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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 June 30, 2002
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer
File Number incorporation, address of principal executive offices, and telephone number Identification Number
1-15929 Progress Energy, Inc. 56-2155481
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina
1-3382 Carolina Power & Light Company 56-0165465
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina
NONE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
This combined Form 10-Q is filed separately by two registrants: Progress Energy,
Inc. (Progress Energy) and Carolina Power & Light Company (CP&L). Information
contained herein relating to either individual registrant is filed by such
registrant solely on its own behalf. Each registrant makes no representation as
to information relating exclusively to the other registrant.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of July 31, 2002, each
registrant had the following shares of common stock outstanding
Registrant Description Shares
---------- ----------- ------
Progress Energy, Inc. Common Stock (Without Par Value) 221,235,262
Carolina Power & Light Company Common Stock (Without Par Value) 159,608,055 (all of which were
held by Progress Energy, Inc.)
1
PROGRESS ENERGY, INC. AND CAROLINA POWER & LIGHT COMPANY
FORM 10-Q - For the Quarter Ended June 30, 2002
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Interim Financial Statements:
Progress Energy, Inc.
-----------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Supplemental Data Schedule
Notes to Consolidated Interim Financial Statements
Carolina Power & Light Company
--------------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Interim Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
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
Code Internal Revenue Service Code
CP&L Carolina Power & Light Company
CR3 Florida Power's nuclear generating plant, Crystal River Unit No. 3
CVO Contingent value obligation
DEP Florida Department of Environment and Protection
DOE Department of Energy
Dt Dekatherm
DWM North Carolina Department of Environment and Natural Resources, Division of Waste
Management
EasternNC Eastern North Carolina Natural Gas Company, formerly referred to as ENCNG
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Florida Power Florida Power Corporation
FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Generally accepted accounting Accounting principles generally accepted in the United States of America
principles
IRS Internal Revenue Service
kWh Kilowatt-hour
MGP Manufactured Gas Plant
MW Megawatt
NCNG North Carolina Natural Gas Corporation
NCUC North Carolina Utilities Commission
NOx SIP Call EPA rule which requires 22 states including North and South Carolina to further reduce
nitrogen oxide emissions.
NRC United States Nuclear Regulatory Commission
PCH Progress Capital Holdings, Inc.
PLRs Private Letter Rulings
Progress Energy Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly referred to as Electric Fuels Corporation
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
Progress Ventures Business segment of Progress Energy primarily made up of merchant energy generation, coal
and synthetic fuel operations and energy marketing and trading, formerly referred to as
Energy Ventures
Progress Ventures, Inc. Legal entity holding certain non-regulated operations and part of Progress Ventures
business segment (formerly referred to as CPL Energy Ventures, Inc.)
PUHCA Public Utility Holding Company Act of 1935, as amended
RTO Regional Transmission Organization
SCPSC Public Service Commission of South Carolina
SEC United States Securities and Exchange Commission
Service Company Progress Energy Service Co., LLC
SFAS No. 133 Statements of Financial Accounting Standards No. 133, Accounting for Derivative and
Hedging Activities
SFAS No. 142 Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
SFAS No. 143 Statements of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations
SRS Strategic Resource Solutions Corp.
the Company Progress Energy, Inc. and subsidiaries
3
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The matters discussed throughout this combined Form 10-Q that are not historical
facts are forward-looking and, accordingly, involve estimates, projections,
goals, forecasts, assumptions, risks and uncertainties that could cause actual
results or outcomes to differ materially from those expressed in the
forward-looking statements.
In addition, forward-looking statements are discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including, but not limited to, statements under the sub-heading "Other Matters"
concerning synthetic fuel tax credits and regulatory developments.
Any forward-looking statement speaks only as of the date on which such statement
is made, and neither Progress Energy nor CP&L undertakes any obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: governmental policies and regulatory actions (including those of the
Federal Energy Regulatory Commission, the Environmental Protection Agency, the
Nuclear Regulatory Commission, the Department of Energy, the Securities and
Exchange Commission under the Public Utility Holding Company Act of 1935, as
amended, the North Carolina Utilities Commission, the Public Service Commission
of South Carolina and the Florida Public Service Commission), particularly
legislative and regulatory initiatives regarding the restructuring of the
electricity industry or potential national deregulation legislation; the outcome
of legal and administrative proceedings, including proceedings before our
principal regulators, and the impact of the settlement of Florida Power's rate
case; risks associated with operating nuclear power facilities, availability of
nuclear waste storage facilities, and nuclear decommissioning costs; terrorist
threats and activities, economic uncertainty caused by such activities on the
United States, and potential adverse reactions to United States anti-terrorism
activities; changes in the economy of areas served by CP&L, Florida Power or
NCNG; the extent to which we are able to obtain adequate and timely rate
recovery of costs, including potential stranded costs arising from the
restructuring of the electricity industry; weather conditions and catastrophic
weather-related damage; general industry trends, changes in technology,
increased competition from energy and gas suppliers, and market demand for
energy; inflation and capital market conditions; the extent to which we are able
to realize the potential benefits of our recent and future acquisitions and
successfully integrate them with the remainder of our business; the extent to
which we are able to realize the potential benefits of our conversion to a
non-regulated holding company structure and the success of our direct and
indirect subsidiaries; the extent to which we are able to continue to use tax
credits associated with the operations of the synthetic fuel facilities; the
extent to which we are able to reduce our capital expenditures through the
utilization of the natural gas expansion fund established by the North Carolina
Utilities Commission; and unanticipated changes in operating expenses and
capital expenditures.
All such factors are difficult to predict, contain uncertainties that may
materially affect actual results, and may be beyond the control of Progress
Energy and CP&L. New factors emerge from time to time, and it is not possible
for management to predict all such factors, nor can it assess the effect of each
such factor on Progress Energy and CP&L.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Progress Energy, Inc.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2002
STATEMENTS OF INCOME
Three Months Ended Six Months Ended
(Unaudited) June 30, June 30,
(In thousands except per share amounts) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 1,600,581 $ 1,565,947 $ 3,098,503 $ 3,197,994
Natural gas 64,498 68,575 150,603 207,149
Diversified businesses 373,185 681,121 677,472 818,591
- -------------------------------------------------------------------------------------------------------------
Total Operating Revenues 2,038,264 2,315,643 3,926,578 4,223,734
- -------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 372,244 378,288 746,438 748,144
Purchased power 224,685 211,876 405,958 429,424
Gas purchased for resale 49,849 57,184 102,772 166,778
Other operation and maintenance 351,526 304,400 686,216 599,497
Depreciation and amortization 215,279 264,131 431,891 580,920
Taxes other than on income 94,436 93,945 191,631 193,592
Diversified businesses 426,875 721,744 798,986 911,447
- -------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,734,894 2,031,568 3,363,892 3,629,802
- -------------------------------------------------------------------------------------------------------------
Operating Income 303,370 284,075 562,686 593,932
- -------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 6,239 9,445 8,315 19,448
Other, net (1,780) (12,119) 4,890 (9,457)
- -------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) 4,459 (2,674) 13,205 9,991
- -------------------------------------------------------------------------------------------------------------
Interest Charges
Gross interest charges 176,355 197,269 350,782 360,215
Allowance for borrowed funds used during construction
and capitalized interest (5,305) (1,873) (9,081) (5,353)
- -------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 171,050 195,396 341,701 354,862
- -------------------------------------------------------------------------------------------------------------
Income before Income Taxes 136,779 86,005 234,190 249,061
Income Tax Expense (Benefit) 16,159 (25,697) (18,957) (16,644)
- -------------------------------------------------------------------------------------------------------------
Net Income $ 120,620 $ 111,702 $ 253,147 $ 265,705
- -------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 215,007 200,043 213,999 199,922
Basic and Diluted Earnings per Common Share $ 0.56 $ 0.56 $ 1.18 $ 1.33
Diluted Earnings per Common Share 0.56 0.56 1.18 1.32
Dividends Declared per Common Share $ 0.545 $ 0.530 $ 1.090 $ 1.060
- -------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
5
Progress Energy, Inc
BALANCE SHEETS
(Unaudited)
(In thousands except share data) June 30, December 31,
Assets 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 19,260,446 $ 19,176,021
Gas utility plant in service 521,001 491,903
Accumulated depreciation (10,435,492) (10,096,412)
- ---------------------------------------------------------------------------------------------------------------
Utility plant in service, net 9,345,955 9,571,512
Held for future use 15,027 15,380
Construction work in progress 1,143,029 1,065,154
Nuclear fuel, net of amortization 224,279 262,869
- ---------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 10,728,290 10,914,915
- ---------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 304,442 54,419
Accounts receivable 758,985 738,740
Unbilled accounts receivable 229,463 199,593
Taxes receivable - 32,325
Inventory 925,676 886,747
Deferred fuel cost 123,933 146,652
Prepayments 68,513 49,056
Other current assets 135,413 224,409
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 2,546,425 2,331,941
- ---------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory Assets 414,625 448,631
Nuclear decommissioning trust funds 839,529 822,821
Diversified business property, net 1,996,130 1,073,046
Miscellaneous other property and investments 507,177 456,880
Goodwill, net 3,722,237 3,690,210
Prepaid pension costs 497,542 489,600
Other assets and deferred debits 516,757 513,099
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 8,493,997 7,494,287
- ---------------------------------------------------------------------------------------------------------------
Total Assets $ 21,768,712 $ 20,741,143
- ---------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ---------------------------------------------------------------------------------------------------------------
Capitalization
Common stock (without par value, 500,000,000 shares authorized,
221,235,262 and 218,725,352 shares issued and outstanding, respectively) $ 4,243,547 $ 4,107,493
Unearned ESOP common stock (104,703) (114,385)
Accumulated other comprehensive loss (28,923) (32,180)
Retained earnings 2,061,224 2,042,605
- ---------------------------------------------------------------------------------------------------------------
Total common stock equity 6,171,145 6,003,533
Preferred stock of subsidiaries-not subject to mandatory redemption 92,831 92,831
Long-term debt, net 10,512,723 9,483,745
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization 16,776,699 15,580,109
- ---------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 352,860 688,052
Accounts payable 591,660 725,977
Taxes accrued 66,835 -
Interest accrued 225,950 212,387
Dividends declared 119,469 117,857
Short-term obligations 346,983 77,529
Customer deposits 159,900 154,343
Other current liabilities 396,609 419,398
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,260,266 2,395,543
- ---------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,407,249 1,434,506
Accumulated deferred investment tax credits 216,159 226,382
Regulatory liabilities 285,014 287,239
Other liabilities and deferred credits 823,325 817,364
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,731,747 2,765,491
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 21,768,712 $ 20,741,143
- ---------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
6
Progress Energy, Inc.
STATEMENTS OF CASH FLOWS Six Months Ended
(Unaudited) June 30,
(In thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 253,147 $ 265,705
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 519,390 676,640
Deferred income taxes (42,933) (31,904)
Investment tax credit (10,223) (13,216)
Deferred fuel cost 22,718 3,973
Net (increase) decrease in accounts receivable (43,627) 79,287
Net increase in inventories (40,729) (177,027)
Net decrease in prepaids and other current assets 3,657 23,818
Net decrease in accounts payable (48,951) (181,134)
Net increase in other current liabilities 102,503 130,349
Other 5,518 (34,031)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 720,470 742,460
- ----------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (495,658) (542,798)
Proceeds from sale of assets - 5,532
Nuclear fuel additions (25,593) (78,871)
Contributions to nuclear decommissioning trust (19,916) (27,883)
Fuel acquisition, net of cash acquired (17,355) -
Diversified business property additions and acquisitions (569,574) (120,393)
Investments in non-utility activities (2,403) 5,500
- ----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,130,499) (758,913)
- ----------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 1,028,843 3,473,300
Net increase (decrease) in commercial paper reclassified to (254,955) 103,558
long-term debt
Net increase (decrease) in short-term indebtedness 269,454 (3,229,253)
Net decrease in cash provided by checks drawn in excess of bank (33,525) (64,774)
balances
Retirement of long-term debt (116,117) (33,914)
Dividends paid on common stock (232,916) (212,506)
Other (732) (47,587)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 660,052 (11,176)
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 250,023 (27,629)
Cash and Cash Equivalents at Beginning of the Period 54,419 101,296
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 304,442 $ 73,667
- ----------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 324,234 $ 265,462
income taxes $ 11,320 $ 40,878
See Note 2 for non-cash investing and financing activity.
- ----------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
7
Progress Energy, Inc.
SUPPLEMENTAL DATA SCHEDULE Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands)
Electric
Retail $ 1,313,045 $ 1,295,650 $ 2,573,854 $ 2,622,453
Wholesale 212,572 214,908 407,519 475,555
Unbilled 29,486 15,099 26,226 (46,780)
Miscellaneous revenue 45,478 40,290 90,904 146,766
- -----------------------------------------------------------------------------------------------------------------------------
Total Electric 1,600,581 1,565,947 3,098,503 3,197,994
Natural gas 64,498 68,575 150,603 207,149
Diversified businesses 373,185 681,121 677,472 818,591
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 2,038,264 $ 2,315,643 $ 3,926,578 $ 4,223,734
- -----------------------------------------------------------------------------------------------------------------------------
Energy Sales - Utility
Electric (millions of kWh)
Retail
Residential 7,777 7,204 15,822 15,926
Commercial 5,884 5,682 11,130 10,956
Industrial 4,354 4,401 8,223 8,594
Other retail 1,053 1,007 1,999 1,970
- -----------------------------------------------------------------------------------------------------------------------------
Total retail 19,068 18,294 37,174 37,446
Unbilled 875 624 720 (543)
Wholesale 4,471 4,080 8,781 8,859
- -----------------------------------------------------------------------------------------------------------------------------
Total Electric 24,414 22,998 46,675 45,762
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Natural Gas Delivered (thousands of dt) 15,390 11,096 32,498 25,942
- -----------------------------------------------------------------------------------------------------------------------------
Energy Supply - Utility (millions of kWh)
Generated - Steam 11,683 11,877 23,098 23,791
Nuclear 7,693 6,813 14,920 13,950
Hydro 107 64 246 117
Combustion turbines 2,162 1,672 3,747 2,809
Purchased 3,857 3,711 6,850 7,385
- -----------------------------------------------------------------------------------------------------------------------------
Total Energy Supply - (Company Share) (a) 25,502 24,137 48,861 48,052
- -----------------------------------------------------------------------------------------------------------------------------
Detail of Income Taxes (in thousands)
Income tax expense (credit) - current $ 76,178 $ (6,730) $ 34,199 $ 28,475
deferred (55,289) (12,723) (42,933) (31,904)
investment tax credit (4,730) (6,244) (10,223) (13,215)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense (Benefit) $ 16,159 $ (25,697) $ (18,957) $ (16,644)
- -----------------------------------------------------------------------------------------------------------------------------
(a) Excludes co-owner's share of the energy supplied from the five generating
facilities that are jointly owned.
8
Progress Energy, Inc.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
Organization. Progress Energy, Inc. (the Company) is a registered
-------------
holding company under the Public Utility Holding Company Act (PUHCA)
of 1935, as amended. Both the Company and its subsidiaries are subject
to the regulatory provisions of PUHCA. Through its wholly owned
subsidiaries, CP&L, Florida Power Corporation (Florida Power) and
North Carolina Natural Gas Corporation (NCNG), the Company is
primarily engaged in the generation, transmission, distribution and
sale of electricity in portions of North Carolina, South Carolina and
Florida and the transport, distribution and sale of natural gas in
portions of North Carolina. Through the Progress Ventures business
unit, the Company is involved in merchant energy generation, coal, gas
and synthetic fuel operations and energy marketing and trading.
Through other business units, the Company engages in other
non-regulated business areas, including energy management and related
services, rail services and telecommunications. Progress Energy's
legal structure is not currently aligned with the functional
management and financial reporting of the Progress Ventures business
segment. Whether, and when, the legal and functional structures will
converge depends upon legislative and regulatory action, which cannot
currently be anticipated.
Basis of Presentation. These financial statements have been prepared
----------------------
in accordance with accounting principles generally accepted in the
United States of America (generally accepted accounting principles)
for interim financial information and with the instructions to Form
10-Q and Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Because the accompanying
consolidated interim financial statements do not include all of the
information and footnotes required by generally accepted accounting
principles, they should be read in conjunction with the audited
financial statements for the period ended December 31, 2001 and notes
thereto included in Progress Energy's Form 10-K for the year ended
December 31, 2001.
The amounts included in the consolidated interim financial statements
are unaudited but, in the opinion of management, reflect all
adjustments necessary to fairly present the Company's financial
position and results of operations for the interim periods. Due to
seasonal weather variations and the timing of outages of electric
generating units, especially nuclear-fueled units, the results of
operations for interim periods are not necessarily indicative of
amounts expected for the entire year. Certain amounts for 2001 have
been reclassified to conform to the 2002 presentation.
In preparing financial statements that conform with generally accepted
accounting principles, management must make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial
statements and amounts of revenues and expenses reflected during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS
------------
Generation Acquisition. On February 15, 2002, Progress Ventures, Inc.
-----------------------
acquired 100% of two electric generating projects located in Georgia
from LG&E Energy Corp., a subsidiary of Powergen plc. The two projects
consist of 1) Walton County Power, LLC in Monroe, Georgia, a 460
megawatt natural gas-fired plant placed in service in June 2001 and 2)
Washington County Power, LLC in Washington County, Georgia, a planned
600 megawatt natural gas-fired plant expected to be operational by
June 2003. The Walton and Washington projects have been included in
the consolidated financial statements since the acquisition date. The
acquisition furthers Progress Ventures' expansion into merchant energy
operations and positions it as a growing provider of wholesale energy
in the Southeast.
The aggregate cash purchase price of approximately $348 million
includes approximately $1.7 million of direct transaction costs. The
purchase price was allocated primarily to fixed assets based on the
preliminary fair values of the assets acquired. The transaction also
included tolling and power sale agreements with LG&E Energy Marketing,
Inc. for each project through December 31, 2004. No preliminary
goodwill has been recorded.
9
In addition, Progress Ventures entered into a project management and
completion agreement whereby LG&E has agreed to manage the completion
of the Washington site construction for Progress Ventures. The
estimated costs to complete the Washington project at the time the
acquisition was completed were approximately $167.6 million.
The preliminary purchase price allocation is subject to adjustment for
changes in the Company's preliminary assumptions and analyses, pending
additional information including asset valuations.
The pro forma results of operations would not be materially different
than the reported results of operations for the three and six months
ended June 30, 2002, or for the comparable periods in the prior year.
Fuel Acquisition. On April 26, 2002, Progress Fuels Corporation, a
-----------------
subsidiary of Progress Energy, acquired 100% of Westchester Gas
Company. The acquisition included approximately 215 producing natural
gas wells, 52 miles of intrastate gas pipeline and 170 miles of
gas-gathering systems located within a 25-miles radius of Jonesville,
Texas, on the Texas-Louisiana border.
The aggregate purchase price of approximately $153 million consisted
of cash consideration of approximately $22 million and the issuance of
2.5 million shares of Progress Energy common stock valued at
approximately $129 million. The purchase price includes approximately
$1.7 million of direct transaction costs. The purchase price was
allocated primarily to fixed assets based on the preliminary fair
values of the assets acquired. The excess of the purchase price over
the preliminary fair value of the net identifiable assets and
liabilities acquired has been recorded as goodwill. Based on this
preliminary allocation, goodwill of approximately $34 million has been
recorded. The preliminary purchase price allocation is subject to
adjustment for changes in the preliminary assumptions and analyses
used, pending additional information including final asset valuations
and allocations to gas properties.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations for Westchester
have been included in Progress Energy's consolidated financial
statements since the date of acquisition. The pro forma results of
operations would not be materially different than the reported results
of operations for the three and six months ended June 30, 2002, or for
the comparable periods in the prior year.
3. FLORIDA POWER RATE CASE SETTLEMENT
----------------------------------
On March 27, 2002, the parties in Florida Power's rate case entered
into a Stipulation and Settlement Agreement (the Agreement) related to
retail rate matters. The Agreement was approved by the Florida Public
Service Commission (FPSC) on April 23, 2002. The Agreement is
generally effective from May 1, 2002 through December 31, 2005;
provided, however, that if Florida Power's base rate earnings fall
below a 10% return on equity, Florida Power may petition the FPSC to
amend its base rates.
The Agreement provides that Florida Power will reduce its retail
revenues from the sale of electricity by an annual amount of $125
million. The Agreement also provides that Florida Power will operate
under a Revenue Sharing Incentive Plan (the Plan) through 2005, and
thereafter until terminated by the FPSC, that establishes annual
revenue caps and sharing thresholds. The Plan provides that retail
base rate revenues between the sharing thresholds and the retail base
rate revenue caps will be divided into two shares - a 1/3 share to be
received by Florida Power's shareholders, and a 2/3 share to be
refunded to Florida Power's retail customers; provided, however, that
for the year 2002 only, the refund to customers will be limited to
67.1% of the 2/3 customer share. The retail base rate revenue sharing
threshold amounts for 2002 will be $1,296 million and will increase
$37 million each year thereafter. The Plan also provides that all
retail base rate revenues above the retail base rate revenue caps
established for each year will be refunded to retail customers on an
annual basis. For 2002, the refund to customers will be limited to
67.1% of the retail base rate revenues that exceed the 2002 cap. The
retail base revenue caps for 2002 will be $1,356 million and will
increase $37 million each year thereafter.
The Agreement also provides that beginning with the in-service date of
Florida Power's Hines Unit 2 and continuing through December 31, 2005,
Florida Power will be allowed to recover through the fuel cost
recovery clause a return on average investment and depreciation
expense for Hines Unit 2, to the extent such costs do not exceed the
Unit's cumulative fuel savings over the recovery period. Hines Unit 2
is a 516 MW combined-cycle unit under construction and currently
scheduled for completion in late 2003.
10
Additionally, the Agreement provides that Florida Power will effect a
mid-course correction of its fuel cost recovery clause to reduce the
fuel factor by $50 million for the remainder of 2002. The fuel cost
recovery clause will operate as it normally does, including, but not
limited to any additional mid-course adjustments that may become
necessary, and the calculation of true-ups to actual fuel clause
expenses.
Florida Power will suspend accruals on its reserves for nuclear
decommissioning and fossil dismantlement through December 31, 2005.
Additionally, for each calendar year during the term of the Agreement,
Florida Power will record a $62.5 million depreciation expense
reduction, and may, at its option, record up to an equal annual amount
as an offsetting accelerated depreciation expense. In addition,
Florida Power is authorized, at its discretion, to accelerate the
amortization of certain regulatory assets over the term of the
Agreement. There was no accelerated depreciation expense recorded for
the three and six months ended June 30, 2002.
Under the terms of the Agreement, Florida Power agreed to continue the
implementation of its four-year Commitment to Excellence Reliability
Plan and expects to achieve a 20% improvement in its annual System
Average Interruption Duration Index by no later than 2004. If this
improvement level is not achieved for calendar years 2004 or 2005,
Florida Power will provide a refund of $3 million for each year the
level is not achieved to 10% of its total retail customers served by
its worst performing distribution feeder lines.
The Agreement also provides that Florida Power will refund to
customers $35 million of revenues Florida Power collected during the
interim period since March 13, 2001. This one-time retroactive revenue
refund was recorded in the first quarter of 2002 and will be returned
to retail customers over an eight-month period ending December 31,
2002.
4. FINANCIAL INFORMATION BY BUSINESS SEGMENT
-----------------------------------------
The Company currently provides services through the following business
segments: CP&L Electric, Florida Power Electric, Progress Ventures,
Rail Services and Other. The prior period has been restated to reflect
the current reportable segments.
The CP&L Electric and Florida Power Electric segments are engaged in
the generation, transmission, distribution, and sale of electric
energy in portions of North Carolina, South Carolina and Florida.
Electric operations are subject to the rules and regulations of FERC,
the NCUC, the SCPSC and the FPSC.
The Progress Ventures segment is primarily engaged in merchant energy
generation and coal, gas and synthetic fuel operations. Management
reviews the operations of the Progress Ventures segment after the
allocation of energy marketing and trading activities which Progress
Ventures performs on behalf of the regulated utilities, CP&L and
Florida Power. The marketing activity refers to soliciting and
managing wholesale power supply contracts and to selling excess
generation as available, all within the regulated framework. Contracts
within this activity are subject to review under SFAS No. 133. The
trading activity refers to trading as defined in EITF 98-10. This
trading activity has primarily consisted of entering into standardized
electric forward contracts. In addition, the trading activity has also
included purchasing power for immediate resale. This trading has been
conducted on behalf of CP&L and Florida Power, but is outside the
regulated framework (i.e., is a non-regulated activity). Progress
Ventures also enters into non-regulated trading transactions for its
non-regulated merchant plant and fuel businesses.
The Rail Services segment operations include railcar repair, rail
parts reconditioning and sales, railcar leasing and sales, and scrap
metal recycling. These activities include maintenance and
reconditioning of salvageable scrap components of railcars, locomotive
repair, right-of-way maintenance and operating manufacturing
facilities for new rail cars.
The Other segment is primarily made up of regulated natural gas, other
diversified businesses and holding company operations, which includes
the transportation, distribution and sale of natural gas in portions
of North Carolina, telecommunication services, miscellaneous
non-regulated activities and elimination entries.
11
For reportable segments presented in the accompanying table, segment
income includes intersegment revenues accounted for at prices
representative of unaffiliated party transactions. Intersegment
revenues that are not eliminated represent natural gas sales to the
CP&L Electric and the Florida Power Electric segments.
Florida Power Progress Rail Services Segment
(in thousands) CP&L Electric Electric Ventures (b) (c) Other Totals
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended 6/30/02
Revenues
Unaffiliated $834,658 $765,923 $137,520 $210,534 $85,082 $2,033,717
Intersegment - - 127,889 855 (124,197) 4,547
----------------------------------------------------------------------------------------
Total Revenues $834,658 $765,923 $265,409 $211,389 $(39,115) $2,038,264
Net Income (Loss) $131,690 $76,753 $53,467 $2,947 $(144,237) $120,620
Segment Income (Loss)After $109,346 $73,069 $79,495 $2,947 $(144,237) $120,620
Allocation (a)
Total Segment Assets $8,669,993 $4,967,998 $2,240,932 $607,617 $5,282,172 $21,768,712
===============================================================================================================================
Florida Power Progress Segment
CP&L Electric Electric Ventures Rail Services Other Totals
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended 6/30/01
Revenues
Unaffiliated $782,287 $783,660 $105,805 $520,308 $118,912 $2,310,972
Intersegment - - 111,890 625 (107,844) 4,671
----------------------------------------------------------------------------------------
Total Revenues $782,287 $783,660 $217,695 $520,933 $11,068 $2,315,643
Net Income (Loss) $84,022 $84,311 $55,671 $(7,533) $(104,769) $111,702
Segment Income (Loss) After $68,987 $80,950 $74,067 $(7,533) $(104,769) $111,702
Allocation (a)
Total Segment Assets $8,942,454 $4,925,985 $795,017 $802,536 $4,769,697 $20,235,689
===============================================================================================================================
Florida Power Progress Rail Services Other Segment
CP&L Electric Electric Ventures (b) (c) Totals
- -------------------------------------------------------------------------------------------------------------------------------
Six Months Ended 6/30/02
Revenues
Unaffiliated $1,646,139 $1,452,364 $250,925 $379,903 $187,511 $3,916,842
Intersegment - - 259,819 1,350 (251,433) 9,736
-----------------------------------------------------------------------------------------
Total Revenues $1,646,139 $1,452,364 $510,744 $381,253 $(63,922) $3,926,578
Net Income (Loss) $217,222 $134,496 $92,951 $2,246 $(193,768) $253,147
Segment Income (Loss) After $187,276 $128,226 $129,167 $2,246 $(193,768) $253,147
Allocation (a)
Total Segment Assets $8,669,993 $4,967,998 $2,240,932 $607,617 $5,282,172 $21,768,712
===============================================================================================================================
Florida Power Progress Segment
CP&L Electric Electric Ventures Rail Services Other Totals
- -------------------------------------------------------------------------------------------------------------------------------
Six Months Ended 6/30/01
Revenues
Unaffiliated $1,603,861 $1,594,133 $251,256 $520,308 $249,287 $4,218,845
Intersegment - - 192,396 625 (188,132) 4,889
----------------------------------------------------------------------------------------
Total Revenues $1,603,861 $1,594,133 $443,652 $520,933 $61,155 $4,223,734
Net Income (Loss) $205,491 $155,917 $97,750 $(7,533) $(185,920) $265,705
Segment Income (Loss) After $176,885 $144,202 $138,071 $(7,533) $(185,920) $265,705
Allocation (a)
Total Segment Assets $8,942,454 $4,925,985 $795,017 $802,536 $4,769,697 $20,235,689
===============================================================================================================================
(a) After allocation of energy trading and marketing net income managed by
Progress Ventures on behalf of the electric utilities.
(b) Progress Ventures total segment assets at June 30, 2002, increased from
the prior year due to the addition of non-regulated generating assets
including Effingham, DeSoto, Walton and Washington, as well as the
transfer of the Rowan plant from CP&L in the first quarter of 2002.
(c) Rail Services total segment assets at June 30, 2002, decreased from the
prior year due to the final purchase price allocation being recorded in
the fourth quarter of 2001.
12
5. IMPACT OF NEW ACCOUNTING STANDARD
---------------------------------
During the second quarter of 2001, the Financial Accounting Standards
Board (FASB) issued interpretations of Statements of Financial
Accounting Standards No. 133, "Accounting for Derivative and Hedging
Activities," (SFAS No. 133) indicating that options in general cannot
qualify for the normal purchases and sales exception, but provided an
exception that allows certain electricity contracts, including certain
capacity-energy contracts, to be excluded from the mark-to-market
requirements of SFAS No. 133. The interpretations were effective July
1, 2001. Those interpretations did not require the Company to
mark-to-market any of its electricity capacity-energy contracts
currently outstanding. In December 2001, the FASB revised the criteria
related to the exception for certain electricity contracts, with the
revision to be effective April 1, 2002. The revised interpretation did
not result in any significant changes to the Company's assessment of
mark-to-market requirements for its current contracts. If an
electricity or fuel supply contract in its regulated businesses is
subject to mark-to-market accounting, there generally would be no
income statement effect of the mark-to-market because such contracts
are generally reflected in fuel adjustment clauses so that the
contract's mark-to-market gain or loss would be recorded as a
regulatory asset or liability. Any mark-to-market gains or losses in
its non-regulated businesses would affect income unless those
contracts qualify for hedge accounting treatment.
The application of the new rules is still evolving, and further
guidance from the FASB is expected, which could additionally impact
the Company's financial statements.
See Note 6 for more information on SFAS No. 142, "Goodwill and Other
Intangible Assets."
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in July 2001. This statement provides accounting
requirements for retirement obligations associated with long-lived
assets and is effective January 1, 2003. This statement requires that
the present value of retirement costs for which the Company has a
legal obligation be recorded as liabilities with an equivalent amount
added to the asset cost and depreciated over an appropriate period.
The liability is then accreted over time by applying an interest
method of allocation to the beginning liability. The Company is in the
process of identifying retirement obligations. Areas that are being
reviewed include electric transmission and distribution, gas
production and distribution, nuclear decommissioning, all generating
facilities, coal mines, synthetic fuel facilities, terminals,
telecommunication assets, and assets that require special handling
under environmental regulations. The Company is also in the process of
quantifying the obligations that have been identified under the
measurement rules described in the standard. For regulated companies,
there is not expected to be any impact on earnings. For non-regulated
companies, the Company currently cannot predict the earnings impact.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
------------------------------------
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." This statement clarifies the criteria
for recording of other intangible assets separately from goodwill.
Effective January 1, 2002, goodwill is no longer subject to
amortization over its estimated useful life. Instead, goodwill is
subject to at least an annual assessment for impairment by applying a
two-step fair-value based test. This assessment could result in
periodic impairment charges.
The Company has completed the first step of the initial transitional
goodwill impairment test, which indicated that the Company's goodwill
was not impaired as of January 1, 2002.
The changes in the carrying amount of goodwill for the six months
ended June 30, 2002, by reportable segment, are as follows:
Florida
Power Progress
(in thousands) CP&L Electric Electric Ventures Other Total
------------- -------- -------- ----- -----
Balance as of January 1, 2002 $1,921,802 $1,733,448 $ - $34,960 $3,690,210
Acquisitions - - 33,747 - 33,747
Divestitures - - - (1,720) (1,720)
--------------- --------------- --------------- --------------- --------------
Balance as of June 30, 2002 $1,921,802 $1,733,448 $33,747 $33,240 $3,722,237
The acquired goodwill relates to the acquisition of Westchester Gas
Company in April 2002 (see Note 2).
13
As required by SFAS No. 142, the results for the prior year periods
have not been restated. A reconciliation of net income as if SFAS No.
142 had been adopted is presented below for the three and six months
ended June 30, 2001, and the years ending December 31, 2001, 2000 and
1999.
Three Months Ended Six Months Ended Year Ended Year Ended Year Ended
(in thousands, except per share data) June 30, 2001 June 30, 2001 2001 2000 1999
------------- ------------- ---- ---- ----
Reported net income $ 111,702 $ 265,705 $ 541,610 $ 478,361 $ 379,288
Add back: Goodwill amortization 24,762 47,649 96,828 14,100 3,968
--------- --------- --------- --------- ---------
Adjusted net income $ 136,464 $ 313,354 $ 638,438 $ 492,461 $ 383,256
Basic earnings per common share:
Reported net income $ 0.56 $ 1.33 $ 2.65 $ 3.04 $ 2.56
Adjusted net income $ 0.68 $ 1.57 $ 3.12 $ 3.13 $ 2.58
Diluted earnings per common share:
Reported net income $ 0.56 $ 1.32 $ 2.64 $ 3.03 $ 2.55
Adjusted net income $ 0.68 $ 1.56 $ 3.11 $ 3.12 $ 2.58
The gross carrying amount and accumulated amortization of the
Company's intangible assets as of June 30, 2002 and December 31, 2001
are as follows:
June 30, 2002 December 31, 2001
--------------------------------------- ------------------------------------------
(in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------ --------------------- --------------------- --------------------
Synthetic fuel intangibles (a) $ 140,469 $ (33,713) $ 140,469 $ (22,237)
Power sale agreements (b) 31,601 (2,297) - -
Customer contracts 17,300 (7,850) 17,300 (5,600)
Other 21,136 (471) 18,771 (338)
------------------ --------------------- --------------------- --------------------
Total $ 210,506 $ (44,331) $ 176,540 $ (28,175)
(a) Represents intangibles for synthetic fuel technology. These
intangibles are being amortized on a straight-line basis over the
period ending with the expiration of tax credits under Section 29 of
the Internal Revenue Code on December 31, 2007.
(b) Relates to the power sale agreements recorded as part of the
acquisition of generating assets from LG&E Energy Corp. (See Note 2),
which are amortized on a straight-line basis beginning with the
in-service date of these plants through December 31, 2004.
Total net intangible assets of $166.2 million and $148.4 million at
June 30, 2002, and December 31, 2001, respectively, are included in
other assets and deferred debits in the accompanying balance sheets.
Amortization expense recorded on intangible assets for the three and
six months ended June 30, 2002 was $8.1 million and $16.2 million,
respectively. The estimated amortization expense on intangible assets
for the next five years is as follows:
(in thousands)
2002 $ 33,663
2003 34,536
2004 36,311
2005 21,087
2006 20,419
7. COMPREHENSIVE INCOME
--------------------
Comprehensive income for the three and six months ended June 30, 2002,
was $119.6 million and $256.4 million, respectively. Comprehensive
income for the three and six months ended June 30, 2001, was $112.5
million and $231.5 million, respectively. Items of other comprehensive
income for the three-month and six-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 the cumulative effect of
implementing SFAS No. 133 as of January 1, 2001.
14
8. FINANCING ACTIVITIES
--------------------
On February 6, 2002, CP&L issued $48.5 million principal amount of
First Mortgage Bonds, Pollution Control Series W, Wake County
Pollution Control Revenue Refunding Bonds, 5.375% Series 2002 Due
February 1, 2017. On March 1, 2002, CP&L redeemed $48.5 million
principal amount of Pollution Control Revenue Bonds, Wake County
(Carolina Power & Light Company Project) Adjustable Rate Option Bond
1983 Series Due April 1, 2019, at 101.5% of the principal amount of
such bonds.
In February 2002, $50 million of Progress Capital Holdings, Inc. (PCH)
medium-term notes, 5.78% Series, matured. Progress Energy funded this
maturity through the issuance of commercial paper.
In March 2002, Progress Ventures, Inc. obtained a $440 million bank
facility that will be used exclusively for expansion of its
non-regulated generation portfolio. Borrowings under this facility are
secured by the assets in the generation portfolio. In March 2002 and
June 2002, Progress Ventures, Inc. made draws under this facility of
$120 million and $67 million, respectively.
On April 17, 2002, Progress Energy issued $350 million of senior
unsecured notes due 2007 with a coupon of 6.05% and $450 million of
senior secured notes due 2012 with a coupon of 6.85%. Proceeds from
this issuance were used to pay down commercial paper.
On June 27, 2002, CP&L announced the redemption of $500 million of
CP&L Extendible Notes due October 28, 2009, at 100% of the principal
amount of such notes. These notes were redeemed on July 29, 2002 and
CP&L funded the redemptions through the issuance of commercial paper.
On July 30, 2002, CP&L issued $500 million of senior unsecured notes
due 2012 with a coupon of 6.5%. Proceeds from this issuance were used
to pay down commercial paper.
On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54%
Series, matured. Florida Power funded this maturity through the
issuance of commercial paper.
On July 11, 2002, Florida Power announced the redemption of $108.55
million principal amount of Citrus County Pollution Control Refunding
Revenue Bonds, Series 1992 A Due January 1, 2027, $90 million
principal amount of Citrus County Pollution Control Refunding Revenue
Bonds, Series 1992 B Due February 1, 2022 and $10.115 million
principal amount of Pasco County Pollution Control Refunding Revenue
Bonds, Series 1992A Due February 1, 2022, at 102% of the principal
amount of such bonds and $32.2 million principal amount of Pinellas
County Pollution Control Refunding Revenue Bonds, Series 1991 Due
December 1, 2014 at 101% of the principal amount of such bonds. These
redemptions were finalized on August 12, 2002.
On July 16, 2002, Florida Power issued $108.55 million principal
amount of Citrus County Pollution Control Revenue Refunding Bonds,
Series 2002A Due January 1, 2027, $100.115 million principal amount of
Citrus County Pollution Control Revenue Refunding Bonds, Series 2002B
Due January 1, 2022 and $32.2 million principal amount of Citrus
County Pollution Control Revenue Refunding Bonds, Series 2002C Due
January 1, 2018. Proceeds from this issuance were used to redeem
Florida Power's pollution control revenue refunding bonds above.
On August 5, 2002, CP&L announced the redemption of $150 million of
First Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the
principal amount of such bonds. CP&L intends to redeem these notes on
September 4, 2002.
9. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
------------------------------------------------------
Progress Energy uses interest rate derivative instruments to adjust
the fixed and variable rate debt components of its debt portfolio.
During March, April and May 2002, Progress Energy converted $1.0
billion of fixed rate debt into variable rate debt by executing
interest rate derivative agreements with a total notional amount of
$1.0 billion with a group of five banks. Under the terms of the
agreements, which were scheduled to mature in 2006 and 2007 and
coincide with the maturity dates of the related debt issuances,
Progress Energy received a fixed rate and paid a floating rate based
on three-month LIBOR. These instruments were designated as fair value
hedges for accounting purposes. In June 2002, Progress Energy
terminated these agreements. As a result of the agreements, at June
30, 2002, Progress Energy had a debt premium of $21.2 million, which
will be amortized and recorded as a reduction to interest expense over
the life of the related debt issuances.
15
Progress Ventures, Inc. is required to hedge 75 percent of the amounts
outstanding under its bank facility pursuant to the terms of the
agreement for expansion of its non-regulated generation portfolio. In
May 2002, Progress Ventures, Inc. entered into hedges that included a
series of zero cost collars that have been designated as cash flow
hedges for accounting purposes. The fair value of these instruments
was a $2.1 million liability position at June 30, 2002.
In April, May and June 2002, CP&L entered into a series of Treasury
Rate Locks to hedge its exposure to interest rates with regard to a
future issuance of fixed-rate debt. These agreements have a
computational period of ten years. The fair value of the swaps was a
$8.5 million liability position at June 30, 2002. These instruments
were designated as cash flow hedges for accounting purposes. The
agreements, with a total notional amount of $350 million, were
terminated simultaneously with the pricing of the $500 million CP&L
senior unsecured notes in July 2002. CP&L realized a $22.5 million
hedging loss, which will be amortized and recorded as an adjustment to
interest expense over the life of the notes.
In August 2002, Progress Energy converted $400 million of fixed rate
debt into variable rate debt by executing interest rate derivative
agreements with two counterparties with a total notional amount of
$400 million. Under the terms of the agreements, which expire in 2006
and coincide with the maturity date of the related debt issuance,
Progress Energy will receive a fixed rate of 3.26% and will pay a
floating rate based on three-month LIBOR. These instruments were
designated as fair value hedges for accounting purposes.
The notional amount of the above contracts is not exchanged and does
not represent exposure to credit loss. In the event of default by a
counterparty, the risk in the transaction is the cost of replacing the
agreements at current market rates. Progress Energy only enters into
swap agreements with strong creditworthy counterparties.
10. EARNINGS PER COMMON SHARE
-------------------------
Restricted stock awards and contingently issuable shares had a
dilutive effect on earnings per share for the six months ended June
30, 2001. As of June 30, 2002, options granted in 2001 and 2002 to
purchase 2.4 million shares of common stock with a weighted-average
exercise price of $43.73 were outstanding.
A reconciliation of the weighted average number of common shares
outstanding for basic and dilutive purposes is as follows (in
thousands):
Three Months Ended, Six Months Ended,
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Weighted Average Common Shares - Basic 215,007 200,043 213,999 199,922
Restricted Stock Awards 734 677 690 651
Stock Options 333 - 224 -
---------- ---------- ---------- ----------
Weighted Average Shares - Fully Dilutive 216,074 200,720 214,913 200,573
Employee Stock Ownership Plan shares that have not been committed to
be released to participants' accounts are not considered outstanding
for the determination of earnings per common share. Those shares
totaled 4,759,277 and 5,330,408 at June 30, 2002 and June 30, 2001,
respectively.
11. FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A
----------------------------------------------------------------------
SUBSIDIARY HOLDING SOLELY FPC GUARANTEED NOTES
----------------------------------------------
In April 1999, FPC Capital I (the Trust), an indirect wholly-owned
subsidiary of FPC, issued 12 million shares of $25 par cumulative
FPC-obligated mandatorily redeemable preferred securities (Preferred
Securities) due 2039, with an aggregate liquidation value of $300
million and an annual distribution rate of 7.10%. Currently, all 12
million shares of the Preferred Securities that were issued are
outstanding. Concurrent with the issuance of the Preferred Securities,
the Trust issued to Florida Progress Funding Corporation (Funding
Corp.) all of the common securities of the Trust (371,135 shares) for
$9.3 million. Funding Corp. is a direct wholly owned subsidiary of
FPC.
16
The existence of the Trust is for the sole purpose of issuing the
Preferred Securities and the common securities and using the proceeds
thereof to purchase from Funding Corp. its 7.10% Junior Subordinated
Deferrable Interest Notes (subordinated notes) due 2039, for a
principal amount of $309.3 million. The subordinated notes and the
Notes Guarantee (as discussed below) are the sole assets of the Trust.
Funding Corp.'s proceeds from the sale of the subordinated notes were
advanced to Progress Capital and used for general corporate purposes
including the repayment of a portion of certain outstanding short-term
bank loans and commercial paper.
FPC has fully and unconditionally guaranteed the obligations of
Funding Corp. under the subordinated notes (the Notes Guarantee). In
addition, FPC has guaranteed the payment of all distributions required
to be made by the Trust, but only to the extent that the Trust has
funds available for such distributions (Preferred Securities
Guarantee). The Preferred Securities Guarantee, considered together
with the Notes Guarantee, constitutes a full and unconditional
guarantee by FPC of the Trust's obligations under the Preferred
Securities.
The subordinated notes may be redeemed at the option of Funding Corp.
beginning in 2004 at par value plus accrued interest through the
redemption date. The proceeds of any redemption of the subordinated
notes will be used by the Trust to redeem proportional amounts of the
Preferred Securities and common securities in accordance with their
terms. Upon liquidation or dissolution of Funding Corp., holders of
the Preferred Securities would be entitled to the liquidation
preference of $25 per share plus all accrued and unpaid dividends
thereon to the date of payment.
These Preferred Securities are classified as long-term debt on the
Company's consolidated balance sheets.
12. COMMITMENTS AND CONTINGENCIES
-----------------------------
Contingencies and significant changes to the commitments discussed in
Note 20 of the financial statements included in the Company's 2001
Annual Report on Form 10-K are described below.
Commitments
1) Guarantees
----------
During the first six months of 2002, Progress Energy issued
approximately $582 million of guarantees on behalf of Progress
Ventures for obligations under power purchase agreements, tolling
agreements, construction agreements and trading operations.
Approximately $441 million of these commitments relate to certain
guarantee agreements issued to support obligations related to
Progress Venture's expansion of its non-regulated generation
portfolio. These guarantees ensure performance under generation
construction and operating agreements.
The remaining $141 million of these new commitments are
guarantees issued to support Progress Ventures' energy trading
and marketing functions. The contracts supporting the guarantees
contain language regarding downgrade events, ratings triggers,
and netting and offset provisions.
Contingencies
1) Impairment of Long-Lived Assets
-------------------------------
Due to the recent decline of the telecommunications industry, the
Company has initiated a valuation study to assess the
recoverability of Progress Telecom's and Caronet's long-lived
assets, which totaled approximately $288 and $111 million,
respectively, at June 30, 2002. The Company expects to record an
impairment in the third quarter. Progress Telecom is currently
providing broadband services to WorldCom Inc. and its
subsidiaries. Due to WorldCom Inc.'s bankruptcy filing in July
2002, the Company is assessing what impact, if any, the WorldCom
Inc. developments will have on Progress Telecom's operations.
Progress Energy does not expect the WorldCom Inc. developments to
have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
17
2) IRS Audit
---------
One of Progress Energy's synthetic fuel entities, Colona Synfuel
Limited Partnership, L.L.L.P., is being audited by the IRS. The
Company has been allocated approximately $220 million in tax
credits to date for this synthetic fuel entity. As provided for
in contractual arrangements pertaining to Progress Energy's
purchase of Colona, the Company has begun escrowing quarterly
royalty payments owed to an unaffiliated entity until final
resolution of the audit. In management's opinion, Progress Energy
is complying with all the necessary requirements to be allowed
such credits and believes it is likely, although it cannot
provide certainty, that it will prevail if challenged by the IRS
on any credits taken. The timing for the ultimate disposition of
this audit is uncertain.
3) Franchise Taxes
---------------
CP&L, like other electric power companies in North Carolina, pays
a franchise tax levied by the State pursuant to North Carolina
General Statutes Section 105-116, a state-level annual franchise
tax (State Franchise Tax). Part of the revenue generated by the
State Franchise Tax is required by North Carolina General
Statutes Section 105-116.1(b) to be distributed to North Carolina
cities in which CP&L maintains facilities. CP&L has paid and
continues to pay the State Franchise Tax to the state when such
taxes are due. However, pursuant to an Executive Order issued on
February 5, 2002, by the Governor of North Carolina, the
Secretary of Revenue withheld distributions of State Franchise
Tax revenues to cities for two quarters of fiscal year 2001-2002
in an effort to balance the state's budget.
In response to the state's failure to distribute the State
Franchise Tax proceeds, certain cities in which CP&L maintains
facilities adopted municipal franchise tax ordinances purporting
to impose on CP&L a local franchise tax. The local taxes are
intended to be collected for as long as the state withholds
distribution of the State Franchise Tax proceeds from the cities.
The first local tax payments would be due August 15, 2002. On
August 2, 2002, CP&L filed a lawsuit against the cities seeking
to enjoin the enforcement of the local taxes and to have the
local ordinances struck down because the ordinances are beyond
the cities' statutory authority and violate provisions of the
North Carolina and United States Constitutions. Progress Energy
cannot predict the outcome of this matter.
4) Claims and Uncertainties.
-------------------------
a) The Company is subject to federal, state and local regulations
addressing air and water quality, hazardous and solid waste
management and other environmental matters.
Various organic materials associated with the production of
manufactured gas, generally referred to as coal tar, are
regulated under federal and state laws. The lead or sole
regulatory agency that is responsible for a particular former
coal tar site depends largely upon the state in which the site is
located. There are several manufactured gas plant (MGP) sites to
which both electric utilities and the gas utility have some
connection. In this regard, both electric utilities and the gas
utility, with other potentially responsible parties, are
participating in investigating and, if necessary, remediating
former coal tar sites with several regulatory agencies,
including, but not limited to, the U.S. Environmental Protection
Agency (EPA), the Florida Department of Environmental Protection
(FDEP) and the North Carolina Department of Environment and
Natural Resources, Division of Waste Management (DWM). In
addition, both electric utilities, the gas utility and Progress
Ventures are periodically notified by regulators such as the EPA
and various state agencies of their involvement or potential
involvement in sites, other than MGP sites, that may require
investigation and/or remediation. A discussion of these sites by
legal entity follows.
18
CP&L. There are 12 former MGP sites and 14 other active waste
-----
sites associated with CP&L that have required or are anticipated
to require investigation and/or remediation costs. As of June 30,
2002, CP&L has not recorded any accruals for investigation and/or
remediation costs for these sites. CP&L received insurance
proceeds to address costs associated with CP&L waste sites. All
eligible expenses related to these waste costs are charged
against a centralized fund containing these proceeds. As of June
30, 2002, approximately $8.7 million remains in this centralized
fund. As costs associated with CP&L's share of investigation and
remediation of these sites become known, the fund is assessed to
determine if additional accruals will be required. CP&L does not
believe that it can provide an estimate of the reasonably
possible total remediation costs beyond what remains in the
centralized fund. This is due to the fact that the sites are at
different stages: investigation has not begun at 15 sites,
investigation has begun but remediation cannot be estimated at 7
sites and 4 sites have begun remediation. CP&L measures its
liability for these sites based on available evidence including
its experience in investigation and remediation of contaminated
sites, which also involves assessing and developing cost-sharing
arrangements with other potentially responsible parties. Once the
centralized fund is depleted, CP&L will accrue costs for the
sites to the extent its liability is probable and the costs can
be reasonably estimated. Therefore, CP&L cannot currently
determine the total costs that may be incurred in connection with
the remediation of all sites. According to current information,
these future costs at the CP&L sites are not material to the
Company's financial condition or results of operations. A
rollforward of the balance in this fund is not provided due to
the immateriality of this activity in the periods presented.
Florida Power. There are two former MGP sites and 8 other active
--------------
waste sites or categories of sites associated with Florida Power
that have required or are anticipated to require investigation
and/or remediation costs. As of June 30, 2002, Florida Power has
accrued approximately $8.4 million for probable and reasonably
estimable costs at these sites. Florida Power believes that the
maximum liability it can currently estimate on these sites is
$12.9 million. As more activity occurs at these sites, Florida
Power will assess the need to adjust the accruals. These accruals
have been recorded on an undiscounted basis. Florida Power
measures its liability for these sites based on available
evidence including its experience in investigation and/or
remediation of contaminated sites, which includes assessing and
developing cost-sharing arrangements with other potentially
responsible parties. A rollforward of the balance in this accrual
is not provided due to the immateriality of this activity in the
periods presented.
NCNG. There are 5 former MGP sites associated with NCNG that have
-----
or are estimated to have investigation or remediation costs
associated with them. As of June 30, 2002, NCNG has accrued
approximately $2.7 million for probable and reasonably estimable
remediation costs at these sites. These accruals have been
recorded on an undiscounted basis. NCNG measures its liability
for these sites based on available evidence including its
experience in investigation and remediation of contaminated
sites, which also involves assessing and developing cost-sharing
arrangements with other potentially responsible parties. NCNG
will accrue costs for the sites to the extent its liability is
probable and the costs can be reasonably estimated. NCNG does not
believe it can provide an estimate of the reasonably possible
total remediation costs beyond the accrual because three of the
five sites associated with NCNG have not begun investigation
activities. Therefore, NCNG cannot currently determine the total
costs that may be incurred in connection with the investigation
and/or remediation of all sites. According to current
information, these future costs at the NCNG sites are not
material to the Company's financial condition or results of
operations. A rollforward of the balance in this accrual is not
provided due to the immateriality of this activity for the
periods presented. NCNG has received insurance proceeds
associated with pollution liability settlements. In addition,
NCNG is receiving approximately $5,000 per month in its rates to
fund expenses associated with its share of costs to investigate,
and if necessary, remediate these sites.
19
As part of the sale of the Inland Marine Transportation segment
to AEP Resources in 2001, Florida Progress established an accrual
to address liabilities which may result from known and unknown
environmental liabilities but primarily to address contamination
in soil and potentially groundwater at one site. The balance in
this accrual is $9.9 million at June 30, 2002. Florida Progress
estimates that its maximum contractual liability to AEP Resources
associated with Inland Marine Transportation segment is $60
million. These accruals have been determined on an undiscounted
basis. Florida Progress measures its liability for this site
based on estimable and probable remediation scenarios. A
rollforward of the balance in this accrual is not provided due to
the immateriality of this activity for the periods presented. The
Company believes that it is reasonably possible that additional
costs, which cannot be currently estimated, may be incurred
related to the environmental indemnification provision beyond the
amounts accrued. The Company cannot predict the outcome of this
matter.
The Company is also currently in the process of assessing
potential costs and exposures at other sites it has been notified
of. As the assessments are developed and analyzed, the Company
will accrue costs for the sites to the extent the costs are
probable and can be reasonably estimated.
There has been and may be further proposed federal legislation
requiring reductions in air emissions for nitrogen oxides, sulfur
dioxide, carbon dioxide and mercury setting forth national caps
and emission levels over an extended period of time. This
national multi-pollutant approach would have significant costs
which could be material to the Company's consolidated financial
position or results of operations. Some companies may seek
recovery of the related cost through rate adjustments or similar
mechanisms. Control equipment that will be installed on North
Carolina fossil generating facilities as part of the North
Carolina legislation discussed below may address some of the
issues outlined above. The Company cannot predict the outcome of
this matter.
The EPA has been conducting an enforcement initiative related to
a number of coal-fired utility power plants in an effort to
determine whether modifications at those facilities were subject
to New Source Review requirements or New Source Performance
Standards under the Clean Air Act. Both CP&L and Florida Power
were asked to provide information to the EPA as part of this
initiative and cooperated in providing the requested information.
The EPA has initiated civil enforcement actions against other
unaffiliated utilities as part of this initiative, some of which
have resulted in settlement agreements calling for expenditures,
ranging from $1.0 billion to $1.4 billion. A utility that was not
subject to a civil enforcement action settled its New Source
Review issues with the EPA for $300 million. These settlement
agreements have generally called for expenditures to be made over
extended time periods, and some of the companies may seek
recovery of the related cost through rate adjustments or similar
mechanisms. The Company cannot predict the outcome of this
matter.
In 1998, the EPA published a final rule addressing the issue of
regional transport of ozone. This rule is commonly known as the
NOx SIP Call. The EPA's rule requires 23 jurisdictions, including
North Carolina, South Carolina and Georgia, but not Florida, to
further reduce nitrogen oxide emissions in order to attain a
pre-set state NOx emission level by May 31, 2004. CP&L is
evaluating necessary measures to comply with the rule and
estimates its related capital expenditures to meet these measures
in North and South Carolina could be approximately $370 million,
which has not been adjusted for inflation. Increased operation
and maintenance costs relating to the NOx SIP Call are not
expected to be material to the Company's results of operations.
Further controls are anticipated as electricity demand increases.
The Company cannot predict the outcome of this matter.
20
In July 1997, the EPA issued final regulations establishing a new
eight-hour ozone standard. In October 1999, the District of
Columbia Circuit Court of Appeals ruled against the EPA with
regard to the federal eight-hour ozone standard. The U.S. Supreme
Court has upheld, in part, the District of Columbia Circuit Court
of Appeals decision. Further litigation and rulemaking are
anticipated. North Carolina adopted the federal eight-hour ozone
standard and is proceeding with the implementation process. North
Carolina has promulgated final regulations, which will require
CP&L to install nitrogen oxide controls under the State's
eight-hour standard. The cost of those controls are included in
the cost estimate of $370 million set forth above.
The EPA published a final rule approving petitions under Section
126 of the Clean Air Act, which requires certain sources to make
reductions in nitrogen oxide emissions by May 1, 2003. The final
rule also includes a set of regulations that affect nitrogen
oxide emissions from sources included in the petitions. The North
Carolina fossil-fueled electric generating plants are included in
these petitions. Acceptable state plans under the NOx SIP Call
can be approved in lieu of the final rules the EPA approved as
part of the 126 petitions. CP&L, other utilities, trade
organizations and other states participated in litigation
challenging the EPA's action. On May 15, 2001, the District of
Columbia Circuit Court of Appeals ruled in favor of the EPA which
will require North Carolina to make reductions in nitrogen oxide
emissions by May 1, 2003. However, the Court in its May 15th
decision rejected the EPA's methodology for estimating the future
growth factors the EPA used in calculating the emissions limits
for utilities. In August 2001, the Court granted a request by
CP&L and other utilities to delay the implementation of the 126
Rule for electric generating units pending resolution by the EPA
of the growth factor issue. The Court's order tolls the
three-year compliance period (originally set to end on May 1,
2003) for electric generating units as of May 15, 2001. On April
30, 2002, the EPA published a final rule harmonizing the dates
for the Section 126 Rule and the NOx SIP Call. In addition, the
EPA determined in this rule that the future growth factor
estimation methodology was appropriate. The new compliance date
for all affected sources is now May 31, 2004, rather than May 1,
2003. The Company cannot predict the outcome of this matter.
On June 20, 2002, legislation was enacted in North Carolina
requiring the state's electric utilities to further reduce the
emissions of nitrogen oxide and sulfur dioxide from coal-fired
power plants. These levels exceed requirements discussed above
with regard to the NOx SIP Call, Section 126 petitions or Title
IV of the Clean Air Act. Progress Energy expects its capital
costs to meet these emission targets will be approximately $813
million. CP&L currently has approximately 5,100 MW of coal-fired
generation in North Carolina that is affected by this
legislation. The legislation requires the emissions reductions to
be completed in phases by 2013, and applies to each utilities'
total system rather than setting requirements for individual
power plants. The legislation also freezes the utilities' base
rates for five years unless there are extraordinary events beyond
the control of the utility or unless the utility persistently
earns a return substantially in excess of the rate of return
established and found reasonable by the NCUC in the utility's
last general rate case. Further, the legislation allows the
utilities to recover from their retail customers the projected
capital costs during the first seven years of the 10-year
compliance period beginning on January 1, 2003. The utilities
must recover at least 70% of their projected capital costs during
the five-year rate freeze period. Pursuant to the new law, CP&L
entered into an agreement with the state of North Carolina to
transfer to the state all future emissions allowances it
generates from over-complying with the new emission limits when
these units are completed. The new law also requires the state to
undertake a study of mercury and carbon dioxide emissions in
North Carolina. Progress Energy cannot predict the future
regulatory interpretation, implementation or impact of this new
law.
CP&L, Florida Power, Progress Ventures and NCNG have filed claims
with the Company's general liability insurance carriers to
recover costs arising out of actual or potential environmental
liabilities. Some claims have been settled and others are still
pending. While management cannot predict the outcome of these
matters, the outcome is not expected to have a material effect on
the consolidated financial position or results of operations.
21
b) The Company and its subsidiaries are involved in various
litigation matters in the ordinary course of business, some of
which involve substantial amounts. Where appropriate, accruals
have been made in accordance with SFAS No. 5, "Accounting for
Contingencies," to provide for such matters. In the opinion of
management, the final disposition of pending litigation would not
have a material adverse effect on the Company's consolidated
results of operations or financial position.
22
CAROLINA POWER & LIGHT COMPANY
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2002
STATEMENTS OF INCOME
Three Months Ended Six Months Ended
(Unaudited) June 30, June 30,
(In thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 834,658 $ 782,287 $1,646,139 $1,603,861
Diversified businesses 3,434 1,092 6,823 6,121
- --------------------------------------------------------------------------------------------------------------
Total Operating Revenues 838,092 783,379 1,652,962 1,609,982
- --------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 173,120 157,672 347,023 311,141
Purchased power 90,918 85,273 164,228 177,202
Other operation and maintenance 191,744 179,434 383,004 348,088
Depreciation and amortization 133,459 139,831 274,844 277,792
Taxes other than on income 36,075 35,822 74,843 74,259
Diversified businesses 2,754 957 5,815 5,470
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses 628,070 598,989 1,249,757 1,193,952
- --------------------------------------------------------------------------------------------------------------
Operating Income 210,022 184,390 403,205 416,030
- --------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 3,202 6,340 4,868 11,025
Other, net 4,652 2,536 1,680 11,921
- --------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) 7,854 8,876 6,548 22,946
- --------------------------------------------------------------------------------------------------------------
Interest Charges
Gross interest charges 56,255 65,326 117,899 130,180
Allowance for borrowed funds used during
construction (2,779) (1,576) (5,873) (4,349)
- --------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 53,476 63,750 112,026 125,831
- --------------------------------------------------------------------------------------------------------------
Income before Income Taxes 164,400 129,516 297,727 313,145
Income Taxes 33,248 44,637 81,456 107,393
- --------------------------------------------------------------------------------------------------------------
Net Income 131,152 84,879 216,271 205,752
Preferred Stock Dividend Requirements (741) (741) (1,482) (1,482)
- --------------------------------------------------------------------------------------------------------------
Earnings for Common Stock 130,411 84,138 214,789 204,270
- --------------------------------------------------------------------------------------------------------------
See notes to Carolina Power & Light Company Interim Financial Statements.
23
Carolina Power & Light Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands) June 30, December 31,
Assets 2002 2001
- -----------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 12,054,025 $ 12,024,291
Accumulated depreciation (6,182,956) (5,952,206)
- -----------------------------------------------------------------------------------------------
Utility plant in service, net 5,871,069 6,072,085
Held for future use 7,105 7,105
Construction work in progress 698,156 711,129
Nuclear fuel, net of amortization 172,890 200,332
- -----------------------------------------------------------------------------------------------
Total Utility Plant, Net 6,749,220 6,990,651
- -----------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 11,030 21,250
Accounts receivable 324,860 317,714
Unbilled accounts receivable 150,901 136,514
Receivables from affiliated companies 67,503 27,180
Taxes receivable - 17,543
Inventory 358,763 365,501
Deferred fuel cost 118,748 131,505
Prepayments 28,011 11,863
Other current assets 64,960 66,193
- -----------------------------------------------------------------------------------------------
Total Current Assets 1,124,776 1,095,263
- -----------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 263,493 277,550
Nuclear decommissioning trust funds 429,676 416,721
Diversified business property, net 118,630 111,802
Miscellaneous other property and investments 242,807 231,325
Other assets and deferred debits 117,035 135,373
- -----------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,171,641 1,172,771
- -----------------------------------------------------------------------------------------------
Total Assets $ 9,045,637 $ 9,258,685
- -----------------------------------------------------------------------------------------------
Capitalization and Liabilities
- -----------------------------------------------------------------------------------------------
Capitalization
Common stock $ 1,921,068 $ 1,904,246
Unearned ESOP common stock (104,703) (114,385)
Retained earnings 1,336,831 1,312,641
Accumulated other comprehensive loss (5,156) (7,046)
- -----------------------------------------------------------------------------------------------
Total common stock equity 3,148,040 3,095,456
Preferred stock - not subject to mandatory redemption 59,334 59,334
Long-term debt, net 3,102,181 2,958,853
- -----------------------------------------------------------------------------------------------
Total Capitalization 6,309,555 6,113,643
- -----------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 250,000 600,000
Accounts payable 194,039 300,829
Payables to affiliated companies 151,176 106,114
Notes payable affiliated companies 11,539 47,913
Taxes accrued 82,013 -
Interest accrued 65,314 61,124
Other current liabilities 156,702 208,645
- -----------------------------------------------------------------------------------------------
Total Current Liabilities 910,783 1,324,625
- -----------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,304,892 1,316,823
Accumulated deferred investment tax credits 164,062 170,302
Regulatory liabilities 7,774 7,494
Other liabilities and deferred credits 348,571 325,798
- -----------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 1,825,299 1,820,417
- -----------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 7)
- -----------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 9,045,637 $ 9,258,685
- -----------------------------------------------------------------------------------------------
See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements.
24
Carolina Power & Light Company
STATEMENTS OF CASH FLOWS Six Months Ended
(Unaudited) June 30,
(In thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 216,271 $ 205,752
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 313,476 324,996
Deferred income taxes (25,358) (63,765)
Investment tax credit (6,240) (9,241)
Deferred fuel cost (credit) 12,757 (5,059)
Net (increase) decrease in accounts receivable 183,507 (1,266)
Net increase in inventories (2,574) (53,729)
Net (increase) decrease in prepaids and other current assets (14,916) 12,776
Net decrease in accounts payable (1,012) (295,481)
Net increase in other current liabilities 93,501 47,832
Other 15,886 31,124
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 785,298 193,939
- ----------------------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (297,761) (387,253)
Nuclear fuel additions (25,485) (45,813)
Contributions to nuclear decommissioning trust (17,915) (17,899)
Net cash flow of company-owned life insurance program (5,178) (6,098)
Diversified business property additions (10,439) (1,714)
Investments in non-utility activities (1,478) (5,179)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (358,256) (463,956)
- ----------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 47,417 296,747
Net increase (decrease) in commercial paper reclassified to long-term debt (207,535) 103,558
Net increase (decrease) in intercompany notes (36,374) 775
Retirement of long-term debt (48,689) (163)
Dividends paid to parent (190,599) (124,466)
Dividends paid on preferred stock (1,482) (1,482)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities (437,262) 274,969
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (10,220) 4,952
Cash and Cash Equivalents at Beginning of the Period 21,250 30,070
- ----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 11,030 $ 35,022
- ----------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 103,911 $ 117,330
income taxes $ 61,163 $ 127,296
See Note 2 for non-cash investing activity.
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements.
25
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
Organization. Carolina Power & Light Company (CP&L) is a public
-------------
service corporation primarily engaged in the generation, transmission,
distribution and sale of electricity in portions of North Carolina and
South Carolina. CP&L is a wholly owned subsidiary of Progress Energy,
Inc. (the Company or Progress Energy). The Company is a registered
holding company under the Public Utility Holding Company Act (PUCHA)
of 1935, as amended. Both the Company and its subsidiaries are subject
to the regulatory provisions of PUCHA.
Basis of Presentation. These financial statements have been prepared
----------------------
in accordance with accounting principles generally accepted in the
United States of America (generally accepted accounting principles)
for interim financial information and with the instructions to Form
10-Q and Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Because the accompanying
consolidated interim financial statements do not include all of the
information and footnotes required by generally accepted accounting
principles, they should be read in conjunction with the audited
financial statements for the period ended December 31, 2001 and notes
thereto included in CP&L's Form 10-K for the year ended December 31,
2001.
The amounts included in the consolidated interim financial statements
are unaudited but, in the opinion of management, reflect all
adjustments necessary to fairly present CP&L's financial position and
results of operations for the interim periods. Due to seasonal weather
variations and the timing of outages of electric generating units,
especially nuclear-fueled units, the results of operations for interim
periods are not necessarily indicative of amounts expected for the
entire year. Certain amounts for 2001 have been reclassified to
conform to the 2002 presentation, with no effect on previously
reported net income or common stock equity.
In preparing financial statements that conform with generally accepted
accounting principles, management must make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial
statements and amounts of revenues and expenses reflected during the
reporting period. Actual results could differ from those estimates.
2. FINANCIAL INFORMATION BY BUSINESS SEGMENT
-----------------------------------------
CP&L's operations consist primarily of the CP&L Electric segment with
no other material segments.
The financial information by business segment for CP&L Electric for
the three and six months ended June 30, 2002 and 2001 is as follows:
(In thousands) Three Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
-------------------------------------------------------------------------------------------
Revenues $834,658 $782,287 $1,646,139 $1,603,861
Segment Income $131,690 $84,022 $217,222 $205,491
Total Segment Assets (a) $8,669,993 $8,942,454 $8,669,993 $8,942,454
===========================================================================================
(a) CP&L Electric's total segment assets at June 30, 2002,
decreased from the prior year due to the transfer of the Rowan
plant to Progress Ventures in February 2002 in the amount of
approximately $245 million.
The primary differences between the CP&L Electric and CP&L
consolidated financial information relate to other non-electric
operations and elimination entries.
26
3. IMPACT OF NEW ACCOUNTING STANDARD
---------------------------------
During the second quarter of 2001, the Financial Accounting Standards
Board (FASB) issued interpretations of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative and Hedging
Activities," (SFAS No. 133) indicating that options in general cannot
qualify for the normal purchases and sales exception, but provided an
exception that allows certain electricity contracts, including certain
capacity-energy contracts, to be excluded from the mark-to-market
requirements of SFAS No. 133. The interpretations were effective July
1, 2001. Those interpretations did not require CP&L to mark-to-market
any of its electricity capacity-energy contracts currently
outstanding. In December 2001, the FASB revised the criteria related
to the exception for certain electricity contracts, with the revision
to be effective April 1, 2002. The revised interpretation did not
result in any significant changes to CP&L's assessment of
mark-to-market requirements for its current contracts. If an
electricity or fuel supply contract in its regulated businesses is
subject to mark-to-market accounting, there generally would be no
income statement effect of the mark-to-market because such contracts
are generally reflected in fuel adjustment clauses so that the
contract's mark-to-market gain or loss would be recorded as a
regulatory asset or liability. Any mark-to-market gains or losses in
its non-regulated businesses would affect income unless those
contracts qualify for hedge accounting treatment.
The application of the new rules is still evolving, and further
guidance from the FASB is expected, which could additionally impact
CP&L's financial statements.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in July 2001. This statement provides accounting
requirements for retirement obligations associated with long-lived
assets and is effective January 1, 2003. This statement requires that
the present value of retirement costs for which CP&L has a legal
obligation be recorded as liabilities with an equivalent amount added
to the asset cost and depreciated over an appropriate period. The
liability is then accreted over time by applying an interest method of
allocation to the beginning liability. CP&L is in the process of
identifying retirement obligations. Areas that are being reviewed
include electric transmission and distribution, nuclear
decommissioning, all generating facilities, telecommunication assets,
and assets that require special handling under environmental
regulations. CP&L is also in the process of quantifying the
obligations that have been identified under the measurement rules
described in the standard. For CP&L's regulated operations, there is
not expected to be any impact on earnings. CP&L currently cannot
predict the earnings impact on its non-regulated companies.
4. COMPREHENSIVE INCOME
--------------------
Comprehensive income for the three and six months ended June 30, 2002
was $129.6 million and $218.2 million, respectively. Comprehensive
income for the three and six months ended June 30, 2001 was $84.8
million and $201.1 million, respectively. Items of other comprehensive
income for the three-month and six-month periods consisted primarily
of changes in fair value of derivatives used to hedge cash flows
related to interest on long-term debt, and the cumulative effect of
adopting SFAS No. 133 as of January 1, 2001.
5. FINANCING ACTIVITIES
--------------------
On February 6, 2002, CP&L issued $48.5 million principal amount of
First Mortgage Bonds, Pollution Control Series W, Wake County
Pollution Control Revenue Refunding Bonds, 5.375% Series 2002 Due
February 1, 2017. On March 1, 2002, CP&L redeemed $48.5 million
principal amount of Pollution Control Revenue Bonds, Wake County
(Carolina Power & Light Company Project) Adjustable Rate Option Bond
1983 Series Due April 1, 2019, at 101.5% of the principal amount of
such bonds.
On June 27, 2002, CP&L announced the redemption of $500 million of
CP&L Extendible Notes due October 28, 2009, at 100% of the principal
amount of such notes. These notes were redeemed on July 29, 2002 and
CP&L funded the redemptions through the issuance of commercial paper.
On July 30, 2002, CP&L issued $500 million of senior unsecured notes
due 2012 with a coupon of 6.5%. Proceeds from this issuance were used
to pay down commercial paper.
On August 5, 2002, CP&L announced the redemption of $150 million of
First Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the
principal amount of such bonds. CP&L intends to redeem these notes on
September 4, 2002.
27
6. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
------------------------------------------------------
In April, May and June 2002, CP&L entered into a series of Treasury
Rate Locks to hedge its exposure to interest rates with regard to a
future issuance of fixed-rate debt. These agreements have a
computational period of ten years. The fair value of the swaps was a
$8.5 million liability position at June 30, 2002. These instruments
were designated as cash flow hedges for accounting purposes. The
agreements, with a total notional amount of $350 million, were
terminated simultaneously with the pricing of the $500 million CP&L
senior unsecured notes in July 2002. CP&L realized a $22.5 million
hedging loss, which will be amortized and recorded as an adjustment to
interest expense over the life of the notes.
The notional amount of the above contracts is not exchanged and does
not represent exposure to credit loss. In the event of default by a
counterparty, the risk in the transaction is the cost of replacing the
agreements at current market rates. CP&L only enters into swap
agreements with strong creditworthy counterparties.
7. COMMITMENTS AND CONTINGENCIES
-----------------------------
Contingencies existing as of the date of these statements are
described below. No significant changes have occurred since December
31, 2001, with respect to the commitments discussed in Note 15 of the
financial statements included in CP&L's 2001 Annual Report on Form
10-K.
Contingencies
1) Impairment of Long-Lived Assets
-------------------------------
Due to the recent decline of the telecommunications industry,
CP&L has initiated a valuation study to assess the recoverability
of Caronet's long-lived assets, which totaled approximately $111
million at June 30, 2002. CP&L expects to record an impairment in
the third quarter.
2) Franchise Taxes
---------------
CP&L, like other electric power companies in North Carolina, pays
a franchise tax levied by the State pursuant to North Carolina
General Statutes Section 105-116, a state-level annual franchise
tax (State Franchise Tax). Part of the revenue generated by the
State Franchise Tax is required by North Carolina General
Statutes Section 105-116.1(b) to be distributed to North Carolina
cities in which CP&L maintains facilities. CP&L has paid and
continues to pay the State Franchise Tax to the state when such
taxes are due. However, pursuant to an Executive Order issued on
February 5, 2002, by the Governor of North Carolina, the
Secretary of Revenue withheld distributions of State Franchise
Tax revenues to cities for two quarters of fiscal year 2001-2002
in an effort to balance the state's budget.
In response to the state's failure to distribute the State
Franchise Tax proceeds, certain cities in which CP&L maintains
facilities adopted municipal franchise tax ordinances purporting
to impose on CP&L a local franchise tax. The local taxes are
intended to be collected for as long as the state withholds
distribution of the State Franchise Tax proceeds from the cities.
The first local tax payments would be due August 15, 2002. On
August 2, 2002, CP&L filed a lawsuit against the cities seeking
to enjoin the enforcement of the local taxes and to have the
local ordinances struck down because the ordinances are beyond
the cities' statutory authority and violate provisions of the
North Carolina and United States Constitutions. CP&L cannot
predict the outcome of this matter.
28
3) Claims and Uncertainties.
-------------------------
a) CP&L is subject to federal, state and local regulations
addressing air and water quality, hazardous and solid waste
management and other environmental matters.
Various organic materials associated with the production of
manufactured gas, generally referred to as coal tar, are
regulated under federal and state laws. The lead or sole
regulatory agency that is responsible for a particular former
coal tar site depends largely upon the state in which the site is
located. There are several manufactured gas plant (MGP) sites to
which CP&L has some connection. In this regard, CP&L, with other
potentially responsible parties, are participating in
investigating and, if necessary, remediating former coal tar
sites with several regulatory agencies, including, but not
limited to, the U.S. Environmental Protection Agency (EPA) and
the North Carolina Department of Environment and Natural
Resources, Division of Waste Management (DWM). In addition, CP&L
is periodically notified by regulators such as the EPA and
various state agencies of their involvement or potential
involvement in sites, other than MGP sites, that may require
investigation and/or remediation.
There are 12 former MGP sites and 14 other active waste sites
associated with CP&L that have required or are anticipated to
require investigation and/or remediation costs. As of June 30,
2002, CP&L has not recorded any accruals for investigation and/or
remediation costs for these sites. CP&L received insurance
proceeds to address costs associated with CP&L waste sites. All
eligible expenses related to these waste costs are charged
against a centralized fund containing these proceeds. As of June
30, 2002, approximately $8.7 million remains in this centralized
fund. As costs associated with CP&L's share of investigation and
remediation of these sites become known, the fund is assessed to
determine if additional accruals will be required. CP&L does not
believe that it can provide an estimate of the reasonably
possible total remediation costs beyond what remains in the
centralized fund. This is due to the fact that the sites are at
different stages: investigation has not begun at 15 sites,
investigation has begun but remediation cannot be estimated at 7
sites and 4 sites have begun remediation. CP&L measures its
liability for these sites based on available evidence including
its experience in investigation and remediation of contaminated
sites, which also involves assessing and developing cost-sharing
arrangements with other potentially responsible parties. Once the
centralized fund is depleted, CP&L will accrue costs for the
sites to the extent its liability is probable and the costs can
be reasonably estimated. Therefore, CP&L cannot currently
determine the total costs that may be incurred in connection with
the remediation of all sites. According to current information,
these future costs at the CP&L sites are not material to its
financial condition or results of operations. A rollforward of
the balance in this fund is not provided due to the immateriality
of this activity in the periods presented.
CP&L is also currently in the process of assessing potential
costs and exposures at other sites it has been notified of. As
the assessments are developed and analyzed, CP&L will accrue
costs for the sites to the extent the costs are probable and can
be reasonably estimated.
There has been and may be further proposed federal legislation
requiring reductions in air emissions for nitrogen oxides, sulfur
dioxide, carbon dioxide and mercury setting forth national caps
and emission levels over an extended period of time. This
national multi-pollutant approach would have significant costs
which could be material to CP&L's consolidated financial position
or results of operations. Some companies may seek recovery of the
related cost through rate adjustments or similar mechanisms.
Control equipment that will be installed on North Carolina fossil
generating facilities as part of the North Carolina legislation
discussed below may address some of the issues outlined above.
CP&L cannot predict the outcome of this matter.
29
The EPA has been conducting an enforcement initiative related to
a number of coal-fired utility power plants in an effort to
determine whether modifications at those facilities were subject
to New Source Review requirements or New Source Performance
Standards under the Clean Air Act. CP&L has been asked to provide
information to the EPA as part of this initiative and cooperated
in providing the requested information. The EPA has initiated
enforcement actions against other unaffiliated utilities as part
of this initiative, some of which have resulted in settlement
agreements calling for expenditures ranging from $1.0 billion to
$1.4 billion. A utility that was not subject to a civil
enforcement action settled its New Source Review issues with the
EPA for $300 million. These settlement agreements have generally
called for expenditures to be made over extended time periods,
and some of the utilities may seek recovery of the related cost
through rate adjustments. CP&L cannot predict the outcome of this
matter.
In 1998, the EPA published a final rule addressing the issue of
regional transport of ozone. This rule is commonly known as the
NOx SIP Call. The EPA's rule requires 23 jurisdictions, including
North Carolina and South Carolina, to further reduce nitrogen
oxide emissions in order to attain a pre-set state NOx emission
level by May 31, 2004. CP&L is evaluating necessary measures to
comply with the rule and estimates its related capital
expenditures could be approximately $370 million, which has not
been adjusted for inflation. Increased operation and maintenance
costs relating to the NOx SIP Call are not expected to be
material to CP&L's results of operations. Further controls are
anticipated as electricity demand increases. CP&L cannot predict
the outcome of this matter.
In July 1997, the EPA issued final regulations establishing a new
eight-hour ozone standard. In October 1999, the District of
Columbia Circuit Court of Appeals ruled against the EPA with
regard to the federal eight-hour ozone standard. The U.S. Supreme
Court has upheld, in part, the District of Columbia Circuit Court
of Appeals decision. Further litigation and rulemaking are
anticipated. North Carolina adopted the federal eight-hour ozone
standard and is proceeding with the implementation process. North
Carolina has promulgated final regulations, which will require
CP&L to install nitrogen oxide controls under the State's
eight-hour standard. The cost of those controls are included in
the cost estimate of $370 million set forth above.
The EPA published a final rule approving petitions under Section
126 of the Clean Air Act, which requires certain sources to make
reductions in nitrogen oxide emissions by 2003. The final rule
also includes a set of regulations that affect nitrogen oxide
emissions from sources included in the petitions. The North
Carolina fossil-fueled electric generating plants are included in
these petitions. Acceptable state plans under the NOx SIP Call
can be approved in lieu of the final rules the EPA approved as
part of the 126 petitions. CP&L, other utilities, trade
organizations and other states are participating in litigation
challenging the EPA's action. On May 15, 2001, the District of
Columbia Circuit Court of Appeals ruled in favor of the EPA which
will require North Carolina to make reductions in nitrogen oxide
emissions by May 1, 2003. However, the Court in its May 15th
decision rejected the EPA's methodology for estimating the future
growth factors the EPA used in calculating the emissions limits
for utilities. In August 2001, the court granted a request by
CP&L and other utilities to delay the implementation of the 126
Rule for electric generating units pending resolution by the EPA
of the growth factor issue. The court's order tolls the
three-year compliance period (originally set to end on May 1,
2003) for electric generating units as of May 15, 2001. On April
30, 2002, the EPA published a final rule harmonizing the dates
for the Section 126 Rule and the NOx SIP Call. In addition, the
EPA determined in this rule that the future growth factor
estimation methodology was appropriate. The new compliance date
for all affected sources is now May 31, 2004, rather than May 1,
2003. CP&L cannot predict the outcome of this matter.
30
On June 20, 2002, legislation was enacted in North Carolina
requiring the state's electric utilities to further reduce the
emissions of nitrogen oxide and sulfur dioxide from coal-fired
power plants. These levels exceed requirements discussed above
with regard to the NOx SIP Call, Section 126 petitions or Title
IV of the Clean Air Act. CP&L expects its capital costs to meet
these emission targets will be approximately $813 million. CP&L
currently has approximately 5,100 MW of coal-fired generation in
North Carolina that is affected by this legislation. The
legislation requires the emissions reductions to be completed in
phases by 2013, and applies to each utilities' total system
rather than setting requirements for individual power plants. The
legislation also freezes the utilities' base rates for five years
unless there are extraordinary events beyond the control of the
utility or unless the utility persistently earns a return
substantially in excess of the rate of return established and
found reasonable by the NCUC in the utility's last general rate
case. Further, the legislation allows the utilities to recover
from their retail customers the projected capital costs during
the first seven years of the 10-year compliance period beginning
on January 1, 2003. The utilities must recover at least 70% of
their projected capital costs during the five-year rate freeze
period. Pursuant to the new law, CP&L entered into an agreement
with the state of North Carolina to transfer to the state all
future emissions allowances it generates from over-complying with
the new emission limits when these units are completed. The new
law also requires the state to undertake a study of mercury and
carbon dioxide emissions in North Carolina. CP&L cannot predict
the future regulatory interpretation, implementation or impact of
this new law.
CP&L has filed claims with its general liability insurance
carriers to recover costs arising out of actual or potential
environmental liabilities. Some claims have settled and others
are still pending. While management cannot predict the outcome of
these matters, the outcome is not expected to have a material
effect on the consolidated financial position or results of
operations.
b) CP&L is involved in various litigation matters in the ordinary
course of business, some of which involve substantial amounts.
Where appropriate, accruals have been made in accordance with
SFAS No. 5, "Accounting for Contingencies," to provide for such
matters. In the opinion of management, the final disposition of
pending litigation would not have a material adverse effect on
CP&L's consolidated results of operations or financial position.
31
Item 2. Management's Discussion and Analysis of Financial Condition
------- -----------------------------------------------------------
and Results of Operations
-------------------------
RESULTS OF OPERATIONS
---------------------
For the three and six months ended June 30, 2002, as compared to the
corresponding period in the prior year
Progress Energy, Inc.
Operating Results
-----------------
Progress Energy's consolidated earnings for the three and six months
ended June 30, 2002, were $120.6 million ($0.56 basic earnings per
common share) and $253.1 million ($1.18 per share), respectively,
compared to earnings of $111.7 ($0.56 per share) and $265.7 million
($1.33 per share) for the same periods ended June 30, 2001. Current
year earnings for the three and six months ended June 30, 2002 were
favorably impacted by customer growth and improved weather which
increased retail and wholesale sales, decreases in depreciation
expense for the CP&L Electric and Florida Power Electric segments,
decreases in interest charges resulting from lower average interest
rates and the elimination of goodwill amortization. Partially
offsetting these positive factors were decreases in revenues as part
of Florida Power's retail rate settlement and increases in operations
and maintenance expenses related to increased benefit costs and
additional expenses at Florida Power to improve system reliability and
customer service. In addition, the common stock issuance in August
2001 (12.5 million shares) and purchase of Westchester Gas Company in
April 2002 (2.5 million shares) resulted in dilution.
Management tracks, monitors, and evaluates financial results based on
reported earnings and on an ongoing earnings basis. The following
reconciles reported earnings to ongoing earnings.
Three Months Ended Six Months
June 30, Ended June 30,
--------------------- ----------------------------
($ millions, except per share figures) 2002 2001 2002 2001
---- ---- ---- ----
Reported Earnings $120.6 $111.7 $253.1 $265.7
Intra-period tax allocation adjustment 58.4 25.3 79.6 45.3
Contingent Value Obligations (CVO) mark to market (1.5) 5.9 (12.8) 8.9
Florida Retroactive Retail Rate Refund - - 21.0 -
Reclassification of Rail Services from Assets Held for Sale - 10.1 - 10.1
--------------------------------------------------------------------------------- ----------------------------
Ongoing Earnings $177.5 $153.0 $340.9 $330.0
====== ====== ====== ======
Ongoing Earnings Per Share $0.83 $0.77 $1.59 $1.65
===== ===== ===== =====
Each of the adjustments to reported earnings and the key business
drivers are discussed in more detail in the business segment reviews
that follow.
CP&L Electric
-------------
CP&L Electric contributed net income for the three and six months
ended June 30, 2002 of $131.7 million and $217.2 million,
respectively, compared to net income of $84.0 million and $205.5
million, respectively, for the same periods in the prior year.
Included in these amounts are energy marketing and trading activities,
which are managed by Progress Ventures on behalf of CP&L, that had net
income for the three and six months ended June 30, 2002 of $22.3
million and $29.9 million, respectively, compared to net income of
$15.0 million and $28.6 million, respectively, for the same periods in
the prior year.
32
Factors contributing to CP&L Electric's results include favorable
electric revenue and margins driven by hotter weather compared to 2001
($6.6 million and $3.5 million margin gain for the three and six
months ended June 30, 2002, respectively); a decrease in accelerated
depreciation expense related to the nuclear plants ($13.3 million and
$18.3 million decrease for the three and six months ended June 30,
2002, respectively); and a decrease in interest expense resulting from
lower debt and an average interest rate reduction (interest decreased
by $9.1 million and $12.3 million for the three and six months ended
June 30, 2002, respectively). Additionally, CP&L Electric's results
for the three and six months ended June 30, 2002 were favorably
impacted by a $28.3 million preliminary tax benefit reallocation from
the holding company to CP&L. See Other Businesses section below for
additional information on the tax benefit reallocation. CP&L
Electric's results were negatively affected by a decline in industrial
sales driven by a weaker economic environment ($3.8 million and $10.0
million margin decline for the three and six months ended June 30,
2002, respectively).
CP&L's electric revenues for the three and six months ended June 30,
2002 and 2001 and the percentage change by customer class are as
follows (in millions):
--------------------------------- ---------------------------------------- ---------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
Customer Class
---------------------------------------- ---------------------------------------
2002 % Change 2001 2002 % Change 2001
--------------------------------- ----------- ------------- -------------- ------------ ------------ -------------
Residential $258.5 5.3% $245.5 $567.7 (0.4)% $569.9
Commercial 198.9 5.8 188.0 386.1 3.8 372.0
Industrial 160.2 (1.8) 163.2 305.9 (3.0) 315.5
Governmental 17.9 4.7 17.1 35.5 4.1 34.1
--------------------------------- ----------- -------------- ------------ -------------
Total Retail Revenues 635.5 3.5 613.8 1,295.2 0.3 1,291.5
Wholesale 156.7 2.6 152.7 299.3 (5.2) 315.7
Unbilled 24.1 - (2.4) 14.4 - (42.0)
Miscellaneous 18.4 1.1 18.2 37.2 (3.9) 38.7
--------------------------------- ----------- -------------- ------------ -------------
Total Electric Revenues $834.7 6.7% $782.3 $1,646.1 2.6% $1,603.9
--------------------------------- ----------- ------------- -------------- ------------ ------------ -------------
CP&L electric energy sales for the three and six months ended June 30,
2002 and 2001 and the percentage change by customer class are as
follows (in thousands of mWh):
--------------------------------- --------------------------------------- ----------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
Customer Class
--------------------------------------- ----------------------------------------
2002 % Change 2001 2002 % Change 2001
--------------------------------- ----------- ------------- ------------- ------------ ------------- -------------
Residential 3,262 3.9% 3,141 7,247 (2.8)% 7,454
Commercial 3,027 4.3 2,902 5,818 1.1 5,753
Industrial 3,361 (0.9) 3,391 6,347 (3.9) 6,605
Governmental 338 1.8 332 663 (2.4) 679
--------------------------------- ----------- ------------- ------------ -------------
Total Retail Energy Sales 9,988 2.3 9,766 20,075 (2.0) 20,491
Wholesale 3,495 15.7 3,020 6,826 4.8 6,513
Unbilled 431 - 69 245 - (602)
--------------------------------- ----------- ------------- ------------ -------------
Total mWh sales 13,914 8.2% 12,855 27,146 2.8% 26,402
--------------------------------- ----------- ------------- ------------- ------------ ------------- -------------
Sales of energy to retail and wholesale customers increased for the
three months ended June 30, 2002, when compared to the same period in
the prior year 2001 primarily due to the impacts of favorable weather
in the current year and customer growth. This was partially offset by
a decrease in sales in the industrial customer class, primarily due to
a decline in the industrial customer base and the continued overall
softness in the industrial markets driven by the weak economic
environment. For the year to date comparison period, weather was less
of a driver as a milder first quarter 2002 offset much of the second
quarter weather gains.
33
CP&L Electric's fuel expense increased $15.4 million for the three
months ended June 30, 2002, when compared to $157.7 million in 2001,
primarily due to an increase in volume and a change in generation mix,
which was partially offset by a decrease in price. Purchased power
expense increased $5.6 million for the three months ended June 30,
2002, when compared to $85.3 million in 2001, due to increases in
volume and price. CP&L Electric's fuel expense increased $35.9 million
for the six months ended June 30, 2002, when compared to $311.1
million in 2001, primarily due to an increase in volume and a change
in generation mix, which was partially offset by a decrease in price.
The increase was also caused by increased deferred fuel expense
resulting from fuel cost collections that reduce previously deferred
fuel costs. Purchased power expense decreased $13.0 million for the
six months ended June 30, 2002, when compared to $177.2 million in
2001, primarily due to decreases in volume attributable to favorable
market conditions and prices that existed in the first quarter of
2001. Fuel and purchased power expenses are recovered primarily
through cost recovery clauses and, as such, have no material impact on
operating results.
CP&L Electric's operations and maintenance expense increased by $12.3
million and $34.9 million for the three and six months ended June 30,
2002, respectively, when compared to operations and maintenance
expense of $179.4 million and $348.1 million, respectively, for the
same periods in the prior year. The increase for the three and six
months ended June 30, 2002 was primarily due to increased salary and
benefit costs ($5.1 million and $9.0 million for the three and six
months ended June 30, 2002); increased insurance costs combined with a
lower NEIL refund ($2.2 million for the six months ended June 30,
2002); and increased Service Company costs ($4.5 million and $9.5
million for the three and six months ended June 30, 2002) as a result
of lower vacancy rates in the prior year subsequent to the FPC
acquisition.
Depreciation expense decreased $6.4 million and $2.9 million for the
three and six months ended June 30, 2002, when compared to
depreciation expense of $139.8 million and $277.8 million,
respectively, for the same periods in the prior year. CP&L's
accelerated cost recovery program for nuclear generating assets allows
flexibility in recording accelerated depreciation expense. The
decrease for these periods relates to CP&L Electric's election to
depreciate the nuclear assets at the lower end of the allowable range
as set by the state utility commissions. See OTHER MATTERS below for
additional information on CP&L's accelerated cost recovery program.
For the three and six months ended June 30, 2002, CP&L recorded
accelerated depreciation expense of $16.7 million and $41.7 million,
respectively. For the three and six months ended June 30, 2001, CP&L
recorded accelerated depreciation expense of $30 million and $60
million, respectively. As of June 30, 2002, CP&L has recorded
cumulative accelerated depreciation expense of approximately $392
million. These reductions are partially offset by increased
depreciation costs resulting from the Richmond units being placed into
service in May 2001.
34
Florida Power Electric
----------------------
Florida Power Electric contributed net income for the three and six
months ended June 30, 2002 of $76.8 million and $134.5 million,
respectively, compared to net income of $84.3 million and $155.9
million, respectively for the same periods in the prior year. Included
in these amounts are energy marketing and trading activities, which
are managed by Progress Ventures on behalf of Florida Power, that had
net income for the three and six months ended June 30, 2002 of $3.7
million and $6.3 million, respectively, compared to net income of $3.4
million and $11.7 million, respectively, for the same periods in the
prior year.
Florida Power Electric's earnings for the three and six months ended
June 30, 2002, were negatively affected by the outcome of the Florida
Power rate case settlement, which included a one-time retroactive
revenue refund of $35 million, $21 million after tax, recorded in the
first quarter of 2002 and a decrease in retail rates, which was
partially offset by reductions in depreciation in accordance with the
settlement. See Note 3 to the Progress Energy Consolidated Interim
Financial Statements for additional information on the settlement. In
addition, Florida Power Electric results for the three months and six
months ended were negatively affected by increase in operations and
maintenance expense as described more fully below.
Florida Power's electric revenues for the three and six months ended
June 30, 2002 and 2001 and the percentage change by customer class are
as follows (in millions):
-------------------------------------- ---------------------------------------- ----------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ----------------------------------------
Customer Class 2002 % Change 2001 2002 % Change 2001
-------------------------------------- -------------- ------------ ------------ ------------- ------------- ------------
Residential $395.6 2.5% $386.0 $774.8 (1.3)% $784.9
Commercial 183.4 (4.7) 192.5 350.2 (0.3) 351.4
Industrial 55.1 (6.9) 59.2 105.1 (6.7) 112.6
Governmental 43.5 (1.6) 44.2 83.5 1.8 82.0
Retroactive Retail Revenue Refund - - - (35.0) - -
-------------------------------------- -------------- ------------ ------------- ------------
Total Retail Revenues 677.6 (0.6) 681.9 1,278.6 (3.9) 1,330.9
Wholesale 55.8 (10.3) 62.2 108.3 (32.3) 159.9
Unbilled 5.4 - 17.5 11.8 - (4.8)
Miscellaneous 27.1 22.6 22.1 53.7 (50.3) 108.1
-------------------------------------- -------------- ------------ ------------- ------------
Total Electric Revenues $765.9 (2.3)% $783.7 $1,452.4 (8.9)% $1,594.1
-------------------------------------- -------------- ------------ ------------ ------------- ------------- ------------
35
Florida Power's electric energy sales for the three and six months
ended June 30, 2002 and 2001, and the percentage change by customer
class are as follows (in thousands of mWh):
-------------------------------------- ---------------------------------------- ----------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ----------------------------------------
Customer Class 2002 % Change 2001 2002 % Change 2001
-------------------------------------- -------------- ------------ ------------ ------------- ------------- ------------
Residential 4,515 11.1% 4,063 8,575 1.2% 8,472
Commercial 2,857 2.8 2,780 5,313 2.1 5,203
Industrial 994 (1.6) 1,010 1,876 (5.7) 1,989
Governmental 715 5.9 675 1,335 3.4 1,291
-------------------------------------- -------------- ------------ ------------- ------------
Total Retail Energy Sales 9,081 6.5 8,528 17,099 0.8 16,955
Wholesale 976 (7.9) 1,060 1,956 (16.6) 2,346
Unbilled 443 - 555 474 - 59
-------------------------------------- -------------- ------------ ------------- ------------
Total mWh sales 10,500 3.5% 10,143 19,529 0.9% 19,360
-------------------------------------- -------------- ------------ ------------ ------------- ------------- ------------
As a result of the settlement of the Florida Power rate case,
effective May 1, 2002, Florida Power reduced its rates by 9.25%. The
effect of this reduction was to reduce revenue by $20.6 million for
the second quarter of 2002. Partially offsetting the decrease in rates
and one-time refund from the settlement detailed above were the
impacts of favorable weather and customer growth. In addition,
revenues for the first six months of 2002 decreased when compared to
the same period in the prior year due to the recognition of $63
million of deferred revenue in the first quarter of 2001, which is
included in miscellaneous revenues in the table above. In 2001, the
deferred revenues were offset by accelerated amortization of the Tiger
Bay regulatory asset, discussed below, and therefore, had no earnings
impact.
Fuel used in generation and purchased power decreased $14.3 million
and $48.1 million for the three and six months ended June 30, 2002,
when compared to $347.2 million and $689.2 million, respectively, for
the same period in the prior year, primarily due to lower oil and gas
prices, partially offset by an increase in coal prices. In addition,
the decrease for the three months ended June 30, 2002, was due to the
lowered recovery of fuel expense as part of the mid-course correction
of Florida Power's fuel cost recovery clause as part of the
settlement. Fuel and purchased power expenses are recovered primarily
through cost recovery clauses and, as such, have no material impact on
operating results.
Operations and maintenance expense increased by $30.2 million and
$50.6 million for the three and six months ended June 30, 2002,
respectively, when compared to operations and maintenance expense of
$119.8 million and $230.7 million, respectively, for the same periods
in the prior year. These amounts have increased due to a decreased
pension credit in the current year ($12.2 million and $16.6 million
lower for the three and six months ended June 30, 2002); increased
other employee benefit costs, primarily driven by medical costs
(approximately $3 million and $6 million for the three and six months
ended June 30, 2002); increased spending related to system
reliability, including the Commitment to Excellence program aimed at
increasing Florida Power's customer satisfaction ($7.8 million and
$13.0 million for the three and six months ended June 30, 2002); and
increased support charges from the Service Company as a result of
lower vacancy rates in the prior year subsequent to the FPC
acquisition.
36
Depreciation and amortization expense decreased by $19.4 million and
$102.1 million for the three and six months ended June 30, 2002, when
compared to expense of $94.6 million and $246.7 million, respectively,
for the same periods in the prior year. The Florida Power rate case
settlement provides for ongoing reductions in depreciation, nuclear
decommissioning and fossil dismantlement costs that reduced the amount
of depreciation recorded by $19.6 million and $39.2 million for the
three and six months ended June 30, 2002. In addition, the first half
of 2001 depreciation includes $63 million of accelerated amortization
on the Tiger Bay regulatory asset associated with deferred revenue
from 2000.
Progress Ventures
-----------------
The Progress Ventures segment operations include gas fuel extraction,
manufacturing and delivery; coal fuel extraction, manufacturing and
delivery, which includes synthetic fuels production; merchant
generation; and energy marketing and trading activities on behalf of
the utility operating companies as well as for its non-regulated
plants. Progress Ventures contributed segment income, including
allocation of energy marketing and trading on behalf of the utilities,
of $79.5 million and $129.2 million for the three and six months ended
June 30, 2002, respectively, compared to net income of $74.1 million
and $138.1 million, respectively, for the same periods in the prior
year. For the three months ended June 30, 2002, the majority of the
increase relates to the addition of merchant plants in the current
year. For the six months ended June 30, 2002, the majority of the
decrease relates to minor reductions in the net income related to
energy marketing and trading, and in both the coal and gas fuel
extraction, manufacturing and delivery operations, partially offset by
the additions of merchant plants during the year.
Progress Ventures' energy marketing and trading activities generated
net income of $25.8 million and $36.0 million for the three and six
months ended June 30, 2002, respectively, compared to net income of
$18.4 million and $40.3 million, respectively, for the same periods in
the prior year. See Note 4 to the Progress Energy Consolidated Interim
Financial Statements for additional information on trading and
marketing activities. Earnings for the current quarter increased
primarily due to an increase in trading gains and a decrease in
capacity charges on certain wholesale contracts over the prior year.
Earnings for the six months ended June 30, 2002, have decreased
primarily due to the completion of certain contracts and the impact of
lower natural gas prices on the pricing of certain contracts.
Progress Ventures' merchant generation operations generated net income
of $7.0 million and $6.8 million for the three and six months ended
June 30, 2002, respectively, when compared to net income of $1.4
million and $1.1 million, respectively, for the same periods in the
prior year. This increase is due to the completion of construction for
certain merchant plants, transfer of generation assets from CP&L and
the acquisitions of merchant plants in the current year. See Note 2 to
the Progress Energy Consolidated Interim Financial Statements for
additional information on this acquisition.
Progress Ventures currently has a tolling agreement for output on one
of its merchant plants with Dynegy, Inc. through June 2008. This
contract is not subject to mark to market accounting under SFAS No.
133. If Dynegy, Inc, was to default on this contract and Progress
Ventures was required to replace the contract on this merchant plant,
this could negatively impact Progress Ventures' cash flows. Progress
Energy does not expect these developments to have a material impact on
the Company's consolidated results of operations, financial position
or cash flows.
Progress Ventures' gas fuel extraction, manufacturing and delivery
operations include the operations of Mesa Hydrocarbons, Inc. (Mesa),
which owns natural gas reserves and operates wells in Colorado and
sells natural gas. These operations also include the activities of the
recently acquired Westchester Gas Company. See Note 2 to the Progress
Energy Consolidated Interim Financial Statements for additional
information on this acquisition. These operations generated net income
of $0.9 million and $1.2 million for the three and six months ended
June 30, 2002, respectively, when compared to net income of $2.0
million and $4.4 million, respectively, for the same periods in the
prior year. Due to the acquisition of Westchester Gas Company in April
2002, the results of these operations are not comparative. However,
the current year results have been negatively affected by the
decreases in sales price of gas over the prior year.
37
Progress Ventures' coal fuel extraction, manufacturing and delivery
operations generated net income of $45.1 million and $84.7 million for
the three and six months ended June 30, 2002, when compared to net
income of $51.4 million and $90.5 million, respectively, for the same
periods in the prior year. The Progress Ventures segment sold 3.4
million and 6.4 million tons of synthetic fuel for the three and six
months ended June 30, 2002, respectively, compared to 3.4 million and
6.3 million tons, respectively, for the same periods in the prior
year. The sales resulted in tax credits of $91.2 million and $175.1
million being recorded for the three and six months ended June 30,
2002, respectively, compared to tax credits of $92.3 million and
$168.9 million, respectively, for the same periods in the prior year.
The production and sale of the synthetic fuel from these facilities
qualifies for tax credits under Section 29 of the Code. See "Synthetic
Fuels" under OTHER MATTERS below for additional discussion of these
tax credits.
Rail Services
-------------
Rail Services' operations represent the activities of Progress Rail
Services Corporation (Progress Rail) and include railcar repair, rail
parts reconditioning and sales, scrap metal recycling and other rail
related services. In the second quarter of 2001, Rail Services was
reclassified from net assets held for sale and the cumulative Rail
Services' operations since the acquisition date of November 30, 2000,
were included in Progress Energy's consolidated results of operations.
Progress Energy recorded an after-tax charge of $10.1 million in the
second quarter of 2001 reflecting the reallocation of the purchase
price and the reversal of the effect of net assets held for sale
accounting. Therefore the results of Rail Services for the three and
six months ended June 30, 2001, are not comparative to the current
year operations.
Rail Services contributed earnings for the three and six months ended
June 30, 2002 of $2.9 million and $2.2 million, respectively. Rail
Service's year to year results were impacted by a weak business
environment, which resulted in $15.0 million decreased revenues for
the quarter and a decrease of $69.4 million for the six months ended
June 30, 2002. In addition, Rail Services' transition from acting as a
scrap reseller in 2001 to acting as a scrap resale agent in 2002 and
asset sales in 2001 decreased revenues. Corresponding decreases in
operating costs and the impact of targeted cost cutting measures
offset the revenue reductions.
Other Businesses
----------------
The Other segment primarily includes the operations of North Carolina
Natural Gas Corporation (NCNG), Strategic Resource Solutions Corp.
(SRS), Progress Telecommunications Corporation (Progress Telecom) and
Caronet, Inc. (Caronet). This segment also includes other
non-regulated operations of CP&L and FPC as well as holding company
results. The Other segment generated a net loss of $144.2 million and
$193.8 million for the three and six months ended June 30, 2002,
respectively, compared to a net loss of $104.8 million and $185.9
million, respectively, for the same periods in the prior year. The
decrease in earnings for the current quarter of 2002, when compared to
the same period in the prior year, was primarily due to the
preliminary tax benefit reallocation recorded in the second quarter,
partially offset by the elimination of goodwill amortization in 2002.
In accordance with SFAS No. 142, effective January 1, 2002, Progress
Energy no longer amortizes goodwill. For the three and six months
ended June 30, 2001, the Company amortized goodwill of $24.8 million
and $47.6 million, respectively. At June 30, 2002, the Company had
$3.7 billion of unamortized goodwill. See Note 6 to the Progress
Energy Consolidated Interim Financial Statements for additional
information on SFAS No. 142.
NCNG recorded a net loss of $1.4 million and net income of $7.0
million for the three and six months ended June 30, 2002,
respectively, compared to a net loss of $5.3 million and net income of
$2.2 million, respectively, for the same periods in the prior year.
NCNG's year to year results were impacted most significantly by the
decline in gas prices and increased industrial volumes related to the
decline in gas prices, which caused NCNG's margin on gas sales to
increase by $3.3 million and $7.5 million for the three and six months
ended June 30, 2002, respectively, when compared to margin on sales of
$11.4 million and $40.4 million for the same periods in the prior
year.
38
NCNG's operations and maintenance expense increased $1.9 million and
$3.9 million for the three and six months ended June 30, 2002,
primarily due to increased staffing and increased operations and
maintenance expense associated with a significant increase in its
fleet. Additionally, NCNG's results for the three and six months ended
June 30, 2002 were favorably impacted by a $1.5 million preliminary
tax benefit reallocation from the holding company. See below for
additional information on the preliminary tax benefit reallocation.
In February 2002, NCNG filed a general rate case with the North
Carolina Utilities Commission (NCUC) requesting an annual rate
increase of $47.6 million. On May 3, 2002, NCNG withdrew the
application, based upon the NCUC Public Staff's and other parties'
interpretation of the order approving the merger of CP&L and NCNG that
such a case was not permitted until 2003. On May 16, 2002, NCNG filed
a request to increase its margin rates and rebalance its rates with
the NCUC, requesting an annual rate increase of $4.1 million to
recover costs associated with specific system improvements. Public
hearings on this matter are scheduled for August and September 2002.
Progress Energy cannot predict the outcome of this matter.
Generally accepted accounting principles require companies to apply a
levelized effective tax rate to interim periods that is consistent
with the estimated annual rate. Income tax expense was increased by
$58.4 million and $79.6 million for the three and six months ended
June 30, 2002, respectively, in order to maintain an effective tax
rate consistent with the estimated annual rate. Income tax expense was
increased by $25.3 million and $45.4 million for the three and six
months ended June 30, 2001, respectively. The tax credits associated
with Progress Energy's synthetic fuel operations lower the overall
effective tax rate. Fluctuations in estimated earnings and tax credits
can also cause large swings in the effective tax rate for interim
periods. Therefore, this adjustment will vary each quarter, but will
have no effect on net income for the year.
Progress Energy is subject to regulation under the Public Utility
Holding Company Act (PUHCA) of 1935, as amended, of the SEC. According
to a recent SEC order, Progress Energy's tax benefit not related to
acquisition interest expense is to be allocated to profitable
subsidiaries. Therefore, the tax benefit that was previously held in
the holding company, included in the Other segment, has been allocated
on a preliminary basis to the profitable subsidiaries effective with
the second quarter of 2002. The allocation has no impact on
consolidated tax expense or earnings. However, the preliminary
allocation decreases CP&L Electric's ($28.3 million) and NCNG's ($1.5
million) tax expense in the second quarter of 2002, with an offsetting
increase in the holding company tax expense.
Progress Energy issued 98.6 million CVOs in connection with the
Florida Progress acquisition. Each CVO represents the right to receive
contingent payments based on the performance of four synthetic fuel
facilities owned by Progress Energy. The payments, if any, are based
on the net after-tax cash flows the facilities generate. These CVOs
are recorded at fair value based on published prices and unrealized
gains and losses from changes in fair value are recognized in
earnings. At June 30, 2002, the CVOs had a fair market value of
approximately $29.1 million. Progress Energy recorded gain of $1.5
million and $12.8 million for the three and six months ended June 30,
2002, respectively, compared to charges of $5.9 million and $8.9
million, respectively, for the same periods in the prior year to
record the changes in fair value of CVOs.
39
Progress Telecom, including Caronet's operations, recorded revenues of
$16.0 million and a net loss of $5.3 million for the quarter compared
with revenues of $15.9 million and a net loss of $0.3 million for the
same period last year. For the six months ended June 30, 2002,
Progress Telecom recorded revenues of $31.6 million and a net loss of
$9.3 compared with revenues of $30.6 million and a net loss of $2.2
million for the same period last year. Due to the recent decline of
the telecommunications industry, the Company has initiated a valuation
study to assess the recoverability of Progress Telecom's and Caronet's
long-lived assets, which totaled approximately $288 and $111 million,
respectively, at June 30, 2002. The Company expects to record an
impairment in the third quarter. Progress Telecom is currently
providing broadband services to WorldCom Inc. Due to WorldCom Inc.'s
bankruptcy filing in July 2002, the Company is assessing what impact,
if any, the WorldCom Inc. developments will have on Progress Telecom's
operations. Progress Energy does not expect the WorldCom Inc.
developments to have a material impact on the Company's consolidated
results of operations, financial position or cash flows.
Effective June 28, 2000, Caronet entered into an agreement with Bain
Capital where it contributed the net assets used in its application
service provider business to a newly formed company for a 35%
ownership interest (15% voting interest) named Interpath
Communications, Inc. (Interpath). In May 2002, Interpath merged with
USinternetworking. Pursuant to the terms of the merger agreement and
additional funds being contributed by Bain Capital, CP&L now owns
approximately 24% of the company (14% voting interest).
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Progress Energy, Inc.
Statement of Cash Flows and Financing Activities
------------------------------------------------
Cash provided by operating activities decreased $22.0 million for the
six months ended June 30, 2002, when compared to the corresponding
period in the prior year. The decrease in cash from operating
activities for the 2002 period is due to a decrease in operating
income from the impact of the Florida Power rate case settlement. In
addition, changes in the balances of certain current assets and
liabilities due to operational fluctuations decreased cash provided by
operating activities.
Net cash used in investing activities increased $371.6 million for the
six months ended June 30, 2002, when compared to the corresponding
period in the prior year. The increase in cash used in investing
activities is primarily due to an expansion of Progress Ventures'
generation and fuel portfolio (See Note 2 to the Progress Energy
Consolidated Interim Financial Statements). During the first six
months of 2002, $495.7 million was spent on its utility subsidiaries'
construction program and $569.6 million was spent in diversified
business property additions. The acquisition of Westchester Gas
Company resulted in a net cash outflow of $17.4 million.
Net cash provided by financing activities increased $671.2 million for
the six months ended June 30, 2002, when compared to the corresponding
period in the prior year. The increase in cash provided by financing
activities is primarily due to an increase in short-term obligations
as well as an increase in long-term debt, the details of which are
described below.
On February 6, 2002, CP&L issued $48.5 million principal amount of
First Mortgage Bonds, Pollution Control Series W, Wake County
Pollution Control Revenue Refunding Bonds, 5.375% Series 2002 Due
February 1, 2017. On March 1, 2002, CP&L redeemed $48.5 million
principal amount of Pollution Control Revenue Bonds, Wake County
(Carolina Power & Light Company Project) Adjustable Rate Option Bond
1983 Series Due April 1, 2019, at 101.5% of the principal amount of
such bonds.
In February 2002, $50 million of Progress Capital Holdings, Inc. (PCH)
medium-term notes, 5.78% Series, matured. Progress Energy funded this
maturity through the issuance of commercial paper.
40
In March 2002, Progress Ventures, Inc. obtained a $440 million bank
facility that will be used exclusively for expansion of its
non-regulated generation portfolio. Borrowings under this facility are
secured by the assets in the generation portfolio. In March and June
2002, Progress Ventures, Inc. made draws under this facility of $120
and $67 million, respectively.
Progress Ventures, Inc. is required to hedge 75 percent of the amounts
outstanding under its bank facility pursuant to the terms of the
agreement for expansion of its non-regulated generation portfolio. In
May 2002, Progress Ventures, Inc. entered into hedges that included a
series of zero cost collars that have been designated as cash flow
hedges for accounting purposes. The fair value of these instruments
was a $2.1 million liability position at June 30, 2002.
During March, April and May 2002, Progress Energy converted $1.0
billion of fixed rate debt into variable rate debt by executing
interest rate derivative agreements with a total notional amount of
$1.0 billion with a group of five banks. Under the terms of the
agreements, which were scheduled to mature in 2006 and 2007 and
coincide with the maturity dates of the related debt issuances,
Progress Energy received a fixed rate and paid a floating rate based
on three-month LIBOR. These instruments were designated as fair value
hedges for accounting purposes. In June 2002, Progress Energy
terminated these agreements. As a result of the agreements, at June
30, 2002, Progress Energy had a debt premium of $21.2 million, which
will be amortized and recorded as a reduction to interest expense over
the life of the related debt issuances.
On March 28, 2002, Standard & Poor's affirmed Progress Energy's
corporate credit rating of BBB+ and the ratings of Florida Power and
CP&L but revised the outlook for all three entities to negative from
stable. S&P stated that its change in outlook reflects the increased
business risk at Progress Ventures and lower-than-projected credit
protection measures. S&P stated that Progress Energy's plan to divest
of non-core assets and use the proceeds to pay down
acquisition-related debt is moving slower than S&P had expected.
On April 10, 2002, Moody's revised its outlook to negative from stable
on Progress Energy's senior unsecured debt rating of Baa1. Moody's
maintained a stable outlook for both Florida Power and CP&L. Moody's
stated that its change in outlook to negative was in response to the
increased level of debt incurred by the company, primarily to finance
the expansion of its Progress Ventures unregulated generation
portfolio.
The change in outlook by the rating agencies has not affected Progress
Energy's access to liquidity nor the cost of its short-term
borrowings. Progress Energy is committed to maintaining its current
ratings and is currently assessing the situation with both rating
agencies to determine an appropriate course of action, if necessary,
to address their concerns.
On April 17, 2002, Progress Energy issued $350 million of senior
unsecured notes due 2007 with a coupon of 6.05% and $450 million of
senior secured notes due 2012 with a coupon of 6.85%. Proceeds from
this issuance were used to pay down commercial paper.
In April, May and June 2002, CP&L entered into a series of Treasury
Rate Locks to hedge its exposure to interest rates with regard to a
future issuance of fixed-rate debt. These agreements have a
computational period of ten years. The fair value of the swaps was a
$8.5 million liability position at June 30, 2002. These instruments
were designated as cash flow hedges for accounting purposes. The
agreements, with a total notional amount of $350 million, were
terminated simultaneously with the pricing of the $500 million CP&L
senior unsecured notes in July 2002 described below. CP&L realized a
$22.5 million hedging loss, which will be amortized and recorded as an
adjustment to interest expense over the life of the notes.
41
On June 20, 2002, legislation was enacted in North Carolina requiring
the state's electric utilities to reduce the emissions of nitrogen
oxide and sulfur dioxide from coal-fired power plants. CP&L expects
its capital costs to meet these emission targets will be approximately
$813 million. See Note 12 to the Progress Energy Consolidated Interim
Financial Statements and OTHER MATTERS below for more information on
this legislation.
On June 27, 2002, CP&L announced the redemption of $500 million of
CP&L Extendible Notes due October 28, 2009, at 100% of the principal
amount of such notes. These notes were redeemed on July 29, 2002 and
CP&L funded the redemptions through the issuance of commercial paper.
On July 30, 2002, CP&L issued $500 million of senior unsecured notes
due 2012 with a coupon of 6.5%. Proceeds from this issuance were used
to pay down commercial paper.
On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54%
Series, matured. Florida Power funded this maturity through the
issuance of commercial paper.
On July 11, 2002, Florida Power announced the redemption of $108.55
million principal amount of Citrus County Pollution Control Refunding
Revenue Bonds, Series 1992 A Due January 1, 2027, $90 million
principal amount of Citrus County Pollution Control Refunding Revenue
Bonds, Series 1992 B Due February 1, 2022 and $10.115 million
principal amount of Pasco County Pollution Control Refunding Revenue
Bonds, Series 1992A Due February 1, 2022, at 102% of the principal
amount of such bonds and $32.2 million principal amount of Pinellas
County Pollution Control Refunding Revenue Bonds, Series 1991 Due
December 1, 2014 at 101% of the principal amount of such bonds. These
redemptions were finalized on August 12, 2002.
On July 16, 2002, Florida Power issued $108.55 million principal
amount of Citrus County Pollution Control Revenue Refunding Bonds,
Series 2002A Due January 1, 2027, $100.115 million principal amount of
Citrus County Pollution Control Revenue Refunding Bonds, Series 2002B
Due January 1, 2022 and $32.2 million principal amount of Citrus
County Pollution Control Revenue Refunding Bonds, Series 2002C Due
January 1, 2018. Proceeds from this issuance were used to redeem
Florida Power's pollution control revenue refunding bonds above.
On August 5, 2002, CP&L announced the redemption of $150 million of
First Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the
principal amount of such bonds. CP&L intends to redeem these notes on
September 4, 2002.
In August 2002, Progress Energy converted $400 million of fixed rate
debt into variable rate debt by executing interest rate derivative
agreements with two counterparties with a total notional amount of
$400 million. Under the terms of the agreements, which expire in 2006
and coincide with the maturity date of the related debt issuance,
Progress Energy will receive a fixed rate of 3.26% and will pay a
floating rate based on three-month LIBOR. These instruments were
designated as fair value hedges for accounting purposes.
Future Commitments
------------------
As of June 30, 2002, Progress Energy's contractual cash obligations
have not changed materially from what was reported in the 2001 Annual
Report on Form 10-K. The only changes in Progress Energy's contractual
cash obligations involve the additional long-term debt issuances made
through the second quarter of 2002 that are detailed above, and the
finalization of Progress Ventures' purchase obligations related to
generation and fuel acquisitions, as detailed in Note 2 to the
Progress Energy Consolidated Interim Financial Statements.
As of June 30, 2002, Progress Energy's other commercial commitments
have changed from what was reported in the 2001 Annual Report on Form
10-K. During the first six months of 2002, Progress Energy issued
approximately $582 million of guarantees on behalf of Progress
Ventures for obligations under power purchase agreements, tolling
agreements, construction agreements and trading operations.
Approximately $441 million of these commitments relate to certain
guarantee agreements issued to support obligations related to Progress
Venture's expansion of its non-regulated generation portfolio. These
guarantees ensure performance under generation construction and
operating agreements.
The remaining $141 million of these new commitments are guarantees
issued to support Progress Ventures' energy trading and marketing
functions. The contracts supporting the guarantees contain language
regarding downgrade events, ratings triggers, and netting and offset
provisions.
42
OTHER MATTERS
-------------
Florida Power Rate Case Settlement
----------------------------------
On March 27, 2002, the parties in Florida Power's rate case entered
into a Stipulation and Settlement Agreement (the Agreement) related to
retail rate matters. The Agreement was approved by the FPSC on April
23, 2002. The Agreement is generally effective from May 1, 2002
through December 31, 2005; provided, however, that if Florida Power's
base rate earnings fall below a 10% return on equity, Florida Power
may petition the FPSC to amend its base rates.
See Note 3 to the Progress Energy Consolidated Interim Financial
Statements for additional information on the Agreement.
North Carolina Clean Air Legislation
------------------------------------
On June 20, 2002, legislation was enacted in North Carolina requiring
the state's electric utilities to reduce the emissions of nitrogen
oxide and sulfur dioxide from coal-fired power plants. Progress Energy
expects its capital costs to meet these emission targets will be
approximately $813 million. CP&L currently has approximately 5,100 MW
of coal-fired generation in North Carolina that is affected by this
legislation. The legislation requires the emissions reductions to be
completed in phases by 2013, and applies to each utilities' total
system rather than setting requirements for individual power plants.
The legislation also freezes the utilities' base rates for five years
unless there are extraordinary events beyond the control of the
utility or unless the utility persistently earns a return
substantially in excess of the rate of return established and found
reasonable by the NCUC in the utility's last general rate case.
Further, the legislation allows the utilities to recover from their
retail customers the projected capital costs during the first seven
years of the 10-year compliance period beginning on January 1, 2003.
The utilities must recover at least 70% of their projected capital
costs during the five-year rate freeze period. Pursuant to the new
law, CP&L entered into an agreement with the state of North Carolina
to transfer to the state all future emissions allowances it generates
from over-complying with the new emission limits when these units are
completed. The new law also requires the state to undertake a study of
mercury and carbon dioxide emissions in North Carolina. Progress
Energy cannot predict the future regulatory interpretation,
implementation or impact of this new law.
On June 14, 2002, the NCUC approved modification of CP&L's ongoing
accelerated cost recovery of its nuclear generating assets. Effective
January 1, 2003, the NCUC will no longer require a minimum annual
depreciation. The aggregate minimum and maximum amounts of accelerated
depreciation, $415 million and $585 million respectively, are
unchanged from the original NCUC order. The date by which the minimum
amount must be depreciated was extended from December 31, 2004 to
December 31, 2009. The aggregate minimum and maximum of $115 million
and $165 million established for accelerated cost recovery by the
SCPSC is unaffected by the NCUC order and will be completed by
December 31, 2004.
Franchise Taxes
---------------
CP&L, like other electric power companies in North Carolina, pays a
franchise tax levied by the State pursuant to North Carolina General
Statutes Section 105-116, a state-level annual franchise tax (State
Franchise Tax). Part of the revenue generated by the State Franchise
Tax is required by North Carolina General Statutes Section
105-116.1(b) to be distributed to North Carolina cities in which CP&L
maintains facilities. CP&L has paid and continues to pay the State
Franchise Tax to the state when such taxes are due. However, pursuant
to an Executive Order issued on February 5, 2002, by the Governor of
North Carolina, the Secretary of Revenue withheld distributions of
State Franchise Tax revenues to cities for two quarters of fiscal year
2001-2002 in an effort to balance the state's budget.
In response to the state's failure to distribute the State Franchise
Tax proceeds, certain cities in which CP&L maintains facilities
adopted municipal franchise tax ordinances purporting to impose on
CP&L a local franchise tax. The local taxes are intended to be
collected for as long as the state withholds distribution of the State
Franchise Tax proceeds from the cities. The first local tax payments
would be due August 15, 2002. On August 2, 2002, CP&L filed a lawsuit
against the cities seeking to enjoin the enforcement of the local
taxes and to have the local ordinances struck down because the
ordinances are beyond the cities' statutory authority and violate
provisions of the North Carolina and United States Constitutions. The
Company cannot predict the outcome of this matter.
43
Generation Acquisition
----------------------
During February 2002, Progress Ventures, Inc. completed the
acquisition of two electric generating projects located in Georgia
from LG&E Energy Corp., a subsidiary of Powergen plc. The two projects
consist of 1) the Walton project in Monroe, Georgia, a 460 megawatt
natural gas-fired plant placed in service in June 2001 and 2) the
Washington project in Washington County, Georgia, a planned 600
megawatt natural gas-fired plant expected to be operational by June
2003. The transaction included tolling and power sale agreements with
LG&E Energy Marketing, Inc. for both projects through December 31,
2004. The aggregate cash purchase price of approximately $348 million
includes approximately $1.7 million of direct transaction costs. See
Note 2 to the Progress Energy Consolidated Interim Financial
Statements for additional information on this acquisition.
Fuel Acquisition
----------------
On April 26, 2002, Progress Energy finalized the acquisition of
Westchester Gas Company, which includes approximately 215 producing
natural gas wells, 52 miles of intrastate gas pipeline and 170 miles
of gas-gathering systems. The aggregate purchase price of
approximately $153 million consisted of cash consideration of
approximately $22 million and the issuance of 2.5 million shares of
Progress Energy common stock valued at approximately $129 million. The
purchase price includes approximately $1.7 million of direct
transaction costs. The properties are located within a 25-mile radius
of Jonesville, Texas, on the Texas-Louisiana border. This transaction
added 140 billion cubic feet (Bcf) of gas reserves to Progress
Ventures' growing energy portfolio. See Note 2 to the Progress Energy
Consolidated Interim Financial Statements for additional information
on this acquisition.
Synthetic Fuels Tax Credits
---------------------------
Progress Energy, through the Progress Ventures business unit, produces
synthetic fuel from coal. The production and sale of the synthetic
fuel qualifies for tax credits under Section 29 of the Internal
Revenue Code (Section 29) if certain requirements are satisfied,
including a requirement that the synthetic fuel differs significantly
in chemical composition from the coal used to produce such synthetic
fuel. All of Progress Energy's synthetic fuel facilities have received
favorable private letter rulings from the Internal Revenue Service
(IRS) with respect to their operations. These tax credits are subject
to review by the IRS, and if Progress Energy failed to prevail through
the administrative or legal process, there could be a significant tax
liability owed for previously taken Section 29 credits, with a
significant impact on earnings and cash flows. Tax credits for the
year ended December 31, 2001 and the six months ended June 30, 2002,
were $349.3 million and $175.1 million, respectively, offset by
operating losses, net of tax, of $163.8 million and $91.9 million,
respectively, for the same periods. One synthetic fuel entity, Colona
Synfuel Limited Partnership, L.L.L.P., from which the Company (and
Florida Progress prior to its acquisition by the Company) has been
allocated approximately $220 million in tax credits to date, is being
audited by the IRS. Total Section 29 credits generated to date are
approximately $781 million. In management's opinion, Progress Energy
is complying with the private letter rulings and all the necessary
requirements to be allowed such credits under Section 29 and believes
it is likely, although it cannot provide certainty, that it will
prevail if challenged by the IRS on any credits taken. The current
Section 29 tax credit program will expire in 2007.
Nuclear Matters
---------------
On May 31, 2002, the NRC approved CP&L's request to increase the
generating capacity at each of the two units at its Brunswick nuclear
power facility. These power uprate projects will be implemented in
phases over the next several years. Upon successful completion of
these power uprates in 2005, the Brunswick units will have an increase
in output totaling approximately 208 MWs.
In June 2002, CP&L filed a request with the NRC to extend the Robinson
Unit No. 2 operating license. The Robinson Unit No. 2 current
operating license is scheduled to expire in July 2010. CP&L has
requested a 20-year extension of the operating license through July
2030. The Company cannot predict the outcome of this matter.
44
Standard Market Design
----------------------
On July 31, 2002, the Federal Energy Regulatory Commission (FERC)
issued its Notice of Proposed Rulemaking in Docket No. RM01-12-000,
Remedying Undue Discrimination through Open Access Transmission
Service and Standard Electricity Market Design (SMD NOPR). The
proposed rules set forth in the SMD NOPR would require, among other
things, that 1) all transmission owning utilities transfer control of
their transmission facilities to an independent third party; 2)
transmission service to bundled retail customers be provided under the
FERC-regulated transmission tariff, rather than state-mandated terms
and condition; 3) new terms and conditions for transmission service be
adopted nationwide, including new provisions for pricing transmission
in the event of transmission congestion; 4) new energy markets be
established for the buying and selling of electric energy; and 5) load
serving entities be required to meet minimum criteria for generating
reserves. If adopted as proposed, the rules set forth in the SMD NOPR
would materially alter the manner in which transmission and generation
services are provided and paid for. Progress Energy is reviewing the
SMD NOPR and expects to file comments. Currently, comments are due to
be filed on October 14, 2002. FERC also has indicated that it expects
to issue final rules during the first quarter of 2003. The Company
cannot predict the outcome of this rulemaking or the possible outcome
of any further proceedings, including appeals, related to this matter.
Regional Transmission Organizations
-----------------------------------
On June 18, 2002, the GridSouth RTO sponsors (CP&L, Duke Energy and
South Carolina Electric and Gas) announced that they will delay filing
applications with their state commissions and will suspend the
GridSouth implementation project. Postponing the filings will allow
GridSouth time to review the effects of state and federal regulatory
initiatives that are ongoing and continuing through the end of 2002.
GridSouth will determine the appropriate time to file new applications
with the state commissions based on the results of these regulatory
developments. The Company cannot predict the outcome or impact of this
matter.
Franchise Litigation
--------------------
Seven cities, with a total of approximately 59,000 customers, have
sued Florida Power in various circuit courts in Florida. The lawsuits
principally seek 1) a declaratory judgment that the cities have the
right to purchase Florida Power's electric distribution system located
within the municipal boundaries of the cities, 2) a declaratory
judgment that the value of the distribution system must be determined
through arbitration, and 3) injunctive relief requiring Florida Power
to continue to collect from Florida Power's customers and remit to the
cities, franchise fees during the pending litigation, and as long as
Florida Power continues to occupy the cities' rights-of-way to provide
electric service, notwithstanding the expiration of the franchise
ordinances under which Florida Power had agreed to collect such fees.
Three circuit courts have entered orders requiring arbitration to
establish the purchase price of Florida Power's electric distribution
facilities within three cities. One appellate court has held that one
city has the right to determine the value of Florida Power's
facilities within the city through arbitration. To date, no city has
attempted to actually exercise the right to purchase any portion of
Florida Power's electric distribution system, nor has there been any
proceeding to determine the value at which such a purchase could be
made. Arbitration in one of the cases is scheduled to occur in the
third quarter of 2002. In July 2002, Florida Power reached a
settlement with one of the cities and signed a new franchise agreement
that includes a purchase option at the end of the 30-year agreement.
Progress Energy cannot predict the outcome of these matters.
Carolina Power & Light Company
The information required by this item is incorporated herein by
reference to the following portions of Progress Energy's Management's
Discussion and Analysis of Financial Condition and Results of
Operations, insofar as they relate to CP&L: RESULTS OF OPERATIONS;
LIQUIDITY AND CAPITAL RESOURCES and OTHER MATTERS.
RESULTS OF OPERATIONS
---------------------
The results of operations for the CP&L Electric segment are identical
between CP&L and Progress Energy. The results of operations for CP&L's
non-utility subsidiaries are not material to CP&L's consolidated
financial statements.
45
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During the first six months of 2002, $297.8 million was spent on
CP&L's construction program and $10.4 million was spent on diversified
business property additions.
As of June 30, 2002, CP&L's contractual cash obligations and other
commercial commitments have not changed materially from what was
reported in the 2001 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------ ----------------------------------------------------------
Progress Energy, Inc.
Market risk represents the potential loss arising from adverse changes
in market rates and prices. Certain market risks are inherent in the
Company's financial instruments, which arise from transactions entered
into in the normal course of business. The Company's primary exposures
are changes in interest rates with respect to its long-term debt and
commercial paper, and fluctuations in the return on marketable
securities with respect to its nuclear decommissioning trust funds.
The Company manages its market risk in accordance with its established
risk management policies, which may include entering into various
derivative transactions.
The Company's exposure to return on marketable securities for the
decommissioning trust funds has not changed materially since December
31, 2001. The Company's exposure to market value risk with respect to
the CVOs has also not changed materially since December 31, 2001.
In March 2002, Progress Ventures, Inc. obtained a $440 million bank
facility that will be used exclusively for expansion of its
non-regulated generation portfolio. In March and June 2002, Progress
Ventures, Inc. made draws under this facility of $120 million and $67
million, respectively.
Progress Ventures, Inc. is required to hedge 75 percent of the amounts
outstanding under its bank facility pursuant to the terms of the
agreement for expansion of its non-regulated generation portfolio. In
May 2002, Progress Ventures, Inc. entered into hedges that included a
series of zero cost collars that have been designated as cash flow
hedges for accounting purposes. The fair value of these instruments
was a $2.1 million liability position at June 30, 2002.
During March, April and May 2002, Progress Energy converted $1.0
billion of fixed rate debt into variable rate debt by executing
interest rate derivative agreements with a total notional amount of
$1.0 billion with a group of five banks. Under the terms of the
agreements, which were scheduled to mature in 2006 and 2007 and
coincide with the maturity dates of the related debt issuances,
Progress Energy received a fixed rate and paid a floating rate based
on three-month LIBOR. These instruments were designated as fair value
hedges for accounting purposes. In June 2002, Progress Energy
terminated these agreements. As a result of the agreements, at June
30, 2002, Progress Energy had a debt premium of $21.2 million, which
will be amortized and recorded as a reduction to interest expense over
the life of the related debt issuances.
On April 17, 2002, Progress Energy issued $350 million of senior
unsecured notes due 2007 with a coupon of 6.05% and $450 million of
senior secured notes due 2012 with a coupon of 6.85%. Proceeds from
this issuance were used to pay down commercial paper.
In April, May and June 2002, CP&L entered into a series of Treasury
Rate Locks to hedge its exposure to interest rates with regard to a
future issuance of fixed-rate debt. These agreements have a
computational period of ten years. The fair value of the swaps was a
$8.5 million liability position at June 30, 2002. These instruments
were designated as cash flow hedges for accounting purposes. The
agreements, with a total notional amount of $350 million, were
terminated simultaneously with the pricing of the $500 million CP&L
senior unsecured notes in July 2002 described above. CP&L realized a
$22.5 million hedging loss, which will be amortized and recorded as an
adjustment to interest expense over the life of the notes.
46
As a result of these issuances, the exposure to changes in interest
rates from the Company's fixed rate and variable rate long-term debt
at June 30, 2002, has changed from December 31, 2001. The total fixed
rate long-term debt at June 30, 2002, was $8.7 billion, with an
average interest rate of 6.86% and fair market value of $9.3 billion.
The total variable rate long-term debt at June 30, 2002, was $770
million, with an average interest rate of 1.78% and fair market value
of $772 million.
The exposure to changes in interest rates from the Company's
commercial paper reclassified as long-term debt, extendible notes and
FPC mandatorily redeemable securities of trust at June 30, 2001, was
not materially different than at December 31, 2001. In addition, the
Company's exposure on the $500 million notional amount of interest
rate swap agreements used to hedge its exposure on variable rate debt
positions at June 30, 2002, was not materially different than at
December 31, 2001. This instrument expired on July 31, 2002.
Carolina Power & Light Company
CP&L has certain market risks inherent in its financial instruments,
which arise from transactions entered into in the normal course of
business. CP&L's primary exposures are changes in interest rates with
respect to long-term debt and commercial paper reclassified as
long-term debt, and fluctuations in the return on marketable
securities with respect to its nuclear decommissioning trust funds.
CP&L's exposure to return on marketable securities for the
decommission trust funds has not changed materially since December 31,
2001. The exposure to changes in interest rates from the Company's
fixed rate long-term debt, variable rate long-term debt, commercial
paper reclassified as long-term debt and extendible notes at June 30,
2002, was not materially different than at December 31, 2001. In
addition, CP&L's exposure on the $500 million notional amount of
interest rate swap agreements used to hedge its exposure on variable
rate debt positions at June 30, 2002, was not materially different
than at December 31, 2001. This instrument expired on July 31, 2002.
In April, May and June 2002, CP&L entered into a series of Treasury
Rate Locks to hedge its exposure to interest rates with regard to a
future issuance of fixed-rate debt. These agreements have a
computational period of ten years. The fair value of the swaps was a
$8.5 million liability position at June 30, 2002. These instruments
were designated as cash flow hedges for accounting purposes. The
agreements, with a total notional amount of $350 million, were
terminated simultaneously with the pricing of the $500 million CP&L
senior unsecured notes in July 2002 described above. CP&L realized a
$22.5 million hedging loss, which will be amortized and recorded as an
adjustment to interest expense over the life of the notes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
------- -----------------
Legal aspects of certain matters are set forth in Part I, Item 1. See
Note 12 to the Progress Energy, Inc. Consolidated Interim Financial
Statements and Note 7 to the CP&L Consolidated Interim Financial
Statements.
Item 2. Changes in Securities and Use of Proceeds
------ -----------------------------------------
RESTRICTED STOCK AWARDS:
(a) Securities Delivered. On May 8, 2002 and July 10, 2002, 33,500 and
---------------------
5,200 restricted shares, respectively, of the Company's Common Shares
were granted to certain key employees pursuant to the terms of the
Company's 2002 Equity Incentive Plan (Plan), which was approved by the
Company's shareholders on May 8, 2002. Section 9 of the Plan provides
for the granting of Restricted Stock by the Organization and
Compensation Committee of the Company's Board of Directors, (the
Committee) to key employees of the Company, including its Affiliates
or any successor, and to outside directors of the Company. The Common
Shares delivered pursuant to the Plan were acquired in market
transactions directly for the accounts of the recipients and do not
represent newly issued shares of the Company.
(b) Underwriters and Other Purchasers. No underwriters were used in
-----------------------------------
connection with the delivery of Common Shares described above. The
Common Shares were delivered to certain key employees of the Company.
The Plan defines "key employee" as an officer or other employee of the
Company who is selected for participation in the Plan.
47
(c) Consideration. The Common Shares were delivered to provide an
--------------
incentive to the employee recipients to exert their utmost efforts on
the Company's behalf and thus enhance the Company's performance while
aligning the employee's interest with those of the Company's
shareholders.
(d) Exemption from Registration Claimed. The Common Shares described
-------------------------------------
in this Item were delivered on the basis of an exemption from
registration under Section 4(2) of the Securities Act of 1933. Receipt
of the Common Shares required no investment decision on the part of
the recipients. All award decisions were made by the Committee, which
consists entirely of non-employee directors.
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
(a) The Annual Meeting of the Shareholders of Progress Energy, Inc.
was held on May 8, 2002.
(b) The meeting involved the election of five Class I directors to
serve for three-year terms. Proxies for the meeting were solicited
pursuant to Regulation 14, there was no solicitation in opposition to
management's nominees as listed below, and all nominees were elected.
(c) The total votes for the election of directors were as follows:
Class I Votes For Votes Withheld
----------------------------------------------------------------------
(Term Expiring in 2005)
W. D. Frederick, Jr. 182,706,339 5,161,543
William O. McCoy 183,839,158 4,028,724
John H. Mullin, III 182,923,898 4,943,984
Carlos A. Saladrigas 182,674,474 5,193,408
J. Tylee Wilson 183,747,540 4,120,342
The Board of Directors' proposal to approve the 2002 Equity Incentive
Plan was approved by the shareholders. The number of shares voted for
the proposal was 136,616,357, the number of shares voted against the
proposal was 16,007,003, and the number of abstaining votes was
3,770,077. The delivered not voted total was 31,474,444 shares.
Item 6. Exhibits and Reports on Form 8-K
------ --------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K filed during or with respect to the quarter:
Progress Energy, Inc.
Financial
Item Statements
Reported Included Date of Event Date Filed
5 No April 17, 2002 April 22, 2002
5 No April 24, 2002 April 25, 2002
9 No May 3, 2002 May 3, 2002
9 No May 30, 2002 May 30, 2002
5 No August 9, 2002 August 9, 2002
Carolina Power & Light Company
Financial
Item Statements
Reported Included Date of Event Date Filed
5 Yes July 24, 2002 July 24, 2002
5 No July 25, 2002 August 5, 2002
48
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: August 13, 2002 (Registrants)
By: /s/ Peter M. Scott III
--------------------------------
Executive Vice President and
Chief Financial Officer
By: /s/ Robert H. Bazemore, Jr.
-------------------------------------
Vice President and Controller
Chief Accounting Officer
49