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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 September 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 October 31, 2002, each
registrant had the following shares of common stock outstanding
Registrant Description Shares
---------- ----------- ------
Progress Energy, Inc. Common Stock (Without Par Value) 222,152,799
Carolina Power & Light Company Common Stock (Without Par Value) 159,608,055 (all of which were
held by Progress Energy, Inc.)
1
PROGRESS ENERGY, INC. AND CAROLINA POWER & LIGHT COMPANY
FORM 10-Q - For the Quarter Ended September 30, 2002
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Interim Financial Statements:
Progress Energy, Inc.
---------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Supplemental Data Schedule
Notes to Consolidated Interim Financial Statements
Carolina Power & Light Company
------------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Interim Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
Code Internal Revenue Service Code
CP&L Carolina Power & Light Company
CR3 Florida Power's nuclear generating plant, Crystal River Unit No. 3
CVO Contingent value obligation
DEP Florida Department of Environment and Protection
DOE United States Department of Energy
Dt Dekatherm
DWM North Carolina Department of Environment and Natural Resources, Division of Waste
Management
EasternNC Eastern North Carolina Natural Gas Company, formerly referred to as ENCNG
EITF 98-10 Accounting for Contracts Involved in Energy Trading and Risk Management Activities
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Florida Power Florida Power Corporation
FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Generally accepted Accounting principles generally accepted in the United States of America
accounting principles
IBEW International Brotherhood of Electrical Workers
IRS Internal Revenue Service
KWh Kilowatt-hour
MGP Manufactured Gas Plant
MW Megawatt
NCNG North Carolina Natural Gas Corporation
NCUC North Carolina Utilities Commission
NOx SIP Call EPA rule which requires 22 states including North and South Carolina to further reduce
nitrogen oxide emissions.
NRC United States Nuclear Regulatory Commission
PCH Progress Capital Holdings, Inc.
PLR Private Letter Ruling
Progress Energy Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly referred to as Electric Fuels Corporation
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
Progress Ventures Business segment of Progress Energy primarily made up of non-regulated energy generation,
coal and synthetic fuel operations and energy marketing and trading, formerly referred to
as Energy Ventures
Progress Ventures, Inc. Legal entity holding certain non-regulated operations and part of Progress Ventures
business segment
PUHCA Public Utility Holding Company Act of 1935, as amended
RTO Regional Transmission Organization
SCPSC Public Service Commission of South Carolina
SEC United States Securities and Exchange Commission
Service Company Progress Energy Service Co., LLC
SFAS No. 133 Statements of Financial Accounting Standards No. 133, Accounting for Derivative and
Hedging Activities
SFAS No. 142 Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
SFAS No. 143 Statements of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations
SFAS No. 144 Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets
3
SFAS No. 145 Statements of Financial Accounting Standards No. 145, Rescission of FASB Statement Nos.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
SFAS No. 146 Statements of Financial Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities
SRS Strategic Resource Solutions Corp.
the Company Progress Energy, Inc. and subsidiaries
4
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This combined report contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The matters discussed throughout this combined Form 10-Q that are not
historical facts are forward-looking and, accordingly, involve estimates,
projections, goals, forecasts, assumptions, risks and uncertainties that could
cause actual results or outcomes to differ materially from those expressed in
the forward-looking statements.
In addition, forward-looking statements are discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including, but not limited to, statements under the sub-heading "Other Matters"
concerning synthetic fuel tax credits and regulatory developments.
Any forward-looking statement speaks only as of the date on which such statement
is made, and neither Progress Energy (the Company) nor CP&L undertakes any
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: the impact of fluid and complex government laws and regulations,
including those relating to the environment; the impact of recent events in the
energy markets that have increased the level of public and regulatory scrutiny
in the energy industry and in the capital markets; deregulation or restructuring
in the electric industry that may result in increased competition and
unrecovered (stranded) costs; the uncertainty regarding the timing, creation and
structure of regional transmission organizations; weather conditions that
directly influence the demand for electricity and natural gas; recurring
seasonal fluctuations in demand for electricity and natural gas; fluctuations in
the price of energy commodities and purchased power; economic fluctuations and
the corresponding impact on the Company's and CP&L's commercial and industrial
customers; the ability of the Company's subsidiaries to pay upstream dividends
or distributions to it; the impact on the facilities and the businesses of the
Company and CP&L from a terrorist attack; the inherent risks associated with the
operation of nuclear facilities, including environmental, health, regulatory and
financial risks; the ability to successfully access capital markets on favorable
terms; the impact that increases in leverage may have on the Company and CP&L;
the ability of the Company and CP&L to maintain their current credit ratings;
the impact of derivative contracts used in the normal course of business by the
Company and CP&L; the Company's continued ability to use Section 29 tax credits
related to its coal and synthetic fuels businesses; the continued depressed
state of the telecommunications industry and the Company's ability to realize
future returns from Progress Telecom and Caronet, Inc.; the Company's ability to
successfully integrate newly acquired businesses, including Westchester Gas
Company, into its operations as quickly or as profitably as expected; the
Company's ability to successfully complete the sale of North Carolina Natural
Gas and apply the proceeds therefrom to reduce outstanding indebtedness; the
Company's ability to manage the risks involved with the construction and
operation of its non-regulated plants, including construction delays, dependence
on third parties and related counter-party risks, and a lack of operating
history; the Company's ability to manage the risks associated with its energy
marketing and trading operations; the extent to which the Company is able to
reduce its capital expenditures through the utilization of the natural gas
expansion fund established by the North Carolina Utilities Commission; and
unanticipated changes in operating expenses and capital expenditures. Many of
these risks similarly impact the Company's subsidiaries.
These and other risk factors are detailed from time to time in the Progress
Energy and CP&L SEC reports. You should closely read these SEC reports,
including, particularly, Progress Energy's current report on Form 8-K filed with
the SEC on August 9, 2002. All such factors are difficult to predict, contain
uncertainties that may materially affect actual results, and may be beyond the
control of Progress Energy and CP&L. New factors emerge from time to time, and
it is not possible for management to predict all such factors, nor can it assess
the effect of each such factor on Progress Energy and CP&L.
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Progress Energy, Inc.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
September 30, 2002
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(Unaudited) September 30, September 30,
(In thousands except per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 1,908,817 $ 1,879,934 $ 5,007,321 $ 5,077,928
Natural gas 60,568 51,671 211,171 258,820
Diversified businesses 383,141 398,942 1,060,613 1,217,532
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 2,352,526 2,330,547 6,279,105 6,554,280
- -----------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 459,293 446,309 1,205,731 1,194,453
Purchased power 269,108 268,794 675,066 698,218
Gas purchased for resale 47,505 36,282 150,277 203,060
Other operation and maintenance 324,880 290,651 1,011,096 890,148
Depreciation and amortization 211,088 268,475 642,979 849,395
Taxes other than on income 106,144 105,125 297,775 298,716
Diversified businesses 737,243 461,393 1,536,229 1,372,840
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,155,261 1,877,029 5,519,153 5,506,830
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income 197,265 453,518 759,952 1,047,450
- -----------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 3,002 5,549 11,317 24,997
Other, net (13,394) 16,671 (8,505) 7,214
- -----------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (10,392) 22,220 2,812 32,211
- -----------------------------------------------------------------------------------------------------------------------------
Interest Charges
Net interest charges 149,431 170,044 498,475 530,259
Allowance for borrowed funds used during construction (3,721) (4,206) (11,064) (9,559)
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Charges 145,710 165,838 487,411 520,700
- -----------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 41,163 309,900 275,353 558,961
Income Tax Benefit (110,771) (56,543) (129,728) (73,187)
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 151,934 $ 366,443 $ 405,081 $ 632,148
- -----------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 216,079 205,866 214,700 201,925
Basic Earnings per Common Share $ 0.71 $ 1.78 $ 1.89 $ 3.13
Diluted Earnings per Common Share $ 0.70 $ 1.77 $ 1.88 $ 3.12
Dividends Declared per Common Share $ 0.545 $ 0.530 $ 1.635 $ 1.590
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
6
Progress Energy, Inc
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share data) September 30, December 31,
Assets 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 19,764,622 $ 19,176,021
Gas utility plant in service 540,693 491,903
Accumulated depreciation (10,522,018) (10,096,412)
- ---------------------------------------------------------------------------------------------------------------
Utility plant in service, net 9,783,297 9,571,512
Held for future use 15,027 15,380
Construction work in progress 806,922 1,065,154
Nuclear fuel, net of amortization 215,493 262,869
- ---------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 10,820,739 10,914,915
- ---------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 58,940 54,419
Accounts receivable 794,659 723,807
Unbilled accounts receivable 231,393 199,593
Taxes receivable - 32,325
Inventory 918,297 893,971
Deferred fuel cost 183,942 146,652
Prepayments 62,740 49,056
Other current assets 190,358 224,409
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 2,440,329 2,324,232
- ---------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 403,168 448,631
Nuclear decommissioning trust funds 790,858 822,821
Diversified business property, net 1,768,477 1,073,046
Miscellaneous other property and investments 515,613 464,589
Goodwill, net 3,785,073 3,690,210
Prepaid pension costs 503,357 489,600
Restricted cash 73,821 -
Other assets and deferred debits 479,321 513,099
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 8,319,688 7,501,996
- ---------------------------------------------------------------------------------------------------------------
Total Assets $ 21,580,756 $ 20,741,143
- ---------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ---------------------------------------------------------------------------------------------------------------
Capitalization
Common stock (without par value, 500,000,000 shares authorized,
221,933,138 and 218,725,352 shares issued and outstanding, respectively) $ 4,278,913 $ 4,107,493
Unearned ESOP common stock (101,560) (114,385)
Accumulated other comprehensive loss (39,102) (32,180)
Retained earnings 2,094,639 2,042,605
- ---------------------------------------------------------------------------------------------------------------
Total common stock equity 6,232,890 6,003,533
Preferred stock of subsidiaries-not subject to mandatory redemption 92,831 92,831
Long-term debt, net 9,735,025 8,618,960
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization 16,060,746 14,715,324
- ---------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 375,202 688,052
Accounts payable 657,572 725,977
Taxes accrued 123,645 -
Interest accrued 153,903 212,387
Dividends declared 120,001 117,857
Short-term obligations 1,060,267 942,314
Customer deposits 159,920 154,343
Other current liabilities 391,470 419,398
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 3,041,980 3,260,328
- ---------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,157,446 1,434,506
Accumulated deferred investment tax credits 211,446 226,382
Regulatory liabilities 292,544 287,239
Other liabilities and deferred credits 816,594 817,364
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,478,030 2,765,491
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 13)
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 21,580,756 $ 20,741,143
- ---------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
7
Progress Energy, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended
(Unaudited) September 30,
(In thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 405,081 $ 632,148
Adjustments to reconcile net income to net cash provided by
Operating activities
Impairment of long-lived assets and investments 329,997 -
Depreciation and amortization 801,157 997,680
Deferred income taxes (312,020) (78,987)
Investment tax credit (14,930) (18,479)
Deferred fuel cost (credit) (37,290) 25,616
Net increase in accounts receivable (96,005) (48,536)
Net increase in inventories (29,069) (252,505)
Net increase in prepaids and other current assets (23,169) (1,815)
Net increase (decrease) in accounts payable 13,605 (60,828)
Net increase in other current liabilities 99,521 65,630
Other 69,457 (24,281)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,206,335 1,235,643
- ----------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (738,559) (884,837)
Diversified business property additions and acquisitions (764,553) (194,661)
Proceeds from sale of assets 670 5,532
Nuclear fuel additions (56,102) (113,099)
Net contributions to nuclear decommissioning trust (13,367) (40,540)
Fuel acquisition, net of cash acquired (17,355) -
Net cash flow of company-owned life insurance program (4,086) (5,137)
Investments in non-utility activities (5,068) 3,390
Net increase in restricted cash (73,821) -
Other 388 -
- ----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,671,853) (1,229,352)
- ----------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 1,787,711 3,772,376
Net increase (decrease) in short-term indebtedness 117,953 (3,632,802)
Net decrease in cash provided by checks drawn in excess of bank (37,471) (78,816)
balances
Retirement of long-term debt (1,049,918) (186,295)
Issuance of common stock - 488,290
Dividends paid on common stock (350,903) (318,910)
Other 2,667 (47,567)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 470,039 (3,724)
- ----------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 4,521 2,567
Cash and Cash Equivalents at Beginning of the Period 54,419 101,296
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 58,940 $ 103,863
- ----------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 540,512 $ 507,284
income taxes $ 104,863 $ 31,664
See Note 2 for non-cash investing and financing activity.
- ----------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
8
Progress Energy, Inc.
SUPPLEMENTAL DATA SCHEDULE Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands)
Electric
Retail $ 1,602,600 $ 1,591,713 $ 4,176,454 $ 4,214,165
Wholesale 251,797 254,054 659,316 729,608
Unbilled 2,542 (7,493) 28,769 (54,272)
Miscellaneous revenue 51,878 41,660 142,782 188,427
- -----------------------------------------------------------------------------------------------------------------------------
Total Electric 1,908,817 1,879,934 5,007,321 5,077,928
Natural gas 60,568 51,671 211,171 258,820
Diversified businesses 383,141 398,942 1,060,613 1,217,532
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 2,352,526 $ 2,330,547 $ 6,279,105 $ 6,554,280
- -----------------------------------------------------------------------------------------------------------------------------
Energy Sales - Utility
Electric (millions of kWh)
Retail
Residential 9,988 9,385 25,810 25,310
Commercial 6,881 6,597 18,012 17,553
Industrial 4,552 4,473 12,776 13,068
Other retail 1,185 1,164 3,183 3,135
- -----------------------------------------------------------------------------------------------------------------------------
Total retail 22,606 21,619 59,781 59,066
Unbilled (3) (350) 716 (893)
Wholesale 5,550 5,087 14,331 13,946
- -----------------------------------------------------------------------------------------------------------------------------
Total Electric 28,153 26,356 74,828 72,119
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Natural Gas Delivered (thousands of dt) 19,965 13,080 52,463 39,022
- -----------------------------------------------------------------------------------------------------------------------------
Energy Supply - Utility (millions of kWh)
Generated - Steam 14,529 13,451 37,628 37,242
Nuclear 7,720 7,553 22,640 21,503
Hydro 51 83 297 200
Combustion turbines 3,121 2,461 6,868 5,270
Purchased 4,142 3,945 10,991 11,330
- -----------------------------------------------------------------------------------------------------------------------------
Total Energy Supply - (Company Share) (a) 29,563 27,493 78,424 75,545
- -----------------------------------------------------------------------------------------------------------------------------
Detail of Income Taxes (in thousands)
Income tax expense (credit) - current $ 163,024 $ (4,197) $ 197,212 $ 24,279
deferred (269,087) (47,082) (312,020) (78,987)
investment tax credit (4,708) (5,264) (14,920) (18,479)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income Tax Benefit $ (110,771) $ (56,543) $ (129,728) $ (73,187)
- -----------------------------------------------------------------------------------------------------------------------------
(a) Excludes co-owner's share of the energy supplied from the five generating
facilities that are jointly owned.
9
Progress Energy, Inc.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization. Progress Energy, Inc. (the Company) is a registered holding
company under the Public Utility Holding Company Act (PUHCA) of 1935, as
amended. Both the Company and its subsidiaries are subject to the
regulatory provisions of PUHCA. Through its wholly owned subsidiaries,
Carolina Power & Light Company (CP&L), Florida Power Corporation (Florida
Power) and North Carolina Natural Gas Corporation (NCNG), the Company is
primarily engaged in the generation, transmission, distribution and sale of
electricity in portions of North Carolina, South Carolina and Florida and
the transport, distribution and sale of natural gas in portions of North
Carolina. Through the Progress Ventures business unit, the Company is
involved in non-regulated energy generation; coal, gas and synthetic fuel
operations; and energy marketing and trading. Through other business units,
the Company engages in other non-regulated business areas, including energy
management and related services, rail services and telecommunications.
Progress Energy's legal structure is not currently aligned with the
functional management and financial reporting of the Progress Ventures
business segment. Whether, and when, the legal and functional structures
will converge depends upon legislative and regulatory action, which cannot
currently be anticipated.
Basis of Presentation. These financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America (generally accepted accounting principles) for interim
financial information and with the instructions to Form 10-Q and Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Because the accompanying consolidated interim financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles, they should be read in
conjunction with the audited financial statements for the period ended
December 31, 2001 and notes thereto included in Progress Energy's Form 10-K
for the year ended December 31, 2001.
The amounts included in the consolidated interim financial statements are
unaudited but, in the opinion of management, reflect all adjustments
necessary to fairly present the Company's financial position and results of
operations for the interim periods. Due to seasonal weather variations and
the timing of outages of electric generating units, especially
nuclear-fueled units, the results of operations for interim periods are not
necessarily indicative of amounts expected for the entire year. Effective
with the quarter ended September 30, 2002, the Company will no longer
reclassify commercial paper as long-term debt. Certain amounts for 2001
have been reclassified to conform to the 2002 presentation.
In preparing financial statements that conform with generally accepted
accounting principles, management must make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements
and amounts of revenues and expenses reflected during the reporting period.
Actual results could differ from those estimates.
2. ACQUISITIONS
Generation Acquisition. On February 15, 2002, Progress Ventures, Inc.
acquired 100% of two electric generating projects located in Georgia from
LG&E Energy Corp., a subsidiary of Powergen plc. The two projects consist
of 1) Walton County Power, LLC in Monroe, Georgia, a 460 megawatt natural
gas-fired plant placed in service in June 2001 and 2) Washington County
Power, LLC in Washington County, Georgia, a planned 600 megawatt natural
gas-fired plant expected to be operational by June 2003. The Walton and
Washington projects have been included in the consolidated financial
statements since the acquisition date. The acquisition furthers Progress
Ventures' expansion into non-regulated energy operations and positions it
as a growing provider of energy in the Southeast.
The aggregate cash purchase price of approximately $348 million included
approximately $1.7 million of direct transaction costs. The purchase price
was primarily allocated to fixed assets based on the preliminary fair
values of the assets acquired. The transaction also included tolling and
power sale agreements with LG&E Energy Marketing, Inc. for each project
through December 31, 2004. The excess of the purchase price over the
preliminary fair value of the net identifiable assets and liabilities
acquired has been recorded as goodwill. Based on this preliminary
allocation, goodwill of approximately $64.1 million has been recorded. The
preliminary purchase price allocation is subject to adjustment for changes
in the preliminary assumptions and analyses used, pending additional
information including final asset valuations.
10
In addition, Progress Ventures, Inc. entered into a project management and
completion agreement whereby LG&E has agreed to manage the completion of
the Washington site construction for Progress Ventures. The estimated costs
to complete the Washington project at the time of acquisition were
approximately $167.6 million.
The pro forma results of operations would not be materially different than
the reported results of operations for the three and nine months ended
September 30, 2002, or for the comparable periods in the prior year.
Fuel Acquisition. On April 26, 2002, Progress Fuels Corporation, a
subsidiary of Progress Energy, acquired 100% of Westchester Gas Company.
The acquisition included approximately 215 producing natural gas wells, 52
miles of intrastate gas pipeline and 170 miles of gas-gathering systems
located within a 25-miles radius of Jonesville, Texas, on the
Texas-Louisiana border.
The aggregate purchase price of approximately $153 million consisted of
cash consideration of approximately $22 million and the issuance of 2.5
million shares of Progress Energy common stock valued at approximately $129
million. The purchase price included approximately $1.7 million of direct
transaction costs. The purchase price was primarily allocated to fixed
assets based on the preliminary fair values of the assets acquired. The
excess of the purchase price over the preliminary fair value of the net
identifiable assets and liabilities acquired has been recorded as goodwill.
Based on this preliminary allocation, goodwill of approximately $33 million
has been recorded. The preliminary purchase price allocation is subject to
adjustment for changes in the preliminary assumptions and analyses used,
pending additional information including final asset valuations and
allocations to gas properties.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations for Westchester have
been included in Progress Energy's consolidated financial statements since
the date of acquisition. The pro forma results of operations would not be
materially different than the reported results of operations for the three
and nine months ended September 30, 2002, or for the comparable periods in
the prior year.
3. IMPAIRMENT OF LONG-LIVED ASSETS, INVESTMENTS AND OTHER ONE-TIME CHARGES
Due to the decline of the telecommunications industry and continued
operating losses, the Company initiated a valuation study to assess the
recoverability of Progress Telecom's and Caronet's long-lived assets. Based
on this assessment, the Company recorded asset impairments and other
one-time charges totaling $330.4 million on a pre-tax basis in the third
quarter of 2002 ($208.5 million after-tax). The asset write-downs and other
one-time charges are included in diversified businesses expenses on the
Consolidated Statements of Income. The results of Progress Telecom and
Caronet are included in the Other segment (See Note 5). This write-down
constitutes a significant reduction in the book value of these long-lived
assets.
The long-lived asset write-downs of $305.0 million on a pre-tax basis
include an impairment of property, plant and equipment, construction work
in process and intangible assets. The impairment charge represents the
difference between the fair value and carrying amount of these long-lived
assets. The fair value of these assets was determined using a valuation
study heavily weighted on the discounted cash flow methodology and using
market approaches as supporting information. The other one-time charges of
$25.4 million on a pre-tax basis primarily relate to inventory adjustments.
Effective June 28, 2000, Caronet entered into an agreement with Bain
Capital where it contributed the net assets used in its application service
provider business to a newly formed company, for a 35% ownership interest
(15% voting interest), named Interpath Communications, Inc. (Interpath). In
May 2002, Interpath merged with Usinternetworking, Inc. Pursuant to the
terms of the merger agreement and additional funds being contributed by
Bain Capital, CP&L now owns approximately 19% of the company (7% voting
interest). As a result of the merger, the Company reviewed the Interpath
investment for impairment and wrote off the remaining amount of its
cost-basis investment in Interpath, recording a pre-tax impairment of $25.0
million in the third quarter of 2002 ($16.3 million after-tax). The
investment write-down is included in other, net on the Consolidated
Statements of Income.
4. FLORIDA POWER RATE CASE SETTLEMENT
On March 27, 2002, the parties in Florida Power's rate case entered into a
Stipulation and Settlement Agreement (the Agreement) related to retail rate
matters. The Agreement was approved by the Florida Public Service
Commission (FPSC) on April 23, 2002. The Agreement is generally effective
from May 1, 2002 through December 31, 2005; provided, however, that if
11
Florida Power's base rate earnings fall below a 10% return on equity,
Florida Power may petition the FPSC to amend its base rates.
The Agreement provides that Florida Power will reduce its retail revenues
from the sale of electricity by an annual amount of $125 million. The
Agreement also provides that Florida Power will operate under a Revenue
Sharing Incentive Plan (the Plan) through 2005, and thereafter until
terminated by the FPSC, that establishes annual revenue caps and sharing
thresholds. The Plan provides that retail base rate revenues between the
sharing thresholds and the retail base rate revenue caps will be divided
into two shares - a 1/3 share to be received by Florida Power's
shareholders, and a 2/3 share to be refunded to Florida Power's retail
customers; provided, however, that for the year 2002 only, the refund to
customers will be limited to 67.1% of the 2/3 customer share. The retail
base rate revenue sharing threshold amounts for 2002 will be $1,296 million
and will increase $37 million each year thereafter. The Plan also provides
that all retail base rate revenues above the retail base rate revenue caps
established for each year will be refunded to retail customers on an annual
basis. For 2002, the refund to customers will be limited to 67.1% of the
retail base rate revenues that exceed the 2002 cap. The retail base revenue
caps for 2002 will be $1,356 million and will increase $37 million each
year thereafter. Any amounts above the retail base revenue caps will be
refunded 100 percent to customers.
The Agreement also provides that beginning with the in-service date of
Florida Power's Hines Unit 2 and continuing through December 31, 2005,
Florida Power will be allowed to recover through the fuel cost recovery
clause a return on average investment and depreciation expense for Hines
Unit 2, to the extent such costs do not exceed the Unit's cumulative fuel
savings over the recovery period. Hines Unit 2 is a 516 MW combined-cycle
unit under construction and currently scheduled for completion in late
2003.
Additionally, the Agreement provides that Florida Power will effect a
mid-course correction of its fuel cost recovery clause to reduce the fuel
factor by $50 million for the remainder of 2002. The fuel cost recovery
clause will operate as it normally does, including, but not limited to any
additional mid-course adjustments that may become necessary, and the
calculation of true-ups to actual fuel clause expenses.
Florida Power will suspend accruals on its reserves for nuclear
decommissioning and fossil dismantlement through December 31, 2005.
Additionally, for each calendar year during the term of the Agreement,
Florida Power will record a $62.5 million depreciation expense reduction,
and may, at its option, record up to an equal annual amount as an
offsetting accelerated depreciation expense. In addition, Florida Power is
authorized, at its discretion, to accelerate the amortization of certain
regulatory assets over the term of the Agreement. There was no accelerated
depreciation or amortization expense recorded for the three and nine months
ended September 30, 2002.
Under the terms of the Agreement, Florida Power agreed to continue the
implementation of its four-year Commitment to Excellence Reliability Plan
and expects to achieve a 20% improvement in its annual System Average
Interruption Duration Index by no later than 2004. If this improvement
level is not achieved for calendar years 2004 or 2005, Florida Power will
provide a refund of $3 million for each year the level is not achieved to
10% of its total retail customers served by its worst performing
distribution feeder lines.
The Agreement also provides that Florida Power will refund to customers $35
million of revenues Florida Power collected during the interim period since
March 13, 2001. This one-time retroactive revenue refund was recorded in
the first quarter of 2002 and will be returned to retail customers over an
eight-month period ending December 31, 2002. Any additional refunds under
the Agreement will be recorded as they become probable. No additional
refunds have been accrued at September 30, 2002.
5. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company currently provides services through the following business
segments: CP&L Electric, Florida Power Electric, Progress Ventures, Rail
Services and Other. The prior period has been restated to reflect the
current reportable segments.
The CP&L Electric and Florida Power Electric segments are engaged in the
generation, transmission, distribution, and sale of electric energy in
portions of North Carolina, South Carolina and Florida. Electric operations
are subject to the rules and regulations of FERC, the NCUC, the SCPSC and
the FPSC.
The Progress Ventures segment is primarily engaged in non-regulated energy
generation and coal, gas and synthetic fuel operations. Management reviews
the operations of the Progress Ventures segment after the allocation of
12
energy marketing and trading activities which Progress Ventures performs on
behalf of the regulated utilities, CP&L and Florida Power. The marketing
activity refers to soliciting and managing wholesale power supply contracts
and to selling excess generation as available, all within the regulated
framework. Contracts within this activity are subject to review under SFAS
No. 133. The trading activity refers to trading as defined in EITF 98-10.
This trading activity has primarily consisted of entering into standardized
electric forward contracts. In addition, the trading activity has also
included purchasing power for immediate resale. This trading has been
conducted on behalf of CP&L and Florida Power, but is outside the regulated
framework (i.e., is a non-regulated activity). Progress Ventures also
enters into non-regulated trading transactions for its non-regulated plant
and fuel businesses.
The Rail Services segment operations include railcar repair, rail parts
reconditioning and sales, railcar leasing and sales, and scrap metal
recycling. These activities include maintenance and reconditioning of
salvageable scrap components of railcars, locomotive repair, right-of-way
maintenance and operating manufacturing facilities for new rail cars.
The Other segment is primarily made up of regulated natural gas, other
diversified businesses and holding company operations, which includes the
transportation, distribution and sale of natural gas in portions of North
Carolina, telecommunication services, miscellaneous non-regulated
activities and elimination entries.
For reportable segments presented in the accompanying table, segment income
includes intersegment revenues accounted for at prices representative of
unaffiliated party transactions. Intersegment revenues that are not
eliminated represent natural gas sales to the CP&L Electric and the Florida
Power Electric segments.
Florida Power Progress Rail Services Segment
(in thousands) CP&L Electric Electric Ventures (b) (c) Other (d) Totals
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended 9/30/02
Revenues
Unaffiliated $1,045,180 $863,637 $168,777 $194,611 $70,902 $2,343,107
Intersegment - - 135,029 1,282 (126,892) 9,419
----------------------------------------------------------------------------------------
Total Revenues $1,045,180 $863,637 $303,806 $195,893 $(55,990) $2,352,526
Net Income (Loss) $179,308 $123,774 $72,976 $733 $(224,857) $151,934
Segment Income (Loss) After $167,974 $120,513 $87,571 $733 $(224,857) $151,934
Allocation (a)
Total Segment Assets $8,785,416 $5,079,719 $2,381,706 $579,947 $4,753,968 $21,580,756
==============================================================================================================================
Florida Power Progress Segment
CP&L Electric Electric Ventures Rail Services Other Totals
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended 9/30/01
Revenues
Unaffiliated $973,803 $906,131 $144,511 $219,554 $77,926 $2,321,925
Intersegment - - 88,014 478 (79,870) 8,622
----------------------------------------------------------------------------------------
Total Revenues $973,803 $906,131 $232,525 $220,032 $(1,944) $2,330,547
Net Income (Loss) $168,456 $114,079 $61,660 $(2,165) $24,413 $366,443
Segment Income (Loss) After $156,725 $107,397 $80,073 $(2,165) $24,413 $366,443
Allocation (a)
Total Segment Assets $9,101,248 $5,044,029 $1,005,962 $828,384 $4,693,366 $20,672,989
==============================================================================================================================
13
CP&L Electric Florida Power Progress Rail Services Other (d) Segment
Electric Ventures (b) (c) Totals
---------------------------------------------------------------------------------------------------------------------------
Nine Months Ended 9/30/02
Revenues
Unaffiliated $2,691,320 $2,316,001 $419,702 $574,514 $258,413 $6,259,950
Intersegment - - 394,848 2,632 (378,325) 19,155
-------------------------------------------------------------------------------------
Total Revenues $2,691,320 $2,316,001 $814,550 $577,146 $(119,912) $6,279,105
Net Income (Loss) $396,530 $258,271 $165,928 $2,979 $(418,627) $405,081
Segment Income (Loss) After $355,251 $248,741 $216,737 $2,979 $(418,627) $405,081
Allocation (a)
Total Segment Assets $8,785,416 $5,079,719 $2,381,706 $579,947 $4,753,968 $21,580,756
===========================================================================================================================
Florida Power Progress Segment
CP&L Electric Electric Ventures Rail Services Other Totals
---------------------------------------------------------------------------------------------------------------------------
Nine Months Ended 9/30/01
Revenues
Unaffiliated $2,577,664 $2,500,265 $395,767 $739,863 $327,211 $6,540,770
Intersegment - - 280,410 1,102 (268,002) 13,510
-------------------------------------------------------------------------------------
Total Revenues $2,577,664 $2,500,265 $676,177 $740,965 $59,209 $6,554,280
Net Income (Loss) $373,949 $269,996 $161,026 $(9,698) $(163,125) $632,148
Segment Income Loss) After $334,593 $251,601 $218,777 $(9,698) $(163,125) $632,148
Allocation (a)
Total Segment Assets $9,101,248 $5,044,029 $1,005,962 $828,384 $4,693,366 $20,672,989
===========================================================================================================================
(a) After allocation of energy trading and marketing net income managed by
Progress Ventures on behalf of the electric utilities.
(b) Progress Ventures total segment assets at September 30, 2002, increased
from the prior year due to the addition of non-regulated generating assets
including Effingham, DeSoto, Walton and Washington, the transfer of the
Rowan plant from CP&L in the first quarter of 2002 and the acquisition of
Westchester Gas Company (See Note 2). The Effingham and Washington units
are still under construction.
(c) Rail Services total segment assets at September 30, 2002, decreased from
the prior year due to the final purchase price allocation being recorded in
the fourth quarter of 2001.
(d) All goodwill is included in the Other Segment herein (See Note 7).
6. IMPACT OF NEW ACCOUNTING STANDARDS
During the second quarter of 2001, the Financial Accounting Standards Board
(FASB) issued interpretations of Statements of Financial Accounting
Standards No. 133, "Accounting for Derivative and Hedging Activities,"
(SFAS No. 133) indicating that options in general cannot qualify for the
normal purchases and sales exception, but provided an exception that allows
certain electricity contracts, including certain capacity-energy contracts,
to be excluded from the mark-to-market requirements of SFAS No. 133. The
interpretations were effective July 1, 2001. Those interpretations did not
require the Company to mark-to-market any of its electricity
capacity-energy contracts currently outstanding. In December 2001, the FASB
revised the criteria related to the exception for certain electricity
contracts, with the revision to be effective April 1, 2002. The revised
interpretation did not result in any significant changes to the Company's
assessment of mark-to-market requirements for its current contracts. If an
electricity or fuel supply contract in its regulated businesses is subject
to mark-to-market accounting, there generally would be no income statement
effect of the mark-to-market because such contracts are generally reflected
in fuel adjustment clauses so that the contract's mark-to-market gain or
loss would be recorded as a regulatory asset or liability. Any
mark-to-market gains or losses in its non-regulated businesses would affect
income unless those contracts qualify for hedge accounting treatment. The
application of the new rules is still evolving, and further guidance from
the FASB is expected, which could additionally impact the Company's
financial statements.
See Note 7 for more information on SFAS No. 142, "Goodwill and Other
Intangible Assets."
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in July 2001. This statement provides accounting and
disclosure requirements for retirement obligations associated with
long-lived assets and is effective January 1, 2003. This statement requires
that the present value of retirement costs for which the Company has a
legal obligation be recorded as liabilities with an equivalent amount added
to the asset cost and depreciated over an appropriate period. The liability
is then accreted over time by applying an interest method of allocation to
the beginning liability. The Company is in the process of identifying
retirement obligations. Areas that are being reviewed include electric
transmission and distribution, gas production and distribution, nuclear
decommissioning, all generating facilities, coal mines, synthetic fuel
facilities, terminals and telecommunication assets. The Company is also in
the process of quantifying the obligations that have been identified under
the measurement rules described in the standard. For regulated companies,
there is not expected to be any impact on earnings. For non-regulated
companies, the Company currently cannot predict the earnings impact.
14
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides
guidance for the accounting and reporting of impairment or disposal of
long-lived assets. The statement supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." It also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" related to the disposal
of a segment of a business. Adoption of this statement did not have a
material effect on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" This standard will require gains and losses from
extinguishment of debt to be classified as extraordinary items only if they
meet the criteria of unusual and infrequent in Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Any gain or loss on extinguishment will be recorded in the
most appropriate line item to which it relates within net income before
extraordinary items. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002; however, certain sections are effective for
transactions occurring after May 15, 2002. The Company does not have any
transactions that are affected by this statement as of September 30, 2002.
For regulated companies, any expenses or call premiums associated with the
reacquisition of debt obligations are amortized over the remaining life of
the original debt using the straight-line method consistent with ratemaking
treatment.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This statement supercedes Emerging
Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability is recognized at the date an entity commits to an exit plan. SFAS
No. 146 also establishes that the liability should initially be measured
and recorded at fair value. The provisions of SFAS No. 146 will be
effective for any exit and disposal activities covered under the scope of
this standard and initiated after December 31, 2002.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." This statement clarifies the criteria for
recording of other intangible assets separately from goodwill. Effective
January 1, 2002, goodwill is no longer subject to amortization over its
estimated useful life. Instead, goodwill is subject to at least an annual
assessment for impairment by applying a two-step fair-value based test.
This assessment could result in periodic impairment charges.
The Company has completed the first step of the initial transitional
goodwill impairment test, which indicated that the Company's goodwill was
not impaired as of January 1, 2002. In addition, the Company performed the
annual goodwill impairment test for the CP&L Electric and Florida Power
Electric segments as of April 1, 2002, and for the Other segment as of July
1, 2002.
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002, by reportable segment, are as follows:
Florida
CP&L Power Progress
(in thousands) Electric Electric Ventures Other Total
-------- -------- -------- ----- -----
Balance as of January 1, 2002 $1,921,802 $1,733,448 $ - $34,960 $3,690,210
Acquisitions - - 96,583 - 96,583
Divestitures - - - (1,720) (1,720)
-----------------------------------------------------------------------------
Balance as of September 30, 2002 $1,921,802 $1,733,448 $96,583 $33,240 $3,785,073
The acquired goodwill relates to the acquisition of Westchester Gas Company
in April 2002 and the acquisition of generating assets from LG&E Energy
Corp in February 2002 (See Note 2).
As required by SFAS No. 142, the results for the prior year periods have
not been restated. A reconciliation of net income as if SFAS No. 142 had
been adopted is presented below for the three and nine months ended
September 30, 2001, and the years ending December 31, 2001, 2000 and 1999.
15
Three Months Ended Nine Months Ended Year Ended Year Ended Year Ended
(in thousands, except per share data) September 30, 2001 September 30, 2001 2001 2000 1999
------------------ ------------------ ---- ---- ----
Reported net income $ 366,443 $ 632,148 $ 541,610 $ 478,361 $ 379,288
Add back: Goodwill amortization 24,927 75,576 96,828 14,100 3,968
Adjusted net income $ 391,370 $ 707,724 $ 638,438 $ 492,461 $ 383,256
Basic earnings per common share:
Reported net income $ 1.78 $ 3.13 $ 2.65 $ 3.04 $ 2.56
Adjusted net income $ 1.90 $ 3.50 $ 3.12 $ 3.13 $ 2.58
Diluted earnings per common share:
Reported net income $ 1.77 $ 3.12 $ 2.64 $ 3.03 $ 2.55
Adjusted net income $ 1.89 $ 3.49 $ 3.11 $ 3.12 $ 2.58
The gross carrying amount and accumulated amortization of the Company's
intangible assets as of September 30, 2002 and December 31, 2001 are as
follows:
September 30, 2002 December 31, 2001
------------------------------------------- ------------------------------------------
(in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------------------------- --------------------- --------------------- --------------------- --------------------
Synthetic fuel intangibles (a) $ 140,469 $ (39,450) $ 140,469 $ (22,237)
Power sale agreements (b) 34,074 (3,912) - -
Customer contracts (c) 11,500 (6,200) 17,300 (5,600)
Other 21,546 (626) 18,771 (338)
-------------------------------- --------------------- --------------------- --------------------- --------------------
Total $ 207,589 $ (50,188) $ 176,540 $ (28,175)
(a) Represents intangibles for synthetic fuel technology. These intangibles
are being amortized on a straight-line basis over the period ending with
the expiration of tax credits under Section 29 of the Internal Revenue Code
on December 31, 2007.
(b) Relates to the power sale agreements recorded as part of the
acquisition of generating assets from LG&E Energy Corp. (See Note 2), which
are amortized on a straight-line basis beginning with the in-service date
of these plants through December 31, 2004.
(c) Decrease at September 30, 2002 relates to the write-down of Progress
Telecom assets (See Note 3).
Total net intangible assets of $157.4 million and $148.4 million at
September 30, 2002, and December 31, 2001, respectively, are included in
other assets and deferred debits in the accompanying balance sheets.
Amortization expense recorded on intangible assets for the three and nine
months ended September 30, 2002 was $8.3 million and $24.5 million,
respectively. The estimated amortization expense on intangible assets for
the next five years is as follows:
(in thousands)
2002 $32,822
2003 33,817
2004 36,542
2005 20,333
2006 19,864
8. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30,
2002, was $141.8 million and $398.2 million, respectively. Comprehensive
income for the three and nine months ended September 30, 2001, was $363.0
million and $594.5 million, respectively. Items of other comprehensive
income for the three-month and nine-month periods consisted primarily of
changes in the fair value of derivatives used to hedge cash flows related
to interest on long-term debt, the cumulative effect of implementing SFAS
No. 133 as of January 1, 2001 and reclassification of amounts into income.
9. FINANCING ACTIVITIES
On February 6, 2002, CP&L issued $48.5 million principal amount of First
Mortgage Bonds, Pollution Control Series W, Wake County Pollution Control
Revenue Refunding Bonds, 5.375% Series 2002 Due February 1, 2017. On March
16
1, 2002, CP&L redeemed $48.5 million principal amount of Pollution Control
Revenue Bonds, Wake County (Carolina Power & Light Company Project)
Adjustable Rate Option Bond 1983 Series Due April 1, 2019, at 101.5% of the
principal amount of such bonds.
In February 2002, $50 million of Progress Capital Holdings, Inc. (PCH)
medium-term notes, 5.78% Series, matured. Progress Energy funded this
maturity through the issuance of commercial paper.
In March 2002, a Progress Ventures, Inc. subsidiary, Progress Genco
Ventures, LLC, obtained a $440 million bank facility that was to be used
exclusively for expansion of its non-regulated generation portfolio.
Borrowings under this facility are secured by the assets in the generation
portfolio. In March 2002, June 2002 and September 2002, Progress Genco
Ventures, LLC made draws under this facility of $120 million, $67 million
and $25 million, respectively. In September 2002, Progress Genco Ventures,
LLC terminated $130 million of the bank facility, reducing it from $440
million to $310 million. Borrowings under the facility are restricted for
the operations, construction, repayments and other related charges of the
credit facility for development projects, including DeSoto County
Generating Company, LLC, Effingham County Power, LLC, MPC Generating
Company, LLC and Rowan County Power, LLC. Cash held and restricted to
operations was $13.0 million at September 30, 2002, and is included in
other current assets. Cash held and restricted for long-term purposes was
$73.8 million at September 30, 2002 and is included in deferred debits and
other assets.
On April 17, 2002, Progress Energy issued $350 million of senior unsecured
notes due 2007 with a coupon of 6.05% and $450 million of senior unsecured
notes due 2012 with a coupon of 6.85%. Proceeds from this issuance were
used to pay down commercial paper.
On June 27, 2002, CP&L announced the redemption of $500 million of CP&L
Extendible Notes due October 28, 2009, at 100% of the principal amount of
such notes. These notes were redeemed on July 29, 2002 and CP&L funded the
redemptions through the issuance of commercial paper. On July 30, 2002,
CP&L issued $500 million of senior unsecured notes due 2012 with a coupon
of 6.5%. Proceeds from this issuance were used to pay down commercial
paper.
On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54%
Series, matured. Florida Power funded this maturity through the issuance of
commercial paper.
On July 11, 2002, Florida Power announced the redemption of $108.55 million
principal amount of Citrus County Pollution Control Refunding Revenue
Bonds, Series 1992 A Due January 1, 2027, $90 million principal amount of
Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 B Due
February 1, 2022 and $10.115 million principal amount of Pasco County
Pollution Control Refunding Revenue Bonds, Series 1992A Due February 1,
2022, at 102% of the principal amount of such bonds and $32.2 million
principal amount of Pinellas County Pollution Control Refunding Revenue
Bonds, Series 1991 Due December 1, 2014 at 101% of the principal amount of
such bonds. These redemptions were finalized on August 12, 2002.
On July 16, 2002, Florida Power issued $108.55 million principal amount of
Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due
January 1, 2027, $100.115 million principal amount of Citrus County
Pollution Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022
and $32.2 million principal amount of Citrus County Pollution Control
Revenue Refunding Bonds, Series 2002C Due January 1, 2018. Proceeds from
this issuance were used to redeem Florida Power's pollution control revenue
refunding bonds above.
On August 5, 2002, CP&L announced the redemption of $150 million of First
Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the principal
amount of such bonds. CP&L redeemed these notes on September 4, 2002
through the issuance of commercial paper.
Progress Energy's 364-day revolving credit facility expired on November 12,
2002. In connection with the renewal, the facility was reduced in size from
$550 million to approximately $430 million. In addition, the permitted debt
to capital ratio was lowered from 70% to 68% effective June 30, 2003;
Progress Energy's debt to capital ratio as of September 30, 2002, was
65.3%. Finally, a minimum EBITDA to interest expense ratio of 2.5x to 1 was
imposed; for the twelve months ended September 30, 2002, Progress Energy's
ratio of EBITDA to interest expense was 3.28x to 1.
On November 13, 2002, Progress Energy issued 14.7 million shares of common
stock at $40.90 per share for net proceeds of $600.0 million. Proceeds from
the issuance will be used to retire commercial paper.
17
10. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
Progress Energy uses interest rate derivative instruments to adjust the
fixed and variable rate debt components of its debt portfolio. During
March, April and May 2002, Progress Energy converted $1.0 billion of fixed
rate debt into variable rate debt by executing interest rate derivative
agreements with a total notional amount of $1.0 billion with a group of
five banks. Under the terms of the agreements, which were scheduled to
mature in 2006 and 2007 and coincide with the maturity dates of the related
debt issuances, Progress Energy received a fixed rate and paid a floating
rate based on three-month LIBOR. These instruments were designated as fair
value hedges for accounting purposes. In June 2002, Progress Energy
terminated these agreements. The terminations resulted in a $21.2 million
deferred hedging gain reflected in long-term debt, which will be amortized
and recorded as a reduction to interest expense over the life of the
related debt issuances.
Progress Genco Ventures, LLC is required to hedge 75 percent of the amounts
outstanding under its bank facility through September 2005 and 50 percent
thereafter pursuant to the terms of the agreement for expansion of its
non-regulated generation portfolio. In May 2002, Progress Genco Ventures,
LLC entered into hedges that included a series of zero cost collars that
have been designated as cash flow hedges for accounting purposes. The fair
value of these instruments was a $10.9 million liability position at
September 30, 2002.
In April, May and June 2002, CP&L entered into a series of treasury rate
locks to hedge its exposure to interest rates with regard to a future
issuance of fixed-rate debt. These agreements had a computational period of
ten years. These instruments were designated as cash flow hedges for
accounting purposes. The agreements, with a total notional amount of $350
million, were terminated simultaneously with the pricing of the $500
million CP&L senior unsecured notes in July 2002. CP&L realized a $22.5
million hedging loss, which will be amortized and recorded as an increase
to interest expense over the life of the notes.
In August 2002, Progress Energy converted $800 million of fixed rate debt
into variable rate debt by executing interest rate derivative agreements
with four counterparties with a total notional amount of $800 million.
Under the terms of the agreements, which were scheduled to expire in 2006
and coincide with the maturity date of the related debt issuance, Progress
Energy received a fixed rate of 3.38% and paid a floating rate based on
three-month LIBOR. These instruments were designated as fair value hedges
for accounting purposes. The fair value of these instruments was a $14.2
million asset position at September 30, 2002. In November 2002, Progress
Energy terminated these agreements. The terminations resulted in a $14.0
million deferred hedging gain reflected in long-term debt, which will be
amortized and recorded as a reduction to interest expense over the life of
the related debt issuance.
Progress Ventures periodically enters into derivative instruments to hedge
its exposure to price fluctuations on natural gas sales. During 2002,
Progress Ventures has executed cash flow hedges on approximately 17.3 Bcf
of natural gas sales for the fourth quarter of 2002 and entire year 2003.
These instruments did not have a material impact on the Company's
consolidated financial position or results of operations.
The notional amount of the above contracts is not exchanged and does not
represent exposure to credit loss. In the event of default by a
counterparty, the risk in the transaction is the cost of replacing the
agreements at current market rates.
11. EARNINGS PER COMMON SHARE
Restricted stock awards and contingently issuable shares had a dilutive
effect on earnings per share for the three and nine months ended September
30, 2002 and 2001. At September 30, 2002, there were options outstanding to
purchase 2.5 million shares of common stock with a weighted average
exercise price of $43.81.
A reconciliation of the weighted average number of common shares
outstanding for basic and dilutive earnings per share purposes is as
follows (in thousands):
Three Months Ended, Nine Months Ended,
September 30, September 30, September 30, September 30,
-------------- -------------- -------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted Average Common Shares - Basic 216,079 205,866 214,700 201,925
Restricted Stock Awards 746 673 709 658
Stock Options 59 - 173 -
--------- --------- --------- ---------
Weighted Average Shares - Fully Dilutive 216,884 206,539 215,582 202,583
18
Employee Stock Ownership Plan shares that have not been committed to be
released to participants' accounts are not considered outstanding for the
determination of earnings per common share. Those shares totaled 4,616,400
and 5,223,387 at September 30, 2002 and September 30, 2001, respectively.
12. FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A SUBSIDIARY
HOLDING SOLELY FPC GUARANTEED NOTES
In April 1999, FPC Capital I (the Trust), an indirect wholly-owned
subsidiary of FPC, issued 12 million shares of $25 par cumulative
FPC-obligated mandatorily redeemable preferred securities (Preferred
Securities) due 2039, with an aggregate liquidation value of $300 million
and an annual distribution rate of 7.10%. Currently, all 12 million shares
of the Preferred Securities that were issued are outstanding. Concurrent
with the issuance of the Preferred Securities, the Trust issued to Florida
Progress Funding Corporation (Funding Corp.) all of the common securities
of the Trust (371,135 shares) for $9.3 million. Funding Corp. is a direct
wholly owned subsidiary of FPC.
The existence of the Trust is for the sole purpose of issuing the Preferred
Securities and the common securities and using the proceeds thereof to
purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable
Interest Notes (subordinated notes) due 2039, for a principal amount of
$309.3 million. The subordinated notes and the Notes Guarantee (as
discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds
from the sale of the subordinated notes were advanced to Progress Capital
and used for general corporate purposes including the repayment of a
portion of certain outstanding short-term bank loans and commercial paper.
FPC has fully and unconditionally guaranteed the obligations of Funding
Corp. under the subordinated notes (the Notes Guarantee). In addition, FPC
has guaranteed the payment of all distributions required to be made by the
Trust, but only to the extent that the Trust has funds available for such
distributions (Preferred Securities Guarantee). The Preferred Securities
Guarantee, considered together with the Notes Guarantee, constitutes a full
and unconditional guarantee by FPC of the Trust's obligations under the
Preferred Securities.
The subordinated notes may be redeemed at the option of Funding Corp.
beginning in 2004 at par value plus accrued interest through the redemption
date. The proceeds of any redemption of the subordinated notes will be used
by the Trust to redeem proportional amounts of the Preferred Securities and
common securities in accordance with their terms. Upon liquidation or
dissolution of Funding Corp., holders of the Preferred Securities would be
entitled to the liquidation preference of $25 per share plus all accrued
and unpaid dividends thereon to the date of payment.
These Preferred Securities are classified as long-term debt on the
Company's consolidated balance sheets.
13. COMMITMENTS AND CONTINGENCIES
Contingencies and significant changes to the commitments discussed in Note
20 of the financial statements included in the Company's 2001 Annual Report
on Form 10-K are described below.
Commitments
Guarantees
During the first nine months of 2002, Progress Energy issued
approximately $363 million of guarantees on behalf of Progress
Ventures and its subsidiaries for obligations under power purchase
agreements, tolling agreements, construction agreements and trading
operations. Approximately $184 million of these commitments relate to
certain guarantee agreements issued to support obligations related to
Progress Ventures' expansion of its non-regulated generation
portfolio. These guarantees ensure performance under generation
construction and operating agreements.
The remaining $179 million of these new commitments are guarantees
issued to support Progress Ventures' energy trading and marketing
functions. The majority of the trading and marketing contracts
supported by the guarantees contain language regarding downgrade
events, ratings triggers, monthly netting of exposure and/or payments
and offset provisions in the event of a default. Based upon the amount
of trading positions outstanding at October 31, 2002, if Progress
Energy's ratings were to decline below investment grade, the Company
would have to deposit cash or provide letters of credit or other cash
collateral for approximately $17 million for the benefit of the
Company's counterparties.
19
Contingencies
1) IRS Audit
One of Progress Energy's synthetic fuel entities, Colona Synfuel
Limited Partnership, L.L.L.P., is being audited by the Internal
Revenue Service (IRS). The audit of Colona was not unexpected.
The Company is audited regularly in the normal course of business
as are most similarly situated companies. The Company (including
Florida Progress prior to its acquisition by the Company) has
been allocated approximately $241 million in tax credits to date
for this synthetic fuel entity. As provided for in contractual
arrangements pertaining to Progress Energy's purchase of Colona,
the Company has begun escrowing quarterly royalty payments owed
to an unaffiliated entity until final resolution of the audit.
In September 2002, all of Progress Energy's majority-owned
synthetic fuel entities were accepted into the IRS's Pre-Filing
Agreement (PFA) program. The PFA program allows taxpayers to
voluntarily accelerate the IRS exam process in order to seek
resolution of specific issues. Either the Company or the IRS can
withdraw from the program at any time, and issues not resolved
through the program may proceed to the next level of the IRS exam
process. While the ultimate outcome is uncertain, the Company
believes that participation in the PFA program will likely
shorten the tax exam process.
In management's opinion, Progress Energy is complying with all
the necessary requirements to be allowed such credits and
believes it is likely, although it cannot provide certainty, that
it will prevail if challenged by the IRS on any credits taken.
2) Franchise Taxes
CP&L, like other electric power companies in North Carolina, pays
a franchise tax levied by the State pursuant to North Carolina
General Statutes ss. 105-116, a state-level annual franchise tax
(State Franchise Tax). Part of the revenue generated by the State
Franchise Tax is required by North Carolina General Statutes ss.
105-116.1(b) to be distributed to North Carolina cities in which
CP&L maintains facilities. CP&L has paid and continues to pay the
State Franchise Tax to the state when such taxes are due.
However, pursuant to an Executive Order issued on February 5,
2002, by the Governor of North Carolina, the Secretary of Revenue
withheld distributions of State Franchise Tax revenues to cities
for two quarters of fiscal year 2001-2002 in an effort to balance
the state's budget.
In response to the state's failure to distribute the State
Franchise Tax proceeds, certain cities in which CP&L maintains
facilities adopted municipal franchise tax ordinances purporting
to impose on CP&L a local franchise tax. The local taxes are
intended to be collected for as long as the state withholds
distribution of the State Franchise Tax proceeds from the cities.
The first local tax payments were due August 15, 2002. On August
2, 2002, CP&L filed a lawsuit against the cities seeking to
enjoin the enforcement of the local taxes and to have the local
ordinances struck down because the ordinances are beyond the
cities' statutory authority and violate provisions of the North
Carolina and United States Constitutions.
On September 14, 2002, the Governor of North Carolina signed into
law a provision that prevents cities and counties from levying
local franchise taxes on electric utilities. The new law is also
intended to prevent a recurrence of the withholding of utility
franchise tax payments by the state. This new legislation makes
it likely that the lawsuit CP&L filed in August against certain
cities that were seeking to enforce local franchise tax
ordinances will become moot.
3) Claims and Uncertainties
a) The Company is subject to federal, state and local regulations
addressing air and water quality, hazardous and solid waste
management and other environmental matters.
Various organic materials associated with the production of
manufactured gas, generally referred to as coal tar, are
regulated under federal and state laws. The lead or sole
regulatory agency that is responsible for a particular former
coal tar site depends largely upon the state in which the site is
located. There are several manufactured gas plant (MGP) sites to
which both electric utilities and the gas utility have some
20
connection. In this regard, both electric utilities and the gas
utility, with other potentially responsible parties, are
participating in investigating and, if necessary, remediating
former coal tar sites with several regulatory agencies,
including, but not limited to, the U.S. Environmental Protection
Agency (EPA), the Florida Department of Environmental Protection
(FDEP) and the North Carolina Department of Environment and
Natural Resources, Division of Waste Management (DWM). In
addition, both electric utilities, the gas utility and Progress
Ventures are periodically notified by regulators such as the EPA
and various state agencies of their involvement or potential
involvement in sites, other than MGP sites, that may require
investigation and/or remediation. A discussion of these sites by
legal entity follows.
CP&L. There are 12 former MGP sites and 14 other active waste
sites associated with CP&L that have required or are anticipated
to require investigation and/or remediation costs. As of
September 30, 2002, CP&L has not recorded any accruals for
investigation and/or remediation costs for these sites. CP&L
received insurance proceeds to address costs associated with CP&L
waste sites. All eligible expenses related to these waste costs
are charged against a centralized fund containing these proceeds.
As of September 30, 2002, approximately $8.3 million remains in
this centralized fund. As costs associated with CP&L's share of
investigation and remediation of these sites become known, the
fund is assessed to determine if additional accruals will be
required. CP&L does not believe that it can provide an estimate
of the reasonably possible total remediation costs beyond what
remains in the centralized fund. This is due to the fact that the
sites are at different stages: investigation has not begun at 15
sites, investigation has begun but remediation cannot be
estimated at 7 sites and 4 sites have begun remediation. CP&L
measures its liability for these sites based on available
evidence including its experience in investigation and
remediation of contaminated sites, which also involves assessing
and developing cost-sharing arrangements with other potentially
responsible parties. Once the centralized fund is depleted, CP&L
will accrue costs for the sites to the extent its liability is
probable and the costs can be reasonably estimated. Therefore,
CP&L cannot currently determine the total costs that may be
incurred in connection with the remediation of all sites.
According to current information, these future costs at the CP&L
sites are not expected to be material to the Company's financial
condition or results of operations. A rollforward of the balance
in this fund is not provided due to the immateriality of this
activity in the periods presented.
Florida Power. There are two former MGP sites and 10 other active
waste sites or categories of sites associated with Florida Power
that have required or are anticipated to require investigation
and/or remediation costs. As of September 30, 2002, Florida Power
has accrued approximately $11.1 million for probable and
reasonably estimable costs at these sites. Florida Power believes
that the maximum liability it can currently estimate on these
sites is $17.0 million. Florida Power has filed for recovery of
approximately $4.0 million of these costs. As more activity
occurs at these sites, Florida Power will assess the need to
adjust the accruals. These accruals have been recorded on an
undiscounted basis. Florida Power measures its liability for
these sites based on available evidence including its experience
in investigation and/or remediation of contaminated sites, which
includes assessing and developing cost-sharing arrangements with
other potentially responsible parties. A rollforward of the
balance in this accrual is not provided due to the immateriality
of this activity in the periods presented.
NCNG. There are 5 former MGP sites associated with NCNG that have
or are estimated to have investigation or remediation costs
associated with them. As of September 30, 2002, NCNG has accrued
approximately $2.7 million for probable and reasonably estimable
remediation costs at these sites. These accruals have been
recorded on an undiscounted basis. NCNG measures its liability
for these sites based on available evidence including its
experience in investigation and remediation of contaminated
sites, which also involves assessing and developing cost-sharing
arrangements with other potentially responsible parties. NCNG
will accrue costs for the sites to the extent its liability is
probable and the costs can be reasonably estimated. NCNG does not
believe it can provide an estimate of the reasonably possible
total remediation costs beyond the accrual because three of the
five sites associated with NCNG have not begun investigation
activities. Therefore, NCNG cannot currently determine the total
costs that may be incurred in connection with the investigation
and/or remediation of all sites. According to current
information, these future costs at the NCNG sites are not
expected to be material to the Company's financial condition or
results of operations. A rollforward of the balance in this
accrual is not provided due to the immateriality of this activity
for the periods presented. NCNG has received insurance proceeds
associated with pollution liability settlements. In addition,
NCNG is receiving approximately $5,000 per month in its rates to
fund expenses associated with its share of costs to investigate,
and if necessary, remediate these sites. On October 16, 2002, the
Company announced plans to sell NCNG to Piedmont Natural Gas
Company, Inc. See Note 14 for more information.
21
As part of the sale of the Inland Marine Transportation segment
to AEP Resources in 2001, Florida Progress established an accrual
to address liabilities which may result from known and unknown
environmental liabilities but primarily to address contamination
in soil and potentially groundwater at one site. The balance in
this accrual is $9.9 million at September 30, 2002. Florida
Progress estimates that its maximum contractual liability to AEP
Resources associated with Inland Marine Transportation segment is
$60 million. These accruals have been determined on an
undiscounted basis. Florida Progress measures its liability for
this site based on estimable and probable remediation scenarios.
A rollforward of the balance in this accrual is not provided due
to the immateriality of this activity for the periods presented.
The Company believes that it is reasonably possible that
additional costs, which cannot be currently estimated, may be
incurred related to the environmental indemnification provision
beyond the amounts accrued. The Company cannot predict the
outcome of this matter.
The Company is also currently in the process of assessing
potential costs and exposures at other sites it has been notified
of. As the assessments are developed and analyzed, the Company
will accrue costs for the sites to the extent the costs are
probable and can be reasonably estimated.
There has been and may be further proposed federal legislation
requiring reductions in air emissions for nitrogen oxides, sulfur
dioxide, carbon dioxide and mercury setting forth national caps
and emission levels over an extended period of time. This
national multi-pollutant approach would have significant costs
which could be material to the Company's consolidated financial
position or results of operations. Some companies may seek
recovery of the related cost through rate adjustments or similar
mechanisms. Control equipment that will be installed on North
Carolina fossil generating facilities as part of the North
Carolina legislation discussed below may address some of the
issues outlined above. The Company cannot predict the outcome of
this matter.
The EPA has been conducting an enforcement initiative related to
a number of coal-fired utility power plants in an effort to
determine whether modifications at those facilities were subject
to New Source Review requirements or New Source Performance
Standards under the Clean Air Act. Both CP&L and Florida Power
were asked to provide information to the EPA as part of this
initiative and cooperated in providing the requested information.
The EPA has initiated civil enforcement actions against other
unaffiliated utilities as part of this initiative, some of which
have resulted in settlement agreements calling for expenditures,
ranging from $1.0 billion to $1.4 billion. A utility that was not
subject to a civil enforcement action settled its New Source
Review issues with the EPA for $300 million. These settlement
agreements have generally called for expenditures to be made over
extended time periods, and some of the companies may seek
recovery of the related cost through rate adjustments or similar
mechanisms. The Company cannot predict the outcome of this
matter.
In 1998, the EPA published a final rule addressing the issue of
regional transport of ozone. This rule is commonly known as the
NOx SIP Call. The EPA's rule requires 23 jurisdictions, including
North Carolina, South Carolina and Georgia, but not Florida, to
further reduce nitrogen oxide emissions in order to attain a
pre-set state NOx emission level by May 31, 2004. CP&L is
evaluating necessary measures to comply with the rule and
estimates its related capital expenditures to meet these measures
in North and South Carolina could be approximately $370 million,
which has not been adjusted for inflation. Increased operation
and maintenance costs relating to the NOx SIP Call are not
expected to be material to the Company's results of operations.
Further controls are anticipated as electricity demand increases.
The Company cannot predict the outcome of this matter.
In July 1997, the EPA issued final regulations establishing a new
eight-hour ozone standard. In October 1999, the District of
Columbia Circuit Court of Appeals ruled against the EPA with
regard to the federal eight-hour ozone standard. The U.S. Supreme
Court has upheld, in part, the District of Columbia Circuit Court
of Appeals decision. Designation of areas that do not attain the
standard is proceeding, and further litigation and rulemaking on
this and other aspects of the standard are anticipated. North
Carolina adopted the federal eight-hour ozone standard and is
proceeding with the implementation process. North Carolina has
promulgated final regulations, which will require CP&L to install
nitrogen oxide controls under the State's eight-hour standard.
The cost of those controls are included in the cost estimate of
$370 million set forth above; however, further technical analysis
and rulemaking may result in a requirement for additional
controls at some units. The Company cannot predict the outcome of
this matter.
22
The EPA published a final rule approving petitions under Section
126 of the Clean Air Act. This rule as originally promulgated
required certain sources to make reductions in nitrogen oxide
emissions by May 1, 2003. The final rule also includes a set of
regulations that affect nitrogen oxide emissions from sources
included in the petitions. The North Carolina fossil-fueled
electric generating plants are included in these petitions.
Acceptable state plans under the NOx SIP Call can be approved in
lieu of the final rules the EPA approved as part of the 126
petitions. CP&L, other utilities, trade organizations and other
states participated in litigation challenging the EPA's action.
On May 15, 2001, the District of Columbia Circuit Court of
Appeals ruled in favor of the EPA which will require North
Carolina to make reductions in nitrogen oxide emissions by May 1,
2003. However, the Court in its May 15th decision rejected the
EPA's methodology for estimating the future growth factors the
EPA used in calculating the emissions limits for utilities. In
August 2001, the Court granted a request by CP&L and other
utilities to delay the implementation of the 126 Rule for
electric generating units pending resolution by the EPA of the
growth factor issue. The Court's order tolls the three-year
compliance period (originally set to end on May 1, 2003) for
electric generating units as of May 15, 2001. On April 30, 2002,
the EPA published a final rule harmonizing the dates for the
Section 126 Rule and the NOx SIP Call. In addition, the EPA
determined in this rule that the future growth factor estimation
methodology was appropriate. The new compliance date for all
affected sources is now May 31, 2004, rather than May 1, 2003.
The Company cannot predict the outcome of this matter.
On June 20, 2002, legislation was enacted in North Carolina
requiring the state's electric utilities to further reduce the
emissions of nitrogen oxide and sulfur dioxide from coal-fired
power plants. These levels exceed requirements of Title IV of the
Clean Air Act pertaining to control of acid rain as well as the
requirements discussed above with regard to the NOx SIP Call,
8-hour ozone standard and Section 126 petitions. Progress Energy
expects its capital costs to meet these emission targets will be
approximately $813 million. CP&L currently has approximately
5,100 MW of coal-fired generation in North Carolina that is
affected by this legislation. The legislation requires the
emissions reductions to be completed in phases by 2013, and
applies to each utilities' total system rather than setting
requirements for individual power plants. The legislation also
freezes the utilities' base rates for five years unless there are
extraordinary events beyond the control of the utility or unless
the utility persistently earns a return substantially in excess
of the rate of return established and found reasonable by the
NCUC in the utility's last general rate case. Further, the
legislation allows the utilities to recover from their retail
customers the projected capital costs during the first seven
years of the 10-year compliance period beginning on January 1,
2003. The utilities must recover at least 70% of their projected
capital costs during the five-year rate freeze period. Pursuant
to the new law, CP&L entered into an agreement with the state of
North Carolina to transfer to the state all future emissions
allowanc