UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Exact name of registrants as specified in their
Commission charters, state of incorporation, address of principal I.R.S. Employer
File Number executive offices, and telephone number Identification Number
1-15929 Progress Energy, Inc. 56-2155481
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina
1-3382 Carolina Power & Light Company 56-0165465
d/b/a Progress Energy Carolinas, Inc.
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Progress Energy, Inc.:
Common Stock (Without Par Value) New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Progress Energy, Inc.: None
Carolina Power & Light Company: $100 par value Preferred Stock, Cumulative
$100 par value Serial Preferred Stock, Cumulative
Indicate by check mark whether the registrants (1) have filed all reports 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 registrants were
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days.
Yes X . No .
---------- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether Progress Energy, Inc. is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X . No .
---------- ----------
Indicate by check mark whether Carolina Power & Light Company is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes . No X .
------------ ----------
As of June 30, 2002, the aggregate market value of the voting and non-voting
common equity of Progress Energy, Inc. held by non-affiliates was
$11,466,869,123. As of June 30, 2002, the aggregate market value of the common
equity of Carolina Power & Light Company held by non-affiliates was $0. All of
the common stock of Carolina Power & Light Company is owned by Progress Energy,
Inc.
1
As of February 28, 2003, each registrant had the following shares of common
stock outstanding:
Registrant Description Shares
---------- ----------- ------
Progress Energy, Inc. Common Stock (Without Par Value) 239,172,863
Carolina Power & Light Company Common Stock (Without Par Value) 159,608,055
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Progress Energy and CP&L definitive proxy statements dated March
31, 2003 are incorporated into PART III, ITEMS 10, 11, 12 and 13 hereof.
This combined Form 10-K 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.
2
TABLE OF CONTENTS
GLOSSARY OF TERMS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
EXECUTIVE OFFICERS OF THE REGISTRANTS
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. CONTROLS AND PROCEDURES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PROGRESS ENERGY, INC. RISK FACTORS
CAROLINA POWER & LIGHT COMPANY RISK FACTORS
3
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-K are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement
APEC Albemarle Pamlico Economic Development Corporation
Bain Capital Bain Capital, Inc. and affiliates
Bcf Billion cubic feet
BellSouth Carolinas PCS BellSouth Carolinas, PCS L.P.
Btu British thermal units
Caronet Caronet, Inc.
CERCLA or Superfund Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended
Code Internal Revenue Service Code
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company Progress Energy, Inc. and subsidiaries
CP&L Carolina Power & Light Company
CP&L Energy CP&L Energy, Inc., now known as Progress Energy, Inc.
CR3 Crystal River Unit No. 3
CVO Contingent value obligation
DOE United States Department of Energy
dt Dekatherm
DWM North Carolina Department of Environment and Natural
Resources, Division of Waste Management
EBITDA Earning before interest, taxes, and depreciation and
amortization
ENCNG Eastern North Carolina Natural Gas Company, formerly
referred to as EasternNC
EITF Emerging Issues Task Force
EITF Issue 02-03 EITF Issue 02-03, "Accounting for Contracts Involved
in Energy Trading and Risk Management Activities"
EPA United States Environmental Protection Agency
EPA of 1992 Energy Policy Act of 1992
ESOP Employee Stock Ownership Plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FDEP Florida Department of Environment and Protection
Financial Statements Progress Energy Financial Statements, for the year
ended December 31, 2002 contained under ITEM 8 herein
FIN No. 45 FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an
Interpretation of FASB Statements No. 5, 57 and 107
and Rescission of FASB Interpretation No. 34"
FIN No. 46 FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of
ARB No. 51"
Florida Power Florida Power Corporation
Florida Progress or FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Funding Corp. Florida Progress Funding Corporation
Georgia Power Georgia Power Company
Harris Plant Shearon Harris Nuclear Plant
Interpath Interpath Communications, Inc.
IBEW International Brotherhood of Electrical Workers
IRS Internal Revenue Service
ISO Independent System Operator
KWh Kilowatt-hour
kV Kilovolt
kVA Kilovolt-ampere
LIBOR London Inter Bank Offering Rate
LSEs Load-serving entities
MDC Maximum Dependable Capability
4
MGP Manufactured Gas Plant
Monroe Power Monroe Power Company
MW Megawatt
MWh Megawatt-hour
NCNG North Carolina Natural Gas Corporation
NCUC North Carolina Utilities Commission
NEIL Nuclear Electric Insurance Limited
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
NSP Northern States Power
Nuclear Waste Act Nuclear Waste Policy Act of 1982
OPEB Postretirement benefits other than pensions
the Plan Revenue Sharing Incentive Plan
PLR Private Letter Ruling
Pollution control bonds Pollution control revenue refunding bonds
Power Agency North Carolina Eastern Municipal Power Agency
PCH Progress Capital Holdings, Inc.
Progress Energy Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly 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
Preferred Securities FPC-obligated mandatorily redeemable preferred
securities of FPC Capital I
PRP Potentially responsible party, as defined in CERCLA
PSSP Performance Share Sub-Plan
PUHCA Public Utility Holding Company Act of 1935, as
amended
PURPA Public Utilities Regulatory Policies Act of 1978
PVI Legal entity of Progress Ventures, Inc. (formerly
referred to as CPL Energy Ventures, Inc.)
PWR Pressurized water reactor
QF Qualifying facilities
RSA Restricted Stock Awards program
RTO Regional Transmission Organization
SCPSC Public Service Commission of South Carolina
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
SFAS No. 4 Statement of Financial Accounting Standards No. 4,
"Reporting Gains and Losses from Extinguishment of
Debt (an amendment of Accounting Principles Board
(APB) Opinion No. 30)"
SFAS No. 5 Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies"
SFAS No. 71 Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of
Regulation"
SFAS No. 87 Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions"
SFAS No. 106 Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits
Other Than Pensions"
SFAS No. 121 Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of"
SFAS No. 123 Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"
SFAS No. 133 Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative and Hedging Activities"
SFAS No. 138 Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB
Statement No. 133"
SFAS No. 142 Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets"
SFAS No. 143 Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations"
5
SFAS No. 144 Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-
Lived Assets"
SFAS No. 145 Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13 and Technical
Corrections"
SFAS No. 148 Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition
and Disclosure - An Amendment of FASB Statement
No. 123"
SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-
000, Remedying Undue Discrimination through Open
Access Transmission and Standard Market Design
SO2 Sulfur dioxide
SRS Strategic Resource Solutions Corp.
Transco Transcontinental Gas Pipeline Corporation
the Trust FPC Capital I
6
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The matters discussed throughout this Form 10-K 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, examples of forward-looking statements discussed in this Form 10-K,
include a) PART II, ITEM 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" including, but not limited to, statements
under the following headings: 1) "Liquidity and Capital Resources" about
operating cash flows, estimated capital requirements through the year 2005 and
future financing plans, 2) "Future Outlook" about Progress Energy's future
earnings potential, and 3) "Other Matters" about the effects of new
environmental regulations, nuclear decommissioning costs and the effect of
electric utility industry restructuring, and b) statements made in the "Risk
Factors" sections.
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: the impact of fluid and complex government laws and regulations,
including those relating to the environment; the impact of recent events in the
energy markets that have increased the level of public and regulatory scrutiny
in the energy industry and in the capital markets; deregulation or restructuring
in the electric industry that may result in increased competition and
unrecovered (stranded) costs; the uncertainty regarding the timing, creation and
structure of regional transmission organizations; weather conditions that
directly influence the demand for electricity and natural gas; recurring
seasonal fluctuations in demand for electricity and natural gas; fluctuations in
the price of energy commodities and purchased power; economic fluctuations and
the corresponding impact on the Company's commercial and industrial customers;
the ability of the Company's subsidiaries to pay upstream dividends or
distributions to it; the impact on the facilities and the businesses of the
Company from a terrorist attack; the inherent risks associated with the
operation of nuclear facilities, including environmental, health, regulatory and
financial risks; the ability to successfully access capital markets on favorable
terms; the impact that increases in leverage may have on the Company; the
ability of the Company to maintain its current credit ratings; the impact of
derivative contracts used in the normal course of business by the Company; the
Company's continued ability to use Section 29 tax credits related to its coal
and synthetic fuels businesses; the continued depressed state of the
telecommunications industry and the Company's ability to realize future returns
from Progress Telecommunications Corporation and Caronet, Inc.; the Company's
ability to successfully integrate newly acquired assets, properties or
businesses into its operations as quickly or as profitably as expected; the
Company's ability to successfully complete the sale of North Carolina Natural
Gas and apply the proceeds therefrom to reduce outstanding indebtedness; the
Company's ability to manage the risks involved with the construction and
operation of its nonregulated plants, including construction delays, dependence
on third parties and related counter-party risks, and a lack of operating
history; the Company's ability to manage the risks associated with its energy
marketing and trading operations; and unanticipated changes in operating
expenses and capital expenditures. Many of these risks similarly impact the
Company's subsidiaries.
These and other risk factors are detailed from time to time in the Company's SEC
reports. Many, but not all of the factors that may impact actual results are
discussed in the "Risk Factors" sections of this report. You should carefully
read the "Risk Factors" sections of this report. 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.
7
PART I
ITEM 1. BUSINESS
GENERAL
COMPANY
Progress Energy, Inc. (Progress Energy or the Company, which term includes
consolidated subsidiaries unless otherwise indicated), is a registered holding
company under the Public Utility Holding Company Act (PUHCA) of 1935. Both the
Company and its subsidiaries are subject to the regulatory provisions of PUHCA.
Progress Energy was incorporated on August 19, 1999. The Company was initially
formed as CP&L Energy, Inc. (CP&L Energy), which became the holding company for
Carolina Power & Light Company (CP&L) on June 19, 2000. All shares of common
stock of CP&L were exchanged for an equal number of shares of CP&L Energy common
stock.
On July 1, 2000, CP&L distributed its ownership interest in the stock of North
Carolina Natural Gas Corporation (NCNG), Strategic Resource Solutions Corp.
(SRS), Monroe Power Company (Monroe Power) and Progress Ventures, Inc. (PVI) to
CP&L Energy. As a result, those companies became direct subsidiaries of CP&L
Energy and are not included in CP&L's results of operations or financial
position since that date.
Subsequent to the acquisition of Florida Progress Corporation (FPC or Florida
Progress) (see "Significant Transactions" below), the Company changed its name
from CP&L Energy to Progress Energy, Inc. on December 4, 2000.
Through its wholly owned regulated subsidiaries, CP&L, Florida Power Corporation
(Florida Power) and NCNG, Progress Energy is primarily engaged in the
generation, transmission, distribution and sale of electricity in portions of
North Carolina, South Carolina and Florida; and the transportation, distribution
and sale of natural gas in portions of North Carolina. Through the Progress
Ventures business segment, Progress Energy is involved in nonregulated
generation operations; natural gas exploration and production; coal fuel
extraction, manufacturing and delivery; and energy marketing and trading
activities. Through the Rail Services business segment, Progress Energy engages
in various rail and railcar related services. Through other business units,
Progress Energy engages in other nonregulated business areas including
telecommunications and holding company operations.
Effective January 1, 2003, CP&L, Florida Power and PVI began doing business
under the names Progress Energy Carolinas, Inc., Progress Energy Florida, Inc.
and Progress Energy Ventures, Inc., respectively. The legal names of these
entities have not changed and there is no restructuring of any kind related to
the name change. The current corporate and business unit structure remains
unchanged.
Progress Energy is an integrated energy company located principally in the
southeast region of the United States. The Company has more than 21,900
megawatts (MW) of electric generation capacity and serves approximately 3.0
million electric and natural gas customers in portions of North Carolina, South
Carolina and Florida. CP&L's and Florida Power's utility operations are
complementary: CP&L has a summer peaking demand, while Florida Power has a
winter peaking demand. In addition, CP&L's greater proportion of commercial and
industrial customers combined with Florida Power's greater proportion of
residential customers creates a more balanced customer base. The Company is
dedicated to expanding the region's electric generation capacity and delivering
reliable, competitively priced energy.
Progress Energy revenues for the year ended December 31, 2002 were $7.9 billion,
and assets at year-end were $21.4 billion. Its principal executive offices are
located at 410 South Wilmington Street, Raleigh, North Carolina 27601, telephone
number (919) 546-6111. The Progress Energy home page on the Internet is located
at http://www.progress-energy.com, the contents of which are not and shall not
be deemed a part of this document or any other U.S. Securities and Exchange
Commission (SEC) filing. The Company makes available free of charge on its
website its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed or furnished to the SEC.
The operations of Progress Energy and its subsidiaries are divided into five
major segments: two electric utilities (CP&L and Florida Power), Progress
Ventures, Rail Services and Other. Progress Energy's legal structure is not
currently aligned with the functional management and financial reporting of its
segments. Whether, and when, the legal and functional structures will converge
depends upon legislative and regulatory action, which cannot currently be
anticipated. The Other segment primarily includes telecommunication services,
miscellaneous nonregulated activities, holding company operations and
elimination entries. For information regarding the revenues, income and assets
attributable to the Company's business segments, see PART II, ITEM 8, Note 4 to
the Progress Energy consolidated financial statements.
8
SIGNIFICANT TRANSACTIONS
Generation Acquisition
On February 15, 2002, PVI completed the acquisition of two electric generating
projects totaling nearly 1,100 MW in capacity in Georgia and related tolling and
power sale agreements from LG&E Energy Corp. for a total cash purchase price of
approximately $350 million including direct transaction costs. The two projects
consist of 1) the Walton project in Monroe, Georgia, a 460 MW natural gas-fired
plant placed in service in June 2001 and 2) the Washington project in Washington
County, Georgia, a planned 600 MW natural gas-fired plant expected to be
operational by June 2003. The transaction included a power purchase agreement
with LG&E Marketing, Inc. for both projects through December 31, 2004. In
addition, there is a project management and completion agreement whereby LG&E
Energy Corp. has agreed to manage the completion of the Washington site
construction for PVI in exchange for cash consideration of $181 million. The
estimated costs to complete the Washington project as of December 31, 2002 are
approximately $57.8 million. See PART II, ITEM 8, Note 2A to the Progress Energy
consolidated financial statements for additional discussion of this transaction.
Westchester Gas Company Acquisition
On April 26, 2002, Progress Fuels Corporation (Progress Fuels), a wholly owned
subsidiary of Progress Energy, completed the acquisition of Westchester Gas
Company, which included approximately 215 natural gas-producing wells, 52 miles
of intrastate gas pipeline and 170 miles of gas-gathering systems. The aggregate
purchase price of approximately $153 million consisted of cash consideration of
approximately $22 million and the issuance of 2.5 million shares of Progress
Energy common stock valued at approximately $129 million. The purchase price
included approximately $2 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 approximately 140 billion cubic feet of gas
reserves to the growing energy portfolio of Progress Fuels). See PART II, ITEM
8, Note 2B to the Progress Energy consolidated financial statements for
additional discussion of this transaction.
Acquisition of Natural Gas Wells
During the first quarter of 2003, Progress Fuels entered into three independent
transactions to acquire approximately 162 natural gas-producing wells with
proven reserves of approximately 195 billion cubic feet (Bcf) from Republic
Energy, Inc. and two other privately-owned companies, all headquartered in
Texas. The total gross purchase price for the transactions was approximately
$133 million.
Wholesale Energy Contract Acquisition
On March 20, 2003, PVI entered into a definitive agreement with Williams Energy
Marketing and Trading, a subsidiary of Williams, to acquire a long-term
full-requirements power supply agreement with Jackson Electric Membership Corp.,
located in Jefferson, Georgia. The agreement calls for a $188 million payment to
Williams in exchange for assignment of the Jackson supply agreement. The power
supply agreement runs through 2015 and includes the use of 640 MW of Georgia
system generation comprised of nuclear, coal, gas and pumped-storage hydro
resources. Progress Energy expects to supplement the acquired resources with its
own intermediate and peaking assets in Georgia to serve Jackson's forecasted
1,100 MW peak demand in 2005 growing to a 1,700 MW demand by 2015. The sale is
expected to close in the second quarter of 2003, subject to customary closing
conditions.
NCNG Divestiture
On October 16, 2002, the Company approved the sale of NCNG to Piedmont Natural
Gas Company, Inc. As a result of this action, the operating results of NCNG were
reclassified to discontinued operations for all reportable periods. Progress
Energy expects to sell NCNG in the summer of 2003, for net proceeds of
approximately $400 million. The asset group, including goodwill, has been
recorded at fair value less cost to sell, resulting in an estimated loss on
disposal of approximately $29.4 million, which has been recorded until the
disposition is complete and the actual loss can be determined. See PART II, ITEM
8, Note 3A to the Progress Energy consolidated financial statements.
Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a resolution to
sell the assets of Railcar Ltd., a leasing subsidiary included in the Rail
Services segment. An estimated impairment on assets held for sale of $58.8
million has been recognized for the write-down of the assets to be sold to fair
value less the costs to sell. See PART II, ITEM 8, Note 3 to the Progress Energy
consolidated financial statements.
On March 12, 2003, the Company signed a letter of intent to sell Railcar Ltd. to
The Andersons, Inc. The proceeds of the sale will be used by the Company to pay
off Railcar Ltd. lease obligations. The transaction is still subject to various
closing conditions including financing, due diligence and the completion of a
definitive purchase agreement.
Florida Progress Acquisition
On November 30, 2000, the Company completed its acquisition of FPC, a
diversified, exempt electric utility holding company, for an aggregate purchase
price of approximately $5.4 billion. The Company paid cash consideration of
approximately $3.5 billion and issued 46.5 million common shares valued at
approximately $1.9 billion. In addition, the Company issued 98.6 million
contingent value obligations (CVOs) valued at approximately $49.3 million. See
PART II, ITEM 8, Note 2C to the Progress Energy consolidated financial
statements for additional discussion of the FPC acquisition.
9
The FPC acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations for FPC have been included in the
Company's consolidated financial statements since the date of acquisition.
Sale of MEMCO Barge Line, Inc.
On July 23, 2001, Progress Energy announced the disposition of the Inland Marine
Transportation segment of FPC, which was operated by MEMCO Barge Line, Inc.
Inland Marine provided transportation of coal, agricultural and other dry-bulk
commodities as well as fleet management services. On November 1, 2001, the
Company completed the sale of the Inland Marine Transportation segment to AEP
Resources, Inc., a wholly owned subsidiary of American Electric Power. See PART
II, ITEM 8, and Note 3C to the Progress Energy consolidated financial statements
for additional discussion of this transaction.
COMPETITION
GENERAL
In recent years, the electric utility industry has experienced a substantial
increase in competition at the wholesale level, caused by changes in federal law
and regulatory policy. Several states have also decided to restructure aspects
of retail electric service. The issue of retail restructuring and competition is
being reviewed by a number of states and bills have been introduced in past
sessions of Congress that sought to introduce such restructuring in all states.
Several electric industry restructuring bills introduced during the 106th
Congress died upon adjournment in 2000. During the 107th Congress, attention
turned more toward a comprehensive energy policy as opposed to restructuring of
the electric industry. However, the 107th Congress failed to pass either a
comprehensive energy policy or industry restructuring bills. Restructuring could
eventually become part of any legislation and/or specific electric industry
restructuring legislation could be introduced and considered by the 108th
Congress. The Company cannot predict the outcome of this matter.
As a result of the Public Utilities Regulatory Policies Act of 1978 (PURPA) and
the Energy Policy Act of 1992 (EPA of 1992), competition in the wholesale
electricity market has greatly increased, especially from non-utility generators
of electricity. In 1996, the Federal Energy Regulatory Commission (FERC) issued
new rules on transmission service to facilitate competition in the wholesale
market on a nationwide basis. The rules give greater flexibility and more
choices to wholesale power customers.
In early 2000, the FERC issued Order No. 2000 on Regional Transmission
Organizations (RTOs), which set minimum characteristics and eight functions for
transmission entities, including independent system operators and transmission
companies, that are required to become FERC-approved RTOs. The rule stated that
public utilities that own, operate or control interstate transmission facilities
had to have filed, by October 15, 2000, either a proposal to participate in an
RTO or an alternative filing describing efforts and plans to participate in an
RTO. The order provided guidance and specified minimum characteristics and
functions required of an RTO and also stated that all RTOs should be operational
by December 15, 2001. During 2001, the deadline for RTOs to be operational was
extended. See PART I, ITEM 1, "Competition" of Electric-CP&L and
Electric-Florida Power for a discussion of the development activities for the
GridSouth RTO and GridFlorida RTO, respectively. See PART II, ITEM 7, "Other
Matters," for additional discussion of current developments.
On July 31, 2002, the FERC issued its Notice of Proposed Rulemaking in Docket
No. RM01-12-000 Remedying Undue Discrimination through Open Access Transmission
Service and Standard Electricity Market Design (SMD NOPR). The proposed rules
set forth in the SMD NOPR would require, among other things, that 1) all
transmission owning utilities transfer control of their transmission facilities
to an independent third party; 2) transmission service to bundled retail
customers be provided under the FERC-regulated transmission tariff, rather than
state-mandated terms and conditions; 3) new terms and conditions for
transmission service be adopted nationwide, including new provisions for pricing
transmission in the event of transmission congestion; 4) new energy markets be
established for the buying and selling of electric energy; and 5) load-serving
entities be required to meet minimum criteria for generating reserves. On
January 15, 2003, the FERC announced the issuance of a White Paper on SMD NOPR
to be released in April 2003. The FERC has also indicated that it expects to
issue final rules during the summer of 2003. See PART I, ITEM 1, "Competition"
of Electric-CP&L and Electric-Florida Power for further discussion.
10
To date, many states have adopted legislation that would give retail customers
the right to choose their electricity provider (retail choice) and most other
states have, in some form, considered the issue. There is currently no proposed
legislation in North Carolina, South Carolina, or Florida that would introduce
retail choice.
The developments described above have created changing markets for energy. As a
strategy for competing in these changing markets, the Company is becoming a
total energy provider in the region by providing a full array of energy-related
services to its current customers and expanding its market reach. The Company
took a major step towards implementing this strategy through its acquisition of
FPC.
See PART I, ITEM 1, "Competition," under Electric-CP&L, Electric-Florida Power
and Other for further discussion of competitive developments within these
segments.
PUHCA
As a result of the acquisition of FPC, Progress Energy is now a registered
holding company subject to regulation by the SEC under PUHCA. Therefore,
Progress Energy and its subsidiaries are subject to the regulatory provisions of
PUHCA, including provisions relating to the issuance of securities, sales and
acquisitions of securities and utility assets, and services performed by
Progress Energy Service Company, LLC.
While various proposals have been introduced in Congress regarding PUHCA, the
prospects for legislative reform or repeal are uncertain at this time.
ENVIRONMENTAL
GENERAL
In the areas of air quality, water quality, control of toxic substances and
hazardous and solid wastes and other environmental matters, the Company is
subject to regulation by various federal, state and local authorities. The
Company considers itself to be in substantial compliance with those
environmental regulations currently applicable to its business and operations
and believes it has all necessary permits to conduct such operations.
Environmental laws and regulations constantly evolve and the ultimate costs of
compliance cannot always be accurately estimated. The capital costs associated
with compliance with pollution control laws and regulations at the Company's
existing fossil facilities that the Company expects to incur from 2003 through
2005 are included in the estimates under the "Investing Activities" discussion
under PART II, ITEM 7, "Liquidity and Capital Resources."
CLEAN AIR LEGISLATION
The 1990 amendments to the Clean Air Act require substantial reductions in
sulfur dioxide and nitrogen oxide emissions from fossil-fueled electric
generating plants. The Clean Air Act required the Company to meet more stringent
provisions effective January 1, 2000. The Company meets the sulfur dioxide
emissions requirements by maintaining sufficient sulfur dioxide emission
allowances. Installation of additional equipment was necessary to reduce
nitrogen oxide emissions. Increased operation and maintenance costs, including
emission allowance expense, installation of additional equipment and increased
fuel costs are not expected to be material to the consolidated financial
position or results of operations of the Company.
The U.S. Environmental Protection Agency (EPA) is conducting an enforcement
initiative related to a number of coal-fired utility power plants in an effort
to determine whether modifications at those facilities were subject to New
Source Review requirements or New Source Performance Standards under the Clean
Air Act. 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 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 companies may seek recovery of the related cost through rate
adjustments. The Company cannot predict the outcome of this matter.
11
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 currently
installing controls necessary to comply with the rule. Capital expenditures
needed to meet these measures in North Carolina and South Carolina could reach
approximately $370 million, which has not been adjusted for inflation. The
Company has spent approximately $194 million to date related to these
expenditures. 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.
The EPA published a final rule approving petitions under Section 126 of the
Clean Air Act. This rule, as originally promulgated, required certain sources to
make reductions in nitrogen oxide emissions by May 1, 2003. The final rule also
includes a set of regulations that affect nitrogen oxide emissions from sources
included in the petitions. The North Carolina coal-fired electric generating
plants are included in these petitions. Acceptable state plans under the NOx SIP
Call can be approved in lieu of the final rules the EPA approved as part of the
Section 126 petitions. 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 Section 126 Rule
for electric generating units pending resolution by the EPA of the growth factor
issue. The Court's order tolls the three-year compliance period (originally set
to end on May 1, 2003) for electric generating units as of May 15, 2001. On
April 30, 2002, the EPA published a final rule harmonizing the dates for the
Section 126 rule and the NOx SIP Call. In addition, the EPA determined in this
rule that the future growth factor estimation methodology was appropriate. The
new compliance date for all affected sources is now May 31, 2004, rather than
May 1, 2003. The EPA has approved North Carolina's NOx SIP Call rule and has
indicated it will rescind the Section 126 rule in a future rule making. The
Company expects a favorable outcome of this matter.
On June 20, 2002, legislation was enacted in North Carolina requiring the
state's electric utilities to reduce the emissions of nitrogen oxide and sulfur
dioxide from coal-fired power plants. The legislation also freezes the
utilities' base rates for five years unless there are significant cost changes
due to governmental action, significant expenditures due to force majeure and
other extraordinary events beyond the control of the utilities, or unless the
utilities persistently earn a return substantially in excess of the rate of
return established and found reasonable by the NCUC in the utilities' last
general rate case. See PART II, ITEM 8, and Note 24E to the Progress Energy
consolidated financial statements for additional discussion of this transaction.
SUPERFUND
The provisions of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA), authorize the EPA to require the
clean up of hazardous waste sites. This statute imposes retroactive joint and
several liability. Some states, including North and South Carolina, have similar
types of legislation. There are presently several sites with respect to which
the Company has been notified by the EPA, the State of North Carolina or the
State of Florida of its potential liability, as described below in greater
detail.
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 EPA,
the Florida Department of Environmental Protection (FDEP) and the North Carolina
Department of Environment and Natural Resources, Division of Waste Management
(DWM). Although the Company may incur costs at these sites about which it has
been notified, based upon current status of these sites, the Company does not
expect those costs to be material to its consolidated financial position or
results of operations.
Both electric utilities, the gas utility, Progress Ventures and Progress Rail
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. Although the Company's
subsidiaries may incur costs at the sites about which they have been notified,
based upon the current status of these sites, the Company does not expect those
costs to be material to the consolidated financial position or results of
operations of the Company.
12
OTHER ENVIRONMENTAL MATTERS
On November 1, 2001, Progress Energy completed the sale of the Inland Marine
Transportation business to AEP Resources, Inc. In connection with the sale,
Progress Energy entered into environmental indemnification provisions covering
both unknown and known sites. Progress Energy recorded an accrual to cover
estimated probable future environmental expenditures. The balance of this
accrual is $9.9 million at December 31, 2002. Progress Energy 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. Progress Energy cannot predict the outcome
of this matter.
Both electric utilities, the gas utility and Progress Ventures 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 Company's consolidated financial position or results of operations.
EMPLOYEES
As of February 28, 2003, Progress Energy and its subsidiaries employed
approximately 15,300 full-time employees. Of this total, approximately 2,100
employees at Florida Power are represented by the International Brotherhood of
Electrical Workers (IBEW). Florida Power and the IBEW reached agreement in early
December 2002 on a new three-year labor contract. The previous contract expired
December 1, 2002.
The Company and some of its subsidiaries have a non-contributory defined benefit
retirement (pension) plan for substantially all full-time employees and an
employee stock purchase plan among other employee benefits. The Company and some
of its subsidiaries also provide contributory postretirement benefits, including
certain health care and life insurance benefits, for substantially all retired
employees.
As of February 28, 2003, CP&L employed approximately 5,300 full-time employees.
ELECTRIC - CP&L
GENERAL
CP&L is a public service corporation formed under the laws of North Carolina in
1926, and is primarily engaged in the generation, transmission, distribution and
sale of electricity in portions of North and South Carolina. As of December 31,
2002, CP&L had a total summer generating capacity (including jointly-owned
capacity) of approximately 12,327 MW.
CP&L distributes and sells electricity in 57 of the 100 counties in North
Carolina and 14 counties in northeastern South Carolina. The territory served is
an area of approximately 34,000 square miles, including a substantial portion of
the coastal plain of North Carolina extending to the Atlantic coast between the
Pamlico River and the South Carolina border, the lower Piedmont section of North
Carolina, an area in northeastern South Carolina and an area in western North
Carolina in and around the city of Asheville. The estimated total population of
the territory served is more than 4.0 million. At December 31, 2002, CP&L was
providing electric services, retail and wholesale, to approximately 1.3 million
customers. Major wholesale power sales customers include North Carolina Eastern
Municipal Power Agency (Power Agency) and North Carolina Electric Membership
Corporation. CP&L is subject to the rules and regulations of the FERC, the North
Carolina Utilities Commission (NCUC) and the Public Service Commission of South
Carolina (SCPSC).
13
BILLED ELECTRIC REVENUES
CP&L's electric revenues billed by customer class, for the last three years, is
shown as a percentage of total CP&L electric revenues in the table below:
BILLED ELECTRIC REVENUES
Revenue Class 2002 2001 2000
------------- ---- ---- ----
Residential 35% 34% 33%
Commercial 24% 23% 22%
Industrial 18% 21% 23%
Wholesale (a) 19% 19% 18%
Other retail 4% 3% 4%
(a) These revenues are managed by the Progress Ventures segment on behalf
of CP&L.
Major industries in CP&L's service area include textiles, chemicals, metals,
paper, food, rubber and plastics, wood products and electronic machinery and
equipment.
FUEL AND PURCHASED POWER
Sources of Generation
CP&L's total system generation (including jointly owned capacity) by primary
energy source, along with purchased power, for the last three years is set forth
below:
ENERGY MIX PERCENTAGES
2002 2001 2000
---- ---- ----
Coal 46% 49% 48%
Nuclear 42% 41% 43%
Hydro 1% 0% 1%
Oil/Gas 3% 2% 1%
Purchased power 8% 8% 7%
CP&L is generally permitted to pass the cost of recoverable fuel and purchased
power to its customers through fuel adjustment clauses. The future prices for
and availability of various fuels discussed in this report cannot be predicted
with complete certainty. However, CP&L believes that its fuel supply contracts,
as described below, will be adequate to meet its fuel supply needs.
CP&L's average fuel costs per million British thermal units (Btu) for the last
three years were as follows:
AVERAGE FUEL COST
(per million Btu)
2002 2001 2000
---- ---- ----
Coal (a) $ 1.93 $ 1.78 $ 1.70
Nuclear 0.43 0.44 0.45
Hydro - - -
Oil (a) 5.48 6.38 5.51
Gas (a) 5.31 4.69 5.41
Weighted average 1.38 1.26 1.21
(a) Changes in the unit price for oil and gas are due to market
conditions. Changes in the unit price for coal are primarily due to
transportation costs. Since these costs are primarily recovered
through recovery clauses established by regulators, fluctuations do
not materially affect net income.
14
Coal
CP&L anticipates a requirement of approximately 11.8 million to 12.2 million
tons of coal in 2003. Almost all of the coal is expected to be supplied from the
Appalachian coal fields in the United States. Most of the coal is delivered by
rail.
For 2003, CP&L has short-term, intermediate and long-term agreements from
various sources for approximately 95% of its burn requirements of its coal
units. These contracts have price adjustment provisions and expiration dates
ranging from 2003 to 2008. All of the coal that CP&L has purchased under
intermediate and long-term agreements is considered to be low sulfur coal by
industry standards.
Nuclear
Nuclear fuel is processed through four distinct stages. Stages I and II involve
the mining and milling of the natural uranium ore to produce a concentrate and
the conversion of this uranium oxide concentrate into uranium hexafluoride.
Stages III and IV entail the enrichment of the uranium hexafluoride and the
fabrication of the enriched uranium hexafluoride into usable fuel assemblies.
CP&L has sufficient uranium, conversion, enrichment and fabrication contracts to
meet its near-term nuclear fuel requirement needs. CP&L reserves a small portion
of its uranium and conversion requirements for spot procurements. CP&L typically
contracts for all of its enrichment services and fabrication needs with contract
durations ranging from five to ten years. Although CP&L cannot predict the
future availability of uranium and nuclear fuel services, CP&L does not
currently expect to have difficulty obtaining uranium oxide concentrate or the
services necessary for its conversion, enrichment and fabrication into nuclear
fuel. For a discussion of CP&L's plans with respect to spent fuel storage, see
PART I, ITEM 1, "Nuclear Matters," for CP&L Electric.
Hydroelectric
Hydroelectric power is electric energy generated by the force of falling water.
CP&L has three hydroelectric generating plants licensed by the FERC: Walters,
Tillery and Blewett. CP&L also owns the Marshall Plant which has a license
exemption. The total maximum dependable capacity for these units is 218 MW.
Record low rainfall in the summer months of 2002 had a corresponding effect on
energy production from these facilities. CP&L is seeking to relicense its
Tillery and Blewett Plants. These plants' licenses currently expire in April
2008. The Walters plant license will expire in 2034.
Oil & Gas
Oil is purchased under contracts and in the spot market from several suppliers.
The cost of CP&L's oil and gas is determined by market prices as reported in
certain industry publications. Management believes that CP&L has access to an
adequate supply of oil for the reasonably foreseeable future. CP&L believes that
the threat of or a war against Iraq could negatively impact the price of oil.
CP&L's natural gas supply and transportation is purchased under firm supply and
transportation contracts as well as spot market purchases from numerous
suppliers. CP&L believes that existing contracts for oil are sufficient to cover
its requirements if natural gas is unavailable during the winter period for
CP&L's combustion turbine peaker fleet.
Purchased Power
CP&L purchased 4,769,194 MWh in 2002, 4,996,645 MWh in 2001 and 4,467,802 MWh in
2000 of its system energy requirements (including jointly-owned capacity) and
had available 1,737 MW in 2002, 1,756 MW in 2001 and 1,036 MW in 2000 of firm
purchased capacity under contract at the time of peak load. CP&L may acquire
purchased power capacity in the future to accommodate a portion of its system
load needs.
COMPETITION
Electric Industry Restructuring
CP&L continues to monitor progress toward a more competitive environment and has
actively participated in regulatory reform deliberations in North Carolina and
South Carolina. Movement toward deregulation in these states has been affected
15
by recent developments, including developments related to deregulation of the
electric industry in California and other states. CP&L expects that both the
North Carolina and South Carolina General Assemblies will continue to monitor
the experiences of states that have implemented electric restructuring
legislation.
Regional Transmission Organizations
In October 2000, as a result of Order 2000, CP&L, along with Duke Energy
Corporation and South Carolina Electric & Gas Company, filed an application with
the FERC for approval of a GridSouth RTO. On July 12, 2001, the FERC issued an
order provisionally approving GridSouth.
See PART II, ITEM 7, "Other Matters," for additional discussion of current
developments of GridSouth RTO.
Standard Market Design
On July 31, 2002, the FERC issued its Notice of Proposed Rulemaking in Docket
No. RM01-12-000 Remedying Undue Discrimination through Open Access Transmission
Service and Standard Electricity Market Design (SMD NOPR). The proposed rules
set forth in the SMD NOPR would require, among other things, that 1) all
transmission owning utilities transfer control of their transmission facilities
to an independent third party; 2) transmission service to bundled retail
customers be provided under the FERC-regulated transmission tariff, rather than
state-mandated terms and conditions; 3) new terms and conditions for
transmission service be adopted nationwide, including new provisions for pricing
transmission in the event of transmission congestion; 4) new energy markets be
established for the buying and selling of electric energy; and 5) load-serving
entities be required to meet minimum criteria for generating reserves. If
adopted as proposed, the rules set forth in the SMD NOPR would materially alter
the manner in which transmission and generation services are provided and paid
for. CP&L filed comments on November 15, 2002 and supplemental comments on
January 10, 2003. On January 15, 2003, the FERC announced the issuance of a
White Paper on SMD NOPR to be released in April 2003. CP&L plans to file
comments on the White Paper. The FERC has also indicated that it expects to
issue final rules during the summer of 2003.
Franchises
CP&L has nonexclusive franchises with varying expiration dates in most of the
municipalities in which it distributes electric energy in North Carolina and
South Carolina. Of these 239 franchises, 194 have expiration dates ranging from
2008 to 2061 and 45 of these have no specific expiration dates. All but 13 of
the 194 franchises with expiration dates have a term of 60 years. The exceptions
include three franchises with terms of ten years, one with a term of twenty
years, six with terms of thirty years, two with terms of forty years and one
with a term of fifty years. However, CP&L also serves within a number of
municipalities and in all of its unincorporated areas without franchise
agreements.
Wholesale Competition
Since passage of the EPA of 1992, competition in the wholesale electric utility
industry has significantly increased due to a greater participation by
traditional electricity suppliers, wholesale power marketers and brokers and due
to the trading of energy futures contracts on various commodities exchanges.
This increased competition could affect CP&L's load forecasts, plans for power
supply and wholesale energy sales and related revenues. The impact could vary
depending on the extent to which additional generation is built to compete in
the wholesale market, new opportunities are created for CP&L to expand its
wholesale load, or current wholesale customers elect to purchase from other
suppliers after existing contracts expire.
To assist in the development of wholesale competition, the FERC previously
issued standards for wholesale wheeling of electric power through its rules on
open access transmission and stranded costs and on information systems and
standards of conduct (Orders 888 and 889). The rules require all transmitting
utilities to have on file an open access transmission tariff, which contains
provisions for the recovery of stranded costs and numerous other provisions that
could affect the sale of electric energy at the wholesale level. CP&L filed its
open access transmission tariff with the FERC in mid-1996. Several wholesale and
retail customers filed protests challenging numerous aspects of CP&L's tariff
and requesting that an evidentiary proceeding be held. In July 1997, CP&L filed
an offer of settlement in this case which was certified by an administrative law
judge in September 1997. In February 2000, the FERC issued a basket order for
several utilities including CP&L to file a compliance filing stating whether
there were any remaining undisputed issues surrounding CP&L's open access
transmission tariff. On May 1, 2000, CP&L made the compliance filing setting
forth the remaining undisputed issues and a plan for settling those issues. On
August 25, 2000, CP&L filed modifications to its open access transmission tariff
as a result of settlement negotiations with the remaining intervenors. In
November 2000, the FERC approved the open access transmission tariff of CP&L
with the settlement modifications.
16
In February 2000, CP&L filed a joint open access tariff to reflect the merger
with FPC. The FERC approved the joint tariff in July 2000 effective with
completion of the merger, which occurred on November 30, 2000. In April 2001,
CP&L and FPC each filed separate transmission tariffs as a result of the FERC
Order 614. The FERC approved the CP&L transmission tariff in June 2001. In April
2001, CP&L filed changes to the Energy Imbalance provision of the transmission
tariff. In October 2001, the FERC approved changes to the Energy Imbalance
provision of the transmission tariff. The FERC ordered CP&L to develop a
mechanism to credit Energy Imbalance penalty revenues to non-offending
transmission customers. In November 2001, CP&L put in place a mechanism to
credit revenues to non-offending transmission customers.
During 2001, legislation was introduced in South Carolina that would impose a
moratorium on the certification and construction of merchant plants until 2003
and prohibit the transfer or sale of a merchant plant certificate. Hearings were
held on these bills but no action has been taken. In addition, the Department of
Health and Environmental Control of South Carolina has halted the issuance of
any air permits for merchant plants applying for such permits. The SCPSC
contracted with a consulting firm to conduct a study on the impact of merchant
plants in South Carolina which was completed in the summer of 2002. The study
concluded that the proper approach to merchant plants should be driven by the
State's position with regard to what role the market should play in determining
the need for electric generation as opposed to the traditional methodology of
relying upon the State's utilities to determine the need for additional
generation. No actions have been taken as a result of the study and no new
construction of merchant plants has begun. CP&L cannot predict the outcome of
this matter.
REGULATORY MATTERS
General
CP&L is subject to regulation in North Carolina by the NCUC and in South
Carolina by the SCPSC with respect to, among other things, rates and service for
electric energy sold at retail, retail service territory and issuances of
securities. In addition, CP&L is subject to regulation by the FERC with respect
to transmission and sales of wholesale power, accounting and certain other
matters. The underlying concept of utility ratemaking is to set rates at a level
that allows the utility to collect revenues equal to its cost of providing
service including a reasonable rate of return on its equity. Increased
competition as a result of industry restructuring may affect the ratemaking
process.
Electric Retail Rates
The NCUC and the SCPSC authorize retail "base rates" that are designed to
provide a utility with the opportunity to earn a specific rate of return on its
"rate base," or investment in utility plant. These rates are intended to cover
all reasonable and prudent expenses of utility operations and to provide
investors with a fair rate of return. In CP&L's most recent rate cases in 1988,
the NCUC and the SCPSC each authorized a return on equity of 12.75% for CP&L.
Legislation enacted in North Carolina in 2002 freezes CP&L's base retail rates
for five years unless there are significant cost changes due to governmental
action, significant expenditures due to force majeure or other extraordinary
events beyond the control of CP&L.
See PART II, ITEM 8, Note 15C to the Progress Energy consolidated financial
statements and Note 9B to the CP&L consolidated financial statements for
additional discussion of CP&L's retail rate developments during 2002.
Wholesale Rate Matters
CP&L is subject to regulation by the FERC with respect to rates for transmission
and sale of electric energy at wholesale, the interconnection of facilities in
interstate commerce (other than interconnections for use in the event of certain
emergency situations), the licensing and operation of hydroelectric projects
and, to the extent FERC determines, accounting policies and practices. CP&L and
its wholesale customers last agreed to a general increase in wholesale rates in
1988; however, wholesale rates have been adjusted since that time through
contractual negotiations.
17
Fuel Cost Recovery
CP&L's operating costs not covered by the utility's base rates include fuel and
purchased power. Each state commission allows electric utilities to recover
certain of these costs through various cost recovery clauses, to the extent the
respective commission determines in an annual hearing that such costs are
prudent. Costs recovered by CP&L, by state, are as follows:
o North Carolina - fuel costs and the fuel portion of purchased power
o South Carolina - fuel costs, certain purchased power costs and
emission allowance expense
Each state commission's determination results in the addition of a rider to a
utility's base rates to reflect the approval of these costs and to reflect any
past over- or under-recovery. Due to the regulatory treatment of these costs and
the method allowed for recovery, changes from year to year have no material
impact on operating results.
NUCLEAR MATTERS
General
CP&L owns and operates four nuclear units, which are regulated by the U.S.
Nuclear Regulatory Commission (NRC) under the Atomic Energy Act of 1954 and the
Energy Reorganization Act of 1974. In the event of noncompliance, the NRC has
the authority to impose fines, set license conditions, shut down a nuclear unit,
or some combination of these, depending upon its assessment of the severity of
the situation, until compliance is achieved. NRC operating licenses currently
expire in December 2014 and September 2016 for Brunswick Units 2 and 1,
respectively, in July 2010 for Robinson Unit No. 2 and in October 2026 for the
Harris Plant. An application to extend the Robinson license 20 years was
submitted in June 2002 and a similar application is expected to be made for
Brunswick in December 2004. An extension will also be sought for the Harris
Plant. On February 20, 2003, CP&L notified the NRC of its intent to submit a
license renewal application for the Harris Plant in 2006. A condition of the
operating license for each unit requires an approved plan for decontamination
and decommissioning. The nuclear units are periodically removed from service to
accommodate normal refueling and maintenance outages, repairs and certain other
modifications.
In addition, the Independent Spent Fuel Storage Installation at the Robinson
plant will request to have its license extended 20 years with an exemption
request for an additional 20-year extension during the first quarter of 2004.
Its current license is due to expire in August 2006. The Company expects to
receive this extension.
CP&L is currently evaluating and implementing power uprate projects at its
nuclear facilities to increase electrical generation output. A power uprate was
completed at the Harris Plant during 2001 and at the Robinson Nuclear Plant in
2002. Power uprates are also in progress at the Brunswick Plant. Brunswick Unit
1 increased its capacity by 52 MW in 2002 and additional increases will be
implemented in phases over the next several years. The total increased
generation from these projects is estimated to be approximately 250 MW.
The nuclear power industry faces uncertainties with respect to the cost and
long-term availability of sites for disposal of spent nuclear fuel and other
radioactive waste, compliance with changing regulatory requirements, nuclear
plant operations, increased capital outlays for modifications, the technological
and financial aspects of decommissioning plants at the end of their licensed
lives and requirements relating to nuclear insurance.
Pressurized Water Reactors
On March 18, 2002, the NRC sent a bulletin to companies that hold licenses for
pressurized water reactors (PWRs) requiring information on the structural
integrity of the reactor vessel head and a basis for concluding that the vessel
head will continue to perform its function as a coolant pressure boundary. The
Company filed responses as required. Inspections of the vessel heads at the
Company's PWR plants have been performed during previous outages. At the
Robinson Plant, an inspection was completed in April 2001 and no penetration
nozzle cracking was identified and there was no degradation of the reactor
vessel head. At the Harris Plant, sufficient inspections were completed during
the last refueling outage in the fourth quarter of 2001 to conclude there is no
degradation of the reactor vessel head. The Company's Brunswick Plant has a
different design and is not affected by the issue.
On August 9, 2002, the NRC issued an additional bulletin dealing with head
leakage due to cracks near the control rod nozzles. The NRC has asked licensees
to commit to high inspection standards to ensure the more susceptible plants
have no cracks. The Robinson Plant is in this category and had a refueling
outage in October 2002. The Company completed a series of examinations in
October 2002 of the entire reactor pressure vessel head and found no indications
18
of control rod drive mechanism cracking and no corrosion of the head itself.
During the outage, a boric acid leakage walkdown of the reactor coolant pressure
boundary was also completed and no corrosion was found. The Harris Plant is
ranked in the lowest susceptibility classification and the Company does not plan
further inspections until its next regularly scheduled outage in spring of 2003.
In February 2003, the NRC issued Order EA-03-009, requiring specific inspections
of the reactor pressure vessel head and associated penetration nozzles at PWRs.
The Company has responded to the Order, stating that the Company intends to
comply with the provisions of the Order. No adverse impact is anticipated.
Security
On February 25, 2002, the NRC issued an order requiring interim compensatory
measures with regard to security at nuclear plants. This order formalized many
of the security enhancements made at the Company's nuclear plants since
September 2001. This order includes additional restrictions on access, increased
security presence and closer coordination with the Company's partners in
intelligence, military, law enforcement and emergency response at the federal,
state and local levels. The Company completed the requirements by the
established deadlines. The NRC inspections for compliance are underway.
In addition, in January 2003, the NRC issued a final order with regard to access
control. This order requires the Company to enhance its current access control
program by January 7, 2004. The Company expects that it will be in full
compliance with the order by the established deadline.
As the NRC, other governmental entities and the industry continue to consider
security issues, it is possible that more extensive security plans could be
required.
Spent Fuel and Other High-Level Radioactive Waste
The Nuclear Waste Policy Act of 1982 (Nuclear Waste Act) provides the framework
for development by the federal government of interim storage and permanent
disposal facilities for high-level radioactive waste materials. The Nuclear
Waste Act promotes increased usage of interim storage of spent nuclear fuel at
existing nuclear plants. CP&L will continue to maximize the use of spent fuel
storage capability within its own facilities for as long as feasible. With
certain modifications and additional approval by the NRC, CP&L's spent nuclear
fuel storage facilities will be sufficient to provide storage space for spent
fuel generated on CP&L's system through the expiration of the current operating
licenses for all of CP&L's nuclear generating units. Subsequent to or prior to
the expiration of these licenses, dry storage may be necessary.
See PART II, ITEM 8, Note 24 to the Progress Energy consolidated financial
statements and Note 18 to the CP&L consolidated financial statements for a
discussion of CP&L's contract with the U.S. Department of Energy (DOE) for spent
nuclear waste.
Decommissioning
In CP&L's retail jurisdictions, provisions for nuclear decommissioning costs are
approved by the NCUC and the SCPSC and are based on site-specific estimates that
include the costs for removal of all radioactive and other structures at the
site. In the wholesale jurisdiction, the provisions for nuclear decommissioning
costs are approved by the FERC. See PART II, ITEM 8, Note 1H to the Progress
Energy consolidated financial statements and Note 1G to the CP&L consolidated
financial statements for a discussion of CP&L's nuclear decommissioning costs.
Enrichment Facilities Decontamination
CP&L filed an action against the United States in the U.S. Court of Claims on
March 21, 1997, challenging certain retroactive assessments imposed by the
federal government on domestic nuclear power companies to fund the
decommissioning and decontamination of the government's uranium enrichment
facilities. The government is collecting this assessment on an annual basis,
which is levied upon all domestic utilities that had enrichment services
contracts with the government. Collection of the special assessments began in
1992 and is scheduled to continue for a fifteen-year period. A number of other
utilities filed similar actions against the government.
The Claims Court issued a decision granting the government's motion for summary
judgment on all counts. The Claims Court decision was appealed to the Court of
19
Appeals for the Federal Circuit on December 26, 2000. The Federal Circuit stayed
consideration of the case pending a decision by the Supreme Court on a petition
for writ of certiorari that was filed by Commonwealth Edison et. al. in their
case against the government. The Supreme Court refused to accept the case in
favor of the Government. Based on a joint motion, CP&L's appeal in the U.S.
Court of Appeals has been dismissed with prejudice.
ENVIRONMENTAL MATTERS
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. CP&L received insurance proceeds to address costs associated
with environmental liabilities related to its involvement with MGP sites. All
eligible expenses related to these waste costs are charged against a specific
fund containing these proceeds. As of December 31, 2002, approximately $8.0
million remains in this centralized fund with a related accrual of $8.0 million
recorded for the associated expenses of environmental issues. As CP&L's share of
costs for investigating and remediating these sites becomes 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 environmental insurance recovery
fund. This is due to the fact that the sites are at different stages:
investigation has not begun at 15 sites, investigation has begun but remediation
cannot be estimated at seven sites and four sites have begun remediation. CP&L
measures its liability for these sites based on available evidence including its
experience in investigating and remediating environmentally impaired sites. The
process often involves assessing and developing cost-sharing arrangements with
other potentially responsible parties (PRPs). 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. Presently, 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.
ELECTRIC - FLORIDA POWER
GENERAL
Florida Power was incorporated in Florida in 1899, and is an operating public
utility engaged in the generation, purchase, transmission, distribution and sale
of electricity. At December 31, 2002, Florida Power had a total summer
generating capacity (including jointly-owned capacity) of approximately 8,024
MW.
Florida Power provided electric service during 2002 to an average of 1.5 million
customers in west central Florida. Its service area covers approximately 20,000
square miles and includes the densely populated areas around Orlando, as well as
the cities of St. Petersburg and Clearwater. Florida Power is interconnected
with 20 municipal and nine rural electric cooperative systems. Major wholesale
power sales customers include Seminole Electric Cooperative, Inc., Florida
Municipal Power Agency, Florida Power & Light Company and Tampa Electric
Company. Florida Power is subject to the rules and regulations of the FERC and
the Florida Public Service Commission (FPSC).
BILLED ELECTRIC REVENUES
Florida Power's electric revenues billed by customer class for the last three
years, is shown as a percentage of total Florida Power electric revenues in the
table below:
BILLED ELECTRIC REVENUES
Revenue Class 2002 2001 2000(a)
------------- ---- ---- -------
Residential 55% 54% 53%
Commercial 24% 24% 24%
Industrial 7% 7% 8%
Others 6% 6% 5%
Wholesale (b) 8% 9% 10%
(a) These figures reflect Florida Power's billed electric revenues for the
full year ended December 31, 2000, which is generally representative
of the period Progress Energy owned Florida Power.
(b) These revenues are managed by the Progress Ventures segment on behalf
of Florida Power.
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Important industries in Florida Power's territory include phosphate rock mining
and processing, electronics design and manufacturing, and citrus and other food
processing. Other important commercial activities are tourism, health care,
construction and agriculture.
FUEL AND PURCHASED POWER
General
Florida Power's consumption of various types of fuel depends on several factors,
the most important of which are the demand for electricity by Florida Power's
customers, the availability of various generating units, the availability and
cost of fuel and the requirements of federal and state regulatory agencies.
Florida Power's energy mix for the last three years is presented in the
following table:
ENERGY MIX PERCENTAGES
Fuel Type 2002 2001 2000 (a)
--------- ---- ---- --------
Coal (b) 33% 33% 34%
Oil 16% 16% 15%
Nuclear 15% 15% 15%
Gas 15% 14% 14%
Purchased power 21% 22% 22%
(a) These figures reflect Florida Power's energy mix percentages for the
full year ended December 31, 2000, which is generally representative
of the period Progress Energy owned Florida Power.
(b) Amounts include synthetic fuel from unrelated third parties and
petroleum coke.
Florida Power is generally permitted to pass the cost of recoverable fuel and
purchased power to its customers through fuel adjustment clauses. The future
prices for and availability of various fuels discussed in this report cannot be
predicted with complete certainty. However, Florida Power believes that its fuel
supply contracts, as described below, will be adequate to meet its fuel supply
needs.
Florida Power's average fuel costs per million Btu for the last three years were
as follows:
AVERAGE FUEL COST
(per million Btu)
2002 2001 2000(a)
------ ------ -------
Coal (b) $ 2.43 $ 2.16 $ 1.89
Oil 3.77 3.81 4.15
Nuclear 0.46 0.47 0.47
Gas 4.06 4.52 4.32
Weighted average 2.60 2.59 2.46
(a) These figures reflect Florida Power's average fuel cost for the year
ended December 31, 2000, which is representative of the period
Progress Energy owned Florida Power.
(b) Amounts include synthetic fuel from unrelated third parties and
petroleum coke.
Changes in the unit price for coal, oil and gas are due to market conditions.
Since these costs are primarily recovered through recovery clauses established
by regulators, fluctuations do not materially affect net income.
Coal
Florida Power anticipates a combined requirement of approximately 5.7 million to
6.1 million tons of coal and synthetic fuel in 2003. Most of the coal is
expected to be supplied from the Appalachian coal fields of the United States.
Approximately two-thirds of the fuel is expected to be delivered by rail and the
remainder by barge. All of this fuel is supplied by Progress Fuels, a subsidiary
of Progress Energy, pursuant to contracts between Florida Power and Progress
Fuels.
For 2003, Progress Fuels has medium-term and long-term contracts with various
sources for approximately 100% of the burn requirements of Florida Power's coal
units. These contracts have price adjustment provisions and have expiration
dates ranging from 2003 to 2005. All the coal to be purchased for Florida Power
is considered to be low sulfur coal by industry standards.
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Oil and Gas
Oil is purchased under term contracts and in the spot market from several
suppliers. The majority of the cost of Florida Power's oil and gas is determined
by market prices as reported in certain industry publications. Management
believes that Florida Power has access to an adequate supply of oil for the
reasonably foreseeable future. Florida Power believes that the threat of or a
war against Iraq could negatively impact the price of oil. Florida Power's
natural gas supply and transportation is purchased under firm supply and
transportation contracts and in the spot market from numerous suppliers. Florida
Power also uses interruptible transportation contracts on certain occasions when
available. Florida Power believes that existing contracts for oil are sufficient
to cover its requirements if natural gas is unavailable during certain time
periods.
Nuclear
Nuclear fuel is processed through four distinct stages. Stages I and II involve
the mining and milling of the natural uranium ore to produce a concentrate and
the conversion of this uranium oxide concentrate into uranium hexafluoride.
Stages III and IV entail the enrichment of the uranium hexafluoride and the
fabrication of the enriched uranium hexafluoride into usable fuel assemblies.
Florida Power has sufficient uranium, conversion, enrichment and fabrication
contracts to meet its near-term nuclear fuel requirements needs. Florida Power
expects to contract for all of its future long-term uranium, conversion and
enrichment service needs with contract durations ranging from five to ten years.
Although Florida Power cannot predict the future availability of uranium and
nuclear fuel services, Florida Power does not currently expect to have
difficulty obtaining uranium oxide concentrate or the services necessary for its
conversion, enrichment and fabrication into nuclear fuel.
Purchased Power
Florida Power, along with other Florida utilities, buys and sells power in the
wholesale market on a short-term and long-term basis. As of December 31, 2002,
Florida Power had a variety of purchase power agreements for the purchase of
approximately 1,304 MW of firm power. These agreements include (1) long-term
contracts for the purchase of about 473 MW of purchased power with other
investor-owned utilities, including a contract with The Southern Company for
approximately 413 MW, and (2) approximately 831 MW of capacity under contract
with certain qualifying facilities (QFs). The capacity currently available from
QFs represents about 10% of Florida Power's total installed system capacity.
COMPETITION
Electric Industry Restructuring
Florida Power continues to monitor progress toward a more competitive
environment and has actively participated in regulatory reform deliberations in
Florida. Movement toward deregulation in this state has been affected by recent
developments related to deregulation of the electric industry in California and
other states.
On December 11, 2001, the Florida 2020 Study Commission issued its final report
to the Florida Legislature regarding possible changes to the regulation of
electric utilities in Florida. The Florida legislature did not take any action
on the final report during the 2001 or 2002 session.
In response to a legislative directive, the FPSC and the FDEP submitted by
February 2003 a joint report on renewable electric generating technologies for
Florida. The report assessed the feasibility and potential magnitude of
renewable electric capacity for Florida, and summarized the mechanisms other
states have adopted to encourage renewable energy. The report did not contain
any policy recommendations. The Company cannot anticipate when, or if,
restructuring legislation will be enacted or if the Company would be able to
support it in its final form.
Regional Transmission Organizations
As a result of Order 2000, Florida Power, along with Florida Power & Light
Company and Tampa Electric Company (the Applicants) filed with the FERC in
October 2000 an application for approval of a GridFlorida RTO. The GridFlorida
proposal is pending before both the FERC and the FPSC. The FERC provisionally
approved the structure and governance of GridFlorida. In December 2001, the FPSC
found the Applicants were prudent in proactively forming GridFlorida but ordered
the Applicants to modify the proposal in several material respects, including a
change in structure to a not-for-profit Independent System Operator (ISO). The
Commission's most recent order in September 2002 ordered further state
proceedings. The issues to be addressed as modifications include, but are not
limited to 1) pricing/rate structure; 2) elimination of the pancaking of
revenues; 3) cost recovery of incremental costs; 4) demarcation dates for new
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facilities and long-term transmission contracts; and 6) market design. The
Florida Office of Public Counsel appealed the September 2002 order to the
Florida Supreme Court and on October 28, 2002, the FPSC abated its proceedings
pending the outcome of the appeal. It is unknown what the outcome of this appeal
will be at this time. It is unknown when the FERC or the FPSC will take final
action with regard to the status of GridFlorida or what the impact of further
proceedings will have on the Company's earnings, revenues or pricing.
See PART II, ITEM 7, "Other Matters," for a discussion of current developments
of GridFlorida RTO.
Standard Market Design
On July 31, 2002, the FERC issued its Notice of Proposed Rulemaking in Docket
No. RM01-12-000 Remedying Undue Discrimination through Open Access Transmission
Service and Standard Electricity Market Design (SMD NOPR). The proposed rules
set forth in the SMD NOPR would require, among other things, that 1) all
transmission owning utilities transfer control of their transmission facilities
to an independent third party; 2) transmission service to bundled retail
customers be provided under the FERC-regulated transmission tariff, rather than
state-mandated terms and conditions; 3) new terms and conditions for
transmission service be adopted nationwide, including new provisions for pricing
transmission in the event of transmission congestion; 4) new energy markets be
established for the buying and selling of electric energy; and 5) load-serving
entities be required to meet minimum criteria for generating reserves. If
adopted as proposed, the rules set forth in the SMD NOPR would materially alter
the manner in which transmission and generation services are provided and paid
for. Florida Power filed comments on November 15, 2002 and supplemental comments
on January 10, 2003. On January 15, 2003, the FERC announced the issuance of a
White Paper on SMD NOPR to be released in April 2003. Florida Power plans to
file comments on the White Paper. The FERC has also indicated that it expects to
issue final rules during the summer of 2003.
Merchant Plants
There has been no change in the statutory framework for siting new generation
since the Florida Supreme Court's decision in Tampa Electric Company v. Garcia,
767 So.2d 428 (Fla. 2000) in April 2000. The Court reversed a decision of the
FPSC and held that under Florida's Power Plant Siting Act, an applicant for any
new generation over 75 MW that includes a steam generating facility must be a
load-serving utility or the output of the proposed plant must be under firm
contract to a load-serving utility. Thus, site certification for merchant
generation for large, non-peaking capacity cannot be independently undertaken.
At the present time there are no pending legislative proposals for change.
Franchise Agreements
Florida Power holds franchises with varying expiration dates in 104 of the
municipalities in which it distributes electric energy. Florida Power also
serves within a number of municipalities and in all its unincorporated areas
without franchise agreements. The general effect of these franchises is to
provide for the manner in which Florida Power occupies rights-of-way in
incorporated areas of municipalities for the purpose of constructing, operating
and maintaining an energy transmission and distribution system.
Approximately 36% of Florida Power's total utility revenues for 2002 were from
the incorporated areas of the 104 municipalities that had franchise ordinances
during the year. Since 2000, Florida Power has renewed 27 expiring franchises
and reached agreement on a franchise with a city that did not previously have a
franchise. Franchises with eight municipalities have expired without renewal.
All but 26 of the existing franchises cover a 30-year period from the date
enacted. The exceptions are 22 franchises, each with a term of 10 years and
expiring between 2005 and 2012; two franchises each with a term of 15 years and
expiring in 2017; one 30-year franchise that was extended in 2000 for five years
expiring in 2005; and one franchise with a term of 20 years expiring in 2020. Of
the 104 franchises, 39 expire between January 1, 2003 and December 31, 2012 and
65 expire between January 1, 2013 and December 31, 2031.
Ongoing negotiations are taking place with the municipalities to reach agreement
on franchise terms and to enact new franchise ordinances. See PART II, ITEM 8,
Note 24 to the Progress Energy consolidated financial statements for a
discussion of Florida Power's franchise litigation.
Stranded Costs
An important issue encompassed by industry restructuring is the recovery of
"stranded costs." Stranded costs primarily include the generation assets of
23
utilities whose value in a competitive marketplace would be less than their
current book value, as well as above-market purchased power commitments to QFs.
Thus far, all states that have passed restructuring legislation have provided
for the opportunity to recover a substantial portion of stranded costs.
Assessing the amount of stranded costs for a utility requires various
assumptions about future market conditions, including the future price of
electricity. For Florida Power, the single largest stranded cost exposure is its
commitment to QFs. Florida Power has taken a proactive approach to this industry
issue. Since 1996, Florida Power has been seeking ways to address the impact of
escalating payments from contracts it was obligated to sign under provisions of
Public Utility Regulatory Policies Act of 1978 (PURPA).
REGULATORY MATTERS
General
Florida Power is subject to the jurisdiction of the FPSC with respect to, among
other things, retail rates and issuance of securities. In addition, Florida
Power is subject to regulation by the FERC with respect to transmission and
sales of wholesale power, accounting and certain other matters. The underlying
concept of utility ratemaking is to set rates at a level that allows the utility
to collect revenues equal to its cost of providing service plus a reasonable
rate of return on its equity. Increased competition as a result of industry
restructuring may affect the ratemaking process.
Electric Retail Rates
The FPSC authorizes retail "base rates" that are designed to provide a utility
with the opportunity to earn a specific rate of return on its "rate base," or
average investment in utility plant. These rates are intended to cover all
reasonable and prudent expenses of utility operations and to provide investors
with a fair rate of return.
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. The Agreement
eliminates the authorized Return on Equity (ROE) range normally used by the FPSC
for the purpose of addressing earning levels; 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 rates by 9.25%;
resulting in a reduction of 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 caps will be divided into two shares - a 1/3
share to be retained 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 amount for 2002
was $1.296 billion 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 100% 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 cap for 2002 was $1.356 billion and will increase $37 million each year
thereafter. As of December 31, 2002, $4.7 million was accrued and will be
refunded to customers in March 2003. On February 24, 2003, the parties to the
Agreement filed a motion seeking an order from the FPSC to enforce the
Agreement. In this motion, the parties dispute Florida Power's calculation of
retail revenue subject to refund and contend that the refund should be
approximately $23 million. Florida Power cannot predict the outcome of this
matter.
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 would effect a
mid-course correction of its fuel cost recovery clause to reduce the fuel factor
by $50 million for 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
24
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 year
ended December 31, 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.
Per the Agreement, Florida Power was required to refund to customers $35 million
of revenues collected during the interim period of March 13, 2001 through April
30, 2002. This one-time retroactive revenue refund was recorded in the first
quarter of 2002 and was returned to retail customers over an eight-month period
ended December 31, 2002.
Fuel and Other Cost Recovery
Florida Power's operating costs not covered by the utility's base rates include
fuel, purchased power and energy conservation expenses and specific
environmental costs. The state commission allows electric utilities to recover
certain of these costs through various cost recovery clauses, to the extent the
respective commission determines in an annual hearing that such costs are
prudent. In addition, in December 2002, the FPSC approved an Environmental Cost
Recovery Clause which will permit the Company to recover the costs of specified
environmental projects to the extent these expenses are found to be prudent in
an annual hearing and not otherwise included in base rates. Costs will be
recovered through this recovery clause in the same manner as the other existing
clause mechanisms.
The state commission's determination results in the addition of a rider to a
utility's base rates to reflect the approval of these costs and to reflect any
past over- or under-recovery. Due to the regulatory treatment of these costs and
the method allowed for recovery, changes from year to year have no material
impact on operating results.
NUCLEAR MATTERS
Florida Power has one nuclear generating plant, Crystal River Unit No. 3 (CR3),
which is subject to regulation by the NRC. The NRC's jurisdiction encompasses
broad supervisory and regulatory powers over the construction and operation of
nuclear reactors, including matters of health and safety, antitrust
considerations and environmental impact. Florida Power has a license to operate
the nuclear plant through December 3, 2016. Florida Power currently has a 91.8%
ownership interest in CR3. On February 20, 2003, Florida Power notified the NRC
of its intent to submit an application to extend the plant license in the first
quarter of 2009.
In late 2002, CR3 received a license amendment authorizing a small power level
increase. The power level increase of approximately 8 MW was implemented in
February 2003.
On March 18, 2002, the NRC sent a bulletin to companies that hold licenses for
PWRs requiring information on the structural integrity of the reactor vessel
head and a basis for concluding that the vessel head will continue to perform
its function as a coolant pressure boundary. The Company filed responses as
required. Inspections of the vessel heads at the Company's PWR plant have been
performed during previous outages. In October 2001, at CR3, one nozzle was found
to have a crack and was repaired; however, no degradation of the reactor vessel
head was identified. Current plans are to replace the vessel head at CR3 during
its next regularly scheduled refueling outage in the fall of 2003.
On August 9, 2002, the NRC issued an additional bulletin dealing with head
leakage due to cracks near the control rod nozzles. The NRC has asked licensees
to commit to high inspection standards to ensure the more susceptible plants
have no cracks. For CR3, the Company has responded to the NRC that previous
inspections are sufficient until the reactor head is replaced in the fall of
2003.
In February 2003, the NRC issued Order EA-03-009, requiring specific inspections
of the reactor pressure vessel head and associated penetration nozzles at PWRs.
The Company has responded to the Order, stating that the Company intends to
comply with the provisions of the Order. No adverse impact is anticipated.
Enrichment Facilities Decontamination
Florida Power filed an action against the United States in the U.S. Court of
Claims on November 1, 1996 challenging certain retroactive assessments imposed
by the federal government on domestic nuclear power companies to fund the
decommissioning and decontamination of the government's uranium enrichment
facilities. The government is collecting this assessment on an annual basis,
which is levied upon all domestic utilities that had enrichment services
25
contracts with the government. Collection of the special assessments began in
1992 and is scheduled to continue for a 15-year period. A number of other
utilities have filed similar actions against the government.
The Claims Court issued a decision granting the government's summary judgment
motion. That decision was appealed to the U.S. Court of Appeals for the Federal
Circuit, which stayed its consideration of the case pending a decision by the
U.S. Supreme Court on a petition for writ of certiorari that was filed by
Commonwealth Edison et al. in their case against the government. This Supreme
Court refused to accept that case for review, effectively resolving the case in
favor of the government. Based on a joint motion, Florida Power's appeal has
been dismissed with prejudice.
ENVIRONMENTAL MATTERS
There are two former MGP sites and 11 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 December 31, 2002 and
2001, Florida Power has accrued approximately $10.9 million and $8.5 million,
respectively, for probable and reasonably estimable costs at these sites.
Florida Power does not believe that it can provide an estimate of the reasonably
possible total remediation costs beyond what it has currently accrued. In 2002,
Florida Power filed a petition for recovery of approximately $4.0 million in
environmental costs through the Environmental Cost Recovery Clause with the
FPSC. Florida Power was successful with this filing and will recover costs
through rates for investigation and remediation associated with transmission and
distribution substations and transformers. As more activity occurs at these
sites, 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 investigating and remediating environmentally impaired sites. This process
often includes assessing and developing cost-sharing arrangements with other
potentially responsible parties.
PROGRESS VENTURES
GENERAL
The Progress Ventures business segment was created in 2000 to manage Progress
Energy's wholesale energy marketing and trading, non-regulated generation and
fuel properties, as well as an ocean barge partnership. The operations of the
Progress Ventures business segment can be broken down into three key areas: 1)
fuel extraction, manufacturing and delivery; 2) merchant generation ownership;
and 3) energy marketing and trading.
FUEL EXTRACTION, MANUFACTURING AND DELIVERY
The Progress Ventures business segment owns an array of assets that produce,
transport and deliver fuel and provide related services for the open market. The
Progress Ventures business segment has subsidiaries that produce natural gas and
oil products, mine coal and others that produce synthetic coal-based fuel, an
alternative fuel product made from waste coal and coal byproducts. This product
has been classified as a synthetic fuel within the meaning of Section 29 of the
Internal Revenue Code. Sales of synthetic fuel therefore qualify for tax
credits. See PART II, ITEM 7, "Other Matters" for a discussion of the synthetic
fuel tax credits.
The current combined assets of Progress Ventures which are involved in fuel
extraction, manufacturing and delivery include:
o Three coal-mining complexes, expected to produce about 3 million tons
per year;
o Seven synthetic fuel plants capable of producing up to 18 million tons
per year;
o Natural gas properties in Colorado, Texas and Louisiana producing
about 21 net billion cubic feet per year;
o Six terminals on the Ohio River and its tributaries, part of the
trucking, rail and barge network for coal delivery;
o Majority-ownership in a barge partnership that moves coal products
from the mouth of the Mississippi River to the Crystal River facility
in Florida.
Progress Fuels, a business unit of the Progress Ventures segment, acquired
approximately 162 natural gas-producing wells with proven reserves of
approximately 195 billion cubic feet from Republic Energy, Inc. and two other
privately-owned companies during the first quarter of 2003.
26
NONREGULATED GENERATION OWNERSHIP
Nonregulated generation represents power plants whose capacity and energy are
sold on the wholesale market outside the realm of retail regulation. A
cornerstone of Progress Ventures' business plan is to own a portfolio of
approximately 3,100 MW of merchant generation capacity by 2003. Much of this
portfolio is being built by Progress Ventures. The Company has contracts
representing 63%, 69% and 25% of planned production capacity for 2003 through
2005, respectively.
On March 20, 2003, PVI entered into a definitive agreement with Williams Energy
Marketing and Trading, a subsidiary of Williams, to acquire a long-term
full-requirements power supply agreement with Jackson Electric Membership Corp.,
located in Jefferson, Georgia. The agreement calls for a $188 million payment to
Williams in exchange for assignment of the Jackson supply agreement. The power
supply agreement runs through 2015 and includes the use of 640 MW of Georgia
system generation comprised of nuclear, coal, gas and pumped-storage hydro
resources. Progress Energy expects to supplement the acquired resources with its
own intermediate and peaking assets in Georgia to serve Jackson's forecasted
1,100 MW peak demand in 2005 growing to a 1,700 MW demand by 2015. The sale is
expected to close in the second quarter of 2003, subject to customary closing
conditions.
Progress Ventures had approximately 1,554 MW of nonregulated generation in
commercial operation as of December 31, 2002. Construction of generating assets
at three locations will increase this to approximately 3,100 MW by the end of
2003. See PART I, ITEM 2, "Properties," for additional information on these
planned additions.
ENERGY MARKETING AND TRADING
Within this business function, the energy produced by the merchant plants as
well as some energy produced by the utilities is sold under term contracts and
in the spot market. This area is divided into two departments: Regulated
Wholesale Marketing and Trading and Competitive Marketing and Trading. Regulated
Wholesale Marketing and Trading manages approximately 5,000 MW of wholesale
power contracts that primarily include those for CP&L and Florida Power.
Competitive Marketing and Trading markets the nonregulated plants not under
contract into the nonregulated market and engages in limited financial trading
activities.
In addition to power contracts, this business area also purchases fuel for both
utility and merchant generation, and trades other sources of energy, such as
natural gas and oil. Progress Ventures also uses financial instruments to manage
the risks associated with fluctuating commodity prices and increase the value of
the Company's power generation assets.
COMPETITION
Progress Ventures does not operate in the same environment as regulated
utilities. It operates specifically in the wholesale market, which means
competition is its primary driver. Progress Ventures' synthetic fuel operations,
coal operations and merchant generation plants compete in the eastern United
States utility and industrial coal markets. Factors contributing to the success
in these markets include a competitive cost structure and strategic locations.
See PART II, ITEM 7, "Other Matters," for a discussion of risks associated with
synthetic fuel tax credits. There are, however, numerous competitors in each of
these markets, although no one competitor is dominant in any industry.
ENVIRONMENTAL MATTERS
Progress Ventures' environmental matters primarily relate to air and water
quality matters. However, certain historical waste sites exist which are being
addressed voluntarily. Environmental costs cannot be determined. The Company
does not expect future costs to be material to Progress Ventures.
RAIL SERVICES
The largest component of the Rail Services business segment is led by Progress
Rail Services Corporation (Progress Rail). Progress Rail is one of the largest
integrated and diversified suppliers of railroad and transit system products and
services in North America and is headquartered in Albertville, Alabama. Rail
Services' principal business functions include the Mechanical Group, Rail and
Trackwork Group, and Recycling Group.
The Mechanical Group is primarily focused on railroad rolling stock that
includes freight cars, transit cars and locomotives, the repair and maintenance
of these units, and the manufacturing or reconditioning of major components for
these units. The Rail and Trackwork Group focuses on rail and other track
components, the infrastructure which supports the operation of rolling stock, as
well as the equipment used in maintaining the railroad infrastructure and
right-of-way. The Recycling Group supports the Mechanical and Rail and Trackwork
Groups through its reclamation of reconditionable material. In addition, the
Recycling Group is a major supplier of recyclable scrap metal to North American
steel mills and foundries through its processing locations as well as its scrap
brokerage operations.
Rail Services' key railroad industry customers are Class 1 railroads, regional
and shortline railroads, major North American transit systems, major railcar and
locomotive builders, and major railcar lessors. The U.S. operations are located
in 26 states and include further geographic coverage through mobile crews on a
selected basis. This coverage allows for Rail Services' customer base to be
dispersed throughout the U.S., Canada and Mexico.
27
During 2003, the Company intends to sell the assets of Railcar Ltd., a leasing
subsidiary, included in the Rail Services segment, and has therefore reported
these assets as assets held for sale. On March 12, 2003, the Company signed a
letter of intent to sell Railcar Ltd. to The Andersons, Inc. The proceeds of the
sale will be used to pay off Railcar Ltd. lease obligations. The transaction is
still subject to various closing conditions including financing, due diligence
and the complet