UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
---- ----
Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer
File Number incorporation, address of principal executive offices, and telephone number Identification Number
1-15929 Progress Energy, Inc. 56-2155481
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina
1-3382 Carolina Power & Light Company 56-0165465
d/b/a Progress Energy Carolinas, Inc.
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina
NONE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether Progress Energy, Inc. is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
Indicate by check mark whether Carolina Power & Light Company is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X
This combined Form 10-Q is filed separately by two registrants: Progress Energy,
Inc. (Progress Energy) and Carolina Power & Light Company d/b/a Progress Energy
Carolinas, Inc. (PEC). Information contained herein relating to either
individual registrant is filed by such registrant solely on its own behalf. Each
registrant makes no representation as to information relating exclusively to the
other registrant.
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date. As of July 31, 2003, each
registrant had the following shares of common stock outstanding:
Registrant Description Shares
---------- ----------- ------
Progress Energy, Inc. Common Stock (Without Par Value) 243,437,696
Carolina Power & Light Company Common Stock (Without Par Value) 159,608,055 (all of which
were held by Progress Energy, Inc.)
1
PROGRESS ENERGY, INC. AND PROGRESS ENERGY CAROLINAS, INC.
FORM 10-Q - For the Quarter Ended June 30, 2003
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Interim Financial Statements:
Progress Energy, Inc.
--------------------------------------------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Interim Financial Statements
Carolina Power & Light Company
d/b/a Progress Energy Carolinas, Inc.
---------------------------------------------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Interim Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement
ARO Asset retirement obligations
Bcf Billion cubic feet
CCO Competitive Commercial Operations
the Code Internal Revenue Service Code
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company Progress Energy, Inc. and subsidiaries
CP&L Energy CP&L Energy, Inc., now known as Progress Energy, Inc.
CPI Consumer Price Index
CR3 Progress Energy Florida's nuclear generating plant, Crystal River Unit No. 3
CVO Contingent value obligation
DIG Derivatives Implementation Group
DOE United States Department of Energy
Dt Dekatherm
DWM North Carolina Department of Environment and Natural Resources, Division of Waste
Management
EITF Emerging Issues Task Force
ENCNG Eastern North Carolina Natural Gas Company, formerly referred to as Eastern NC
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FDEP Florida Department of Environment and Protection
Federal Circuit U.S. Circuit Court of Appeals
FERC Federal Energy Regulatory Commission
FIN No. 46 FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51"
FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Funding Corp. Florida Progress Funding Corporation
GAAP Accounting principles generally accepted in the United States of America
Genco Progress Genco Ventures, LLC
IRS Internal Revenue Service
Jackson Jackson Electric Membership Corp.
KWh Kilowatt-hour
MACT Maximum Available Control Technology
MGP Manufactured gas plant
MW Megawatt
NCNG North Carolina Natural Gas Corporation
NCUC North Carolina Utilities Commission
NOx SIP Call EPA rule which requires 23 jurisdictions including North and South
Carolina and Georgia to further reduce nitrogen oxide emissions
NRC United States Nuclear Regulatory Commission
NSP Northern States Power
PCH Progress Capital Holdings, Inc.
PEC Progress Energy Carolinas, Inc., formerly referred to as Carolina Power & Light Company
PEF Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation
PFA IRS Prefiling Agreement
the Plan Revenue Sharing Incentive Plan
PLRs Private Letter Rulings
Preferred Securities FPC-obligated mandatorily redeemable preferred securities
3
Progress Energy Progress Energy, Inc.
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
Progress Ventures Business segment of Progress Energy primarily made up of nonregulated
energy generation, gas, coal and synthetic fuel operations and energy
marketing and trading
PUHCA Public Utility Holding Company Act of 1935, as amended
PVI Legal entity of Progress Ventures, Inc., formerly referred to as CPL Energy Ventures, Inc.
PWR Pressurized water reactor
RAFT Railcar Asset Financing Trust
Rail Rail Services
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
Section 42 Section 42 of the Internal Revenue Service Code
Service Company Progress Energy Service Company, LLC
SFAS No. 5 Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies"
SFAS No. 71 Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation"
SFAS No. 131 Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information"
SFAS No. 133 Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and
Hedging Activities"
SFAS No. 142 Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets"
SFAS No. 143 Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations"
SFAS No. 148 Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123"
SFAS No. 149 Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities"
SFAS No. 150 Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity"
SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination
through Open Access Transmission and Standard Market Design
SRS Strategic Resource Solutions Corp.
the Trust FPC Capital I
4
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This combined report contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The matters discussed throughout this combined Form 10-Q that are not
historical facts are forward-looking and, accordingly, involve estimates,
projections, goals, forecasts, assumptions, risks and uncertainties that could
cause actual results or outcomes to differ materially from those expressed in
the forward-looking statements.
In addition, forward-looking statements are discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including, but not limited to, statements under the sub-heading "Other Matters"
about the effects of new environmental regulations, nuclear decommissioning
costs and the effect of electric utility industry restructuring.
Any forward-looking statement speaks only as of the date on which such statement
is made, and neither Progress Energy, Inc. (Progress Energy) nor Progress Energy
Carolinas, Inc. (PEC) undertakes any obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: the impact of fluid and complex government laws and regulations,
including those relating to the environment; the impact of recent events in the
energy markets that have increased the level of public and regulatory scrutiny
in the energy industry and in the capital markets; deregulation or restructuring
in the electric industry that may result in increased competition and
unrecovered (stranded) costs; the uncertainty regarding the timing, creation and
structure of regional transmission organizations; weather conditions that
directly influence the demand for electricity and natural gas; recurring
seasonal fluctuations in demand for electricity and natural gas; fluctuations in
the price of energy commodities and purchased power; economic fluctuations and
the corresponding impact on the Company's commercial and industrial customers;
the ability of the Company's subsidiaries to pay upstream dividends or
distributions to it; the impact on the facilities and the businesses of the
Company from a terrorist attack; the inherent risks associated with the
operation of nuclear facilities, including environmental, health, regulatory and
financial risks; the ability to successfully access capital markets on favorable
terms; the impact that increases in leverage may have on the Company; the
ability of the Company to maintain its current credit ratings; the impact of
derivative contracts used in the normal course of business by the Company; the
outcome of the IRS's audit and inquiry into the availability and use of Section
29 tax credits by synthetic fuel producers and 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; the Company's
ability to obtain an extension of the Securities and Exchange Commission's order
requiring us to divest of Progress Rail Services Corporation by November 30,
2003; and unanticipated changes in operating expenses and capital expenditures.
Most of these risks similarly impact the Company's subsidiaries including PEC.
These and other risk factors are detailed from time to time in the Progress
Energy and PEC SEC reports. Many, but not all of the factors that may impact
actual results are discussed in the Risk Factors sections of Progress Energy's
and PEC's annual report on Form 10-K for the year ended December 31, 2002, which
were filed with the SEC on March 21, 2003. All such factors are difficult to
predict, contain uncertainties that may materially affect actual results and may
be beyond the control of Progress Energy and PEC. New factors emerge from time
to time, and it is not possible for management to predict all such factors, nor
can it assess the effect of each such factor on Progress Energy and PEC.
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Progress Energy, Inc.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2003
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
(Unaudited) June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Operating Revenues
Utility $ 1,582,787 $ 1,600,581 $ 3,236,674 $ 3,098,503
Diversified business 429,897 358,274 792,015 647,653
- -----------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 2,012,684 1,958,855 4,028,689 3,746,156
- -----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Utility
Fuel used in electric generation 393,331 366,757 804,954 736,809
Purchased power 209,825 224,685 412,567 405,958
Operation and maintenance 364,766 346,358 699,079 675,332
Depreciation and amortization 223,595 210,485 443,683 422,373
Taxes other than on income 94,446 93,306 197,278 189,227
Diversified business
Cost of sales 379,710 347,438 686,651 647,963
Depreciation and amortization 33,680 29,329 61,948 56,664
Other 38,996 35,209 89,254 64,562
- -----------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,738,349 1,653,567 3,395,414 3,198,888
- -----------------------------------------------------------------------------------------------------------------------
Operating Income 274,335 305,288 633,275 547,268
- -----------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 3,531 6,153 6,297 8,106
Other, net (9,432) (2,340) (11,883) 3,718
- -----------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (5,901) 3,813 (5,586) 11,824
- -----------------------------------------------------------------------------------------------------------------------
Income before Interest Charges and Income Taxes 268,434 309,101 627,689 559,092
- -----------------------------------------------------------------------------------------------------------------------
Interest Charges
Net interest charges 159,520 170,161 315,768 340,330
Allowance for borrowed funds used during construction (2,222) (3,353) (5,109) (6,906)
- -----------------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 157,298 166,808 310,659 333,424
- -----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Income Tax 111,136 142,293 317,030 225,668
Income Tax Expense (Benefit) (39,174) 20,360 (30,146) (20,326)
- -----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 150,310 121,933 347,176 245,994
Discontinued Operations, Net of Tax 2,513 (1,313) 13,803 7,153
- -----------------------------------------------------------------------------------------------------------------------
Net Income $ 152,823 $ 120,620 $ 360,979 $ 253,147
- -----------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 236,057 215,007 234,755 213,999
- -----------------------------------------------------------------------------------------------------------------------
Basic Earnings per Common Share
Income from Continuing Operations $ 0.64 $ 0.57 $ 1.48 $ 1.15
Discontinued Operations, Net of Tax $ 0.01 $ (0.01) $ 0.06 $ 0.03
Net Income $ 0.65 $ 0.56 $ 1.54 $ 1.18
- -----------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Common Share
Income from Continuing Operations $ 0.63 $ 0.56 $ 1.47 $ 1.15
Discontinued Operations, Net of Tax $ 0.01 $ 0.00 $ 0.06 $ 0.03
Net Income $ 0.64 $ 0.56 $ 1.53 $ 1.18
- -----------------------------------------------------------------------------------------------------------------------
Dividends Declared per Common Share $ 0.560 $ 0.545 $ 1.120 $ 1.090
- -----------------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
6
Progress Energy, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share data) June 30, December 31,
Assets 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 20,991,295 $ 20,152,787
Accumulated depreciation (9,990,819) (10,480,880)
- -----------------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 11,000,476 9,671,907
Held for future use 12,864 15,109
Construction work in progress 842,520 752,336
Nuclear fuel, net of amortization 234,515 216,882
- -----------------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 12,090,375 10,656,234
- -----------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 45,654 61,358
Accounts receivable 824,233 737,369
Unbilled accounts receivable 217,586 225,011
Inventory 846,928 875,485
Deferred fuel cost 277,480 183,518
Assets of discontinued operations 491,784 490,429
Prepayments and other current assets 213,209 260,804
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 2,916,874 2,833,974
- -----------------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 640,891 393,215
Nuclear decommissioning trust funds 861,752 796,844
Diversified business property, net 2,213,623 1,884,271
Miscellaneous other property and investments 443,428 463,776
Goodwill 3,719,327 3,719,327
Prepaid pension costs 57,919 60,169
Other assets and deferred debits 684,764 517,182
- -----------------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 8,621,704 7,834,784
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 23,628,953 $ 21,324,992
- -----------------------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value, 500,000,000 shares authorized, 242,187,774 and
237,992,513 shares issued and outstanding,
respectively $ 5,109,564 $ 4,929,104
Unearned ESOP common stock (88,734) (101,560)
Accumulated other comprehensive loss (240,508) (237,762)
Retained earnings 2,182,440 2,087,227
- -----------------------------------------------------------------------------------------------------------------------------
Total Common Stock Equity 6,962,762 6,677,009
- -----------------------------------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption 92,831 92,831
Long-Term Debt 9,223,632 9,747,293
- -----------------------------------------------------------------------------------------------------------------------------
Total Capitalization 16,279,225 16,517,133
- -----------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 1,130,308 275,397
Accounts payable 606,658 756,287
Interest accrued 222,896 220,400
Dividends declared 135,280 132,232
Short-term obligations 858,991 694,850
Customer deposits 161,539 158,214
Liabilities of discontinued operations 119,058 124,767
Other current liabilities 478,419 350,132
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 3,713,149 2,712,279
- -----------------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 824,961 932,813
Accumulated deferred investment tax credits 198,098 206,221
Regulatory liabilities 542,210 119,766
Asset retirement obligations 1,225,605 -
Other liabilities and deferred credits 845,705 836,780
- -----------------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 3,636,579 2,095,580
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 15)
- -----------------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 23,628,953 $ 21,324,992
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
7
Progress Energy, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended
(Unaudited) June 30,
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 360,979 $ 253,147
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations (13,803) (7,153)
Depreciation and amortization 568,328 567,106
Deferred income taxes (118,442) (44,234)
Investment tax credit (8,123) (10,126)
Deferred fuel cost (credit) (93,962) 22,718
Net increase in accounts receivable (85,314) (35,229)
Net (increase) decrease in inventories 26,591 (38,637)
Net (increase) decrease in prepayments and other current assets 23,120 (14,993)
Net decrease in accounts payable (15,332) (62,655)
Net increase in income taxes, net 104,997 78,837
Net increase in other current liabilities 52,538 30,661
Other 92,666 39,896
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 894,243 779,338
- ------------------------------------------------------------------------------------------------------------------------
Investing Activities
Gross utility property additions (541,205) (520,872)
Diversified business property additions and acquisitions (366,494) (627,042)
Nuclear fuel additions (84,050) (49,346)
Net contributions to nuclear decommissioning trust (17,959) (19,917)
Investments in non-utility activities (5,792) (10,301)
Acquisition of intangibles (190,168) -
Net decrease (increase) in restricted cash 16,784 (105,721)
Other (1,136) 5,257
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,190,020) (1,327,942)
- ------------------------------------------------------------------------------------------------------------------------
Financing Activities
Issuance of common stock, net of issuance costs 171,771 -
Purchase of restricted shares (6,560) (5,393)
Issuance of long-term debt, net of issuance costs 654,824 1,013,633
Net increase in short-term indebtedness 163,092 14,499
Net decrease in cash provided by checks drawn in excess of bank balances (43,707) (33,605)
Retirement of long-term debt (392,054) (108,381)
Dividends paid on common stock (267,608) (238,404)
Other 815 47,407
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 280,573 689,756
- ------------------------------------------------------------------------------------------------------------------------
Cash Used in Discontinued Operations (500) (584)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (15,704) 140,568
Cash and Cash Equivalents at Beginning of the Period 61,358 53,708
- ------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 45,654 $ 194,276
- ------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 305,206 $ 324,234
income taxes (net of refunds) $ 22,241 $ 15,977
Noncash Activities
o On April 26, 2002, Progress Fuels Corporation, a subsidiary of the
Company, acquired 100% of Westchester Gas Company. In conjunction with
the purchase, the Company issued approximately $129.0 million in common
stock.
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
8
Progress Energy, Inc.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
A. Organization
Progress Energy, Inc. (Progress Energy or the Company) is a registered
holding company under the Public Utility Holding Company Act of 1935
(PUHCA), as amended. Both the Company and its subsidiaries are subject to
the regulatory provisions of PUHCA. Effective January 1, 2003, Carolina
Power & Light Company, Florida Power Corporation and Progress Ventures,
Inc. (PVI) began doing business under the names Progress Energy Carolinas,
Inc. (PEC), Progress Energy Florida, Inc. (PEF) and Progress Energy
Ventures, Inc., respectively. The legal names of these entities have not
changed, and there was no restructuring of any kind related to the name
change. The current corporate and business unit structure remains
unchanged.
Through its wholly owned subsidiaries, Progress Energy Carolinas, Inc. and
Progress Energy Florida, Inc., the Company is engaged in the generation,
purchase, transmission, distribution and sale of electricity primarily in
portions of North Carolina, South Carolina and Florida. The Progress
Ventures business unit consists of the Fuels and Competitive Commercial
Operations (CCO) operating segments. The Fuels operating segment includes
natural gas drilling and production, coal mining and synthetic fuels
production. The CCO operating segment includes nonregulated generation and
energy marketing and limited trading activities. Through other business
units, the Company engages in other nonregulated business areas, including
energy management and related services, rail services and
telecommunications. Progress Energy's legal structure is not currently
aligned with the functional management and financial reporting of the
Progress Ventures business unit. Whether, and when, the legal and
functional structures will converge depends upon legislative and regulatory
action, which cannot currently be anticipated.
B. Basis of Presentation
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. Because the
accompanying consolidated interim financial statements do not include all
of the information and footnotes required by GAAP, they should be read in
conjunction with the audited financial statements for the period ended
December 31, 2002 and notes thereto included in Progress Energy's Form 10-K
for the year ended December 31, 2002.
In accordance with the provisions of APB 28, GAAP requires companies to
apply a levelized effective tax rate to interim periods that is consistent
with the estimated annual effective tax rate. Income tax expense was
increased by $4.8 million and $58.4 million for the second quarter of 2003
and 2002, respectively, in order to maintain an effective tax rate
consistent with the estimated annual rate. Income tax expense was decreased
by $5.4 million and increased $79.6 million for the first half of 2003 and
2002, respectively.
The amounts included in the consolidated interim financial statements are
unaudited but, in the opinion of management, reflect all normal recurring
adjustments necessary to fairly present the Company's financial position
and results of operations for the interim periods. Due to seasonal weather
variations and the timing of outages of electric generating units,
especially nuclear-fueled units, the results of operations for interim
periods are not necessarily indicative of amounts expected for the entire
year or future periods.
In preparing financial statements that conform with GAAP, management must
make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and amounts of revenues and expenses
reflected during the reporting period. Actual results could differ from
those estimates. Certain amounts for 2002 have been reclassified to conform
to the 2003 presentation.
2. ACQUISITIONS
During the first quarter of 2003, Progress Fuels Corporation, a wholly
owned subsidiary of Progress Energy, entered into three independent
transactions to acquire approximately 162 natural gas-producing wells with
proven reserves of approximately 195 billion cubic feet (Bcf) from Republic
Energy, Inc. and two other privately-owned companies, all headquartered in
Texas. The primary assets in the acquisition have been contributed to
9
Progress Fuels North Texas Gas, L.P., a wholly owned subsidiary of Progress
Fuels Corporation. The cash purchase price for the transactions totaled
$148 million.
On May 31, 2003, PVI acquired from Williams Energy Marketing and Trading, a
subsidiary of the Williams Companies, Inc., a long-term full-requirements
power supply agreement at fixed prices with Jackson Electric Membership
Corp. (Jackson), for $188.2 million. See Note 7 for additional information.
3. DIVESTITURES
A. NCNG Divestiture
On October 16, 2002, the Company announced the Board of Directors' approval
to sell North Carolina Natural Gas Corporation (NCNG) and the Company's
equity investment in Eastern North Carolina Natural Gas Company (ENCNG) to
Piedmont Natural Gas Company, Inc., for approximately $400 million in net
proceeds. By order issued June 26, 2003, the North Carolina Utilities
Commission (NCUC) approved the Company's application to sell NCNG to
Piedmont Natural Gas Company, Inc. The closing of the acquisition is
subject to the approval of the Securities and Exchange Commission (SEC).
The sale is expected to close during the summer of 2003. Net proceeds from
the sale will be used to pay down debt obligations.
The accompanying consolidated interim financial statements have been
restated for all periods presented for the discontinued operations of NCNG.
The net income of these operations is reported as discontinued operations
in the Consolidated Statements of Income. Interest expense has been
allocated to discontinued operations based on the net assets of NCNG,
assuming a uniform debt-to-equity ratio across the Company's operations.
Interest expense allocated for the three months ended June 30, 2003 and
2002 was $3.3 million and $4.0 million, respectively. Amounts allocated for
the six months ended June 30, 2003 and 2002 were $6.9 million and $8.0
million, respectively. The Company ceased recording depreciation upon
classification of the assets as discontinued operations. After-tax
depreciation expense recorded by NCNG during the second quarter of 2002 was
$2.9 million and during the first half of 2002 was $5.8 million. The asset
group, including goodwill, has been recorded at fair value less cost to
sell, resulting in an estimated loss on disposal of approximately $29.4
million, which was recorded in the fourth quarter of 2002. The estimated
loss is reviewed quarterly and will be finalized once the disposition is
complete and the actual loss can be determined. Results of discontinued
operations were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2003 2002 2003 2002
-------------- ------------- --------------- --------------
Revenues $ 70,815 $ 64,510 $ 225,041 $ 150,625
============== ============= =============== ==============
Earnings (loss) before income taxes $ 4,119 $(5,514) $ 22,602 $ 8,522
Income tax expense (benefit) 1,606 (4,201) 8,799 1,369
-------------- ------------- --------------- --------------
Net earnings (loss) from discontinued
operations $ 2,513 $(1,313) $ 13,803 $ 7,153
============== ============= =============== ==============
The major balance sheet classes included in assets and liabilities of
discontinued operations in the Consolidated Balance Sheets are as follows:
June 30, December 31,
(in thousands) 2003 2002
--------------- ----------------
Utility plant, net $ 403,515 $398,931
Current assets 69,743 72,821
Deferred debits and other assets 18,526 18,677
--------------- ----------------
Assets of discontinued operations $ 491,784 $490,429
=============== ================
Current liabilities $ 68,884 $ 76,372
Deferred credits and other liabilities 50,174 48,395
--------------- ----------------
Liabilities of discontinued operations $119,058 $124,767
=============== ================
The Company's equity investment in ENCNG of $7.7 million as of June 30,
2003 and December 31, 2002 is included in miscellaneous other property and
investments in the Consolidated Balance Sheets.
10
B. Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a
resolution to sell the assets of Railcar Ltd., a leasing subsidiary
included in the Rail Services segment. A series of sales transactions is
expected to take place throughout 2003. An estimated impairment on assets
held for sale was recognized in December 2002 to write-down the assets to
fair value less costs to sell.
The assets of Railcar Ltd. have been grouped as assets held for sale and
are included in other current assets in the accompanying Consolidated
Balance Sheets as of June 30, 2003. The assets are recorded at $24.0
million and $23.6 million as of June 30, 2003 and December 31, 2002,
respectively.
On March 12, 2003, the Company signed a letter of intent to sell the
majority of Railcar Ltd. assets to The Andersons, Inc. The majority of the
proceeds from the sale will be used by the Company to pay off certain
Railcar Ltd. off balance sheet lease obligations for railcars that will be
transferred to The Andersons, Inc. as part of the sales transaction. The
transaction is subject to various closing conditions including financing,
due diligence and the completion of a definitive purchase agreement.
4. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company currently has the following business segments: Progress Energy
Carolinas Electric (PEC Electric), Progress Energy Florida (PEF), Fuels,
Competitive Commercial Operations (CCO), Rail Services (Rail) and Other
Businesses (Other). Prior to 2003, Fuels and CCO were reported together as
the Progress Ventures business segment and corporate costs were included in
the Other segment. These reportable segment changes reflect the current
management structure. Additionally, earnings from wholesale customers of
the regulated plants have previously been reported in both the regulated
utilities' results and the results of Progress Ventures. With the
realignment of the reportable business segments, these results are now
included in each of the respective regulated utilities' results only.
The PEC Electric and PEF segments are engaged in the generation,
transmission, distribution and sale of electric energy primarily in
portions of North Carolina, South Carolina and Florida. These electric
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC), the NCUC, the Public Service Commission of
South Carolina (SCPSC), the Florida Public Service Commission (FPSC) and
the U.S. Nuclear Regulatory Commission (NRC).
Fuels' operations, which are located in the United States, include natural
gas drilling and production, coal mining and terminals, and the production
of synthetic fuels.
CCO operations, which are located in the United States, include
nonregulated electric generation operations and limited trading activities.
The increase in revenue and income from continuing operations for the six
months ended June 30, 2003 is primarily due to a tolling agreement
termination payment from Dynegy.
Rail operations include railcar repair, rail parts reconditioning and
sales, railcar leasing (primarily through Railcar Ltd.) and sales, and
scrap metal recycling. These activities include maintenance and
reconditioning of salvageable scrap components of railcars, locomotive
repair and right-of-way maintenance. Rail's primary operations are located
in the United States, with limited operation in Mexico and Canada.
Other primarily includes operations in the United States of Progress
Telecommunications Corporation and Caronet, Inc. (collectively referred to
as Progress Telecom) and other nonregulated subsidiaries that do not meet
the disclosure requirements of SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information."
The Company's corporate operations include the operations of the holding
company, Progress Energy Service Company, LLC and intercompany elimination
transactions. The operating business segments combined with the corporate
operations represent the total continuing operations of the Company. In
prior periods, Corporate was reported as a component of the Other segment.
The discontinued operations related to NCNG are not included as an
operating segment.
The following summarizes the revenues, income from continuing operations
and assets (excluding assets of discontinued operations) for the business
segments, corporate and total Progress Energy. The 2002 information has
been restated to align with the 2003 segment structure.
11
Income
Revenues from
--------------------------------------------------- Continuing
(in thousands) Unaffiliated Intersegment Total Operations
------------ --------------- ---------------- ------------
Three Months Ended June 30, 2003
PEC Electric $ 816,240 $ - $ 816,240 $ 88,394
PEF 766,547 - 766,547 61,359
Fuels 166,918 89,861 256,779 53,807
CCO 33,283 - 33,283 2,383
Rail 213,740 - 213,740 2,192
Other 15,903 1,460 17,363 1,200
Corporate 53 (91,321) (91,268) (59,025)
------------ --------------- ---------------- ------------
Consolidated totals $ 2,012,684 $ - $ 2,012,684 $ 150,310
------------ --------------- ---------------- ------------
Three Months Ended June 30, 2002
PEC Electric $ 834,658 $ - $ 834,658 $ 131,690
PEF 765,923 - 765,923 76,753
Fuels 112,558 74,896 187,454 46,729
CCO 23,902 - 23,902 6,738
Rail 196,489 - 196,489 2,947
Other 25,325 1,454 26,779 (8,353)
Corporate - (76,350) (76,350) (134,571)
------------ --------------- ---------------- ------------
Consolidated totals $ 1,958,855 $ - $ 1,958,855 $ 121,933
------------ --------------- ---------------- ------------
Income
Revenues from
--------------------------------------------------- Continuing
(in thousands) Unaffiliated Intersegment Total Operations Assets
------------ --------------- ---------------- ------------ -------------
Six Months Ended June 30, 2003
PEC Electric $ 1,741,710 $ - $ 1,741,710 $ 223,264 $ 9,568,769
PEF 1,494,964 - 1,494,964 132,116 5,912,152
Fuels 297,769 174,068 471,837 80,385 1,215,374
CCO 70,833 - 70,833 10,909 1,712,985
Rail 391,549 - 391,549 (1,204) 503,897
Other 31,758 2,957 34,715 1,869 305,535
Corporate 106 (177,025) (176,919) (100,163) 3,918,457
------------ --------------- ---------------- ------------ -------------
Consolidated totals $ 4,028,689 $ - $ 4,028,689 $ 347,176 $ 23,137,169
------------ --------------- ---------------- ------------ -------------
Six Months Ended June 30, 2002
PEC Electric $ 1,646,139 $ - $ 1,646,139 $ 217,222 $ 8,669,993
PEF 1,452,364 - 1,452,364 134,496 4,967,998
Fuels 215,824 150,003 365,827 88,324 963,109
CCO 32,949 - 32,949 4,627 1,277,824
Rail 351,456 - 351,456 2,246 607,617
Other 47,424 2,908 50,332 (13,202) 803,837
Corporate - (152,911) (152,911) (187,719) 4,008,041
------------ --------------- ---------------- ------------ -------------
Consolidated totals $ 3,746,156 $ - $ 3,746,156 $ 245,994 $ 21,298,419
------------ --------------- ---------------- ------------ -------------
5. IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 148, "Accounting for Stock-Based Compensation"
The Company measures compensation expense for stock options as the
difference between the market price of its common stock and the exercise
price of the option at the grant date. Accordingly, no compensation expense
has been recognized for stock option grants.
For purposes of the pro forma disclosures required by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," the estimated fair value of the
Company's stock options is amortized to expense over the options' vesting
period. The Company's information related to the pro forma impact on
earnings and earnings per share assuming stock options were expensed for
the three and six months ended June 30 is as follows:
12
(in thousands except per share data) Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ----------------------------
2003 2002 2003 2002
--------------- ------------- ------------ --------------
Net income, as reported $ 152,823 $ 120,620 $ 360,979 $ 253,147
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 1,697 1,320 4,276 3,112
--------------- ------------- ------------ --------------
Pro forma net income $ 151,126 $ 119,300 $ 356,703 $ 250,035
=============== ============= ============ ==============
Basic earnings per share
As reported $ 0.65 $ 0.56 $ 1.54 $ 1.18
Pro forma $ 0.64 $ 0.55 $ 1.52 $ 1.17
Fully diluted earnings per share
As reported $ 0.64 $ 0.56 $ 1.53 $ 1.18
Pro forma $ 0.64 $ 0.55 $ 1.51 $ 1.16
In April 2003, the Financial Accounting Standards Board (FASB) approved
certain decisions on its stock-based compensation project. Some of the key
decisions reached by the FASB were that stock-based compensation should be
recognized in the income statement as an expense and that the expense
should be measured as of the grant date at fair value. A significant issue
yet to be resolved by the FASB is the determination of the appropriate fair
value measure. The FASB continues to deliberate additional issues in this
project; however, the FASB plans to issue an exposure draft in 2003 that
could become effective in 2004.
Derivative Instruments and Hedging Activities
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies SFAS No. 133 on accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The new guidance incorporates decisions made as part of the
Derivatives Implementation Group (DIG) process, as well as decisions
regarding implementation issues raised in relation to the application of
the definition of a derivative. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003. The Company is
currently evaluating what effects, if any, this statement will have on its
results of operations and financial position.
In connection with the January 2003 FASB Emerging Issues Task Force (EITF)
meeting, the FASB was requested to reconsider an interpretation of SFAS No.
133. The interpretation, which is contained in the Derivative
Implementation Group's C11 guidance, relates to the pricing of contracts
that include broad market indices (e.g., CPI). In particular, that guidance
discusses whether the pricing in a contract that contains broad market
indices could qualify as a normal purchase or sale (the normal purchase or
sale term is a defined accounting term, and may not, in all cases, indicate
whether the contract would be "normal" from an operating entity viewpoint).
In late June 2003, the FASB issued final superseding guidance (DIG Issue
C20) on this issue, which is significantly different from the tentative
superseding guidance that was issued in April 2003. The new guidance is
effective October 1, 2003 for the Company. DIG Issue C20 specifies new
pricing-related criteria for qualifying as a normal purchase or sale, and
it requires a special transition adjustment as of October 1, 2003.
PEC has determined that it has one existing "normal" contract that is
affected by this revised guidance. PEC is in the process of evaluating the
revised guidance and related contract to determine the transition
adjustment that will be necessary and to determine if the contract will be
required to be recorded at fair value subsequent to October 1, 2003.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity"
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The financial instruments within the scope of SFAS No. 150 include
mandatorily redeemable stock, obligations to repurchase the issuer's equity
shares by transferring assets, and certain obligations to issue a variable
number of shares. SFAS No. 150 is effective immediately for such financial
instruments entered into or modified after May 31, 2003, and is effective
for previously issued financial instruments within its scope on July 1,
2003.
13
Upon the Company's adoption of the FIN No. 46, "Consolidation of Variable
Interest Entities" (see below), the FPC Capital I Preferred Securities, as
discussed in Note 12, are anticipated to be deconsolidated from the
Company's financial statements effective July 1, 2003. Therefore, the
Company does not expect the adoption of SFAS No. 150 to have a material
impact on its financial position or results of operations.
FIN No. 46, "Consolidation of Variable Interest Entities"
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46).
This interpretation provides guidance related to identifying variable
interest entities (previously known as special purpose entities or SPEs)
and determining whether such entities should be consolidated. Certain
disclosures are required if it is reasonably possible that a company will
consolidate or disclose information about a variable interest entity when
it initially applies FIN No. 46. This interpretation must be applied
immediately to variable interest entities created or obtained after January
31, 2003. During the first six months of 2003, the Company did not
participate in the creation of, or obtain a new variable interest in, any
variable interest entity. For those variable interest entities created or
obtained on or before January 31, 2003, the Company must apply the
provisions of FIN No. 46 in the third quarter of 2003.
The Company is currently evaluating what effects, if any, this
interpretation will have on its results of operations and financial
position. During this evaluation process, several arrangements through its
Railcar Ltd. subsidiary have been identified to which this interpretation
may apply. These arrangements include an agreement with Railcar Asset
Financing Trust (RAFT), a receivables securitization trust, and seven
synthetic leases. Because the Company expects to sell the majority of
Railcar Ltd. during 2003 (See Note 3B) and divest of its interests in these
arrangements, the application of FIN No. 46 is not expected to have a
material impact with respect to these arrangements. If these interests are
not divested as currently expected, the maximum cash obligations under
these arrangements total approximately $54 million. However, management
believes the maximum loss exposure would be significantly reduced based on
the current fair values of the underlying assets related to these
arrangements.
In addition, the Company is also evaluating certain other investments to
determine if they require consolidation or disclosure upon adoption of FIN
No. 46. These include investments in approximately 50 Affordable Housing
properties eligible for Section 42 tax credits of the Internal Revenue
Service Code (Section 42). The Company divested approximately 30 of these
Affordable Housing investments in July 2003, and therefore the application
of FIN No. 46 is not expected to have a material impact with respect to
these 30 investments. It is reasonably possible that the Company will be
required to consolidate some of the remaining 20 Affordable Housing
entities that are currently accounted for under the equity method. The
maximum exposure to loss as a result of the Company's total funding
commitments for the remaining 20 Affordable Housing investments is
approximately $23.9 million. However, management believes the total loss of
its investments is unlikely given the nature of the investments and the
utilization of certain Section 42 tax credits to date.
The implementation of FIN No. 46 may require deconsolidation of certain
previously consolidated entities. Upon adoption, the company anticipates
deconsolidating the FPC Capital I Trust, which holds FPC-obligated
mandatorily redeemable preferred securities. The Company will reflect it
subordinate note obligation to the Trust as detailed in Note 12. Therefore,
the deconsolidation is not expected to have a material effect.
The Company is in the final stages of completing the adoption of FIN No.
46, but having considered the facts described herein, does not expect the
results to have a material impact on its consolidated financial position,
results of operations or liquidity.
EITF Issue No. 03-04, "Accounting for 'Cash Balance' Pension Plans"
In May 2003, the EITF reached consensus in EITF Issue No. 03-04 to
specifically address the accounting for certain cash balance pension plans.
The consensus reached in EITF Issue No. 03-04 requires certain cash balance
pension plans to be accounted for as defined benefit plans. For cash
balance plans described in the consensus, the consensus also requires the
use of the traditional unit credit method for purposes of measuring the
benefit obligation and annual cost of benefits earned as opposed to the
projected unit credit method. The Company has historically accounted for
its cash balance plans as defined benefit plans; however, the Company is
required to adopt the measurement provisions of EITF 03-04 at its cash
balance plans' next measurement date of December 31, 2003. Any differences
in the measurement of the obligations as a result of applying the consensus
will be reported as a component of actuarial gain or loss. The Company is
currently evaluating what effects EITF 03-04 will have on its results of
operations and financial position.
14
6. ASSET RETIREMENT OBLIGATIONS
SFAS No. 143, "Accounting for Asset Retirement Obligations," provides
accounting and disclosure requirements for retirement obligations
associated with long-lived assets and was adopted by the Company effective
January 1, 2003. This statement requires that the present value of
retirement costs for which the Company has a legal obligation be recorded
as liabilities with an equivalent amount added to the asset cost and
depreciated over an appropriate period. The liability is then accreted over
time by applying an interest method of allocation to the liability.
Cumulative accretion and accumulated depreciation were recognized for the
time period from the date the liability would have been recognized had the
provisions of this statement been in effect, to the date of adoption of
this statement. For assets acquired through acquisition, the cumulative
effect was based on the acquisition date.
Upon adoption of SFAS No. 143, the Company recorded asset retirement
obligations (AROs) totaling $1,182.5 million for nuclear decommissioning of
radiated plant at PEC and PEF. The Company used an expected cash flow
approach to measure these obligations. This amount includes accruals
recorded prior to adoption totaling $775.2 million, which were previously
recorded in accumulated depreciation. The related asset retirement costs,
net of accumulated depreciation, recorded upon adoption totaled $367.5
million for regulated operations. The adoption of this statement had no
impact on the income of the regulated entities, as the effects were offset
by the establishment of a regulatory asset and a regulatory liability
pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation." A regulatory asset was recorded related to PEC in the amount
of $271.1 million, representing the cumulative accretion and accumulated
depreciation for the time period from the date the liability would have
been recognized had the provisions of this statement been in effect to the
date of adoption, less amounts previously recorded. A regulatory liability
was recorded related to PEF in the amount of $231.3 million, representing
the amount by which previously recorded accruals exceeded the cumulative
accretion and accumulated depreciation for the time period from the date
the liability would have been recognized had the provisions of this
statement been in effect at the date of the acquisition of the assets by
Progress Energy to the date of adoption.
Funds set aside in the Company's nuclear decommissioning trust fund for the
nuclear decommissioning liability totaled $861.8 million at June 30, 2003
and $796.8 million at December 31, 2002.
The Company also recorded AROs totaling $10.3 million for synthetic fuel
operations of PVI and coal mine operations, synthetic fuel operations and
gas production of Progress Fuels Corporation. The Company used an expected
cash flow approach to measure these obligations. This amount includes
accruals recorded prior to adoption totaling $4.6 million, which was
previously recorded in other liabilities and deferred credits. The related
asset retirement costs, net of accumulated depreciation, recorded upon
adoption totaled $7.0 million for nonregulated operations. The cumulative
effect of initial adoption of this statement related to nonregulated
operations was $1.3 million of pre-tax income. The ongoing impact on
earnings related to accretion and depreciation was not significant for the
three or six months ended June 30, 2003.
Pro forma net income has not been presented for prior years because the pro
forma application of SFAS No. 143 to prior years would result in pro forma
net income not materially different from the actual amounts reported.
The Company has identified but not recognized AROs related to electric
transmission and distribution, gas distribution and telecommunications
assets as the result of easements over property not owned by the Company.
These easements are generally perpetual and only require retirement action
upon abandonment or cessation of use of the property for the specified
purpose. The ARO liability is not estimable for such easements as the
Company intends to utilize these properties indefinitely. In the event the
Company decides to abandon or cease the use of a particular easement, an
ARO liability would be recorded at that time.
The utilities have previously recognized removal costs as a component of
depreciation in accordance with regulatory treatment. As of June 30, 2003,
the portions of such costs not representing AROs under SFAS No. 143 were
$882.6 million for PEC, $940.1 million for PEF and $39.2 million for NCNG.
The amounts for PEC and PEF are included in accumulated depreciation on the
accompanying Consolidated Balance Sheets. The amount for NCNG is included
as an offset to assets of discontinued operations on the accompanying
Consolidated Balance Sheets. PEC and PEF have collected amounts for
non-radiated areas at nuclear facilities, which do not represent asset
retirement obligations. The amounts at June 30, 2003 were $63.5 million for
PEC and $61.5 million for PEF, which are included in accumulated
depreciation on the accompanying Consolidated Balance Sheets. PEF
previously collected amounts for dismantlement of its fossil generation
plants. As of June 30, 2003, this amounted to $142.2 million, which is
included in accumulated depreciation on the accompanying Consolidated
Balance Sheets. This collection was suspended pursuant to the rate case
settlement discussed in Note 13A.
15
PEC filed a request with the NCUC requesting deferral of the difference
between expense pursuant to SFAS No. 143 and expense as previously
determined by the NCUC. The NCUC granted the deferral of the January 1,
2003 cumulative adjustment. Because the clean air legislation discussed in
Note 15 under "Air Quality" contained a prohibition against cost deferrals
unless certain criteria are met, the NCUC denied the deferral of the
ongoing effects. The Company has provided additional information to the
NCUC that it believes will demonstrate that deferral of the ongoing effects
should also be allowed. Since the NCUC order denied deferral of the ongoing
effects, PEC ceased deferral of the ongoing effects during the second
quarter for the six months ended June 30, 2003 related to its North
Carolina retail jurisdiction. Pre-tax income for the three and six months
ended June 30, 2003 increased by approximately $13.6 million, which
represents a decrease in non-ARO cost of removal expense, partially offset
by an increase in decommissioning expense.
On April 8, 2003, the SCPSC approved a joint request by PEC, Duke Energy
and South Carolina Electric and Gas Company for an accounting order to
authorize the deferral of all cumulative and prospective effects related to
the adoption of SFAS No. 143.
On January 23, 2003, the Staff of the FPSC issued a notice of proposed rule
development to adopt provisions relating to accounting for asset retirement
obligations under SFAS No. 143. Accompanying the notice was a draft rule
presented by the Staff which adopts the provisions of SFAS No. 143 along
with the requirement to record the difference between amounts prescribed by
the FPSC and those used in the application of SFAS No. 143 as regulatory
assets or regulatory liabilities, which was accepted by all parties. The
Commission approved the draft rule in June 2003, and a final order is
expected in the third quarter of 2003.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
SFAS No. 142, "Goodwill and Other Intangible Assets," requires that
goodwill be tested for impairment at least annually and more frequently
when indicators of impairment exist. SFAS No. 142 requires a two-step fair
value-based test. The first step, used to identify potential impairment,
compares the fair value of the reporting unit with its carrying amount,
including goodwill. The second step, used to measure the amount of the
impairment loss if step one indicates a potential impairment, compares the
implied fair value of the reporting unit goodwill with the carrying amount
of the goodwill. This assessment could result in periodic impairment
charges. The Company performed the annual goodwill impairment test for the
CCO segment in the first quarter of 2003, and the annual goodwill
impairment test for the PEC Electric and PEF segments in the second quarter
of 2003, both of which indicated no impairment.
During 2002, the Company acquired Westchester Gas Company (Westchester).
The purchase price was finalized during the first quarter 2003 with the
purchase price being primarily allocated to fixed assets including oil and
gas properties. No goodwill was recorded.
The carrying amounts of goodwill at June 30, 2003, by reportable segment,
are $1.9 billion, $1.7 billion and $64.1 million for PEC Electric, PEF and
CCO, respectively.
The gross carrying amount and accumulated amortization of the Company's
intangible assets as of June 30, 2003 and December 31, 2002 are as follows:
June 30, 2003 December 31, 2002
------------------------------ -----------------------------
(in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- --------------- -------------- --------------
Synthetic fuel intangibles $ 140,469 $(54,717) $ 140,469 $(45,189)
Power agreements 221,192 (10,073) 33,000 (5,593)
Other 53,182 (9,453) 40,968 (7,792)
-------------- --------------- -------------- --------------
Total $ 414,843 $(74,243) $ 214,437 $(58,574)
-------------- --------------- -------------- --------------
All of the Company's intangibles are subject to amortization. Synthetic
fuel intangibles represent intangibles for synthetic fuel technology. These
intangibles are being amortized on a straight-line basis until the
expiration of tax credits under Section 29 of the Internal Revenue Service
Code (the Code) in December 2007.
On May 31, 2003, PVI acquired from Williams Energy Marketing and Trading, a
subsidiary of The Williams Companies, Inc., a long-term full-requirements
power supply agreement at fixed prices with Jackson, located in Jefferson,
Georgia for $188.2 million. Assignment of Williams' responsibilities under
the contract began in June 2003 and terminates in 2015, with a first
refusal option to extend for five years. The agreement includes the use of
640 megawatts (MW) of contracted Georgia System generation comprised of
nuclear, coal, gas and pumped-storage hydro resources. The intangible
16
related to this power agreement is being amortized based on the economic
benefits of the contract. As part of the acquisition of generating assets
from LG&E Energy Corp. on February 15, 2002, power agreements of $33
million were recorded and are amortized based on the economic benefits of
the contracts through December 31, 2004, which approximates straight-line.
Other intangibles are primarily customer contracts and permits that are
amortized over their respective lives. Of the increase in other intangible
assets, $9.2 million relates to customer contracts acquired as part of the
Westchester acquisition, which was identified as an intangible in the final
purchase price allocation.
Net intangible assets are included in other assets and deferred debits in
the accompanying Consolidated Balance Sheets. Amortization expense recorded
on intangible assets for the three months ended June 30, 2003 and 2002,
respectively, was $8.5 million and $8.1 million. Amortization expense
recorded on intangible assets for the six months ended June 30, 2003 and
2002, respectively, was $15.7 million and $16.2 million. The estimated
amortization expense for intangible assets for 2003 through 2007, in
millions, is approximately $36.7, $41.3, $34.8, $35.9 and $36.1,
respectively.
8. COMPREHENSIVE INCOME
Comprehensive income for the three and six months ended June 30, 2003 was
$150.6 million and $358.2 million, respectively. Comprehensive income for
the three and six months ended June 30, 2002 was $119.6 million and $256.4
million, respectively. Items of other comprehensive income for the three
month periods consisted primarily of changes in the fair value of
derivatives used to hedge cash flows related to interest on long-term debt
and gas sales.
9. FINANCING ACTIVITIES
On February 21, 2003, PEF issued $425 million of First Mortgage Bonds,
4.80% Series, Due March 1, 2013 and $225 million of First Mortgage Bonds,
5.90% Series, Due March 1, 2033. Proceeds from this issuance were used to
repay the balance of its outstanding commercial paper, to refinance its
secured and unsecured indebtedness, including PEF's First Mortgage Bonds
6.125% Series Due March 1, 2003, and to redeem the aggregate outstanding
balance of its 8% First Mortgage Bonds Due 2022.
On March 1, 2003, $70 million of PEF First Mortgage Bonds, 6.125% Series,
matured and were retired.
On March 24, 2003, PEF redeemed $150 million of First Mortgage Bonds, 8%
Series, Due December 1, 2022 at 103.75% of the principal amount of such
bonds.
In March 2003, Progress Genco Ventures, LLC (Genco), a wholly owned
subsidiary of PVI, terminated its $50 million working capital credit
facility. A related construction facility initially provided for Genco to
draw up to $260 million. The amount outstanding under this facility is $241
million as of June 30, 2003. During the second quarter of 2003 Genco
determined it did not need to make any additional draws under this
facility. As a result of this decision, the drawn amount of $241 million
will not increase.
On April 1, 2003, PEF entered into a new $200 million 364-day credit
agreement and a new $200 million three-year credit agreement, replacing its
prior credit facilities (which had been a $90 million 364-day facility and
a $200 million five-year facility). The new PEF credit facilities contain a
defined maximum total debt to total capital ratio of 65%; as of June 30,
2003 the calculated ratio was 52.6%. The new credit facilities also contain
a requirement that the ratio of EBITDA, as defined in the facilities, to
interest expense to be at least 3 to 1; as of June 30, 2003 the calculated
ratio was 8.7 to 1.
Also on April 1, 2003, PEC reduced the size of its existing 364-day credit
facility from $285 million to $165 million. The other terms of this
facility were not changed. On July 30, 2003, PEC renewed its $165 million
364-day credit agreement. PEC's $285 million three-year credit agreement
entered into in July 2002 remains in place, for total facilities of $450
million.
On May 27, 2003, PEC redeemed $150 million of First Mortgage Bonds, 7.5%
Series, Due March 1, 2023 at 103.22% of the principal amount of such bonds;
PEC funded the redemption with commercial paper.
17
On July 14, 2003, PEC announced the redemption of $100 million of First
Mortgage Bonds, 6.875% Series Due August 15, 2023 at 102.84%. The date of
the redemption will be August 15, 2003. PEC will fund the redemption with
commercial paper.
For the three months ended June 30, 2003, the Company issued approximately
2.4 million shares representing approximately $98 million in proceeds from
its Investor Plus Stock Purchase Plan and its employee benefit plans during
the second quarter. For the six months ended June 30, 2003, the Company has
issued 4.2 million shares through these plans, resulting in approximately
$172 million of cash proceeds.
10. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
Progress Energy and its subsidiaries are exposed to various risks related
to changes in market conditions. The Company has a risk management
committee that is chaired by the Chief Financial Officer and includes
senior executives from various business groups. The risk management
committee is responsible for administering risk management policies and
monitoring compliance with those policies by all subsidiaries.
The Company manages its market risk in accordance with its established risk
management policies, which may include entering into various derivative
transactions.
Progress Energy uses interest rate derivative instruments to adjust the
fixed and variable rate debt components of its debt portfolio and to hedge
interest rates with regard to future fixed rate debt issuances. Treasury
rate lock agreements were terminated in conjunction with the pricing of the
PEF First Mortgage Bonds in February 2003. The loss on the agreements was
deferred and is being amortized over the life of the bonds as these
agreements had been designated as cash flow hedges for accounting purposes.
Progress Energy currently has $850 million of fixed rate debt swapped to
floating rate debt by executing interest rate derivative agreements. Under
terms of these swap rate agreements, Progress Energy will receive a fixed
rate and pay a floating rate based on 3-month LIBOR. These agreements
expire in March of 2006, April 2007 and October 2008.
In March, April and June of 2003, PEC entered into treasury rate locks to
hedge its exposure to interest rates with regard to a future issuance of
debt. These agreements have a computational period of ten years and are
designated as cash flow hedges for accounting purposes. The agreements have
a total notional amount of $60 million.
Progress Fuels Corporation periodically enters into derivative instruments
to hedge its exposure to price fluctuations on natural gas sales. As of
June 30, 2003, Progress Fuels Corporation had approximately 16.6 Bcf of
cash flow hedges in place for its natural gas production. These positions
span the remainder of 2003 and extend through December 2004. These
instruments did not have a material impact on the Company's consolidated
financial position or results of operations.
Genco has a series of interest rate collars to hedge floating rate exposure
associated with the construction credit facility. These collars hedge 75%
of the drawn facility balance through March of 2007.
The notional amounts of the above contracts are not exchanged and do not
represent exposure to credit loss. In the event of default by a
counterparty, the risk in the transaction is the cost of replacing the
agreements at current market rates. Progress Energy only enters into
interest rate derivative agreements with banks with credit ratings of
single A or better.
11. EARNINGS PER COMMON SHARE
A reconciliation of the weighted-average number of common shares
outstanding for basic and dilutive earnings per share purposes is as
follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------ ------------ ---------------
-------------
Weighted-average common shares - basic 236,057 215,007 234,755 213,999
Restricted stock awards 1,004 734 967 690
Stock options 140 333 23 224
------------- ------------ ------------ ---------------
------------- ------------
Weighted-average shares - fully dilutive 237,201 216,074 235,745 214,913
------------- ------------ ------------ ---------------
18
12. FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A SUBSIDIARY
HOLDING SOLELY FPC GUARANTEED NOTES
In April 1999, FPC Capital I (the Trust), an indirect wholly owned
subsidiary of FPC, issued 12 million shares of $25 par cumulative
FPC-obligated mandatorily redeemable preferred securities (Preferred
Securities) due 2039, with an aggregate liquidation value of $300 million
and an annual distribution rate of 7.10%. Currently, all 12 million shares
of the Preferred Securities that were issued are outstanding. Concurrent
with the issuance of the Preferred Securities, the Trust issued to Florida
Progress Funding Corporation (Funding Corp.) all of the common securities
of the Trust (371,135 shares) for $9.3 million. Funding Corp. is a direct
wholly owned subsidiary of FPC.
The existence of the Trust is for the sole purpose of issuing the Preferred
Securities and the common securities and using the proceeds thereof to
purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable
Interest Notes (subordinated notes) due 2039, for a principal amount of
$309.3 million. The subordinated notes and the Notes Guarantee (as
discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds
from the sale of the subordinated notes were advanced to Progress Capital
and used for general corporate purposes including the repayment of a
portion of certain outstanding short-term bank loans and commercial paper.
FPC has fully and unconditionally guaranteed the obligations of Funding
Corp. under the subordinated notes (Notes Guarantee). In addition, FPC has
guaranteed the payment of all distributions required to be made by the
Trust, but only to the extent that the Trust has funds available for such
distributions (Preferred Securities Guarantee). The Preferred Securities
Guarantee, considered together with the Notes Guarantee, constitutes a full
and unconditional guarantee by FPC of the Trust's obligations under the
Preferred Securities.
The subordinated notes may be redeemed at the option of Funding Corp.
beginning in 2004 at par value plus accrued interest through the redemption
date. The proceeds of any redemption of the subordinated notes will be used
by the Trust to redeem proportional amounts of the Preferred Securities and
common securities in accordance with their terms. Upon liquidation or
dissolution of Funding Corp., holders of the Preferred Securities would be
entitled to the liquidation preference of $25 per share plus all accrued
and unpaid dividends thereon to the date of payment.
These Preferred Securities are classified as long-term debt on the
Company's Consolidated Balance Sheets. Upon adoption of FIN No. 46, the
Company anticipates deconsolidating the FPC Capital I Trust which is not
expected to have a material effect on the consolidated financial position,
results of operations or liquidity (See Note 5).
13. REGULATORY MATTERS
A. Retail Rate Matters
In conjunction with the acquisition of NCNG, PEC agreed to cap base retail
electric rates in North Carolina and South Carolina through December 2004.
The cap on base retail electric rates in South Carolina was extended to
December 2005 in conjunction with regulatory approval to form a holding
company. NCNG also agreed to cap its North Carolina margin rates for gas
sales and transportation services, with limited exceptions, through
November 1, 2003. On May 16, 2002, NCNG filed a request to increase its
margin rates and rebalance its rates with the NCUC, requesting an annual
rate increase of $4.1 million to recover costs associated with specific
system improvements. In September 2002, the NCUC issued its order approving
the $4.1 million rate increase. The rate increase was effective October 1,
2002. NCNG filed a general rate case with the NCUC on March 31, 2003. NCNG
anticipates that new rates, if approved, will go into effect in November
2003, after the terms of the joint stipulation agreement expire (See Note
3A).
On March 27, 2002, the parties in PEF's rate case entered into a
Stipulation and Settlement Agreement (the Agreement) related to retail rate
matters. The Agreement was approved by the FPSC on April 23, 2002. The
Agreement provides that PEF will operate under a Revenue Sharing Incentive
Plan (the Plan) through 2005 and thereafter until terminated by the FPSC.
The Plan establishes annual revenue caps and sharing thresholds. The Plan
provides that all retail base revenues between an established threshold and
cap will be shared - a 2/3 share to be refunded to PEF's retail customers,
and a 1/3 share to be received by PEF's shareholders. All retail base rate
revenues above the retail base rate revenue caps established for each year
will be refunded 100% to retail customers on an annual basis. For 2002, the
refund to customers was limited to 67.1% of the retail base rate revenues
that exceeded the 2002 cap. The retail base rate revenue sharing threshold
amounts for 2003 are $1.333 billion and will increase $37 million each year
thereafter. The retail base revenue cap for 2003 is $1.393 billion and will
increase $37 million each year thereafter. As of December 31, 2002, $4.7
million was accrued and was refunded to customers in March 2003. On
February 24, 2003, the parties to the Agreement filed a motion seeking an
order from the FPSC to enforce the Agreement. In this motion, the parties
19
disputed PEF's calculation of retail revenue subject to refund and
contended that the refund should be approximately $23 million. On July 9,
2003, the FPSC ruled that PEF must provide an additional $18.4 million to
its retail customers related to the 2002 revenue sharing calculation. PEF
recorded this refund in the second quarter of 2003 as a charge against
electric operating revenue and will refund this amount by no later than
October 31, 2003. In the second quarter of 2003, PEF also recorded an
additional accrual of $9.5 million related to estimated 2003 revenue
sharing.
On March 4, 2003, the FPSC approved PEF's petition to increase its fuel
factors due to continuing increases in oil and natural gas commodity
prices. The crisis in the Middle East along with the recent Venezuelan oil
workers' strike have put upward pressure on commodity prices that was not
anticipated by PEF when fuel factors for 2003 were approved by the FPSC in
November 2002. New rates became effective on March 28, 2003.
B. Regional Transmission Organizations
In early 2000, the FERC issued Order 2000 regarding regional transmission
organizations (RTOs). This Order set minimum characteristics and functions
that RTOs must meet, including independent transmission service. As a
result of Order 2000, PEF, along with Florida Power & Light Company and
Tampa Electric Company, filed with the FERC, in October 2000, an
application for approval of a GridFlorida RTO. In March 2001, the FERC
issued an order provisionally approving GridFlorida. PEC, along with Duke
Energy Corporation and South Carolina Electric & Gas Company, filed with
the FERC, for approval of a GridSouth RTO. In July 2001, the FERC issued an
order provisionally approving GridSouth. However, in July 2001, FERC issued
orders recommending that companies in the Southeast engage in a mediation
to develop a plan for a single RTO for the Southeast. PEF and PEC
participated in the mediation. The FERC has not issued an order
specifically on this mediation. In July 2002, the FERC issued its Notice of
Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
Discrimination through Open Access Transmission Service and Standard
Electricity Market Design (SMD NOPR). If adopted as proposed, the rules set
forth in the SMD NOPR would materially alter the manner in which
transmission and generation services are provided and paid for. PEF and
PEC, as subsidiaries of Progress Energy, filed comments on November 15,
2002 and supplemental comments on January 10, 2003. On April 28, 2003, the
FERC released a White Paper on the Wholesale Market Platform. The White
Paper provides an overview of what the FERC currently intends to include in
a final rule in the SMD NOPR docket. The White Paper retains the
fundamental and most protested aspects of SMD NOPR, including mandatory
RTOs and the FERC's assertion of jurisdiction over certain aspects of
retail service. PEF and PEC, as subsidiaries of Progress Energy, plan to
file comments on the White Paper. The FERC has also indicated that it
expects to issue a final rule after Congress votes this fall on the
proposed House and Senate Energy Bills. The Company cannot predict the
outcome of these matters or the effect that they may have on the
GridFlorida and GridSouth proceedings currently ongoing before the FERC.
The Company has $31.2 million and an immaterial amount invested in
GridSouth and GridFlorida, respectively, at June 30, 2003. It is unknown
what impact the future proceedings will have on the Company's earnings,
revenues or prices.
In October 2002, the FPSC abated its proceedings regarding its review of
the proposed GridFlorida RTO. The FPSC action to abate the proceedings came
in response to the Florida Office at Public Counsel's appeal before the
State Supreme Court requesting review of the FPSC's order approving the
transfer of operational control of electric transmission assets to an RTO
under the jurisdiction of the FERC. On June 2, 2003 the Florida Supreme
Court dismissed the appeal without prejudice on the ground that certain
portions of the Commission's order constituted non-final action. The
dismissal is without prejudice to any party to challenge the Commission's
order after all portions are final. A technical conference for the state of
Florida to be conducted by the FERC is scheduled for September 15, 2003. It
is unknown when the FERC or the FPSC will take final action with regard to
the status of GridFlorida or what the impact of further proceedings will
have on the Company's earnings, revenues or prices.
14. OTHER INCOME AND OTHER EXPENSE
Other income and expense includes interest income, gain on the sale of
investments, impairment of investments and other income and expense items
as discussed below. The components of other, net as shown on the
Consolidated Statements of Income are as follows:
20
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
(in thousands) 2003 2002 2003 2002
-------------- ----------- ------------ ---------------
Other income
Net financial trading gain (loss) $ 67 $ 792 $ (2,632) $ (1,429)
Net energy brokered for resale (1,369) 124 157 (141)
Nonregulated energy and delivery services income 5,652 5,862 11,242 12,459
Contingent value obligation mark-to-market (1,677) 1,479 - 12,821
Investment gains - 2,960 - 2,960
AFUDC equity 4,035 1,833 5,914 4,077
Other 5,299 7,905 10,937 13,049
-------------- ----------- ------------ ---------------
Total other income $ 12,007 $ 20,955 $ 25,618 $ 43,796
-------------- ----------- ------------ ---------------
Other expense
Nonregulated energy and delivery services expenses 5,479 6,248 9,696 9,383
Donations 3,377 2,736 6,721 7,007
Investment losses 8,644 - 8,644 -
Other 3,939 14,311 12,440 23,688
-------------- ----------- ------------ ---------------
Total other expense $ 21,439 $ 23,295 $ 37,501 $ 40,078
-------------- ----------- ------------ ---------------
Other, net $ (9,432) $ (2,340) $ (11,883) $ 3,718
============== =========== ============ ===============
Net financial trading gains and losses represent non-asset-backed trades of
electricity and gas. Net energy brokered for resale represents electricity
purchased for sale to a third party. Nonregulated energy and delivery
services include power protection services and mass market programs (surge
protection, appliance services and area light sales) and delivery,
transmission and substation work for other utilities. Investment losses
represent losses on limited partnership investment funds.
15. COMMITMENTS AND CONTINGENCIES
Contingencies and significant changes to the commitments discussed in Note
24 of the financial statements included in the Company's 2002 Annual Report
on Form 10-K are described below.
A. Guarantees
As a part of normal business, Progress Energy and certain subsidiaries
enter into various agreements providing financial or performance
assessments to third parties. Such agreements include guarantees, standby
letters of credit and surety bonds. These agreements are entered into
primarily to support or enhance the creditworthiness otherwise attributed
to a subsidiary on a stand-alone basis, thereby facilitating the extension
of sufficient credit to accomplish the subsidiaries' intended commercial
purposes.
Guarantees as of June 30, 2003, are summarized in the table below and
discussed more fully in the subsequent paragraphs.
(in millions)
Guarantees of performance issued by or on behalf of affiliates
Guarantees supporting nonregulated portfolio expansion
and energy marketing and trading activities issued by Progress Energy $ 290.5
Guarantees supporting energy marketing and trading activities issued by
subsidiaries of Progress Energy 12.0
Guarantees supporting nuclear decommissioning 276.0
Guarantee supporting power supply agreements 285.0
Standby letters of credit 49.5
Surety bonds 104.3
Other guarantees 44.1
Guarantees issued on behalf of third parties
Other guarantees 16.4
-------------------
Total $ 1,077.8
===================
21
Guarantees Supporting Nonregulated Portfolio Expansion and Energy Marketing
and Trading Activities
Progress Energy has issued approximately $290.5 million of guarantees on
behalf of PVI and its subsidiaries for obligations under tolling
agreements, transmission agreements, gas agreements, construction
agreements and trading operations. Approximately $26.9 million of these
guarantees were issued during the year to support energy and trading
activities. The majority of the marketing and trading contracts supported
by the guarantees contain language regarding downgrade events, ratings
triggers, monthly netting of exposure and/or payments and offset provisions
in the event of a default. Based upon the amount of trading positions
outstanding at June 30, 2003, if the Company's ratings were to decline
below investment grade, the Company would have to deposit cash or provide
letters of credit or other cash collateral of approximately $40.0 million
for the benefit of the Company's counterparties.
Guarantees Supporting Nuclear Decommissioning
In 2003, PEC determined that its external funding levels did not fully meet
the nuclear decommissioning financial assurance levels required by the NRC.
Therefore, PEC met the financial assurance requirements by obtaining parent
company guarantees.
Guarantee Supporting Power Supply Agreements
On March 20, 2003, PVI entered into a definitive agreement with Williams
Energy Marketing and Trading, a subsidiary of The Williams Companies, Inc.,
to acquire a long-term full-requirements power supply agreement at fixed
prices with Jackson. The power supply agreement included a performance
guarantee by Progress Energy. The transaction closed during the second
quarter of 2003. The Company issued a payment and performance guarantee to
Jackson related to the power supply agreement of $285.0 million. In the
event that Progress Energy's credit ratings fall below investment grade,
Progress Energy will be required to provide additional security for this
guarantee in form and amount (not to exceed $285 million) acceptable to
Jackson.
Standby Letters of Credit
The Company has issued standby letters of credit to financial institutions
for the benefit of third parties that have extended credit to the Company
and certain subsidiaries. These letters of credit have been issued
primarily for the purpose of supporting payments of trade payables,
securing performance under contracts and lease obligations and
self-insurance for workers' compensation. If a subsidiary does not pay
amounts when due under a covered contract, the counterparty may present its
claim for payment to the financial institution, which will in turn request
payment from the Company. Any amounts owed by the Company's subsidiaries
are reflected in the accompanying Consolidated Balance Sheets.
Surety Bonds
At June 30, 2003, the Company had $104.3 million in surety bonds purchased
primarily for purposes such as providing workers' compensation coverage,
obtaining licenses, permits and rights-of-way and project performance. To
the extent liabilities are incurred as a result of the activities covered
by the surety bonds, such liabilities are included in the accompanying
Consolidated Balance Sheets.
Other Guarantees
The Company has other guarantees outstanding related primarily to prompt
performance payments, lease obligations and other payments subject to
contingencies.
As of June 30, 2003, management does not believe conditions are likely for
performance under the agreements discussed in this Note 15.
B. Insurance
Both PEC and PEF are insured against public liability for a nuclear
incident. Under the current provisions of the Price Anderson Act, which
limits liability for accidents at nuclear power plants, each company, as an
owner of nuclear units, can be assessed a portion of any third-party
liability claims arising from an accident at any commercial nuclear power
plant in the United States. In the event that public liability claims from
an insured nuclear incident exceed $300 million (currently available
through commercial insurers), each company would be subject to pro rata
assessments for each reactor owned per occurrence. Effective August 20,
2003, the retroactive premium assessments will increase to $100.6 million
per reactor from the current amount of $88.1 million. The total limit
available to cover nuclear liability losses will increase as well from $9.6
billion to $10.6 billion. The annual retroactive premium limit of $10
million per reactor owned will not change.
22
C. Claims and uncertainties
a) The Company is subject to federal, state and local regulations
addressing hazardous and solid waste management, air and water quality and
other environmental matters.
Hazardous and Solid Waste Management