UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 registrants (1) have 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
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 whether Progress Energy, Inc. (Progress Energy) 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
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 October 31, 2003, each
registrant had the following shares of common stock outstanding:
Registrant Description Shares
Progress Energy Common Stock (Without Par Value) 245,065,096
PEC 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 September 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 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement
APB No. 28 Accounting Principles Board Opinion No. 28, "Interim Financial Reporting"
ARO Asset retirement obligation
Bcf Billion cubic feet
CCO Competitive Commercial Operations
the Code Internal Revenue Code
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company Progress Energy, Inc. and subsidiaries
CPI Consumer Price Index
CR3 Progress Energy Florida Inc.'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 United States 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"
Florida Progress or 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.
MACT Maximum Available Control Technology
Mesa Mesa Hydrocarbons, LLC
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 of FPC Capital I
Progress Energy Progress Energy, Inc.
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
3
Progress Ventures Business unit of Progress Energy primarily made up of nonregulated energy generation,
gas, coal and synthetic fuel operations and energy marketing
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 Code
Section 42 Section 42 of the Internal Revenue 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 Corporation
the Trust FPC Capital I Trust
Westchester Westchester Gas Company
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; recurring seasonal fluctuations
in demand for electricity; 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 and PEC; the ability of the
Company and PEC to maintain their current credit ratings; the impact of
derivative contracts used in the normal course of business; 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 manage the risks involved with the operation
of its nonregulated plants, including 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 operations; 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, and PEC's Form 8-K filed on September
8, 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
September 30, 2003
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(Unaudited) September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Operating Revenues
Utility $ 1,914,004 $ 1,908,817 $ 5,150,678 $ 5,007,321
Diversified business 526,762 403,562 1,418,800 1,103,707
- ----------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 2,440,766 2,312,379 6,569,478 6,111,028
- ----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Utility
Fuel used in electric generation 488,607 448,960 1,293,561 1,185,769
Purchased power 254,627 269,108 667,194 675,066
Operation and maintenance 368,769 325,495 1,067,848 1,000,827
Depreciation and amortization 220,136 205,922 663,819 628,295
Taxes other than on income 107,222 104,989 304,499 294,217
Diversified business
Cost of sales 433,817 365,481 1,219,934 1,072,818
Depreciation and amortization 45,333 28,563 111,751 86,625
Impairment of long-lived assets - 304,986 - 304,986
Other 42,739 58,655 128,082 114,937
- ----------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,961,250 2,112,159 5,456,688 5,363,540
- ----------------------------------------------------------------------------------------------------------------------
Operating Income 479,516 200,220 1,112,790 747,488
- ----------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 2,166 3,293 8,464 11,673
Impairment of investments - (25,011) - (25,011)
Other, net (3,067) 10,806 (14,950) 14,249
- ----------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (901) (10,912) (6,486) 911
- ----------------------------------------------------------------------------------------------------------------------
Interest Charges
Net interest charges 146,006 142,242 461,774 482,571
Allowance for borrowed funds used during construction (1,932) (624) (7,041) (7,530)
- ----------------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 144,074 141,618 454,733 475,041
- ----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Income Tax 334,541 47,690 651,571 273,358
Income Tax Benefit (3,112) (109,383) (33,258) (129,710)
- ----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 337,653 157,073 684,829 403,068
Discontinued Operations, Net of Tax (18,691) (5,139) (4,888) 2,013
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 318,962 $ 151,934 $ 679,941 $ 405,081
- ----------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 239,025 216,079 236,183 214,700
- ----------------------------------------------------------------------------------------------------------------------
Basic Earnings per Common Share
Income from Continuing Operations $ 1.42 $ 0.72 $ 2.90 $ 1.88
Discontinued Operations, Net of Tax ($ 0.08) ($ 0.01) ($ 0.02) $ 0.01
Net Income $ 1.34 $ 0.71 $ 2.88 $ 1.89
- ----------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Common Share
Income from Continuing Operations $ 1.42 $ 0.71 $ 2.89 $ 1.87
Discontinued Operations, Net of Tax ($ 0.08) ($ 0.01) ($ 0.02) $ 0.01
Net Income $ 1.34 $ 0.70 $ 2.87 $ 1.88
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Dividends Declared per Common Share $0.560 $0.545 $1.680 $1.635
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
6
Progress Energy, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share data) September 30, December 31,
Assets 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 21,198,711 $ 20,152,787
Accumulated depreciation (10,162,434) (10,480,880)
- ---------------------------------------------------------------------------------------------------------------
Utility plant in service, net 11,036,277 9,671,907
Held for future use 13,177 15,109
Construction work in progress 862,125 752,336
Nuclear fuel, net of amortization 219,574 216,882
- ---------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 12,131,153 10,656,234
- ---------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 100,146 61,358
Accounts receivable 813,110 737,369
Unbilled accounts receivable 190,867 225,011
Inventory 816,425 875,485
Deferred fuel cost 327,213 183,518
Assets of discontinued operations - 490,429
Prepayments and other current assets 328,969 260,804
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 2,576,730 2,833,974
- ---------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 649,956 393,215
Nuclear decommissioning trust funds 883,837 796,844
Diversified business property, net 2,147,456 1,884,271
Miscellaneous other property and investments 446,026 463,776
Goodwill 3,719,327 3,719,327
Prepaid pension costs 52,575 60,169
Other assets and deferred debits 672,272 517,182
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 8,571,449 7,834,784
- ---------------------------------------------------------------------------------------------------------------
Total Assets $ 23,279,332 $ 21,324,992
- ---------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ---------------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value, 500,000,000 shares
authorized, 244,929,214 and 237,992,513 shares
issued and outstanding, respectively $ 5,223,644 $ 4,929,104
Unearned ESOP common stock (88,734) (101,560)
Accumulated other comprehensive loss (221,603) (237,762)
Retained earnings 2,366,769 2,087,227
- ---------------------------------------------------------------------------------------------------------------
Total Common Stock Equity 7,280,076 6,677,009
- ---------------------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption 92,831 92,831
Long-Term Debt 9,760,671 9,747,293
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization 17,133,578 16,517,133
- ---------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 868,008 275,397
Accounts payable 566,201 677,197
Income taxes accrued 156,928 -
Interest accrued 135,550 220,400
Dividends declared 136,398 132,232
Short-term obligations - 694,850
Customer deposits 167,755 158,214
Liabilities of discontinued operations - 124,767
Other current liabilities 453,366 429,222
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,484,206 2,712,279
- ---------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 753,423 932,813
Accumulated deferred investment tax credits 194,037 206,221
Regulatory liabilities 548,321 119,766
Asset retirement obligations 1,242,165 -
Other liabilities and deferred credits 923,602 836,780
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 3,661,548 2,095,580
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 15)
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 23,279,332 $ 21,324,992
- ---------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
7
Progress Energy, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended
(Unaudited) September 30,
(In thousands) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 679,941 $ 405,081
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations 4,888 (2,013)
Impairment of long-lived assets and investments - 329,997
Depreciation and amortization 852,015 835,659
Deferred income taxes (208,260) (313,654)
Investment tax credit (12,184) (14,790)
Deferred fuel credit (143,695) (37,290)
Net increase in accounts receivable (91,003) (99,777)
Net (increase) decrease in inventories 62,951 (25,930)
Net (increase) decrease in prepayments and other current assets 43,440 (28,377)
Net increase in accounts payable (22,049) 59,184
Net increase in income taxes, net 140,450 162,213
Net decrease in other current liabilities 18,776 (52,906)
Other 109,805 74,330
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,435,075 1,291,727
- -----------------------------------------------------------------------------------------------------------------------
Investing Activities
Gross utility property additions (759,374) (771,309)
Diversified business property additions (475,992) (455,102)
Nuclear fuel additions (96,031) (56,029)
Acquisition of businesses, net of cash - (365,232)
Acquisition of intangibles (198,234) (3,079)
Proceeds from sales of subsidiaries and investments 477,502 11,931
Other (37,364) (94,861)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,089,493) (1,733,681)
- -----------------------------------------------------------------------------------------------------------------------
Financing Activities
Issuance of common stock, net of issuance costs 283,846 31,916
Issuance of long-term debt, net of issuance costs 1,243,046 1,770,622
Net increase (decrease) in short-term indebtedness (695,899) 117,953
Net decrease in cash provided by checks drawn in excess of bank balances (53,476) (37,471)
Retirement of long-term debt (699,157) (1,045,380)
Dividends paid on common stock (403,383) (358,978)
Other 18,457 (31,126)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided by Financing Activities (306,566) 447,536
- -----------------------------------------------------------------------------------------------------------------------
Cash Used in Discontinued Operations (228) (640)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 38,788 4,942
Cash and Cash Equivalents at Beginning of the Period 61,358 53,708
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 100,146 $ 58,650
- -----------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 516,081 $ 540,512
- income taxes (net of refunds) $ 97,301 $ 109,520
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, PEC and PEF, the Company is engaged
in the generation, purchase, transmission, distribution and sale of
electricity primarily in portions of North Carolina, South Carolina and
Florida. The Progress Ventures business unit consists of the Fuels and
Competitive Commercial Operations (CCO) operating segments. The Fuels
operating segment includes natural gas drilling and production, coal mining
and synthetic fuels production. The CCO operating segment includes
nonregulated generation and energy marketing 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 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 Accounting Principles Board Opinion
(APB) No. 28, "Interim Financial Reporting," 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
decreased by $35.4 million and $39.1 million for the three months ended
September 30, 2003 and 2002, respectively, in order to maintain an
effective tax rate consistent with the estimated annual rate. Income tax
expense was decreased by $40.8 million and increased $40.5 million for the
nine months ended September 30, 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.
9
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 180 billion cubic feet (Bcf) from Republic
Energy, Inc. and two other privately-owned companies, all headquartered in
Texas. The primary assets in the acquisitions have been contributed to
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 million. See Note 7 for additional information.
3. DIVESTITURES
A. NCNG Divestiture
On September 30, 2003, the Company completed the sale of 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. Net proceeds from the sale were used to reduce debt.
Based on net proceeds associated with the NCNG sale of $443.3 million, the
Company recorded an after-tax loss of $8.9 million during the third quarter
of 2003. In the fourth quarter of 2002, the Company recorded an estimated
after-tax loss of $29.4 million. The Company anticipates adjustments to the
loss on the divestiture during the fourth quarter of 2003 related to
employee benefit settlements and the finalization of other operating
estimates.
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 September 30, 2003
and 2002 was $3.3 million and $3.9 million, respectively. Amounts allocated
for the nine months ended September 30, 2003 and 2002 were $10.2 million
and $11.9 million, respectively. The Company ceased recording depreciation
upon classification of the assets as discontinued operations in the fourth
quarter of 2002. After-tax depreciation expense recorded by NCNG during the
three months ended September 30, 2002 was $3.1 million and during the nine
months ended September 30, 2002 was $8.9 million. Results of discontinued
operations were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2003 2002 2003 2002
-------------- ------------- --------------- --------------
Revenues $ 59,348 $ 60,589 $ 284,389 $ 211,214
============== ============= =============== ==============
Earnings (loss) before income taxes $ (16,108) $ (6,527) $ 6,494 $ 2,423
Income tax expense (benefit) (6,313) (1,388) 2,486 410
-------------- ------------- --------------- --------------
Net earnings (loss) from discontinued
operations (9,795) (5,139) 4,008 2,013
-------------- ------------- --------------- --------------
Estimated loss on disposal of discontinued
operations, including applicable income
tax expense of $3,522 (8,896) - (8,896) -
-------------- ------------- --------------- --------------
Earnings (loss) from discontinued operations $ (18,691) $ (5,139) $ (4,888) $ 2,013
============== ============= =============== ==============
10
The major balance sheet classes included in assets and liabilities of
discontinued operations in the Consolidated Balance Sheets as of December
31, 2002 are as follows:
(in thousands)
Utility plant, net $ 398,931
Current assets 72,821
Deferred debits and other assets 18,677
---------------
Assets of discontinued operations $ 490,429
===============
Current liabilities $ 76,372
Deferred credits and other liabilities 48,395
---------------
Liabilities of discontinued operations $ 124,767
===============
The sale of ENCNG resulted in net proceeds of $7.5 million and a pre-tax
loss of $2.2 million, which is included in other, net on the Consolidated
Statements of Income for the three and nine months ended September 30,
2003. The Company's equity investment in ENCNG of $7.7 million as of
December 31, 2002 is included in miscellaneous other property and
investments in the Consolidated Balance Sheets.
B. Mesa Hydrocarbons, Inc. Divestiture
In September 2003, the Finance Committee as authorized by the Company's
Board of Directors adopted a resolution approving the sale of certain gas
producing properties owned by Mesa Hydrocarbons, LLC, a wholly-owned
subsidiary of Progress Fuels Corporation, which is included in the Fuels
segment. The $79.7 million book value of the assets to be sold has been
grouped as assets held for sale and are included in other current assets on
the accompanying Consolidated Balance Sheets as of September 30, 2003. The
primary components of assets held for sale are oil and gas leases and
wells.
On October 1, 2003, the Company completed the sale of these assets. Net
proceeds of approximately $97 million will be used to reduce debt. The
Company will record this transaction in the fourth quarter of 2003.
C. Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a
resolution authorizing the sale of the majority of the assets of Railcar
Ltd., a leasing subsidiary included in the Rail Services segment. 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 September 30, 2003. The assets are recorded at $33.1
million and $23.6 million as of September 30, 2003 and December 31, 2002,
respectively.
On March 12, 2003, the Company signed a letter of intent with The
Andersons, Inc. to sell the majority of Railcar Ltd. assets. A definitive
purchase agreement was signed on November 6, 2003 with the buyers,
including Cap Acquire LLC. A significant portion 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 buyers as part of the sales transaction. The transaction is targeted to
close in 2003, but is subject to various closing conditions including
financing.
4. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company currently provides services through the following business
segments: PEC Electric, PEF, Fuels, Competitive Commercial Operations
(CCO), Rail and Other.
PEC Electric and PEF are engaged in the generation, transmission,
distribution and sale of electric energy in portions of North Carolina,
South Carolina and Florida. These electric operations are subject to the
rules and regulations of the FERC, the NCUC, the SCPSC and the FPSC. PEC
Electric also distributes and sells electricity to other utilities,
primarily on the east coast of the United States.
11
Fuels' operations, which are located in the United States, include
synthetic fuel operations; natural gas production; and coal fuel
extraction, manufacturing and delivery.
CCO's operations, which are located in the southeastern United States,
include nonregulated generation and energy marketing activities.
Rail's operations include railcar repair, rail parts reconditioning and
sales, railcar leasing and sales, and scrap metal recycling. These
activities include maintenance and reconditioning of salvageable scrap
components of railcars, locomotive repair and right-of-way maintenance.
Rail's operations are located in the United States, Canada and Mexico.
The Other segment, whose operations are primarily in the United States, is
made up of other nonregulated business areas including telecommunications
and other nonregulated subsidiaries that do not separately meet the
disclosure requirements of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Included in this segment's 2002 losses
are asset impairments and certain other charges related to the
telecommunications operations of $224.8 million.
Prior to 2003, PEC Electric was referred to as CP&L Electric, PEF was
referred to as Florida Power Electric, and Fuels and CCO were collectively
referred to as Progress Ventures. The nature of the PEC Electric and PEF
segments is unchanged from previous years' reporting. With the expansion of
the nonregulated energy generation facilities and the current management
structure, CCO is now a distinct operating segment.
In addition to these reportable operating segments, the Company has other
corporate activities that include holding company operations, service
company operations and eliminations. These corporate activities have been
included in the Other segment in the past. Additionally, earnings from
wholesale customers 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, this
activity is now included in the regulated utilities' results only. The
operations of NCNG, previously reported in the Other segment, were
reclassified to discontinued operations and therefore were not included in
the results from continuing operations during the periods reported. For
comparative purposes, the 2002 results have been restated to align with the
new business segment structure.
The profit or loss of the identified segments plus the loss of Corporate
represents the Company's total income from continuing operations.
Revenues
--------------------------------------------------- Segment
(in thousands) Unaffiliated Intersegment Total Profit (Loss)
------------ --------------- ---------------- ------------
Three Months Ended September 30, 2003
PEC Electric $ 1,009,889 $ - $ 1,009,889 $ 159,998
PEF 904,115 - 904,115 114,341
Fuels 236,691 135,739 372,430 79,752
CCO 66,653 - 66,653 12,671
Rail 208,795 951 209,746 706
Other 14,679 3,578 18,257 (3,588)
Corporate (56) (140,268) (140,324) (26,227)
------------ --------------- ---------------- ------------
Consolidated totals $ 2,440,766 $ - $ 2,440,766 $ 337,653
------------ --------------- ---------------- ------------
Three Months Ended September 30, 2002
PEC Electric $ 1,045,180 $ - $ 1,045,180 $ 179,308
PEF 863,637 - 863,637 123,774
Fuels 161,962 132,839 294,801 52,123
CCO 44,345 - 44,345 20,853
Rail 179,712 1,282 180,994 733
Other 17,543 3,562 21,105 (225,884)
Corporate - (137,683) (137,683) 6,166
------------ --------------- ---------------- ------------
Consolidated totals $ 2,312,379 $ - $ 2,312,379 $ 157,073
------------ --------------- ---------------- ------------
12
Revenues Segment
-----------------------------------------------
Profit
(in thousands) Unaffiliated Intersegment Total (Loss) Assets
------------ --------------- ---------------- ------------ -------------
Nine Months Ended September 30, 2003
PEC Electric $ 2,751,599 $ - $ 2,751,599 $ 383,262 $ 9,736,103
PEF 2,399,079 - 2,399,079 246,457 6,048,238
Fuels 639,159 380,813 1,019,972 160,139 1,117,205
CCO 137,486 - 137,486 23,579 1,700,765
Rail 600,344 951 601,295 (498) 595,104
Other 41,758 11,214 52,972 (2,648) 279,120
Corporate 53 (392,978) (392,925) (125,462) 3,802,797
------------ --------------- ---------------- ------------ -------------
Consolidated totals $ 6,569,478 $ - $ 6,569,478 $ 684,829 $ 23,279,332
------------ --------------- ---------------- ------------ -------------
Nine Months Ended September 30, 2002
PEC Electric $ 2,691,320 $ - $ 2,691,320 $ 396,530 $ 8,785,416
PEF 2,316,001 - 2,316,001 258,271 5,079,718
Fuels 435,657 389,434 825,091 140,450 843,422
CCO 77,291 - 77,291 25,478 1,538,285
Rail 529,818 2,632 532,450 2,979 579,947
Other 60,941 10,496 71,437 (239,254) 450,511
Corporate - (402,562) (402,562) (181,386) 3,840,874
------------ --------------- ---------------- ------------ -------------
Consolidated totals $ 6,111,028 $ - $ 6,111,028 $ 403,068 $ 21,118,173
------------ --------------- ---------------- ------------ -------------
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. The exercise price at which options
are granted by the Company equals the market price at the grant date and
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 nine months ended September 30 is as follows:
(in millions except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
2003 2002 2003 2002
--------------- ------------- ------------ --------------
Net income, as reported $ 318,962 $ 151,934 $ 679,941 $ 405,081
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 2,794 1,686 7,070 4,798
--------------- ------------- ------------ --------------
Pro forma net income $ 316,168 $ 150,248 $ 672,871 $ 400,283
=============== ============= ============ ==============
Basic earnings per share
As reported $ 1.34 $ 0.71 $ 2.88 $ 1.89
Pro forma $ 1.33 $ 0.70 $ 2.85 $ 1.87
Fully diluted earnings per share
As reported $ 1.34 $ 0.70 $ 2.87 $ 1.88
Pro forma $ 1.32 $ 0.69 $ 2.84 $ 1.86
13
During 2003, the Financial Accounting Standards Board (FASB) has approved
certain decisions in conjunction with its stock-based compensation project.
Some of the key decisions reached by the FASB were that stock-based
compensation should be recognized as an expense and that the expense should
be measured as of the grant date at fair value. The FASB continues to
deliberate additional issues in this project and plans to issue an exposure
draft in early 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. Interpretations and
implementation issues with regard to SFAS No. 149 continue to evolve. Based
on its analysis and understanding to date, and considering the types of
contracts historically entered into, the Company does not anticipate that
this statement will have a significant impact on its results of operations
or 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 determined that it has one existing "normal" contract that is affected
by this revised guidance. The contract is a purchase power agreement with
Broad River LLC, which is a subsidiary of Calpine Corporation. Pursuant to
the provisions of DIG Issue C20, PEC will record a pre-tax fair value loss
transition adjustment of $37.6 million in the fourth quarter of 2003, which
will be reported as a cumulative effect of a change in accounting
principle. The subject contract meets the DIG Issue C20 criteria for normal
purchase or sale and, therefore, was designated as a normal purchase as of
October 1, 2003. The liability of $37.6 million associated with the fair
value loss will be amortized to earnings over the term of the related
contract.
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 was effective
for previously issued financial instruments within its scope on July 1,
2003.
The FPC Capital I Preferred Securities, as discussed in Note 12, were
reported as debt prior to July 1, 2003. Therefore, the adoption of SFAS No.
150 did not have a material impact on the Company's financial position or
results of operations as of and for the periods ended September 30, 2003.
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 and determining whether such entities should be
consolidated. FIN No. 46 requires an enterprise to consolidate a variable
interest entity when the enterprise (a) absorbs a majority of the variable
interest entity's expected losses, (b) receives a majority of the entity's
expected residual returns, or both, as a result of ownership, contractual
or other financial interests in the entity. Prior to the effective date of
FIN No. 46, entities were generally consolidated by an enterprise that had
control through ownership of a majority voting interest in the entity. FIN
No. 46 applies immediately to variable interest entities created or
obtained after January 31, 2003. During the first nine months of 2003, the
Company did not participate in the creation of, or obtain a new variable
interest in, any variable interest entity. On October 9, 2003, the FASB
issued Staff Position No. FIN 46-6, which allowed for the optional deferral
of the effective date of FIN No. 46 from July 1, 2003 until December 31,
2003, for interests held by a public company in variable interest entities
created prior to February 1, 2003. Because the Company expects additional
transitional guidance to be issued, it has deferred its implementation of
FIN No. 46 until December 31, 2003.
14
The Company has entered into arrangements with several variable interest
entities through its Railcar, Ltd. subsidiary. These agreements include six
synthetic leases with a master trust, a servicing contract with the Railcar
Asset Financing Trust (RAFT), and a receivables securitization transaction
with a commercial paper conduit. Because the Company expects to divest of
its interests in all of these arrangements in 2003, the adoption of FIN No.
46 related to these variable interests is not expected to have a
significant effect on the Company's financial position or results of
operations. If the Company does not divest of its interests in 2003 as
expected, under the current guidance the Company would consolidate the
master trust and record an increase in both total assets and total
liabilities of approximately $25.8 million. As of September 30, 2003, the
maximum cash obligations under all three of these arrangements total
approximately $39.2 million. Management believes this maximum loss exposure
is significantly reduced based on the current fair values of the underlying
assets of the entities.
Upon adoption of FIN No. 46 as currently issued, the Company expects to
deconsolidate the FPC Capital I Trust (the Trust), which holds
FPC-obligated mandatorily redeemable preferred securities (see Note 12).
The Trust is a variable interest entity, but the Company does not absorb a
majority of the Trust's expected losses and therefore is not its primary
beneficiary. In connection with the planned deconsolidation as of December
31, 2003, the Company expects to record an additional equity investment in
the Trust of approximately $9.3 million, an increase in outstanding debt of
approximately $8.0 million, and a gain of approximately $1.3 million
relating to the cumulative effect of a change in accounting principle. See
Note 12 for a discussion of the Company's guarantees with the Trust.
The Company also has investments in 14 limited partnerships accounted for
under the equity method for which it may be the primary beneficiary. These
partnerships invest in and operate low-income housing and historical
renovation properties that qualify for federal and state tax credits. The
Company has not concluded whether it is the primary beneficiary of these
partnerships. These partnerships are partially funded with financing from
third party lenders, which is secured by the assets of the partnerships.
The creditors of the partnerships do not have recourse to the Company. As
of September 30, 2003, the maximum exposure to loss as a result of the
Company's investments for these limited partnerships is approximately $15.5
million. The Company expects to complete its evaluation of these
partnerships under FIN No. 46 during the fourth quarter of 2003. If the
Company had consolidated these 14 entities as of September 30, 2003, it
would have recorded an increase to both total assets and total liabilities
of approximately $45.8 million.
The Company is also evaluating several other potential variable interest
entities created before January 31, 2003, for which the Company would not
be the primary beneficiary based on the current guidance. These
arrangements include equity investments in approximately 20 limited
partnerships, limited liability corporations and venture capital funds, and
two building leases with special purpose entities. If all of these entities
were determined to be variable interest entities, the aggregate maximum
loss exposure as of September 30, 2003 under these arrangements totals
approximately $37.3 million. The creditors of these variable interest
entities do not have recourse to the general credit of the Company in
excess of the aggregate maximum loss exposure. The Company expects to
complete its evaluation of these entities under FIN No. 46 during the
fourth quarter of 2003.
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 effect of
this standard on the Company is dependent on other factors that also affect
the determination of actuarial gains and losses and the subsequent
amortization of such gains and losses. However, the Company does not expect
the adoption of EITF 03-04 to have a material effect on its results of
operations or financial position.
15
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
irradiated 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 $883.8 million at September 30,
2003 and $796.8 million at December 31, 2002. In accordance with SFAS No.
143, unrealized gains and losses on the nuclear decommissioning trust fund
are now included in regulatory liabilities rather than accumulated
depreciation. The balances of these regulatory liabilities as of September
30, 2003 were $84.3 million for PEC and $78.1 million for PEF.
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, which is included in other,
net on the Consolidated Statements of Income for the nine months ended
September 30, 2003. The ongoing impact on earnings related to accretion and
depreciation was not significant for the three or nine months ended
September 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 September 30,
2003, the portions of such costs not representing AROs under SFAS No. 143
were $908.7 million for PEC and $955.8 million for PEF. The amounts for PEC
and PEF are included in accumulated depreciation on the accompanying
Consolidated Balance Sheets. PEC and PEF have collected amounts for
non-irradiated areas at nuclear facilities, which do not represent asset
retirement obligations. The amounts at September 30, 2003 were $65.7
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 September 30, 2003, this amounted to $142.4 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.
16
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 initially denied the deferral of
the ongoing effects. During the second quarter of 2003, PEC ceased deferral
of the ongoing effects 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 represented a decrease in non-ARO cost of removal expense, partially
offset by an increase in decommissioning expense. PEC requested
reconsideration from the NCUC regarding the ongoing effects. During the
third quarter of 2003, the NCUC issued an order allowing the deferral of
the ongoing effects of SFAS No. 143 and PEC reversed the second quarter
income statement impact in accordance with the NCUC's decision. Therefore,
the ongoing effects of SFAS No. 143 have no impact on the income of PEC for
the nine months ended September 30, 2003.
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.
Therefore, the adoption of the statement had no impact on the income of PEF
due to the establishment of a regulatory liability pursuant to SFAS No. 71.
A final order was issued 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, 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 September 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 September 30, 2003 and December 31, 2002 are as
follows:
September 30, 2003 December 31, 2002
------------------------------------------- ------------------------------------------
(in thousands) Gross Carrying Amount Accumulated Gross Carrying Amount Accumulated
Amortization Amortization
--------------------- --------------------- --------------------- --------------------
Synthetic fuel intangibles $ 140,469 $(59,481) $ 140,469 $(45,189)
Power agreements acquired 221,218 (15,161) 33,000 (5,593)
Other 60,117 (10,357) 40,968 (7,792)
--------------------- --------------------- --------------------- --------------------
Total $ 421,804 $(84,999) $ 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 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 Electric Membership
Corp., located in Jefferson, Georgia for $188 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 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 $33.0 million were recorded and are amortized
based on the economic benefits of the contracts through December 31, 2004,
which approximates straight-line.
17
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 September 30, 2003 and
2002, respectively, was $10.7 million and $8.3 million. Amortization
expense recorded on intangible assets for the nine months ended September
30, 2003 and 2002, respectively, was $26.4 million and $24.5 million. The
estimated annual amortization expense for intangible assets for 2003
through 2007, in millions, is approximately $36.8, $41.3, $34.8, $35.9 and
$36.1, respectively.
8. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 2003
was $337.9 million and $696.1 million, respectively. Comprehensive income
for the three and nine months ended September 30, 2002 was $141.8 million
and $398.2 million, respectively. Changes in other comprehensive income for
the 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 $70 million of PEF's First
Mortgage Bonds, 6.125% Series, Due March 1, 2003, and to redeem on March
24, 2003, the $150 million aggregate outstanding balance of its 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 September 30, 2003. During the three months ended September
30, 2003, Genco determined it did not need to make any additional draws
under this facility.
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 September
30, 2003 the calculated ratio, as defined, was 51.3%. 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
September 30, 2003 the calculated ratio, as defined, was 8.1 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 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.
On July 1, 2003, $110 million of PEF's First Mortgage Bonds, 6.0% Series,
Due July 1, 2003 and $35 million of PEF's medium-term notes, 6.62% Series,
matured; PEF funded the redemption with commercial paper.
On August 15, 2003, PEC redeemed $100 million of First Mortgage Bonds,
6.875% Series, Due August 15, 2023 at 102.84%. PEC funded the redemption
with commercial paper.
On September 11, 2003, PEC issued $400 million of First Mortgage Bonds,
5.125% Series, Due September 15, 2013 and $200 million of First Mortgage
Bonds, 6.125% Series, Due September 15, 2033. Proceeds from this issuance
were used to reduce the balance of PEC's outstanding commercial paper and
short-term notes payable to affiliated companies, which notes represent
PEC's borrowings under an internal money pool operated by Progress Energy.
On September 30, 2003, Progress Energy completed the sale of NCNG and the
Company's equity investment in ENCNG. Net proceeds of approximately $450
million were used to reduce debt.
18
In addition, the Company received net proceeds of approximately $97 million
in October 2003 for the sale of its Mesa gas properties located in
Colorado. Net proceeds will primarily be used to reduce short-term debt.
For the three months ended September 30, 2003, the Company issued
approximately 2.7 million shares representing approximately $112 million in
proceeds from its Investor Plus Stock Purchase Plan and its employee
benefit plans. For the nine months ended September 30, 2003, the Company
issued approximately 6.9 million shares through these plans, resulting in
approximately $284 million of cash proceeds.
On October 31, 2003, PEF announced the redemption of $100 million of its
First Mortgage Bonds, 7% Series, Due 2023 at 103.19% of the principal
amount of such bonds. PEF intends to redeem the bonds on December 1, 2003
with commercial paper 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.
The amount of this loss was not material.
As of September 30, 2003, Progress Energy had $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, May and June of 2003, PEC entered into treasury rate locks
to hedge its exposure to interest rates with regard to a future issuance of
fixed-rate debt. These agreements had a computational period of ten years
and were designated as cash flow hedges for accounting purposes. The
agreements, with a total notional amount of $110 million, were terminated
simultaneously with the pricing of the PEC First Mortgage Bonds in
September 2003. The $4.2 million gain 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 Fuels Corporation periodically enters into derivative instruments
to hedge its exposure to price fluctuations on natural gas sales. As of
September 30, 2003, Progress Fuels Corporation had approximately 12.6 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.
19
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 Nine Months Ended
September 30, September 30,
----------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------ ------------ ---------------
Weighted-average common shares - basic 239,025 216,079 236,183 214,700
Restricted stock awards 959 746 965 709
Stock options 2 59 12 173
------------- ------------ ------------ ---------------
Weighted-average shares - fully dilutive 239,986 216,884 237,160 215,582
------------- ------------ ------------ ---------------
12. FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A SUBSIDIARY
HOLDING SOLELY FPC GUARANTEED NOTES
In April 1999, 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 accompanying Consolidated Balance Sheets. Upon adoption of the
current FIN No. 46 standard, the Company anticipates deconsolidating the
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
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. The retail
base rate revenue sharing threshold amounts for 2003 are $1.333 billion and
20
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 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 refunded
this amount by October 31, 2003. For the nine months ended September 30,
2003, PEF recorded an additional accrual of $5.4 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. New rates became effective on March 28, 2003.
On September 12, 2003, PEF asked the FPSC to approve a cost adjustment in
its annual fuel filing, primarily related to rising costs of fuel that will
increase retail customer bills beginning January 1, 2004. The total amount
of the fuel adjustment requested above current levels was approximately
$322 million. A decision from the FPSC is expected on November 12, 2003.
PEC obtained SCPSC and NCUC approval of fuel factors in annual
fuel-adjustment proceedings. The SCPSC approved PEC's petition to leave
billing rates unchanged from the prior year by order issued March 28, 2003.
The NCUC approved an increase of $19.6 million by order issued September
25, 2003.
On October 16, 2003, PEC made a filing with the North Carolina Utilities
Commission (NCUC) to seek permission to defer expenses incurred from
Hurricane Isabel and the February 2003 winter storms. As a result of rising
storm costs and the frequency of major storm damage, Progress Energy has
asked the NCUC to allow the company to create a deferred account in which
the company would place expenses incurred as a result of named tropical
storms, hurricanes and significant winter storms. The future amortization
of such deferred costs would be includable as allowable costs in base rate
filings. The Company estimates that it would charge $23.5 million in 2003
from Hurricane Isabel and from current year ice storms to the deferred
account, if approved. Any additional major storm activity in 2003 could
cause the amount to increase.
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, the 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 $31.3 million and an immaterial amount invested in
GridSouth and GridFlorida, respectively, at September 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 of 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 was conducted by the FERC on 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.
21
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
accompanying Consolidated Statements of Income are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
(in thousands) 2003 2002 2003 2002
-------------- ----------- ------------ ---------------
Other income
Net financial trading gain (loss) $ 607 $ (169) $ (2,026) $ (1,598)
Net energy brokered for resale (189) 1,909 (33) 2,664
Nonregulated energy and delivery services income 5,185 7,563 16,427 20,022
Contingent value obligation mark-to-market gain (loss) (3,945) 9,371 (3,945) 22,192
Investment gains - 8,000 - 10,960
AFUDC equity 1,986 2,728 7,900 6,806
Other 2,532 (2,755) 8,127 4,133
-------------- ----------- ------------ ---------------
Total other income $ 6,176 $ 26,647 $ 26,450 $ 65,179
-------------- ----------- ------------ ---------------
Other expense
Nonregulated energy and delivery services expenses $ 4,596 $ 6,492 $ 14,292 $ 15,933
Donations 3,910 3,447 10,920 10,453
Investment losses 558 952 9,201 6,704
Other (a) 179 4,950 6,987 17,840
-------------- ----------- ------------ ---------------
Total other expense $ 9,243 $ 15,841 $ 41,400 $ 50,930
-------------- ----------- ------------ ---------------
Other, net $ (3,067) $ 10,806 $ (14,950) $ 14,249
============== =========== ============ ===============
(a) 2003 includes reduction of approximately $6 million in the FPC
contractual environmental liability as discussed in Note 15.
Net financial trading gains and losses represent non-asset-backed trades of
electricity and gas. Net energy brokered for resale represents electricity
purchased for simultaneous 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 primarily 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
a) As a part of normal business, Progress Energy and certain subsidiaries
enter into various agreements providing financial or performance assurances
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. As of September 30, 2003, management does not believe conditions
are likely for significant performance under the guarantees of performance
issued by or on behalf of affiliates discussed herein.
22
Guarantees as of September 30, 2003, are summarized in the table below and
discussed more fully in the subsequent paragraphs.
(in millions)
Guarantees issued on behalf of affiliates
Guarantees supporting nonregulated portfolio and energy marketing
activities issued by Progress Energy $ 330.6
Guarantees supporting nuclear decommissioning 276.0
Guarantee supporting power supply agreements 312.0
Standby letters of credit 9.6
Surety bonds 1.6
Other guarantees 8.2
Guarantees issued on behalf of third parties
Other guarantees 26.4
------------
Total $ 964.4
============
Guarantees Supporting Nonregulated Portfolio and Energy Marketing
Activities
Progress Energy has issued approximately $330.6 million of guarantees on
behalf of Progress V