequent or prior to the expiration of these licenses, or any renewal of
these licenses, dry storage or acquisition of new shipping casks may be
necessary. PEC obtained approval from the NRC to use additional storage
space at the Harris Plant in December 2000. PEF currently is storing spent
nuclear fuel onsite in spent fuel pools. If PEF does not seek renewal of
the Crystal River Nuclear Plant (CR3) operating license, CR3 will have
sufficient storage capacity in place for fuel consumed through the end of
the expiration of the license in 2016. If PEF extends the CR3 operating
license, dry storage may be necessary.
c) Progress Energy, through its subsidiaries, produces synthetic fuel from
coal fines. The production and sale of the synthetic fuel from these
facilities qualifies for tax credits under Section 29 of the Code (Section
29) if certain requirements are satisfied, including a requirement that the
synthetic fuel differs significantly in chemical composition from the coal
used to produce such synthetic fuel. Any synthetic fuel tax credit amounts
not utilized are carried forward indefinitely. All of Progress Energy's
synthetic fuel facilities have received private letter rulings (PLRs) from
the Internal Revenue Service (IRS) with respect to their synthetic fuel
operations. These tax credits are subject to review by the IRS, and if
Progress Energy fails 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.
One synthetic fuel entity, Colona Synfuel Limited Partnership, L.L.L.P.
(Colona), from which the Company (and FPC prior to its acquisition by the
Company) has been allocated approximately $258 million in tax credits to
date, is being audited by the IRS. The audit of Colona was expected. The
Company is audited regularly in the normal course of business, as are most
similarly situated companies. In September 2002, all of Progress Energy's
majority-owned synthetic fuel entities, including Colona, were accepted
into the IRS Prefiling 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 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.
d) The Company and its subsidiaries are involved in various litigation
matters in the ordinary course of business, some of which involve claims
for substantial amounts. Where appropriate, accruals have been made in
accordance with SFAS No. 5, "Accounting for Contingencies," to provide for
such matters. The Company believes the final disposition of pending
litigation would not have a material adverse effect on the Company's
consolidated results of operations or financial position.
26
CAROLINA POWER & LIGHT COMPANY
d/b/a PROGRESS ENERGY CAROLINAS, INC.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2003
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(Unaudited) March 31,
- -----------------------------------------------------------------------------------
(In thousands) 2003 2002
- -----------------------------------------------------------------------------------
Operating Revenues
Electric $ 925,470 $ 811,482
Diversified business 3,397 3,389
- -----------------------------------------------------------------------------------
Total Operating Revenues 928,867 814,871
- -----------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 225,542 171,726
Purchased power 73,180 73,309
Operation and maintenance 189,875 193,436
Depreciation and amortization 138,797 141,386
Taxes other than on income 44,176 38,768
Diversified business 939 3,061
- -----------------------------------------------------------------------------------
Total Operating Expenses 672,509 621,686
- -----------------------------------------------------------------------------------
Operating Income 256,358 193,185
- -----------------------------------------------------------------------------------
Other Income (Expense)
Interest income 1,367 1,666
Other, net (2,553) (2,973)
- -----------------------------------------------------------------------------------
Total Other Expense (1,186) (1,307)
- -----------------------------------------------------------------------------------
Interest Charges
Interest charges 49,303 61,645
Allowance for borrowed funds used during construction (925) (3,094)
- -----------------------------------------------------------------------------------
Total Interest Charges, Net 48,378 58,551
- -----------------------------------------------------------------------------------
Income before Income Taxes 206,794 133,327
Income Tax Expense 71,733 48,208
- -----------------------------------------------------------------------------------
Net Income $ 135,061 $ 85,119
Preferred Stock Dividend Requirement 741 741
- -----------------------------------------------------------------------------------
Earnings for Common Stock $ 134,320 $ 84,378
- -----------------------------------------------------------------------------------
See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial
Statements.
27
Carolina Power & Light Company
d/b/a Progress Energy Carolinas, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands) March 31, December 31,
Assets 2003 2002
- -----------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 12,954,849 $ 12,675,761
Accumulated depreciation (5,999,260) (6,356,933)
- -----------------------------------------------------------------------------------------------
Utility plant in service, net 6,955,589 6,318,828
Held for future use 7,188 7,188
Construction work in progress 374,031 325,695
Nuclear fuel, net of amortization 182,253 176,622
- -----------------------------------------------------------------------------------------------
Total Utility Plant, Net 7,519,061 6,828,333
- -----------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 13,454 18,284
Accounts receivable 322,638 301,178
Unbilled accounts receivable 120,417 151,352
Receivables from affiliated companies 26,527 36,870
Notes receivable from affiliated companies - 49,772
Taxes receivable - 5,890
Inventory 326,562 342,886
Deferred fuel cost 138,273 146,015
Prepayments and other current assets 84,654 94,658
- -----------------------------------------------------------------------------------------------
Total Current Assets 1,032,525 1,146,905
- -----------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 518,747 252,083
Nuclear decommissioning trust funds 421,159 423,293
Diversified business property, net 9,763 9,435
Miscellaneous other property and investments 213,123 209,657
Other assets and deferred debits 100,471 104,978
- -----------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,263,263 999,446
- -----------------------------------------------------------------------------------------------
Total Assets $ 9,814,849 $ 8,974,684
- -----------------------------------------------------------------------------------------------
Capitalization and Liabilities
- -----------------------------------------------------------------------------------------------
Capitalization
- -----------------------------------------------------------------------------------------------
Common stock $ 3,122,281 $ 3,089,115
Preferred stock - not subject to mandatory redemption 59,334 59,334
Long-term debt, net 2,898,985 3,048,466
- -----------------------------------------------------------------------------------------------
Total Capitalization 6,080,600 6,196,915
- -----------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 150,000 -
Accounts payable 242,622 259,217
Payables to affiliated companies 101,615 98,572
Notes payable to affiliated companies 39,679 -
Taxes accrued 86,465 -
Interest accrued 47,385 58,791
Short-term obligations 221,975 437,750
Current portion of accumulated deferred income taxes 67,562 66,088
Other current liabilities 73,672 93,171
- -----------------------------------------------------------------------------------------------
Total Current Liabilities 1,030,975 1,013,589
- -----------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,164,952 1,179,689
Accumulated deferred investment tax credits 155,757 158,308
Regulatory liabilities 67,536 7,774
Asset retirement obligations 892,422 -
Other liabilities and deferred credits 422,607 418,409
- -----------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,703,274 1,764,180
- -----------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
- -----------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 9,814,849 $ 8,974,684
- -----------------------------------------------------------------------------------------------
See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial
Statements.
28
Carolina Power & Light Company
d/b/a Progress Energy Carolinas, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended
(Unaudited) March 31,
(In thousands) 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 135,061 $ 85,119
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 164,008 167,980
Deferred income taxes (10,377) (12,891)
Investment tax credit (2,550) (3,496)
Deferred fuel credit 7,742 12,063
Net (increase) decrease in accounts receivable 19,818 (126,306)
Net (increase) decrease in inventories 16,324 (14,452)
Net (increase) decrease in prepayments and other current assets 5,469 (13,622)
Net increase (decrease) in accounts payable 14,239 (78,351)
Net increase in other current liabilities 61,616 62,332
Other 28,124 32,962
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 439,474 111,338
- -----------------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (149,938) (176,230)
Nuclear fuel additions (29,592) (33,406)
Contributions to nuclear decommissioning trust (10,262) (10,225)
Diversified business property additions (181) (8,350)
Investments in non-utility activities (4,000) (4,480)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (193,973) (232,691)
- -----------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt - 46,507
Net increase (decrease) in short-term obligations (215,775) 243,930
Net increase in intercompany notes 89,450 107,507
Retirement of long-term debt (153) (49,697)
Dividends paid to parent (123,112) (131,000)
Dividends paid on preferred stock (741) (741)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (250,331) 216,506
- -----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,830) 95,153
- -----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period 18,284 21,250
- -----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 13,454 $ 116,403
- -----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 58,305 $ 58,410
income taxes (net of refunds) $ 3,382 $ 31,307
Non-cash investing and financing activity
o In February 2002, Progress Energy Carolinas, Inc. transferred the Rowan
Plant to Progress Ventures, Inc. The property and inventory transferred
totaled approximately $245 million.
See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial
Statements.
29
Carolina Power & Light Company
d/b/a Progress Energy Carolinas, Inc.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
A. Organization.
Progress Energy Carolinas, Inc. (PEC) is a public service corporation
primarily engaged in the generation, transmission, distribution and sale of
electricity primarily in portions of North Carolina and South Carolina. PEC
is a wholly owned subsidiary of Progress Energy, Inc. (the Company or
Progress Energy), which was formed as a result of the reorganization of
Carolina Power & Light Company (CP&L) into a holding company structure on
June 19, 2000. All shares of common stock of CP&L were exchanged for an
equal number of shares of CP&L Energy, Inc. On December 4, 2000, the
Company changed its name from CP&L Energy, Inc. to Progress Energy, Inc.
The Company is a registered holding company under the Public Utility
Holding Company Act of 1935 (PUHCA), as amended. Both the Company and its
subsidiaries are subject to the regulatory provisions of PUHCA.
Effective January 1, 2003, CP&L began doing business under the assumed name
Progress Energy Carolinas, Inc. The legal name has not changed and there
was no restructuring of any kind related to the name change. The current
corporate and business unit structure remains unchanged.
B. Basis of Presentation.
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) 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 GAAP 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, 2002 and notes thereto
included in PEC's Form 10-K for the year ended December 31, 2002.
The amounts included in the consolidated interim financial statements are
unaudited but, in the opinion of management, reflect all adjustments
necessary to fairly present PEC's financial position and results of
operations for the interim periods. Due to seasonal weather variations and
the timing of outages of electric generating units, especially
nuclear-fueled units, the results of operations for interim periods are not
necessarily indicative of amounts expected for the entire year. Certain
amounts for 2002 have been reclassified to conform to the 2003
presentation, with no effect on previously reported net income or common
stock equity.
In preparing financial statements that conform with GAAP, 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
PEC's operations consist primarily of the PEC Electric segment with no
other material segments.
The financial information for the PEC Electric segment for the three months
ended March 31, 2003 and 2002 is as follows:
Three Months Ended
(in thousands) March 31, 2003 March 31, 2002
-----------------------------------------------------------------
Revenues $ 925,470 $ 811,482
Segment income $ 134,577 $ 85,533
Total segment assets $ 9,616,357 $ 9,092,069
=================================================================
The primary differences between the PEC Electric segment and PEC
consolidated financial information relate to other non-electric operations
and elimination entries.
30
3. IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 148, "Accounting for Stock-Based Compensation" For purposes of
Company's stock the pro forma disclosures required by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," the estimated fair value of the
Company's stock options is amortized to expense over the options' vesting
period. PEC's information related to the pro forma impact on earnings
assuming stock options were expensed for the three months ended March 31 is
as follows:
(in thousands) 2003 2002
---------------- ---------------
Earnings for common stock, as reported $ 134,320 $ 84,378
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 1,073 759
---------------- ---------------
Pro forma earnings for common stock $ 133,247 $ 83,619
================ ===============
In April 2003, the Financial Accounting Standards Board (FASB) approved
certain decisions on its stock-based compensation project. Some of the key
decisions reached by the FASB were that stock-based compensation should be
recognized in the income statement as an expense and that the expense
should be measured as of the grant date at fair value. A significant issue
yet to be addressed by the FASB is the determination of the appropriate
fair value measure. The FASB has not yet scheduled when it will deliberate
additional issues in this project; however, the FASB plans to issue an
exposure draft in 2003 that could become effective in 2004.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities"
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies SFAS No. 133 on accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The new guidance incorporates decisions made as part of the
Derivatives Implementation Group (DIG) process, as well as decisions
regarding implementation issues raised in relation to the application of
the definition of a derivative. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003. PEC is currently
evaluating what effects, if any, this statement will have on its results of
operations and financial position.
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others"
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others - an Interpretation of FASB Statements
No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34" (FIN No.
45). This interpretation clarifies the disclosures to be made by a
guarantor in its interim and annual financial statements about obligations
under certain guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of certain guarantees,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of
this interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. See Note 9 for disclosures of
current guarantees. The adoption of FIN No. 45 did not have a material
effect on PEC's results of operations or financial position.
FIN No. 46, "Consolidation of Variable Interest Entities"
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46).
This interpretation provides guidance related to identifying variable
interest entities (previously known as special purpose entities or SPEs)
and determining whether such entities should be consolidated. Certain
disclosures are required when FIN No. 46 becomes effective if it is
reasonably possible that a company will consolidate or disclose information
about a variable interest entity when it initially applies FIN No. 46. This
interpretation must be applied immediately to variable interest entities
created or obtained after January 31, 2003. During the first quarter of
2003, PEC did not participate in the creation of, or obtain a new variable
interest in, any variable interest entity. For those variable interest
entities created or obtained on or before January 31, 2003, PEC must apply
the provisions of FIN No. 46 in the third quarter of 2003. PEC is currently
evaluating what effects, if any, this interpretation will have on its
results of operations and financial position.
31
4. ASSET RETIREMENT OBLIGATIONS
SFAS No. 143, "Accounting for Asset Retirement Obligations," provides
accounting and disclosure requirements for retirement obligations
associated with long-lived assets and was adopted by the Company effective
January 1, 2003. This statement requires that the present value of
retirement costs for which PEC 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 liability.
Cumulative accretion and accumulated depreciation were recognized for the
time period from the date the liability would have been recognized had the
provisions of this statement been in effect, to the date of adoption of
this statement.
Upon adoption of SFAS No. 143, PEC recorded asset retirement obligations
(AROs) for nuclear decommissioning of radiated plant totaling $879.7
million. PEC used an expected cash flow approach to measure these
obligations. This amount includes accruals recorded prior to adoption
totaling $491.3 million, which were previously recorded in accumulated
depreciation. The related asset retirement costs, net of accumulated
depreciation, recorded upon adoption totaled $117.3 million. The cumulative
effect of adoption of this statement had no impact on the net income of
PEC, as the effects were offset by the establishment of a regulatory asset
in the amount of $271.1 million, pursuant to SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation." The regulatory asset
represents the cumulative accretion and accumulated depreciation for the
time period from the date the liability would have been recognized had the
provisions of this statement been in effect to the date of adoption, less
the amount previously recorded.
Funds set aside in PEC's nuclear decommissioning trust fund for the nuclear
decommissioning liability totaled $421.2 million at March 31, 2003 and
$423.3 million at December 31, 2002.
Pro forma net income has not been presented for prior years because the pro
forma application of SFAS No. 143 to prior years would result in pro forma
net income not materially different from the actual amounts reported.
PEC has identified but not recognized AROs related to electric transmission
and distribution and telecommunications assets as the result of easements
over property not owned by PEC. These easements are generally perpetual and
only require retirement action upon abandonment or cessation of use of the
property for the specified purpose. The ARO liability is not estimable for
such easements as PEC intends to utilize these properties indefinitely. In
the event PEC decides to abandon or cease the use of a particular easement,
an ARO liability would be recorded at that time.
PEC has previously recognized removal costs as a component of depreciation
in accordance with regulatory treatment. As of March 31, 2003, the portion
of such costs not representing AROs under SFAS No. 143 was $893.2 million.
This amount is included in accumulated depreciation on the accompanying
Consolidated Balance Sheets. PEC has collected amounts for non-radiated
areas at nuclear facilities, which do not represent asset retirement
obligations. These amounts totaled $63.8 million as of March 31, 2003,
which is included in accumulated depreciation on the accompanying
Consolidated Balance Sheets.
PEC filed a request with the North Carolina Utility Commission (NCUC)
requesting deferral of the difference between expense pursuant to SFAS No.
143 and expense as previously determined by the NCUC. The NCUC granted the
deferral of the January 1, 2003 cumulative adjustment, but denied the
deferral of the ongoing effects, citing a lack of information concerning
the ongoing effects that would support the granting of such a deferral. PEC
is in the process of providing additional information to the NCUC that it
believes will demonstrate that deferral of the ongoing effects should be
allowed. Accordingly, for the quarter ended March 31, 2003, PEC deferred
the ongoing effects. If PEC had not deferred the ongoing effects, pre-tax
income for the quarter would have increased by approximately $5.7 million,
which represents a decrease in non-ARO cost of removal expense, partially
offset by an increase in decommissioning expense.
On April 8, 2003, the Public Service Commission of South Carolina (SCPSC)
approved a joint request by PEC, Duke Energy and South Carolina Electric
and Gas Company for an accounting order to authorize the deferral of all
cumulative and prospective effects related to the adoption of SFAS No. 143.
32
5. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2003 and 2002 was
$135.2 million and $88.5 million, respectively. Items of other
comprehensive income for the three month periods consisted primarily of
changes in fair value of derivatives used to hedge cash flows related to
interest on long-term debt.
6. FINANCING ACTIVITIES
On April 1, 2003, PEC reduced the size of its existing 364-day credit
facility from $285 million to $165 million. The other terms of this
facility were not changed. PEC's $285 million three-year credit agreement
entered into in July 2002 remains in place, for total facilities of $450
million.
On April 25, 2003, PEC announced the redemption of $150 million of First
Mortgage Bonds, 7.5% Series, Due March 1, 2023 at 103.22% of the principal
amount of such bonds. The date of the redemption will be May 27, 2003. PEC
will fund the redemption through commercial paper.
7. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
PEC uses interest rate derivative instruments to adjust the fixed and
variable rate debt components of its debt portfolio and to hedge interest
rates with regard to future fixed rate debt issuances. In March and April
of 2003, PEC entered into treasury rate locks to hedge its exposure to
interest rates with regard to a future issuance of debt. These agreements
have a computational period of ten years and are designated as cash flow
hedges for accounting purposes.
The notional amounts of the above contracts are not exchanged and do not
represent exposure to credit loss. In the event of default by a counter
party, the risk in the transaction is the cost of replacing the agreements
at current market rates. PEC only enters into swap agreements with banks
with credit ratings of single A or better.
In connection with the January 2003 FASB Emerging Issues Task Force (EITF)
meeting, the FASB was requested to reconsider an interpretation of SFAS No.
133. The interpretation, which is contained in the Derivatives
Implementation Group's C11 guidance, relates to the pricing of contracts
that include broad market indices (e.g., CPI). In particular, that guidance
discusses whether the pricing in a contract that contains broad market
indices could qualify as a normal purchase or sale (the normal purchase or
sale term is a defined accounting term, and may not, in all cases, indicate
whether the contract would be "normal" from an operating entity viewpoint).
In April 2003, the FASB issued tentative superceding guidance (DIG Issue
C20) on this issue and is expected to be finalized in the second or third
quarter of 2003.
The Company has determined that it has one existing "normal" contract that
could be affected by this revised guidance, and the Company is in the
process of evaluating the revised guidance to determine if that contract
will be required to be recorded at fair value if the revised guidance is
approved in its present form.
8. OTHER INCOME AND OTHER EXPENSE
Other income and expense includes interest income, gain on the sale of
investments, impairment of investments and other income and expense items
as discussed below. The components of other, net as shown on the
Consolidated Statements of Income for the three months ended March 31, 2003
and 2002 are as follows:
33
(in thousands) 2003 2002
----------------- ------------------
Other income
Net financial trading loss $ (2,698) $ (2,541)
Net energy purchased for resale 338 (36)
Nonregulated energy and delivery services income 2,286 2,551
AFUDC equity 1,090 2,059
Other 2,703 -
----------------- ------------------
Total other income $ 3,719 $ 2,033
----------------- ------------------
Other expense
Nonregulated energy and delivery services expenses $ 1,973 $ 1,635
Donations 1,306 1,370
Other 2,993 2,001
----------------- ------------------
Total other expense $ 6,272 $ 5,006
----------------- ------------------
Other, net $ (2,553) $ (2,973)
================= ==================
Net financial trading loss represents non-asset-backed trades of
electricity and gas. Net energy purchased for resale represents electricity
purchased externally for sale to a third party. Nonregulated energy and
delivery services include power protection services and mass market
programs (surge protection, appliance services and area light sales) and
delivery, transmission and substation work for other utilities.
9. COMMITMENTS AND CONTINGENCIES
Contingencies existing as of the date of these statements are described
below. No significant changes have occurred since December 31, 2002, with
respect to the commitments discussed in Note 18 of the financial statements
included in PEC's 2002 Annual Report on Form 10-K.
Other
In 2003, PEC determined that its external funding levels did not fully meet
the nuclear decommissioning financial assurance levels required by the NRC.
Therefore, PEC obtained a parent company guarantee to meet the required
levels.
As of March 31, 2003, management does not believe conditions are likely for
performance under these agreements.
Contingencies
1) Claims and uncertainties
a) PEC is subject to federal, state and local regulations addressing
hazardous and solid waste management, air and water quality and other
environmental matters.
Hazardous and Solid Waste Management
Various organic materials associated with the production of manufactured
gas, generally referred to as coal tar, are regulated under federal and
state laws. The principal regulatory agency that is responsible for a
specific former MGP site depends largely upon the state in which the site
is located. There are several MGP sites to which PEC has some connection.
In this regard, PEC and other potentially responsible parties, are
participating in investigating and, if necessary, remediating former MGP
sites with several regulatory agencies, including, but not limited to, the
EPA and the North Carolina Department of Environment and Natural Resources,
Division of Waste Management (DWM). In addition, PEC 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.
There are 12 former MGP sites and 14 other sites associated with PEC that
have required or are anticipated to require investigation and/or
remediation costs. PEC received insurance proceeds to address costs
associated with PEC environmental liabilities related to its involvement
with MGP sites. All eligible expenses related to these are charged against
a specific fund containing these proceeds. As of March 31, 2003,
approximately $5.7 million remains in this centralized fund with a related
accrual of $5.7 million recorded for the associated expenses of
environmental issues. As PEC's share of costs for investigating and
34
remediating these sites become known, the fund is assessed to determine if
additional accruals will be required. PEC does not believe that it can
provide an estimate of the reasonably possible total remediation costs
beyond what remains in the environmental insurance recovery 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 seven sites and four sites have begun remediation. PEC
measures its liability for these sites based on available evidence
including its experience in investigating and remediating environmentally
impaired sites. The process often involves assessing and developing
cost-sharing arrangements with other potentially responsible parties. Once
the environmental insurance recovery fund is depleted, PEC will accrue
costs for the sites to the extent its liability is probable and the costs
can be reasonably estimated. Presently, PEC cannot 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 PEC sites are
not expected to be material to PEC's financial condition or results of
operations.
PEC 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.
PEC is also currently in the process of assessing potential costs and
exposures at other environmentally impaired sites. As the assessments are
developed and analyzed, PEC will accrue costs for the sites to the extent
the costs are probable and can be reasonably estimated.
Air Quality
There has been and may be further proposed federal legislation requiring
reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon
dioxide and mercury. Some of these proposals establish nation-wide caps and
emission rates over an extended period of time. This national
multi-pollutant approach to air pollution control could involve significant
capital costs which could be material to PEC'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. However, PEC cannot predict the
outcome of this matter.
The EPA is 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.
PEC was asked to provide information to the EPA as part of this initiative
and cooperated in providing the requested information. During the first
quarter of 2003, PEC responded to a supplemental information request from
EPA. The EPA initiated civil enforcement actions against other unaffiliated
utilities as part of this initiative. Some of these actions 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. PEC cannot predict the outcome of this matter.
In 1998, the EPA published a final rule addressing the 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, to further reduce nitrogen oxide emissions in order to attain a
pre-set state NOx emission levels by May 31, 2004. PEC is currently
installing controls necessary to comply with the rule. Capital expenditures
needed to meet these measures in North and South Carolina could reach
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 PEC's results of operations. Further
controls are anticipated as electricity demand increases. PEC 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 PEC to install nitrogen oxide
controls under the State's eight-hour standard. The costs of those controls
35
are included in the $370 million cost estimate set forth above. However,
further technical analysis and rulemaking may result in a requirement for
additional controls at some units. PEC 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 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
coal-fired 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. PEC, 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 PEC 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 EPA has
approved North Carolina's NOx SIP Call rule and has formally proposed to
rescind the Section 126 rule. This rulemaking is expected to become final
during the summer of 2003. PEC expects a favorable outcome of this matter.
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. PEC expects its capital costs
to meet these emission targets will be approximately $813 million by 2013.
PEC 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
utility's 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
utilities or unless the utilities persistently earn a return substantially
in excess of the rate of return established and found reasonable by the
NCUC in the utilities' 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, PEC entered into an agreement with the state of
North Carolina to transfer to the state any future emissions allowances
acquired as a result of compliance with the new law. The new law also
requires the state to undertake a study of mercury and carbon dioxide
emissions in North Carolina. PEC cannot predict the future regulatory
interpretation, implementation or impact of this new law. PEC has recorded
$20 million of clean air amortization to date and clean air expenditures to
date are $2.5 million.
Other Environmental Matters
The Kyoto Protocol was adopted in 1997 by the United Nations to address
global climate change by reducing emissions of carbon dioxide and other
greenhouse gases. The United States has not adopted the Kyoto Protocol;
however, a number of carbon dioxide emissions control proposals have been
advanced in Congress and by the Bush administration. The Bush
administration favors voluntary programs. Reductions in carbon dioxide
emissions to the levels specified by the Kyoto Protocol and some
legislative proposals could be materially adverse to PEC's financials and
operations if associated costs cannot be recovered from customers. PEC
favors the voluntary program approach recommended by the administration,
and is evaluating options for the reduction, avoidance, and sequestration
of greenhouse gases. However, PEC cannot predict the outcome of this
matter.
In 1997, the EPA's Mercury Study Report and Utility Report to Congress
conveyed that mercury is not a risk to the average American and expressed
uncertainty about whether reductions in mercury emissions from coal-fired
power plants would reduce human exposure. Nevertheless, EPA determined in
2000 that regulation of mercury emissions from coal-fired power plants was
appropriate. Pursuant to a Court Order, the EPA is developing a Maximum
Available Control Technology (MACT) standard, which is expected to become
final in December 2004, with compliance in 2008. Achieving compliance with
the MACT standard could be materially adverse to PEC's financial condition
and results of operations. However, PEC cannot predict the outcome of this
matter.
36
b) As required under the Nuclear Waste Policy Act of 1982, PEC entered into
a contract with the DOE under which the DOE agreed to begin taking spent
nuclear fuel by no later than January 31, 1998. All similarly situated
utilities were required to sign the same standard contract.
In April 1995, the DOE issued a final interpretation that it did not have
an unconditional obligation to take spent nuclear fuel by January 31, 1998.
In Indiana & Michigan Power v. DOE, the Court of Appeals vacated the DOE's
final interpretation and ruled that the DOE had an unconditional obligation
to begin taking spent nuclear fuel. The Court did not specify a remedy
because the DOE was not yet in default.
After the DOE failed to comply with the decision in Indiana & Michigan
Power v. DOE, a group of utilities petitioned the Court of Appeals in
Northern States Power (NSP) v. DOE, seeking an order requiring the DOE to
begin taking spent nuclear fuel by January 31, 1998. The DOE took the
position that its delay was unavoidable, and the DOE was excused from
performance under the terms and conditions of the contract. The Court of
Appeals did not order the DOE to begin taking spent nuclear fuel, stating
that the utilities had a potentially adequate remedy by filing a claim for
damages under the contract.
After the DOE failed to begin taking spent nuclear fuel by January 31,
1998, a group of utilities filed a motion with the Court of Appeals to
enforce the mandate in NSP v. DOE. Specifically, this group of utilities
asked the Court to permit the utilities to escrow their waste fee payments,
to order the DOE not to use the waste fund to pay damages to the utilities,
and to order the DOE to establish a schedule for disposal of spent nuclear
fuel. The Court denied this motion based primarily on the grounds that a
review of the matter was premature, and that some of the requested remedies
fell outside of the mandate in NSP v. DOE.
Subsequently, a number of utilities each filed an action for damages in the
Federal Court of Claims. In a recent decision, the U.S. Circuit Court of
Appeals (Federal Circuit) ruled that utilities may sue the DOE for damages
in the Federal Court of Claims instead of having to file an administrative
claim with DOE. PEC is in the process of evaluating whether it should file
a similar action for damages.
On July 9, 2002, Congress passed an override resolution to Nevada's veto of
DOE's proposal to locate a permanent underground nuclear waste storage
facility at Yucca Mountain, Nevada. DOE plans to submit a license
application for the Yucca Mountain facility by the end of 2004. PEC and PEF
cannot predict the outcome of this matter.
With certain modifications and additional approval by the NRC, PEC's spent
nuclear fuel storage facilities will be sufficient to provide storage space
for spent fuel generated on its system through the expiration of the
current operating licenses for all of its nuclear generating units.
Subsequent or prior to the expiration of these licenses, or any renewal of
these licenses, dry storage or acquisition of new shipping casks may be
necessary. PEC obtained NRC approval to use additional storage space at the
Harris Plant in 2000.
c) PEC is involved in various litigation matters in the ordinary course of
business, some of which involve claims for substantial amounts. Where
appropriate, accruals have been made in accordance with SFAS No. 5,
"Accounting for Contingencies," to provide for such matters. PEC believes
the final disposition of pending litigation would not have a material
adverse effect on PEC's consolidated results of operations or financial
position.
37
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis contains forward-looking
statements that 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. Please review
"SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion of the factors
that may impact any such forward-looking statements made herein.
RESULTS OF OPERATIONS
In this section, earnings and the factors affecting earnings for the three
months ended March 31, 2003 as compared to the same period in 2002 are
discussed. The discussion begins with a general overview, then separately
discusses earnings by business segment.
Amounts reported in the interim Consolidated Statements of Income are not
necessarily indicative of amounts expected for the respective annual periods due
to the effects of seasonal temperature variations on energy consumption and the
timing of maintenance on electric generating units, among other factors.
Overview
The net income and basic earnings per share of Progress Energy, Inc. (Progress
Energy or the Company) was $208.2 million or $0.89 per share and $132.5 million
or $0.62 per share for the quarters ended March 31, 2003 and 2002, respectively.
Income from continuing operations was $196.9 million and $124.1 million,
respectively, with the operations of North Carolina Natural Gas Corporation
(NCNG) being classified as discontinued operations. The increase in net income
in 2003 is primarily due to:
o the favorable impact of weather and customer growth on retail sales,
o strong, weather-related wholesale sales,
o lower interest expense,
o positive impact of the Westchester Gas acquisition and
o a wholesale contract termination agreement.
Partially offsetting these items were:
o higher operation and maintenance costs primarily due to ice storm costs in
the Carolinas and a decreased pension credit and
o lower planned synthetic fuel production.
Effective January 1, 2003, Carolina Power and Light Company (CP&L),
Florida Power Corporation and Progress Ventures, Inc. began doing
business under the names Progress Energy Carolinas, Inc., Progress
Energy Florida, Inc., and Progress Energy Ventures, Inc., respectively.
The legal names of these entities have not changed and there is no
restructuring of any kind related to the name change. The corporate and
business unit structure remains unchanged.
The Company's business segments and their primary operations are:
o PEC Electric - engaged in the generation, transmission, distribution and
sale of electricity in portions of North Carolina and South Carolina;
o PEF - engaged in the generation, transmission, distribution and sale of
electricity in portions of Florida;
o Fuels - engaged in natural gas drilling and production, coal mining and the
production of synthetic fuels;
o Competitive Commercial Operations (CCO) - engaged in nonregulated
generation operations and energy marketing and limited trading activities;
o Progress Rail Services (Rail) - engaged in various rail and railcar related
services; and
o Other Businesses (Other) - engaged in other nonregulated business areas
including telecommunications and energy services operations.
In prior reporting, CCO and Fuels were components of the Progress Ventures
segment. With the expansion of the nonregulated energy generation facilities and
the current management structure, CCO is now a distinct operating segment. In
addition to these operating segments, the Company has other corporate activities
that include holding company operations, service company operations and
eliminations. These corporate activities have been included in the Other segment
in the past. Additionally, earnings from wholesale customers on the regulated
38
plants have previously been reported in both the regulated utilities' results
and the results of Progress Ventures. With the realignment of the reportable
business segments, this activity is now included in the regulated utilities'
results only. For comparative purposes, the 2002 results have been restated to
align with the new business segments.
In 2002, the operations of NCNG, previously reported in the Other segment, were
reclassified to discontinued operations and therefore were not included in the
results from continuing operations during the periods reported. A discussion of
the planned divestiture of NCNG is in the Discontinued Operations section.
In March 2003, the SEC completed an audit of the Progress Energy Service
Company, LLC (Service Company) and recommended that the Company change its cost
allocation methodology for allocating Service Company costs. As part of the
audit process, the Company was required to change the cost allocation
methodology for 2003 and record retroactive reallocations between its affiliates
in the first quarter of 2003 for allocations originally made in 2001 and 2002.
This change in allocation methodology and the related retroactive adjustments
have no impact on consolidated expense or earnings. The impact on the affiliates
is included in the segment discussion that follows.
Electric Segments
The operating results of both electric utilities are primarily influenced by
customer demand for electricity, the ability to control costs and regulatory
return on equity. Annual demand for electricity is based on the number of
customers and their annual usage, with usage largely impacted by weather. In
addition, the current economic conditions in the service territories may impact
the annual demand for electricity.
Effective January 1, 2003, the Company implemented SFAS No. 143 which 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
liability. Both electric utilities recognized asset retirement obligations
(AROs) in the first quarter of 2003. The adoption of the statement had no impact
on the income of the electric segments, due to the establishment of regulatory
assets and liabilities pursuant to SFAS No. 71. At March 31, 2003, the utilities
have recorded AROs of $892.4 million and $306.8 million for PEC and PEF,
respectively.
PEC filed a request with the NCUC requesting deferral of the difference between
expense pursuant to SFAS No. 143 and expense as previously determined by the
NCUC. The NCUC granted the deferral of the January 1, 2003, cumulative
adjustment, but denied the deferral of the ongoing effects, citing a lack of
information concerning the ongoing effects that would support the granting of
such a deferral. The Company is in the process of providing additional
information to the NCUC that it believes will demonstrate that deferral of the
ongoing effects should also be allowed. Accordingly, for the quarter ended March
31, 2003, PEC deferred the ongoing effects. If PEC had not deferred the ongoing
effects, expense for the quarter would have decreased by approximately $5.7
million, which represents a decrease in non-ARO cost of removal expense,
partially offset by an increase in decommissioning expense.
On April 8, 2003, the SCPSC approved a joint request by PEC, Duke Energy and
South Carolina Electric and Gas Company for an accounting order to authorize the
deferral of all cumulative and prospective effects related to the adoption of
SFAS No. 143.
On January 23, 2003, the Staff of the FPSC issued a notice of proposed rule
development to adopt provisions relating to accounting for asset retirement
obligations under SFAS No. 143. Accompanying the notice was a draft rule
presented by the staff which adopts the provisions of SFAS No. 143 along with
the requirement to record the difference between amounts prescribed by the FPSC
and those used in the application of SFAS No. 143 as regulatory assets or
regulatory liabilities, which was accepted by all parties. The adoption and
acceptance of this draft rule is subject to FPSC approval.
PROGRESS ENERGY CAROLINAS ELECTRIC
PEC Electric contributed income from continuing operations of $134.6 million and
$85.5 million in the first quarter of 2003 and 2002, respectively. The increase
is primarily attributed to favorable weather conditions in the first quarter of
2003, as compared to the first quarter of 2002, which impacted both the retail
and wholesale markets, strong customer growth and lower interest charges.
39
Revenues
PEC's electric revenues for the first quarter of 2003 and 2002 and the amount
and percentage change by quarter and by customer class are as follows:
- ----------------------------------------------------------------------------------------
(in millions)
- ----------------------------------------------------------------------------------------
Customer Class 2003 Amount Change % Change 2002
- ----------------------------------------------------------------------------------------
Residential $356.9 $47.6 15.4% $309.3
Commercial 200.9 13.6 7.3 187.3
Industrial 146.7 1.0 0.7 145.7
Governmental 18.7 1.2 6.9 17.5
-----------------------------------------------------------
Total retail revenues 723.2 63.4 9.6 659.8
Wholesale 209.4 66.8 46.8 142.6
Unbilled (30.9) (21.2) - (9.7)
Miscellaneous 23.8 5.0 26.6 18.8
-----------------------------------------------------------
Total electric revenues $925.5 $114.0 14.0% $811.5
- ----------------------------------------------------------------------------------------
PEC's electric energy sales for 2003 and 2002 and the amount and percentage
change by quarter and by customer class are as follows:
- -------------------------------------------------------------------------------------------
(in thousands of mWh)
- -------------------------------------------------------------------------------------------
Customer Class 2003 Amount Change % Change 2002
- -------------------------------------------------------------------------------------------
Residential 4,587 602 15.1% 3,985
Commercial 2,984 194 7.0 2,790
Industrial 3,005 18 0.6 2,987
Governmental 343 18 5.5 325
-----------------------------------------------------------
Total retail energy sales 10,919 832 8.2 10,087
Wholesale 4,619 1,288 38.7 3,331
Unbilled (480) (293) - (187)
-----------------------------------------------------------
Total mWh sales 15,058 1,827 13.8% 13,231
- -------------------------------------------------------------------------------------------
Favorable weather in the first quarter of 2003 as compared to the first quarter
of 2002 was the primary driver of the increased retail and wholesale energy
sales and revenue. Wholesale revenue growth is also attributed to increased
weather driven sales of energy to the Northeastern United States markets during
the first quarter of 2003. The residential and commercial customer classes'
customer base increased two percent.
Expenses
The following summarizes PEC Electric's expenses for the first quarter of 2003
and 2002.
- -------------------------------------------------------------------------------------------
(in millions)
- -------------------------------------------------------------------------------------------
Expense Category 2003 Amount Change % Change 2002
- -------------------------------------------------------------------------------------------
Fuel and purchased power $298.7 $51.5 20.8% $247.2
Operations and maintenance 189.9 (1.4) (0.7) 191.3
Depreciation and amortization 138.8 (2.6) (1.8) 141.4
Taxes other than on income 44.2 5.4 13.9 38.8
Net interest charges 48.4 (10.1) (17.3) 58.5
Income taxes 70.0 22.6 47.7 47.4
Other expenses 0.9 (0.5) (35.7) 1.4
---------------------------------------------------------
Total expenses $790.9 $64.9 8.9% $726.0
- -------------------------------------------------------------------------------------------
The increase in fuel and purchased power expense is due to an 11.8% increase in
generation, higher fuel prices and changes in generation mix. Fuel expenses are
recovered primarily through cost recovery clauses and, as such, have no material
impact on operating results.
The decrease in operations and maintenance expense is primarily the result of
the revised Service Company cost allocation methodology. Operations and
maintenance costs decreased $15.9 million related to the reallocation of prior
years' costs and $2.5 million related to current year costs. These cost
reductions were partially offset by costs incurred for the February ice storms
of $10.4 million.
40
The decrease in depreciation and amortization expense results from a $25.0
million reduction in accelerated nuclear amortization, partially offset by a
$20.0 million increase in clean air amortization. An NCUC order allowed the
reduction in the accelerated nuclear amortization and extended the recovery
time.
Interest expense decreased due to both a decrease in average outstanding debt
and a slightly lower interest rate.
In accordance with an SEC order under PUHCA, effective in the second quarter of
2002, tax benefits not related to acquisition interest expense that were
previously held unallocated at the holding company must be allocated to the
profitable subsidiaries. As a result, $5.5 million of the tax benefit that was
previously held at the holding company was allocated to PEC in the first quarter
of 2003. The allocation has no impact on the Company's consolidated tax expense
or net income. Other fluctuations in income taxes are primarily due to changes
in pre-tax income.
PROGRESS ENERGY FLORIDA
PEF contributed income from continuing operations of $70.8 million and $57.7
million in the first quarter of 2003 and 2002, respectively. This increase is
primarily attributed to favorable weather, retail growth/usage and the absence
of the impact of the retroactive rate refund in 2002. Partially offsetting these
improvements was the impact of the reduced rates in 2003 resulting from the May
2002 rate case settlement.
In March 2002, PEF settled a rate case which provided for a one-time retroactive
rate refund, decreased future retail rates by 9.25% (effective May 1, 2002),
provided for lower depreciation and amortization and provided for increases in
certain service revenue rates.
Revenues
PEF's electric revenues for the first quarter of 2003 and 2002 and the amount
and percentage change by quarter and by customer class are as follows:
- ------------------------------------------------------------------------------------------
(in millions)
- ------------------------------------------------------------------------------------------
Customer Class 2003 Amount Change % Change 2002
- ------------------------------------------------------------------------------------------
Residential $385.0 $5.8 1.5% $379.2
Commercial 150.4 (16.4) (9.8) 166.8
Industrial 47.5 (2.5) (5.0) 50.0
Governmental 38.0 (1.9) (4.8) 39.9
Revenue Sharing/Rate Refund - 35.0 100.0 (35.0)
------------------------------------------------------
Total retail revenues 620.9 20.0 3.3 600.9
Wholesale 71.3 18.9 36.1 52.4
Unbilled (0.7) (7.2) - 6.5
Miscellaneous 36.9 10.3 38.7 26.6
------------------------------------------------------
Total electric revenues $728.4 $42.0 6.1% $686.4
- ------------------------------------------------------------------------------------------
PEF's electric energy sales for the first quarter of 2003 and 2002 and the
amount and percentage change by quarter and by customer class are as follows:
- ------------------------------------------------------------------------------------------
(in thousands of mWh)
- ------------------------------------------------------------------------------------------
Customer Class 2003 Amount Change % Change 2002
- ------------------------------------------------------------------------------------------
Residential 4,553 493 12.1% 4,060
Commercial 2,442 (14) (0.6) 2,456
Industrial 916 34 3.9 882
Governmental 657 36 5.8 621
------------------------------------------------------
Total Retail Energy Sales 8,568 549 6.8 8,019
Wholesale 1,277 298 30.4 979
Unbilled 54 22 - 32
------------------------------------------------------
Total mWh Sales 9,899 869 9.6% 9,030
- ------------------------------------------------------------------------------------------
The first quarter 2002 rate refund of $35.0 million was virtually offset by the
2003 first quarter rate reduction, both of which resulted from the 2002 rate
case settlement. Excluding these impacts, revenue increased due to favorable
weather in the first quarter of 2003, as compared to the first quarter of 2002
(heating degree days increased 25.6%) and continued retail customer growth
41
(retail customer base increased 1.25%). Increased demand from other utilities
drove the wholesale revenue increase. Higher service charges allowed in the rate
case settlement contributed to the higher miscellaneous revenues.
Expenses
The following summarizes PEF's expenses for the first quarter of 2003 and 2002.
- -------------------------------------------------------------------------------------------
(in millions)
- -------------------------------------------------------------------------------------------
Expense Category 2003 Amount Change % Change 2002
- -------------------------------------------------------------------------------------------
Fuel and purchased power $315.6 $8.8 2.9% $306.8
Operations and maintenance 139.8 7.0 5.3 132.8
Depreciation and amortization 79.4 10.1 14.6 69.3
Taxes other than on income 58.6 1.5 2.6 57.1
Net interest charges 26.5 (1.8) (6.4) 28.3
Income taxes 37.0 3.6 10.8 33.4
Other expenses 0.7 (0.3) (30.0) 1.0
---------------------------------------------------------
Total expenses $657.6 $28.9 4.6% $628.7
- -------------------------------------------------------------------------------------------
Fuel and purchased power expenses are recovered primarily through cost recovery
clauses and, as such, have no material impact on operating results.
The increase in operations and maintenance expense results from a $5.3 million
lower pension credit.
The increase in depreciation and amortization expense relates primarily to an
increase in amortization of the Tiger Bay regulatory asset. The amortization is
recovered through a cost recovery clause and has no impact on earnings. The
regulatory asset was created as a result of the early termination of certain
long-term cogeneration contracts and is amortized according to a plan approved
by the Florida Public Service Commission.
In accordance with an SEC order under PUHCA, effective in the second quarter of
2002, tax benefits not related to acquisition interest expense that were
previously held unallocated at the holding company must be allocated to the
profitable subsidiaries. As a result, $3.4 million of the tax benefit that was
previously held at the holding company was allocated to PEF in the first quarter
of 2003. The allocation has no impact on the Company's consolidated tax expense
or net income. Other fluctuations in income taxes are primarily due to changes
in pre-tax income.
DIVERSIFIED BUSINESSES
The Company's diversified businesses consist primarily of the Fuels segment and
the CCO segment, the Rail segment, Progress Telecom and SRS, which are in the
Other segment. These businesses and are explained in more detail below.
FUELS
The Fuels segment's operations includes synthetic fuel operations, natural gas
exploration and production and coal extraction. Fuels' results for the first
quarter of 2003 were impacted most significantly by the timing of synthetic fuel
production and the increase in gas production.
The following summarizes the income from continuing operations of the Fuels
segment for the first quarter 2003 and 2002.
- -------------------------------------------------------------------------------------
(in millions) 2003 Change 2002
- -------------------------------------------------------------------------------------
Synthetic fuel operations $25.4 $(13.4) $38.8
Gas production and coal fuel operations 5.2 4.7 0.5
Other (losses) earnings (4.0) (6.3) 2.3
----------------------------------------
Income from continuing operations $26.6 $(15.0) $41.6
- -------------------------------------------------------------------------------------
42
Synthetic Fuel Operations
The synthetic fuels operations generated income from continuing operations of
$25.4 million and $38.8 million in the first quarter of 2003 and 2002,
respectively. The production and sale of synthetic fuel generate operating
losses, but qualify for tax credits under Section 29 of the Code, which more
than offset the effect of such losses. The following summarizes the synthetic
fuel operations for the first quarter of 2003 and 2002.
- ------------------------------------------------------------------------------
(in millions) 2003 2002
- ------------------------------------------------------------------------------
Tons produced 2.0 3.0
----------------------------------
Operating losses, excluding tax credits $(27.3) $(45.0)
Tax credits generated 52.7 83.8
----------------------------------
Income from continuing operations $ 25.4 $ 38.8
- ------------------------------------------------------------------------------
Total synthetic fuel sales decreased in the current year primarily due to a
change in the synthetic fuel production pattern for 2003. The Company
anticipates total synthetic fuel production of 12 to 13 million tons for the
year, which is comparable to 2002 production levels.
Gas production and coal fuel operations
Gas operations generated income from continuing operations of $4.9 million and
$0.3 million in the first quarter of 2003 and 2002, respectively. The increase
in production drove the increased revenue and earnings with the addition of the
Westchester operations accounting for 64% of the gas production in the first
quarter of 2003. Income from operations related to coal fuel operations was
immaterial for both periods presented.
During the first quarter of 2003, Progress Fuels Corporation, a wholly owned
subsidiary of Progress Energy, entered into three independent transactions to
acquire approximately 162 natural gas-producing wells with proven reserves of
195 billion cubic feet for $148 million. The primary assets in the acquisition
have been transferred to Progress Fuels North Texas Gas, L.P., a wholly owned
subsidiary of Progress Fuels Corporation.
Fuels' operations also include terminals, coal production and transportation
operations and other unallocated segment costs. The 2003 unallocated segment
costs include $4.7 million after tax of additional Service Company allocations
related to the SEC audit.
COMPETITIVE COMMERCIAL OPERATIONS
CCO generates and sells (on a wholesale basis) electricity through nonregulated
plants. These operations also include limited financial trading activities. The
following summarizes the income from continuing operations, sales and generating
capacity of the nonregulated plants for the first quarters of 2003 and 2002.
- ------------------------------------------------------------------------------
(in millions except megawatts) 2003 Change 2002
- ------------------------------------------------------------------------------
Income/loss from continuing operations $ 8.5 $ 10.6 $ (2.1)
Operating revenue $ 37.2 $ 28.2 $ 9.0
Generation capacity (MW) 1,554 1,239 315
- ------------------------------------------------------------------------------
On March 21, 2003, PVI announced entering into a definitive agreement with
Williams Energy Marketing and Trading to acquire a full-requirements power
supply agreement with Jackson in Georgia for $188 million. This transaction is
expected to close in the second quarter.
The increase in revenue and earnings is primarily due to a tolling agreement
termination payment from Dynegy. Also contributing slightly to the increase was
the increased production capacity from the addition of generating capacity. The
earnings and revenue increases related to the increased capacity was partially
offset by lower prices in the wholesale energy market. Including the Jackson
contract and the impact of the Dynegy contract termination, mentioned above, the
Company has contracts for 68%, 74% and 49% of planned production capacity for
2003 through 2005, respectively. The 2005 decline results from the expiration of
four contracts. The Company continues to pursue opportunities with both current
customers and other potential customers.
The first quarter 2003 results include $2.8 million after tax of additional
Service Company allocations related to the SEC order.
43
During 2002, the Company completed the acquisition of two electric generation
projects, Walton County Power, LLC and Washington County Power, LLC. The
acquisition resulted in goodwill of $64.1 million. The Company performed the
annual goodwill impairment test in the first quarter of 2003 which indicated no
impairment. However, modest changes in either assumptions or market conditions
could cause some or all of the $64 million of goodwill related to the CCO
operating segment to become impaired.
RAIL SERVICES (RAIL)
Rail's operations include railcar and locomotive repair, trackwork, rail parts
reconditioning and sales, scrap metal recycling, railcar leasing and other rail
related services. The Company intends to sell the assets of Railcar Ltd., a
leasing subsidiary, in 2003 and has reported these assets as assets held for
sale at March 31, 2003.
Progress Rail contributed losses from continuing operations of $3.4 million and
$0.7 million for the first quarters of 2003 and 2002, respectively. As a result
of the SEC order, Rail incurred additional Service Company allocations of $3.4
million after tax in the first quarter of 2003. Rail's results for both quarters
were affected by the downturn in the overall economy. Rail experienced revenue
growth in the first quarter of 2003 with stronger wheel set sales and recycling
sales. Aggressive cost management programs were identified throughout 2002 and
in the first quarter of 2003.
An SEC order approving the merger of FPC requires the Company to divest Rail by
November 30, 2003. The Company is pursuing alternatives, but does not expect to
find the right divestiture opportunity by that date. Therefore, the Company has
sought an extension from the SEC.
OTHER BUSINESSES SEGMENT
Progress Energy's Other segment primarily includes the operations of SRS,
Progress Telecom and small nonregulated subsidiaries of PEC. Holding company
operations and other corporate functions that have previously been included in
the Other segment have been removed and are being reported separately. The
segment contributed earnings of $0.3 million and a loss of $4.9 million in the
first quarter of 2003 and 2002, respectively.
The improvement is related to Progress Telecom's lower depreciation charges
resulting from the impairment of a significant portion of its assets in the
third quarter of 2002.
CORPORATE SERVICES
Corporate Services includes the operations of the Holding Company, the Service
Company, and consolidation entities, as summarized below (expenses are indicated
by positive numbers).
- ------------------------------------------------------------------------------
(in millions) 2003 Amount Change 2002
- ------------------------------------------------------------------------------
Interest expense $ 71.0 $ - $ 71.0
Contingent value obligations (1.7) 9.6 (11.3)
Tax reallocation 9.1 9.1 -
Tax levelization (10.3) (31.5) 21.2
Other income taxes (30.9) 1.0 (31.9)
Other expenses 3.3 (0.8) 4.1
---------------------------------------
Loss from continuing operations $ 40.5 $(12.6) $ 53.1
- ------------------------------------------------------------------------------
Progress Energy issued 98.6 million contingent value obligations (CVOs) in
connection with the FPC 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. At March 31, 2003 and 2002, the CVOs had
fair market values of approximately $12.1 million and $30.6 million,
respectively. Progress Energy recorded an unrealized gain of $1.7 million and
$11.3 million for the first quarter of 2003 and 2002, respectively, to record
the changes in fair value of the CVOs, which had average unit prices of $0.12
and $0.31 at March 31, 2003 and 2002, respectively.
According to an SEC order under PUHCA, 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 was
allocated to the profitable subsidiaries effective with the second quarter of
44
2002. The allocation has no impact on consolidated tax expense or earnings.
However, in the first quarter of 2003, the allocation increased the Corporate
Services tax expense $9.1 million with offsetting decreases in other segments
(primarily PEC and PEF).
GAAP requires 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 increased by $10.3 million and decreased $21.2 million for the
first quarter of 2003 and 2002, respectively, in order to maintain an effective
tax rate consistent with the estimated annual rate. The tax credits associated
with the Company's synthetic fuel operations primarily drive the required
levelization amount. In the first quarter of 2003, a benefit was realized
because synthetic fuel production was shifted out of the first quarter and
weather conditions hindered the delivery of synthetic fuels to customers. In the
first quarter of 2002, a tax expense was recognized because of higher synthetic
fuel production and sales. 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.
Other fluctuations in income taxes are primarily due to changes in pre-tax
income.
DISCONTINUED OPERATIONS
In the fourth quarter of 2002, the Company's Board of Directors approved the
sale of North Carolina Natural Gas Corporation (NCNG) to Piedmont Natural Gas
Company, Inc. As a result of this action, the operating results of NCNG were
reclassified to discontinued operations for all reportable periods. With its
classification as a discontinued operation, the assets of NCNG are no longer
depreciated, resulting in $2.9 million less after-tax depreciation expense, when
compared to the first quarter 2002. Progress Energy expects to sell NCNG in the
summer of 2003 for net proceeds of approximately $400 million. The company
expects to use the proceeds to reduce outstanding debt.
LIQUIDITY AND CAPITAL RESOURCES
Progress Energy, Inc.
Statement of Cash Flows and Financing Activities
Cash provided by operating activities increased $174 million for the three
months ended March 31, 2003, when compared to the corresponding period in the
prior year. The increase in cash from operating activities for the 2003 period
is due to improved operating results at both electric utilities. In addition,
changes in the balances of certain current assets and liabilities due to
operational fluctuations provided cash by operating activities.
Net cash used in investing activities decreased $309 million for the three
months ended March 31, 2003, when compared to the corresponding period in the
prior year. The decrease in cash used in investing activities is primarily due
to lower capital spending at PVI, which acquired generating assets from LG&E in
February 2002 for approximately $350 million. During the first three months of
2003, $222.6 million was spent in diversified business property additions. The
acquisition of the natural gas reserves resulted in a cash outflow of $148
million, which is included in the $222.6 million in diversified property
additions.
Net cash provided by financing activities decreased $712 million for the three
months ended March 31, 2003, when compared to the corresponding period in the
prior year. The decrease in financing requirements was primarily due to the
improved operating cash flow and lower capital expenditures for the quarter.
On February 7, 2003, Moody's Investors Service (Moody's) announced that it was
lowering Progress Energy, Inc.'s senior unsecured debt rating from Baa1 to Baa2,
and changing the outlook of the rating from negative to stable. Moody's cited
the slower than planned pace of the Company's efforts to pay down debt from its
acquisition of Florida Progress as the primary reason for the ratings change.
Moody's also changed the outlook of Progress Energy Florida, Inc. (A1 senior
secured) and Progress Capital Holdings, Inc. (A3 senior unsecured) from stable
to negative and lowered the trust preferred rating of FPC Capital I from A3 to
Baa1 with a negative outlook.
The change in outlook by the rating agency has not materially affected Progress
Energy's access to liquidity or the cost of its short-term borrowings.
On February 21, 2003, PEF issued $425 million of First Mortgage Bonds, 4.80%
Series, Due March 1, 2013 and $225 million of First Mortgage Bonds, 5.90%
Series, Due March 1, 2033. Proceeds from this issuance were used to repay the
45
balance of its outstanding commercial paper, to refinance its secured and
unsecured indebtedness, including PEF's First Mortgage Bonds 6.125% Series Due
March 1, 2003, and to redeem the aggregate outstanding balance of its 8% First
Mortgage Bonds due 2022.
On March 1, 2003, $70 million of PEF First Mortgage Bonds, 6.125% Series,
matured and were retired.
Effective March 24, 2003, PEF redeemed $150 million of First Mortgage Bonds, 8%
Series, due December 1, 2022 at 103.75% of the principal amount of such bonds.
On April 1, 2003, PEF entered into a new $200 million 364-day credit agreement
and a new $200 million three-year credit agreement, replacing its prior credit
facilities (which had been a $90 million 364-day facility and a $200 million
five-year facility). The new PEF credit facilities contain a defined maximum
total debt to total capital ratio of 65%; as of March 31, 2003 the calculated
ratio was 50.9%. The new credit facilities also contain a requirement that the
ratio of EDITDA, as defined in the facilities, to interest expense to be at
least 3 to 1; as of March 31, 2003 the calculated ratio was 8.7 to 1.
Also on April 1, 2003, PEC reduced the size of its existing 364-day credit
facility from $285 million to $165 million. The other terms of this facility
were not changed. Progress Energy Carolinas' $285 million three-year credit
agreement entered into in July 2002 remains in place, for total facilities of
$450 million.
On April 25, 2003, PEC announced the redemption of $150 million of First
Mortgage Bonds, 7.5% Series, Due March 1, 2023 at 103.22% of the principal
amount of such bonds. The date of the redemption will be May 27, 2003 and PEC
will fund the redemption through commercial paper.
In March 2003, Progress Genco Ventures, LLC (Genco), a wholly owned subsidiary
of PVI, terminated its $50 million working capital credit facility. The
remaining $260 million of Genco's credit facility was not changed.
The Company issued approximately 1.8 million shares representing approximately
$74 million in proceeds from its Dividend Reinvestment and Stock Purchase Plan
and its employee benefit plans during the three months ended March 31, 2003.
Future Commitments
As of March 31, 2003, Progress Energy's contractual cash obligations and other
commercial commitments has not changed materially from what was reported in the
2002 Annual Report on Form 10-K. The only changes in Progress Energy's future
commitments involve the additional first quarter 2003 long-term debt issuances
that are detailed above.
OTHER MATTERS
PEF Rate Case Settlement
On March 27, 2002, the parties in PEF'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 provides
that PEF will operate under a Revenue Sharing Incentive Plan (the Plan) through
2005 and thereafter until terminated by the FPSC.
The Plan provides that all retail base revenues between the established
threshold and cap will be shared on a 2/3 - 1/3, customer/shareholder basis. All
retail base rate revenues above the retail base rate revenue caps established
for each year will be refunded 100% to retail customers on an annual basis. For
2002, the refund to customers was limited to 67.1% of the retail base rate
revenues that exceeded the 2002 cap. The retail base revenue cap for 2003 is
$1.393 billion and will increase $37 million each year thereafter. As of
December 31, 2002, $4.7 million was accrued and was refunded to customers in
March 2003. On February 24, 2003, the parties to the Agreement filed a motion
seeking an order from the FPSC to enforce the Agreement. In this motion, the
parties dispute PEF's calculation of retail revenue subject to refund and
contend that the refund should be approximately $23 million. This issue will be
addressed by the FPSC in the near future. The Company cannot predict the outcome
of this matter.
46
Synthetic Fuels Tax Credits
Progress Energy, through its subsidiaries, produces synthetic fuel from coal
fines. The production and sale of the synthetic fuel from these facilities
qualifies for tax credits under Section 29 of the Code (Section 29) if certain
requirements are satisfied, including a requirement that the synthetic fuel
differs significantly in chemical composition from the coal used to produce such
synthetic fuel. Any synthetic fuel tax credit amounts not utilized are carried
forward indefinitely. All of Progress Energy's synthetic fuel facilities have
received private letter rulings (PLRs) from the Internal Revenue Service (IRS)
with respect to their synthetic fuel operations. These tax credits are subject
to review by the IRS, and if Progress Energy fails 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. Total Section 29 credits generated to date (including FPC prior
to its acquisition by the Company) are approximately $949.9 million.
One synthetic fuel entity, Colona Synfuel Limited Partnership, L.L.L.P.
(Colona), from which the Company (and FPC prior to its acquisition by the
Company) has been allocated approximately $258 million in tax credits to date,
is being audited by the IRS. The audit of Colona was expected. The Company is
audited regularly in the normal course of business, as are most similarly
situated companies. In September 2002, all of Progress Energy's majority-owned
synthetic fuel entities, including Colona, were accepted into the IRS Prefiling
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 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.
The Company has retained an advisor to assist in selling an interest in one or
more synthetic fuel entities. The Company is pursuing the sale of a portion of
its synthetic fuel production capacity that is underutilized due to limits on
the amount of credits that can be generated and utilized by the Company. The
Company would expect to retain an ownership interest and to operate any sold
facility for a management fee. The final outcome and timing of these discussions
is uncertain and the Company cannot predict the outcome of this matter.
Nuclear Matters
Progress Energy's Brunswick Nuclear Plant Unit 2 completed a successful
refueling outage on April 6, 2003, when the unit was returned to service. During
the outage, the first of two phases of an extended power uprate project for that
unit was completed, which added approximately 70 additional megawatts of
electricity at the plant.
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 penetration leakage and no corrosion of the head
itself. During the outage, a boric acid leakage walkdown of the reactor coolant
pressure boundary was also completed and no corrosion was found.
The Company currently plans to re-inspect the Robinson Plant reactor head during
its next refueling outage in the spring of 2004 and replace the head in the fall
of 2005. The Harris Plant is ranked in the lowest susceptibility classification.
During the Harris Plant's Spring 2003 outage, the Company completed a series of
examinations of the entire reactor pressure vessel head and found no degradation
or indication of leakage.
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.
In February 2003, the NRC issued Order EA-03-009, requiring specific inspections
of the reactor pressure vessel head and associated penetration nozzles at
pressurized water reactors (PWRs). The Company has responded to the Order,
stating that the Company intends to comply with the provisions of the Order. No
adverse impact is anticipated.
47
In April 2003, the STP Nuclear Operating Company, an unaffilated entity,
notified the NRC of a potential leak indication on the bottom head of the
reactor vessel of one of its units. The Company is continuing to monitor this
development for applicability to our plants and will take appropriate action if
and when necessary.
In January 2003, the NRC issued a final order with regard to access control.
This order requires the Company to enhance its current access control program by
January 7, 2004. The Company expects that it will be in full compliance with the
order by the established deadline.
The NRC continues to issue additional orders designed to increase security at
nuclear facilities. In April 2003, one of the orders issued by the NRC imposes
revisions to the Design Basis Threat and requires power plants to implement
additional protective actions to protect against sabotage by terrorists and
other adversaries. The Company is currently in the process of reviewing this
order and cannot currently predict the potential impact to the Company's
financial condition or results of operations. As the NRC, other governmental
entities and the industry continue to consider security issues, it is possible
that more extensive security plans could be required.
Franchise Litigation
Six cities, with a total of approximately 49,000 customers, have sued PEF in
various circuit courts in Florida. The lawsuits principally seek 1) a
declaratory judgment that the cities have the right to purchase PEF'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 PEF to
continue to collect from PEF's customers and remit to the cities, franchise fees
during the pending litigation, and as long as PEF continues to occupy the
cities' rights-of-way to provide electric service, notwithstanding the
expiration of the franchise ordinances under which PEF had agreed to collect
such fees. Five circuit courts have entered orders requiring arbitration to
establish the purchase price of PEF's electric distribution system within five
cities. Two appellate courts have upheld these circuit court decisions and
authorized cities to determine the value of PEF's electric distribution system
within the cities through arbitration. To date, no city has attempted to
actually exercise the option to purchase any portion of PEF's electric
distribution system. Arbitration in one of the cases (the City of Casselberry)
was held in August 2002 and an award was issued in October 2002 setting the
value of PEF's distribution system within that city at approximately $22
million. On April 2, 2003, PEF filed a rate filing with the FERC to recover
$10.6 million in stranded costs from the City of Casselberry in the event the
City ultimately chooses and is allowed to form a municipal electric utility. PEF
has made a settlement proposal, which is scheduled to be voted on by the City
Commission on May 12, 2003. At this time, whether and when there will be further
proceedings regarding the City cannot be determined. A second arbitration (with
the City of Winter Park) was completed in February 2003. A decision from the
arbitration panel has not yet been issued in that case. Two additional
arbitrations have been scheduled to occur in the second quarter of 2003 and the
first quarter of 2004.
As part of the above litigation, two appellate courts have also reached opposite
conclusions regarding whether PEF must continue to collect from its customers
and remit to the cities "franchise fees" under the expired franchise ordinances.
PEF has filed an appeal with the Florida Supreme Court to resolve the conflict
between the two appellate courts. The Florida Supreme Court has set oral
argument for August 27, 2003. The Company cannot predict the outcome of these
matters at this time.
Progress Energy Carolinas, Inc.
The information required by this item is incorporated herein by reference to the
following portions of Progress Energy's Management's Discussion and Analysis of
Financial Condition and Results of Operations, insofar as they relate to PEC:
RESULTS OF OPERATIONS; LIQUIDITY AND CAPITAL RESOURCES and OTHER MATTERS.
RESULTS OF OPERATIONS
The results of operations for the PEC Electric segment are identical between PEC
and Progress Energy. The results of operations for PEC's non-utility
subsidiaries for the three months ended March 31, 2003 and 2002 are not material
to PEC's consolidated financial statements.
48
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 2003, $150 million was spent on PEC's
construction program and $0.2 million was spent on diversified business property
additions.
As of March 31, 2003, PEC's liquidity, contractual cash obligations and other
commercial commitments have not changed materially from what was reported in the
2002 Annual Report on Form 10-K.
On April 1, 2003, PEC reduced the size of its existing 364-day credit facility
from $285 million to $165 million. The other terms of this facility were not
changed. PEC's $285 million three-year credit agreement entered into in July
2002 remains in place, for total facilities of $450 million.
On April 25, 2003, PEC announced the redemption of $150 million of First
Mortgage Bonds, 7.5% Series, Due March 1, 2023 at 103.22% of the principal
amount of such bonds. The date of the redemption will be May 27, 2003 and PEC
will fund the redemption through commercial paper.
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, 2002.
The Company's exposure to market value risk with respect to the CVOs has also
not changed materially since December 31, 2002.
On February 21, 2003, PEF issued $425 million of First Mortgage Bonds, 4.80%
Series, Due March 1, 2013 and $225 million of First Mortgage Bonds, 5.90%
Series, Due March 1, 2033.
On March 1, 2003, $70 million of PEF First Mortgage Bonds, 6.125% Series,
matured and were retired.
Effective March 24, 2003, PEF redeemed $150 million of First Mortgage Bonds, 8%
Series, Due December 1, 2022 at 103.75% of the principle amount of such bonds.
The exposure to changes in interest rates from the Company's fixed rate and
variable rate long-term debt at March 31, 2003 has changed from December 31,
2002. The total fixed rate long-term debt at March 31, 2003 was $9.1 billion,
with an average interest rate of 6.7% and fair market value of $10 billion. The
total variable rate long-term debt at March 31, 2003, was $1.1 billion, with an
average interest rate of 1.44% and fair market value of $1.1 billion.
The exposure to changes in interest rates from the Company's commercial paper
and FPC mandatorily redeemable securities of trust at March 31, 2003, was not
materially different than at December 31, 2002.
Progress Energy Carolinas, Inc.
PEC has certain market risks inherent in its financial instruments, which arise
from transactions entered into in the normal course of business. PEC's primary
exposures are changes in interest rates with respect to long-term debt and
commercial paper, and fluctuations in the return on marketable securities with
respect to its nuclear decommissioning trust funds. PEC's exposure to return on
marketable securities for the decommission trust funds has not changed
materially since December 31, 2002.
In March and April of 2003, PEC entered into treasury rate locks to hedge its
exposure to interest rates with regard to a future issuance of debt. These
agreements have a computational period of ten years and are designated as cash
flow hedges for accounting purposes.
49
The exposure to changes in interest rates from the PEC's fixed rate long-term
debt, variable rate long-term debt and commercial paper at March 31, 2003 was
not materially different than at December 31, 2002. In addition, PEC's exposure
on the notional amount of interest rate swap agreements used to hedge its
exposure on variable rate debt positions at March 31, 2003 was not materially
different than at December 31, 2002.
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 (CEO) and
Chief Financial Officer (CFO), of the effectiveness of the design and operation
of Progress Energy's disclosure controls and procedures pursuant to Rules 13a-14
and 15d-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 the
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.
Progress Energy Carolinas, Inc.
Within the 90 days prior to the filing date of this report, PEC carried out an
evaluation, under the supervision and with the participation of its management,
including PEC's CEO and CFO, of the effectiveness of the design and operation of
PEC's disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14
under the Securities Exchange Act of 1934. Based upon that evaluation, PEC's CEO
and CFO concluded that its disclosure controls and procedures are effective in
timely alerting them to material information relating to PEC (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
PEC'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 15 to
the Progress Energy, Inc. Consolidated Interim Financial Statements and Note 9
to the PEC's Consolidated Interim Financial Statements.
1. Strategic Resource Solutions Corp. ("SRS") v. San Francisco Unified School
District, et al., Sacramento Superior Court, Case No. 02AS033114
In November of 2001, SRS filed a claim against the San Francisco Unified School
District ("the District") and other defendants claiming that SRS is entitled to
approximately $10 million in unpaid contract payments and delay and impact
damages related to the District's $30 million contract with SRS. On March 4,
2002, the District filed a counterclaim, seeking compensatory damages and
liquidated damages in excess of $120 million, for various claims, including
breach of contract and demand on a performance bond. SRS has asserted defenses
to the District's claims.
On March 13, 2003, the City Attorney's office announced the filing of new claims
by the City Attorney and the District in the form of a cross-complaint against
SRS, Progress Energy, Inc., Progress Energy Solutions, Inc., and certain
individuals, alleging fraud, false claims, violations of California statutes,
and seeking compensatory damages, punitive damages, liquidated damages, treble
damages, penalties, attorneys' fees and injunctive relief. The City Attorney's
announcement states that the City and the District seek "more than $300 million
in damages and penalties."
The Company has reviewed the District's earlier pleadings against SRS and
believes that those claims are not meritorious. SRS filed its answer to the new
pleadings on April 14, 2003. The Company has reviewed the new pleadings and the
Company believes that the new claims are not meritorious. The Company will file
50
appropriate responsive pleadings in due course. SRS, the Company and Progress
Energy Solutions, Inc. will vigorously defend and litigate all of these claims.
The Company cannot predict the outcome of this matter, but the Company believes
that it and its subsidiaries have good defenses to all claims asserted by both
the District and the City.
Item 2. Changes in Securities and Use of Proceeds
RESTRICTED STOCK AWARDS:
(a) Securities Delivered. On March 18, 2003, 167,400 restricted shares of the
Company's Common Shares were granted to certain key employees pursuant to
the terms of the Company's 2002 Equity Incentive Plan (Equity Incentive
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.
51
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Progress Progress Energy
Number Description Energy, Inc. Carolinas, Inc.
------ ----------- ------------ ---------------
*10(i) Progress Energy, Inc. Amended and Restated Management X X
Deferred Compensation Plan Adopted as of January 1,
2000, Revised and Restated effective January 1, 2003
(filed as Exhibit 4.3 to Progress Energy Form S-8 on May
2, 2003, File No. 333-104952).
10(ii) Notice, dated March 25, 2003, to the Agent for the X
lenders named in the Carolina Power & Light Company
364-day Revolving Credit Agreement, dated July 31, 2002,
of a commitment reduction in the amount of $120,000
10(iii) Florida Power Corporation d/b/a Progress Energy Florida, X
Inc. 364-Day $200,000,000 Credit Agreement, dated as of
April 1, 2003 (filed as Exhibit 10(ii) to Florida Power
Corporation Form 10-Q for the quarter ended March 31, 2003).
10(iv) Florida Power Corporation d/b/a Progress Energy Florida, X
Inc. 30-Year 200,000,000 Credit Agreement, dated as of
April 1, 2003 (filed as Exhibit 10(iii) to the Florida
Power Corporation Form 10-Q for the quarter ended
March 31, 2003).
99 Certifications pursuant to Section 906 of the X X
Sarbanes-Oxley Act of 2002
*Incorporated herein by reference as indicated.
52
(b) Reports on Form 8-K with respect to the quarter:
Progress Energy, Inc.
Financial
Item Statements
Reported Included Date of Event Date Filed
5 No February 7, 2003 February 12, 2003
7 Yes February 18, 2003 February 18, 2003
5 No April 1, 2003 April 1, 2003
9, 12 Yes April 23, 2003 April 23, 2003
Carolina Power & Light Company
d/b/a Progress Energy Carolinas, Inc.
Financial
Item Statements
Reported Included Date of Event Date Filed
5 No January 1, 2003 January 3, 2003
7 Yes February 18, 2003 February 18, 2003
5 No April 1, 2003 April 1, 2003
9, 12 Yes April 23, 2003 April 23, 2003
53
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PROGRESS ENERGY, INC.
CAROLINA POWER & LIGHT COMPANY
Date: May 9, 2003 (Registrants)
By: /s/ Peter M. Scott III
------------------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
By: /s/ Robert H. Bazemore, Jr.
---------------------------------
Robert H. Bazemore, Jr.
Vice President and Controller
Chief Accounting Officer
54
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 officer 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 officer 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:
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 officer 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: May 9, 2003 /s/ William Cavanaugh III
-------------------------
William Cavanaugh III
Chairman and Chief Executive 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, 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 officer 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 officer 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:
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 officer 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: May 9, 2003 /s/ Peter M. Scott III
----------------------
Peter M. Scott III
Executive Vice President and
Chief Financial 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, 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 officer 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 officer 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:
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 officer 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: May 9, 2003 /s/ William Cavanaugh III
-------------------------
William Cavanaugh III
Chairman and Chief Executive Officer
57
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 officer 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 officer 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:
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 officer 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: May 9, 2003 /s/ Peter M. Scott III
----------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
58
Exhibit 99
CERTIFICATION FURNISHED PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Progress Energy,
Inc. (the "Company") for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, William
Cavanaugh III, Chairman and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ William Cavanaugh III
- -------------------------
William Cavanaugh III
Chairman and Chief Executive Officer
May 9, 2003
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
59
CERTIFICATION FURNISHED PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Progress Energy,
Inc. (the "Company") for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Peter
M. Scott III, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Peter M. Scott III
- ----------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
May 9, 2003
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
60
CERTIFICATION FURNISHED PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Carolina Power &
Light Company (the "Company") for the period ending March 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
William Cavanaugh III, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ William Cavanaugh III
- -------------------------
William Cavanaugh III
Chairman and Chief Executive Officer
May 9, 2003
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
61
CERTIFICATION FURNISHED PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Carolina Power &
Light Company (the "Company") for the period ending March 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Peter M. Scott III, Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Peter M. Scott III
- ----------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
May 9, 2003
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
62