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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Exact name of registrants as specified in their charters, state of
Commission incorporation, address of principal executive offices, and telephone I.R.S. Employer
File Number 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 April 30, 2004, each
registrant had the following shares of common stock outstanding:
Registrant Description Shares
---------- ----------- ------
Progress Energy Common Stock (Without Par Value) 246,577,745
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 March 31, 2004
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, Use of Proceeds and Issuer Purchases of Equity
Securities
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
the Act Medicare Prescription Drug, Improvement and Modernization Act of 2003
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement
Bcf Billion cubic feet
CCO Competitive Commercial Operations business segment
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company or Progress Progress Energy, Inc. and subsidiaries
Energy
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
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
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
Fuels Fuels business segment
Genco Progress Genco Ventures, LLC
Jackson Jackson County EMC
MACT Maximum Available Control Technology
Mesa Mesa Hydrocarbons, LLC
MGP Manufactured gas plant
NCNG North Carolina Natural Gas Corporation
NCUC North Carolina Utilities Commission
NOx Nitrogen oxide
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
Progress Rail Progress Rail Services Corporation
PTC LLC Progress Telecom LLC
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.
PWR Pressurized water reactor
Rail Services or Rail Rail Services business segment
RTO Regional Transmission Organization
3
SCPSC Public Service Commission of South Carolina
Section 29 Section 29 of the Internal Revenue Code
Service Company Progress Energy Service Company, LLC
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"
SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
Discrimination through Open Access Transmission and Standard Market Design
SO2 Sulfur dioxide
SRS Strategic Resource Solutions Corp.
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 or the Company) 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 Progress
Energy, Inc. and subsidiaries' (the Company) 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;
investment performance of pension and benefit plans and the ability to control
costs; the availability and use of Internal Revenue Code Section 29 (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 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. Many of
these risks similarly impact the Company's subsidiaries.
These and other risk factors are detailed from time to time in the Progress
Energy and PEC United States Securities and Exchange Commission (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, 2003, which were filed with the SEC on
March 12, 2004. 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
March 31, 2004
UNAUDITED CONSOLIDATED STATEMENTS of INCOME
Three Months Ended March 31,
(in millions except per share data) 2004 2003
- ---------------------------------------------------------------------------------------------
Operating Revenues
Utility $ 1,685 $ 1,654
Diversified business 549 533
- ---------------------------------------------------------------------------------------------
Total Operating Revenues 2,234 2,187
- ---------------------------------------------------------------------------------------------
Operating Expenses
Utility
Fuel used in electric generation 493 411
Purchased power 183 203
Operation and maintenance 363 335
Depreciation and amortization 202 220
Taxes other than on income 105 103
Diversified business
Cost of sales 504 475
Depreciation and amortization 45 33
Other 43 50
- ---------------------------------------------------------------------------------------------
Total Operating Expenses 1,938 1,830
- ---------------------------------------------------------------------------------------------
Operating Income 296 357
- ---------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 3 3
Other, net (25) (6)
- ---------------------------------------------------------------------------------------------
Total Other Expense (22) (3)
- ---------------------------------------------------------------------------------------------
Interest Charges
Net interest charges 166 156
Allowance for borrowed funds used during construction (1) (3)
- ---------------------------------------------------------------------------------------------
Total Interest Charges, Net 165 153
- ---------------------------------------------------------------------------------------------
Income from Continuing Operations before Income Tax and
Cumulative Effect of Change in Accounting Principle 109 201
Income Tax Expense (Benefit) 1 (6)
- ---------------------------------------------------------------------------------------------
Income from Continuing Operations before Cumulative Effect of
Change in Accounting Principle 108 207
Discontinued Operations, Net of Tax - 11
- ---------------------------------------------------------------------------------------------
Income before Cumulative Effect of Change in Accounting Principle 108 218
Cumulative Effect of Change in Accounting Principle, Net of Tax - 1
- ---------------------------------------------------------------------------------------------
Net Income $ 108 $ 219
- ---------------------------------------------------------------------------------------------
Average Common Shares Outstanding 241 233
- ---------------------------------------------------------------------------------------------
Basic Earnings per Common Share
Income from Continuing Operations before Cumulative Effect of
Change in Accounting Principle $ 0.45 $ 0.89
Discontinued Operations, Net of Tax - 0.05
Cumulative Effect of Change in Accounting Principle, Net of Tax - -
Net Income $ 0.45 $ 0.94
- ---------------------------------------------------------------------------------------------
Diluted Earnings per Common Share
Income from Continuing Operations before Cumulative Effect of $ 0.45 $ 0.89
Change in Accounting Principle
Discontinued Operations, Net of Tax - 0.05
Cumulative Effect of Change in Accounting Principle, Net of Tax - -
Net Income $ 0.45 $ 0.94
- ---------------------------------------------------------------------------------------------
Dividends Declared per Common Share $ 0.575 $ 0.560
- ---------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
6
PROGRESS ENERGY, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions) March 31, December 31,
ASSETS 2004 2003
- -----------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 21,761 $ 21,675
Accumulated depreciation (8,204) (8,116)
- -----------------------------------------------------------------------------------------------------
Utility plant in service, net 13,557 13,559
Held for future use 13 13
Construction work in progress 722 634
Nuclear fuel, net of amortization 233 228
- -----------------------------------------------------------------------------------------------------
Total Utility Plant, Net 14,525 14,434
- -----------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 41 273
Accounts receivable 794 841
Unbilled accounts receivable 193 217
Inventory 782 808
Deferred fuel cost 254 317
Prepayments and other current assets 297 375
- -----------------------------------------------------------------------------------------------------
Total Current Assets 2,361 2,831
- -----------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 626 612
Nuclear decommissioning trust funds 988 938
Diversified business property, net 2,181 2,158
Miscellaneous other property and investments 464 464
Goodwill 3,729 3,726
Prepaid pension costs 453 462
Intangibles, net 319 327
Other assets and deferred debits 237 253
- -----------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 8,997 8,940
- -----------------------------------------------------------------------------------------------------
Total Assets $ 25,883 $ 26,205
- -----------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- -----------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value, 500 million shares authorized,
246 million shares issued and outstanding $ 5,310 $ 5,270
Unearned restricted shares (20) (17)
Unearned ESOP shares (79) (89)
Accumulated other comprehensive loss (61) (50)
Retained earnings 2,299 2,330
- -----------------------------------------------------------------------------------------------------
Total Common Stock Equity 7,449 7,444
- -----------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption 93 93
Long-Term Debt, Affiliate 309 309
Long-Term Debt , Net 9,603 9,625
- -----------------------------------------------------------------------------------------------------
Total Capitalization 17,454 17,471
- -----------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 232 868
Accounts payable 618 699
Interest accrued 140 209
Dividends declared 141 140
Short-term obligations 507 4
Customer deposits 169 167
Other current liabilities 524 580
- -----------------------------------------------------------------------------------------------------
Total Current Liabilities 2,331 2,667
- -----------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 682 737
Accumulated deferred investment tax credits 186 190
Regulatory liabilities 2,995 2,938
Asset retirement obligations 1,289 1,271
Other liabilities and deferred credits 946 931
- -----------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 6,098 6,067
- -----------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- -----------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 25,883 $ 26,205
- -----------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
7
PROGRESS ENERGY, INC.
UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS
Three Months Ended March 31,
(in millions) 2004 2003
- --------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 108 $ 219
Adjustments to reconcile net income to net cash provided by operating
activities:
Income from discontinued operations - (11)
Cumulative effect of change in accounting principle - (1)
Depreciation and amortization 275 280
Deferred income taxes (22) (3)
Investment tax credit (4) (4)
Deferred fuel cost (credit) 63 (46)
Cash provided (used) by changes in operating assets and
liabilities:
Accounts receivable 65 16
Inventories 26 32
Prepayments and other current assets (37) (3)
Accounts payable (64) 49
Other current liabilities (85) (91)
Other 57 2
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 382 439
- --------------------------------------------------------------------------------------------------------
Investing Activities
Gross utility property additions (248) (291)
Diversified business property additions (58) (229)
Nuclear fuel additions (39) (68)
Proceeds from sales of investments and assets 85 -
Other (8) (12)
- --------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (268) (600)
- --------------------------------------------------------------------------------------------------------
Financing Activities
Issuance of common stock 29 74
Issuance of long-term debt - 655
Net increase (decrease) in short-term indebtedness 503 (205)
Retirement of long-term debt (675) (226)
Dividends paid on common stock (141) (133)
Other (62) (30)
- --------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (346) 135
- --------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (232) (26)
Cash and Cash Equivalents at Beginning of Period 273 61
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 41 $ 35
- --------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 232 $ 209
income taxes (net of refunds) $ 32 $ 3
- --------------------------------------------------------------------------------------------------------
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 holding company
headquartered in Raleigh, North Carolina. The Company is registered under
the Public Utility Holding Company Act of 1935 (PUHCA), as amended and as
such, the Company and its subsidiaries are subject to the regulatory
provisions of PUHCA.
Through its wholly-owned subsidiaries, Carolina Power & Light Company d/b/a
Progress Energy Carolinas, Inc. (PEC) and Florida Power Corporation d/b/a
Progress Energy Florida, Inc. (PEF), the Company's PEC Electric and PEF
segments are primarily engaged in the generation, transmission,
distribution and sale of electricity in portions of North Carolina, South
Carolina and Florida. The Progress Ventures business unit consists of the
Fuels (Fuels) and the Competitive Commercial Operations (CCO) business
segments. The Fuels segment is involved in natural gas drilling and
production, coal terminal services, coal mining, synthetic fuel production,
fuel transportation and delivery. The CCO segment includes nonregulated
electric generation and energy marketing activities. Through the Rail
Services (Rail) segment, the Company is involved in nonregulated railcar
repair, rail parts reconditioning and sales, and scrap metal recycling.
Through its other business units, the Company engages in other nonregulated
business areas, including telecommunications and energy management and
related services. 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 annual 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, 2003, and notes thereto included in Progress Energy's Form
10-K for the year ended December 31, 2003.
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
increased by $39 million and decreased by $10 million for the three months
ended March 31, 2004 and 2003, respectively, in order to maintain an
effective tax rate consistent with the estimated annual rate. The income
tax provisions for the Company differ from amounts computed by applying the
Federal statutory tax rate to income before income taxes, primarily due to
the recognition of synthetic fuel tax credits.
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 2003 have been reclassified to conform
to the 2004 presentation.
9
C. Subsidiary Reporting Period Change
In the fourth quarter of 2003, the Company ceased recording portions of
Fuels' segment operations, primarily synthetic fuel operations, one month
in arrears. As a result, earnings for the year ended December 31, 2003 as
reported in the Company's Form 10-K, included 13 months of results for
these operations. The 2003 quarterly results for periods ended March 31,
June 30 and September 30 have been restated for the above-mentioned
reporting period change. This resulted in four months of earnings in the
first quarter. The impact of the reclassification of earnings between
quarters is outlined for the first quarter of 2003 in the table below:
(in millions, except per share data) As Previously Quarter As
Reported Reclassification Restated
---------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Cumulative Effect $ 196 $ 11 $ 207
of Change in Accounting Principle
Net Income $ 208 $ 11 $ 219
Basic and Diluted earnings per common share
Income from Continuing Operations before Cumulative
Effect of Change in Accounting Principle $ 0.84 $ 0.05 $ 0.89
Net Income $ 0.89 $ 0.05 $ 0.94
D. 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" (SFAS No. 148), the estimated fair
value of the Company's stock options is amortized to expense over the
options' vesting period. The following table illustrates the effect on net
income and earnings per share if the fair value method had been applied to
all outstanding and unvested awards in each period:
Three Months Ended March 31,
------------------------------
(in millions except per share data) 2004 2003
-------------- --------------
Net Income, as reported $ 108 $ 219
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 3 3
-------------- --------------
Pro forma net income $ 105 $ 216
============== ==============
Basic earnings per share
As reported $0.45 $0.94
Pro forma $0.44 $0.93
Fully diluted earnings per share
As reported $0.45 $0.94
Pro forma $0.43 $0.92
2. IMPACT OF NEW ACCOUNTING STANDARDS
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 or deconsolidated. 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 originally applied immediately to
variable interest entities created or obtained after January 31, 2003.
10
During 2003 and the first quarter of 2004, the Company did not participate
in the creation of, or obtain a significant new variable interest in, any
variable interest entity. In December 2003, the FASB issued a revision to
FIN No. 46 (FIN No. 46R), which modified certain requirements of FIN No. 46
and was effective for all variable interest entities as of March 31, 2004.
The Company adopted FIN No. 46 for special-purpose entities as of December
31, 2003, and deconsolidated the FPC Capital I trust (the Trust) as of that
date. Upon the adoption of FIN No. 46R as of March 31, 2004, no other
variable interest entities were required to be deconsolidated.
Upon adoption of FIN No. 46R as of March 31, 2004, the Company determined
that it is the primary beneficiary of a limited partnership which invests
in 17 low-income housing partnerships that qualify for federal and state
tax credits. The Company consolidated the limited partnership as of March
31, 2004, the effect of which was insignificant. The Company has requested
but has not received all the necessary information to determine the primary
beneficiary of the limited partnership's underlying 17 partnership
investments, and has applied the information scope exception in FIN No.
46R, paragraph 4(g) to the 17 partnerships. The Company has no direct
exposure to loss from the 17 partnerships; the Company's only exposure to
loss is from its investment of approximately $1 million in the newly-
consolidated limited partnership. The Company will continue its efforts to
obtain the necessary information to fully apply FIN No. 46R to the 17
partnerships. The Company believes that if the newly-consolidated limited
partnership is determined to be the primary beneficiary of the 17
partnerships, the effect of consolidating the 17 partnerships would not be
significant to the Company's Consolidated Balance Sheets.
The Company has variable interests in two power plants resulting from
long-term power purchase contracts. The Company has requested but has not
received all the necessary information to determine if the counterparties
are variable interest entities or to identify the primary beneficiaries,
and has applied the information scope exception in FIN No. 46R, paragraph
4(g). Certain payments for fuel costs under these contracts are linked to
inflation indices. The Company's only significant exposure to loss from
these contracts results from fluctuations in the market price of fuel used
by the two plants to produce the power purchased by the Company. Total
purchases from these counterparties were approximately $9 million in each
of the first quarters of 2003 and 2004. The Company will continue its
efforts to obtain the necessary information to fully apply FIN No. 46R to
these contracts. Although the Company has not received any financial
information from these two counterparties, the Company believes that if it
is determined to be the primary beneficiary of these two entities the
effect of consolidating the entities could be significant to its
Consolidated Balance Sheets. However, the approximate impact cannot be
determined at this time.
The Company also has interests in several other variable interest entities
created before January 31, 2003, for which the Company is not the primary
beneficiary. These arrangements include investments in approximately 33
limited partnerships, limited liability corporations and venture capital
funds and two building leases with special-purpose entities. The aggregate
maximum loss exposure at March 31, 2004, that the Company could be required
to record in its income statement as a result of these arrangements totals
approximately $39 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.
3. DIVESTITURES
A. Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a
resolution approving the sale of Railcar Ltd., a subsidiary included in the
Rail Services segment. In March 2003, the Company signed a letter of intent
to sell the majority of Railcar Ltd. assets to The Andersons, Inc. and the
transaction closed in February 2004. Proceeds from the sale were
approximately $82 million before transaction costs and taxes of
approximately $13 million. The assets of Railcar Ltd. were grouped as
assets held for sale and are included in other current assets on the
Consolidated Balance Sheets at December 31, 2003 and March 31, 2004. The
assets were recorded at approximately $6 million and $75 million at March
31, 2004 and December 31, 2003, respectively, which reflects the Company's
estimates of the fair value expected to be realized from the sale of these
assets less costs to sell. The primary component of assets held for sale at
December 31, 2003 was property and equipment of $74 million.
11
B. NCNG Divestiture
In October 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. On September 30, 2003, the Company
completed the sale. The 2003 net income of these operations is reported as
discontinued operations in the Consolidated Statements of Income. Interest
expense of $4 million for the three months ended March 31, 2003 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.
Results of discontinued operations were as follows:
(in millions) First Quarter
2003
----------------
Revenues $ 154
================
Earnings before income taxes $ 18
Income tax expense 7
----------------
Net earnings from discontinued operations $ 11
================
4. REGULATORY MATTERS
A. Retail Rate Matters
PEC has exclusively utilized external funding for its decommissioning
liability since 1994. Prior to 1994, PEC retained its funds internally to
meet its decommissioning liability. The North Carolina Utilities Commission
(NCUC) order issued in February 2004 found that by January 1, 2008 PEC must
begin transitioning these amounts to external funds. The transition of $131
million must be completed by December 31, 2017, and at least 10% must be
transitioned each year.
PEC filed with the Public Service Commission of South Carolina (SCPSC)
seeking permission to defer expenses incurred from the first quarter 2004
winter storm. The SCPSC approved PEC's request to defer the costs and
amortize them over five years beginning in January 2005. Approximately $10
million related to storm costs incurred during the quarter was deferred.
During the first quarter of 2004, PEC filed with the NCUC and obtained
approval from the SCPSC for a depreciation study which allowed the utility
to reduce the rates used to calculate depreciation expense. As a result,
depreciation expense decreased $7 million compared to the prior year
quarter.
On April 29, 2004, PEF, the Office of Public Counsel and the Florida
Industrial Power Users Group executed a Stipulation and Settlement that,
upon approval by the Florida Public Service Commission (FPSC), will resolve
the issue currently pending before the FPSC regarding the costs PEF will be
allowed to recover through its Fuel and Purchased Power Cost Recovery
clause in 2004 and beyond for waterborne coal deliveries by the Company's
affiliated coal supplier, Progress Fuels Corporation. The settlement sets
fixed per ton prices based on point of origin for all waterborne coal
deliveries in 2004, and establishes a market-based pricing methodology for
determining recoverable waterborne coal transportation costs through a
competitive solicitation process or market price proxies beginning in 2005
and thereafter. The settlement will reduce the amount that PEF will charge
to the Fuel and Purchased Power Cost Recovery clause for waterborne
transportation by approximately $13 million beginning in 2004. Also on
April 29, 2004, the parties filed a joint request with the FPSC for
approval of the Stipulation and Settlement, which the FPSC is expected to
act upon prior to the commencement of a hearing on the waterborne
transportation issues scheduled for June 10, 2004.
B. Regional Transmission Organizations
In 2000, the Federal Energy Regulatory Commission (FERC) issued Order 2000
regarding regional transmission organizations (RTOs). This Order set
minimum characteristics and functions that RTOs must meet, including
independent transmission service. 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
12
forth in the SMD NOPR would materially alter the manner in which
transmission and generation services are provided and paid for. In April
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. The FERC has not yet issued a final rule on SMD NOPR. The
Company cannot predict the outcome of these matters or the effect that they
may have on the GridSouth and GridFlorida proceedings currently ongoing
before the FERC. It is unknown what impact the future proceedings will have
on the Company's earnings, revenues or prices.
The Company has recorded $33 million and $4 million related to startup
costs for GridSouth and GridFlorida, respectively, at March 31, 2004. The
Company expects to recover these startup costs in conjunction with the
GridSouth and GridFlorida original structures or in conjunction with any
alternate combined transmission structures that emerge.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company performed the annual goodwill impairment test in accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets," for the CCO
segment in the first quarter of 2004, and the annual goodwill impairment
test for the PEC Electric and PEF segments in the second quarter of 2003,
which indicated no impairment. The first annual impairment test for the
Other segment will be performed in the fourth quarter 2004.
The changes in the carrying amount of goodwill for the periods ended March
31, 2004 and December 31, 2003, by reportable segment, are as follows:
(in millions) PEC Electric PEF CCO Other Total
---------------------------------------------------------------
Balance as of January 1, 2003 $ 1,922 $ 1,733 $ 64 $ - $ 3,719
Acquisitions - - - 7 7
---------------------------------------------------------------
Balance as of December 31, 2003 $ 1,922 $ 1,733 $ 64 $ 7 $ 3,726
Purchase price adjustment - - - 3 3
---------------------------------------------------------------
Balance as of March 31, 2004 $ 1,922 $ 1,733 $ 64 $10 $ 3,729
===============================================================
The gross carrying amount and accumulated amortization of the Company's
intangible assets at March 31, 2004 and December 31, 2003, are as follows:
March 31, 2004 December 31, 2003
------------------------------------ ---------------------------------
(in millions) Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
--------------------------------- ---------------------------------
Synthetic fuel intangibles $ 140 $ (69) $ 140 $ (64)
Power agreements acquired 221 (24) 221 (20)
Other 63 (12) 62 (12)
--------------------------------- ---------------------------------
Total $ 424 $(105) $ 423 $ (96)
================================= =================================
13
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
(Section 29) in December 2007. The intangibles related to power agreements
acquired are being amortized based on the economic benefits of the
contracts. Other intangibles are primarily acquired customer contracts and
permits that are amortized over their respective lives.
Amortization expense recorded on intangible assets for the three months
ended March 31, 2004 and 2003, was $9 million and $7 million, respectively.
The estimated annual amortization expense for intangible assets for 2004
through 2008, in millions, is approximately $42, $35, $36, $36 and $17,
respectively.
6. EQUITY
A. 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 millions) Three Months Ended March 31,
----------------------------
2004 2003
----------- ---------
Weighted-average common shares - basic 241 233
Restricted stock awards 1 1
----------- ---------
Weighted-average shares - fully dilutive 242 234
----------- ---------
B. Comprehensive Income
Comprehensive income for the three months ended March 31, 2004 and 2003 was
$97 million and $219 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.
7. FINANCING ACTIVITIES
On March 1, 2004, Progress Energy used available cash and proceeds from the
issuance of commercial paper to retire $500 million 6.55% senior unsecured
notes. Cash and commercial paper capacity was created primarily from the
sale of assets in 2003.
On January 15, 2004, PEC paid at maturity $150 million 5.875% First
Mortgage Bonds with commercial paper proceeds. On April 15, 2004, PEC also
paid at maturity $150 million 7.875% First Mortgage Bonds with commercial
paper proceeds and internally-generated funds.
On March 31, 2004, PEC announced the redemption of $35 million of
Darlington County 6.6% Series Pollution Control Bonds at 102.5% of par, $2
million of New Hanover County 6.30% Series Pollution Control Bonds at
101.5% of par, and $3 million of Chatham County 6.30% Series Pollution
Control Bonds at 101.5% of par. All three series were fully redeemed on
April 30, 2004.
On February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25
million 6.48% medium term notes with excess cash.
For the three months ended March 31, 2004, the Company issued approximately
0.7 million shares of its common stock for approximately $29 million in
proceeds from its Investor Plus Stock Purchase Plan and its employee
benefit plans.
8. BENEFIT PLANS
The Company and some of its subsidiaries have a non-contributory defined
benefit retirement (pension) plan for substantially all full-time
employees. The Company also has supplementary defined benefit pension plans
that provide benefits to higher-level employees. In addition to pension
14
benefits, the Company and some of its subsidiaries provide contributory
other postretirement benefits (OPEB), including certain health care and
life insurance benefits, for retired employees who meet specified criteria.
The components of the net periodic benefit cost for the three months ended
March 31 are:
Other Postretirement
Pension Benefits Benefits
-------------------- ---------------------
(in millions) 2004 2003 2004 2003
-------------------- ---------------------
Service cost $ 13 $ 13 $ 4 $ 3
Interest cost 28 27 8 8
Expected return on plan assets (37) (36) (1) (1)
Amortization of actuarial (gain) loss 5 5 1 1
Other amortization, net - - 1 1
-------------------- ---------------------
Net periodic cost $ 9 $ 9 $ 13 $ 12
Additional cost / (benefit) recognition (a) (4) (4) 1 1
-------------------- ---------------------
Net periodic cost / (benefit) recognized $ 5 $ 5 $ 14 $ 13
==================== =====================
(a) Relates to the acquisition of FPC. See Note 16B of Progress Energy's
Form 10-K for year ended December 31, 2003.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. In accordance with
guidance issued by the FASB in FASB Staff Position FAS 106-1, the Company
has elected to defer accounting for the effects of the Act due to
uncertainties regarding the effects of the implementation of the Act and
the accounting for certain provisions of the Act. Therefore, OPEB
information presented in the financial statements does not reflect the
effects of the Act. When specific authoritative accounting guidance is
issued, it could require plan sponsors to change previously reported
information. The Company is in the early stages of reviewing the Act and
determining its potential effects on the Company.
9. 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 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.
Under its risk management policy, the Company may use a variety of
instruments, including swaps, options and forward contracts, to manage
exposure to fluctuations in commodity prices and interest rates. Such
instruments contain credit risk if the counterparty fails to perform under
the contract. The Company minimizes such risk by performing credit reviews
using, among other things, publicly available credit ratings of such
counterparties. Potential nonperformance by counterparties is not expected
to have a material effect on the consolidated financial position or
consolidated results of operations of the Company.
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. In March
2004, two interest rate swap agreements totaling $200 million were
terminated. These swaps were associated with Progress Energy 5.85% Notes
due in 2008. The loss on the agreements was deferred and is being amortized
over the life of the bonds as these agreements had been designated as fair
value hedges for accounting purposes.
As of March 31, 2004, Progress Energy had $650 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 2006 and April 2007.
In March 2004, PEC entered into a forward swap to hedge its exposure to
interest rates with regard to a future issuance of approximately $300
million of debt. This agreement has a computational period of ten years.
In April 2004, PEC entered into a cash flow hedge to hedge the payment
stream associated with an upcoming lease.
15
The Company holds interest rate collars with a varying notional amount and
maximum of $195 million to hedge floating rate exposure associated with
variable rate long-term debt. The Company is required to hedge 50% of the
amount outstanding under its bank facility through March 2007.
The Company also holds interest rate cash flow hedges, with a total
notional amount of $400 million, related to projected outstanding balances
of commercial paper.
The notional amounts of interest rate derivatives 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.
Progress Fuels Corporation, through Progress Ventures, Inc. (PVI),
periodically enters into derivative instruments to hedge its exposure to
price fluctuations on natural gas sales. As of March 31, 2004, Progress
Fuels Corporation is hedging exposures to the price variability of its
natural gas production through December 2005. These instruments did not
have a material impact on the Company's consolidated financial position or
results of operations.
Nonhedging derivatives, primarily electricity and natural gas contracts,
are entered into for trading purposes and for economic hedging purposes.
While management believes the economic hedges mitigate exposures to
fluctuations in commodity prices, these instruments are not designated as
hedges for accounting purposes and are monitored consistent with trading
positions.
The Company recorded mark-to-market losses of $9 million in the first
quarter of 2004 related to an agreement to provide energy needed to fulfill
a contract obligation.
10. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company currently provides services through the following business
segments: PEC Electric, PEF, Fuels, CCO, Rail Services and Other.
PEC Electric and PEF are primarily 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, the FPSC and the
United States Nuclear Regulatory Commission (NRC). These electric
operations also distribute and sell electricity to other utilities,
primarily on the east coast of the United States.
Fuels' operations, which are located throughout the United States, are
involved in natural gas drilling and production, coal terminal services,
coal mining, synthetic fuel production, fuel transportation and delivery.
CCO's operations, which are located in the southeastern United States,
include nonregulated electric generation operations and marketing
activities.
Rail Services' operations include railcar repair, rail parts reconditioning
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 Services' operations are located
in the United States, Canada and Mexico.
The Other segment, whose operations are in the United States, is composed
of other nonregulated business areas including telecommunications and
energy service operations 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."
In addition to these reportable operating segments, the Company has other
corporate activities that include holding company operations, service
company operations and eliminations. The profit or loss of the identified
segments plus the loss of Corporate represents the Company's total income
from continuing operations before cumulative effect of change in accounting
principle.
16
Revenues
-----------------------------------------------
Income from
Continuing
(in millions) Unaffiliated Intersegment Total Operations Assets
------------- ------------- ------------ --------------- -------------
FOR THE THREE MONTHS
ENDED MARCH 31, 2004
PEC Electric $ 901 $ - $ 901 $ 116 $ 10,669
PEF 784 - 784 49 7,284
Fuels 255 82 337 48 1,164
CCO 33 - 33 (8) 1,764
Rail Services 240 - 240 6 543
Other 21 1 22 (2) 320
Corporate - (83) (83) (101) 4,139
------------- ------------- ------------ --------------- -------------
Consolidated totals $ 2,234 $ - $ 2,234 $ 108 $ 25,883
------------- ------------- ------------ --------------- -------------
FOR THE THREE MONTHS
ENDED MARCH 31, 2003
PEC Electric $ 926 $ - $ 926 $ 135
PEF 728 - 728 71
Fuels 304 82 386 38
CCO 37 - 37 9
Rail Services 178 - 178 (3)
Other 14 4 18 -
Corporate - (86) (86) (43)
------------- ------------- ------------ ---------------
Consolidated totals $ 2,187 $ - $ 2,187 $ 207
------------- ------------- ------------ ---------------
11. OTHER INCOME AND OTHER EXPENSE
Other income and expense includes interest income 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
March 31,
-----------------------------
(in millions) 2004 2003
-------------- -----------
Other income
Net financial trading gain $ 1 $ -
Net energy brokered for resale - (2)
Nonregulated energy and delivery services income 6 5
Contingent value obligation unrealized gain - 2
Income from equity investments 2 -
AFUDC equity 2 2
Other 2 3
-------------- -----------
Total other income $ 13 $ 10
-------------- -----------
Other expense
Nonregulated energy and delivery services expenses $ 4 $ 4
Donations 8 3
Investment losses 4 4
Contingent value obligations unrealized loss 7 -
Write-off of non-trade receivable 7 -
Other 8 5
-------------- -----------
Total other expense $ 38 $ 16
-------------- -----------
Other, net $ (25) $ (6)
============== ===========
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 such as surge protection, appliance services and area light sales,
and delivery, transmission and substation work for other utilities.
17
12. COMMITMENTS AND CONTINGENCIES
Contingencies and significant changes to the commitments discussed in Note
21 of the Company's 2003 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 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
subsidiaries on a stand-alone basis, thereby facilitating the extension of
sufficient credit to accomplish the subsidiaries' intended commercial
purposes. At March 31, 2004, management does not believe conditions are
likely for significant performance under the guarantees of performance
issued by or on behalf of affiliates discussed herein.
Guarantees at March 31, 2004, 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 $ 383
Guarantees supporting nuclear decommissioning 276
Guarantee supporting power supply agreements 307
Standby letters of credit 11
Surety bonds 115
Other guarantees 1
Guarantees issued on behalf of third parties
Other guarantees 10
-----------
Total $ 1,103
===========
Guarantees Supporting Nonregulated Portfolio and Energy Marketing
Activities
Progress Energy has issued approximately $383 million of guarantees on
behalf of Progress Ventures (the business unit) and its subsidiaries for
obligations under tolling agreements, transmission agreements, gas
agreements, construction agreements, fuel procurement agreements and
trading operations. Approximately $38 million of these guarantees were
issued during the first quarter of 2004 to support Fuels and
energy-marketing activities. The majority of the marketing contracts
supported by the guarantees contain language regarding downgrade events,
ratings triggers, monthly netting of exposure and/or payments and offset
provisions in the event of a default. Based upon current business levels at
March 31, 2004, if the Company's ratings were to decline below investment
grade, the Company estimates that it may have to deposit cash or provide
letters of credit or other cash collateral of approximately $115 million
for the benefit of the Company's counterparties to support ongoing
operations within a 90-day period.
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
guarantees from Progress Energy in the amount of $276 million.
Guarantees Supporting Power Supply Agreements
In March 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 County EMC (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
18
$280 million. In the event that Progress Energy's credit ratings fall below
investment grade, Progress Energy may be required to provide additional
security for this guarantee in form and amount (not to exceed $280 million)
acceptable to Jackson. During the third quarter of 2003, PVI entered into
an agreement with Morgan Stanley Capital Group Inc. (Morgan Stanley) to
fulfill Morgan Stanley's obligations to schedule resources and supply
energy to Oglethorpe Power Corporation of Georgia through March 31, 2005.
The Company issued a payment and performance guarantee to Morgan Stanley
related to the power supply agreement. In the event that Progress Energy's
credit ratings fall below investment grade, Progress Energy estimates that
it may have to deposit cash or provide letters of credit or other cash
collateral of approximately $27 million for the benefit of Morgan Stanley
at March 31, 2004.
Standby Letters of Credit
The Company has issued $11 million of 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 March 31, 2004, the Company had $115 million in surety bonds purchased
primarily for purposes such as providing workers' compensation coverage,
obtaining licenses, permits, 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 of approximately $11 million.
Included in the $11 million are $10 million of guarantees issued on behalf
of third parties which is in support of synthetic fuel operations at a
third-party plant. The remaining $1 million in affiliate guarantees is
related primarily to prompt performance payments and other payments subject
to contingencies.
B. Insurance
Both PEC and PEF are insured against public liability for a nuclear
incident up to $10,760 million per occurrence. 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 assessments of up to $101 million for each reactor
owned per occurrence. Payment of such assessments would be made over time
as necessary to limit the payment in any one year to no more than $10
million per reactor owned. Congress is expected to approve revisions to the
Price Anderson Act during 2004 that could include increased limits and
assessments per reactor owned. The final outcome of this matter cannot be
predicted at this time.
C. Claims and Uncertainties
The Company is subject to federal, state and local regulations addressing
hazardous and solid waste management, air and water quality and other
environmental matters.
19
Hazardous and Solid Waste Management
Various organic materials associated with the production of manufactured
gas, generally referred to as coal tar, are regulated under federal and
state laws. The principal regulatory agency that is responsible for a
specific former manufactured gas plant (MGP) site depends largely upon the
state in which the site is located. Both electric utilities and other
potentially responsible parties (PRPs) are participating in, investigating
and, if necessary, remediating former MGP sites with several regulatory
agencies, including, but not limited to, the U.S. Environmental Protection
Agency (EPA), the Florida Department of Environmental Protection (FDEP) and
the North Carolina Department of Environment and Natural Resources,
Division of Waste Management (DWM). In addition, the Company and its
subsidiaries are periodically notified by regulators such as the EPA and
various state agencies of their involvement or potential involvement in
sites, other than MGP sites, that may require investigation and/or
remediation. A discussion of these sites by legal entity follows.
PEC, PEF and Progress Fuels Corporation have filed claims with the
Company's general liability insurance carriers to recover costs arising out
of actual or potential environmental liabilities. Some claims have been
settled and others are still pending. While the Company cannot predict the
outcome of these matters, the outcome is not expected to have a material
effect on the consolidated financial position or results of operations.
The Company is also currently in the process of assessing potential costs
and exposures at other environmentally impaired sites. As the assessments
are developed and analyzed, the Company will accrue costs for the sites to
the extent the costs are probable and can be reasonably estimated.
PEC There are nine former MGP sites and other sites associated with PEC
that have required or are anticipated to require investigation and/or
remediation costs. PEC received insurance proceeds to address costs
associated with environmental liabilities related to its involvement with
some sites. All eligible expenses related to these are charged against a
specific fund containing these proceeds. At March 31, 2004, approximately
$8 million remains in this centralized fund with a related accrual of $8
million recorded for the associated expenses of environmental issues. PEC
does not believe that it can provide an estimate of the reasonably possible
total remediation costs beyond what is currently accrued due to the fact
that investigations have not been completed at all sites. This accrual has
been recorded on an undiscounted basis. PEC measures its liability for
these sites based on available evidence including its experience in
investigating and remediating environmentally impaired sites. The process
often involves assessing and developing cost-sharing arrangements with
other PRPs. PEC will accrue costs for the sites to the extent its liability
is probable and the costs can be reasonably estimated. Presently, PEC
cannot determine the total costs that may be incurred in connection with
the remediation of all sites.
In September 2003, the Company sold NCNG to Piedmont Natural Gas Company,
Inc. As part of the sales agreement, the Company retained responsibility to
remediate five former NCNG MGP sites, all of which also are associated with
PEC, to state standards pursuant to an Administrative Order on Consent.
These sites are anticipated to have investigation or remediation costs
associated with them. NCNG had previously accrued approximately $2 million
for probable and reasonably estimable remediation costs at these sites.
These accruals have been recorded on an undiscounted basis. At the time of
the sale, the liability for these costs and the related accrual was
transferred to PEC. PEC does not believe it can provide an estimate of the
reasonably possible total remediation costs beyond the accrual because
investigations have not been completed at all sites. Therefore, PEC cannot
currently determine the total costs that may be incurred in connection with
the investigation and/or remediation of all sites.
PEF At March 31, 2004, PEF has accrued $20 million for probable and
estimable costs related to various environmental sites. Of this accrual,
$10 million is for costs associated with the remediation of distribution
transformers which are more fully discussed below. The remaining $10
million is related to two former MGP sites and other sites associated with
PEF that have required or are anticipated to require investigation and/or
remediation costs. PEF does not believe that it can provide an estimate of
the reasonably possible total remediation costs beyond what is currently
accrued.
In 2002, PEF accrued approximately $3 million for investigation and
remediation associated with distribution transformers and received approval
from the FPSC for annual recovery of these environmental costs through the
Environmental Cost Recovery Clause (ECRC). By December 2003, PEF accrued an
additional $9 million for similar environmental costs as a result of
increased sites and estimated costs per site. PEF has received approval
from the FPSC to recover these costs through the ECRC. As more activity
occurs at these sites, PEF will assess the need to adjust the accruals.
20
In addition, PEF received insurance proceeds of approximately $3 million to
address costs associated with environmental liabilities related to its
involvement with some MGP and other sites. All eligible expenses related to
these sites are included in the amount accrued above and charged against a
fund containing these proceeds.
These accruals have been recorded on an undiscounted basis. PEF measures
its liability for these sites based on available evidence including its
experience in investigating and remediating environmentally impaired sites.
This process often includes assessing and developing cost-sharing
arrangements with other PRPs. Presently, PEF cannot determine the total
costs that may be incurred in connection with the remediation of all sites.
Florida Progress Corporation In 2001, FPC sold its Inland Marine
Transportation business operated by MEMCO Barge Line, Inc. to AEP
Resources, Inc. FPC established an accrual to address indemnities and
retained an environmental liability associated with the transaction. FPC
estimates that its contractual liability to AEP Resources, Inc., associated
with Inland Marine Transportation, is $4 million at March 31, 2004 and has
accrued such amount. The previous accrual of $10 million was reduced in
2003 based on a change in estimate. This accrual has been determined on an
undiscounted basis. FPC measures its liability for this site based on
estimable and probable remediation scenarios. The Company believes that it
is not reasonably probable that additional costs, which cannot be currently
estimated, will be incurred related to the environmental indemnification
provision beyond the amount accrued. The Company cannot predict the outcome
of this matter.
Certain historical sites exist that are being addressed voluntarily by FPC.
An immaterial accrual has been established to address investigation
expenses related to these sites. The Company cannot determine the total
costs that may be incurred in connection with these sites.
Rail Services is voluntarily addressing certain historical waste sites. The
Company cannot determine the total costs that may be incurred in connection
with these sites.
Air Quality
There has been and may be further proposed legislation requiring reductions
in air emissions for NOx, SO2, carbon dioxide and mercury. Some of these
proposals establish nationwide caps and emission rates over an extended
period of time. This national multi-pollutant approach to air pollution
control could involve significant capital costs which could be material to
the Company's consolidated financial position or results of operations.
Control equipment that will be installed on North Carolina fossil
generating facilities as part of the North Carolina legislation discussed
below may address some of the issues outlined above. However, the Company
cannot predict the outcome of this matter.
The EPA is conducting an enforcement initiative related to a number of
coal-fired utility power plants in an effort to determine whether
modifications at those facilities were subject to New Source Review
requirements or New Source Performance Standards under the Clean Air Act.
Both PEC and PEF were asked to provide information to the EPA as part of
this initiative and cooperated in providing the requested information. The
EPA initiated civil enforcement actions against other unaffiliated
utilities as part of this initiative. Some of these actions resulted in
settlement agreements calling for expenditures by these unaffiliated
utilities, ranging from $1.0 billion to $1.4 billion. A utility that was
not subject to a civil enforcement action settled its New Source Review
issues with the EPA for $300 million. These settlement agreements have
generally called for expenditures to be made over extended time periods,
and some of the companies may seek recovery of the related cost through
rate adjustments or similar mechanisms. The Company cannot predict the
outcome of this matter.
In 2003, the EPA published a final rule addressing routine equipment
replacement under the New Source Review program. The rule defines routine
equipment replacement and the types of activities that are not subject to
New Source Review requirements or New Source Performance Standards under
the Clean Air Act. The rule was challenged in the Federal Appeals Court and
its implementation stayed. The Company cannot predict the outcome of this
matter.
In 1998, the EPA published a final rule at Section 110 of the Clean Air Act
addressing the regional transport of ozone (NOx SIP Call). The EPA's rule
requires 23 jurisdictions, including North Carolina, South Carolina and
Georgia, but not Florida, to further reduce NOx emissions in order to
attain a preset emission level during each year's "ozone season," beginning
May 31, 2004. PEC is currently installing controls necessary to comply with
the rule and expects to be in compliance as required by the final rule.
Total capital expenditures to meet these measures in North and South
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Carolina could reach approximately $370 million, which has not been
adjusted for inflation. The Company has spent approximately $265 million to
date related to these expenditures. Increased operation and maintenance
costs relating to the NOx SIP Call are not expected to be material to the
Company's results of operations. Further controls are anticipated as
electricity demand increases.
In 1997, the EPA issued final regulations establishing a new 8-hour ozone
standard. In 1999, the District of Columbia Circuit Court of Appeals ruled
against the EPA with regard to the federal 8-hour ozone standard. The U.S.
Supreme Court has upheld, in part, the District of Columbia Circuit Court
of Appeals' decision. In April 2004, the EPA identified areas that do not
meet the standard. The states with identified areas, including North and
South Carolina are proceeding with the implementation of the federal 8-hour
ozone standard. Both states promulgated final regulations, which will
require PEC to install NOx controls under the states' 8-hour standard. The
costs of those controls are included in the $370 million cost estimate
above. However, further technical analysis and rulemaking may result in a
requirement for additional controls at some units. The Company cannot
predict the outcome of this matter.
The EPA published a final rule approving petitions under Section 126 of the
Clean Air Act. This rule, as originally promulgated, required certain
sources to make reductions in NOx emissions by May 1, 2003. The final rule
also includes a set of regulations that affect NOx emissions from sources
included in the petitions. The North Carolina coal-fired electric
generating plants are included in these petitions. Acceptable state plans
under the NOx SIP Call can be approved in lieu of the final rules the EPA
approved as part of the Section 126 petitions. In April 2002, the EPA
published a final rule harmonizing the dates for the Section 126 rule and
the NOx SIP Call. The new compliance date for all affected sources is now
May 31, 2004, rather than May 1, 2003. The EPA has approved North
Carolina's NOx SIP Call rule and has indicated it will rescind the Section
126 rule in a future rulemaking. The Company expects a favorable outcome of
this matter.
In June 2002, legislation was enacted in North Carolina requiring the
state's electric utilities to reduce the emissions of NOx and SO2 from
coal-fired power plants. Progress Energy expects its capital costs to meet
these emission targets will be approximately $813 million by 2013. PEC has
expended approximately $32 million of these capital costs through March 31,
2004. PEC currently has approximately 5,100 MW of coal-fired generation
capacity in North Carolina that is affected by this legislation. The
legislation requires the emissions reductions to be completed in phases by
2013, and applies to each utility's total system rather than setting
requirements for individual power plants. The legislation also freezes the
utilities' base rates for five years unless there are extraordinary events
beyond the control of the utilities or unless the utilities persistently
earn a return substantially in excess of the rate of return established and
found reasonable by the NCUC in the utilities' last general rate case.
Further, the legislation allows the utilities to recover from their retail
customers the projected capital costs during the first seven years of the
ten-year compliance period beginning on January 1, 2003. The utilities must
recover at least 70% of their projected capital costs during the five-year
rate freeze period. PEC recognized amortization of $15 million and $20
million in the quarters ended March 31, 2004 and 2003, respectively.
Pursuant to the law, PEC entered into an agreement with the state of North
Carolina to transfer to the state certain NOx and SO2 emissions allowances
that result from compliance with the collective NOx and SO2 emissions
limitations set out in the law. The law also requires the state to
undertake a study of mercury and carbon dioxide emissions in North
Carolina. Operation and maintenance costs will increase due to the
additional personnel, materials and general maintenance associated with the
equipment. Operation and maintenance expenses are recoverable through base
rates, rather than as part of this program. Progress Energy cannot predict
the future regulatory interpretation, implementation or impact of this law.
In 2004, a bill was introduced in the Florida legislature that would
require significant reductions in NOx, SO2 and particulate emissions from
certain coal, natural gas and oil-fired generating units owned or operated
by investor-owned electric utilities, including PEF. The NOx and SO2
reductions would be effective beginning with calendar year 2010 and the
particulate reductions would be effective beginning with calendar year
2012. Under the proposed legislation, the FPSC would be authorized to allow
the utilities to recover the costs of compliance with the emission
reductions over a period not greater than seven years beginning in 2005,
but the utilities' rates would be frozen at 2004 levels for at least five
years of the maximum recovery period. The 2004 legislature took no action
on this matter.
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In 1997, the EPA's Mercury Study Report and Utility Report to Congress
conveyed that mercury is not a risk to the average American and expressed
uncertainty about whether reductions in mercury emissions from coal-fired
power plants would reduce human exposure. Nevertheless, the EPA determined
in 2000 that regulation of mercury emissions from coal-fired power plants
was appropriate. In 2003, the EPA proposed alternative control plans that
would limit mercury emissions from coal-fired power plants. The first, a
Maximum Achievable Control Technology (MACT) standard applicable to every
coal-fired plant, would require compliance in 2008. The second, a mercury
cap and trade program, would require limits to be met in two phases, 2010
and 2018. The mercury rule is expected to become final in March 2005.
Achieving compliance with the proposal could involve significant capital
costs which could be material to the Company's consolidated financial
position or results of operations. The Company cannot predict the outcome
of this matter.
In conjunction with the proposed mercury rule, the EPA proposed a MACT
standard to regulate nickel emissions from residual oil-fired units. The
agency estimates the proposal will reduce national nickel emissions to
approximately 103 tons. The rule is expected to become final in March 2005.
The Company cannot predict the outcome of this matter.
In December 2003, the EPA released its proposed Interstate Air Quality Rule
(commonly known as the Fine Particulate Transport Rule and/or the Regional
Transport Rule). The EPA's proposal requires 28 jurisdictions, including
North Carolina, South Carolina, Georgia and Florida, to further reduce NOx
and SO2 emissions in order to attain preset state NOx and SO2 emissions
levels (which have not yet been determined). The rule is expected to become
final in 2004. The air quality controls already installed for compliance
with the NOx SIP Call and currently planned by the Company for compliance
with the North Carolina legislation will reduce the costs required to meet
the requirements of the Interstate Air Quality Rule for the Company's North
Carolina units. Additional compliance costs will be determined later this
year once the rule is better defined.
In March 2004, the North Carolina Attorney General filed a petition with
the EPA under Section 126 of the Clean Air Act, asking the federal
government to force coal-fired power plants in thirteen other states,
including South Carolina to reduce their NOx and SO2 emissions. The state
of North Carolina contends these out-of-state polluters are interfering
with North Carolina's ability to meet national air quality standards for
ozone and particulate matter. The EPA has not made a determination on the
Section 126 petition, and the Company cannot predict the outcome of this
matter.
Water Quality
As a result of the operation of certain control equipment needed to address
the air quality issues outlined above, new wastewater streams may be
generated at the applicable facilities. Integration of these new wastewater
streams into the existing wastewater treatment processes may result in
permitting, construction and treatment challenges to PEC in the immediate
and extended future.
After many years of litigation and settlement negotiations the EPA
published regulations in February 2004 for the implementation of Section
316(b) of the Clean Water Act. The purpose of these regulations is to
minimize adverse environmental impacts caused by cooling water intake
structures and intake systems. Over the next several years these
regulations will impact the larger base load generation facilities and may
require the facilities to mitigate the effects to aquatic organisms by
constructing intake modifications or undertaking other restorative
activities. Substantial costs could be incurred by the facilities in order
to comply with the new regulation. The Company cannot predict the outcome
and impacts to the facilities at this time.
The EPA has published for comment a draft Environmental Impact Statement
(EIS) for surface coal mining (sometimes referred to as "mountaintop
mining") and valley fills in the Appalachian coal region, where Progress
Fuels currently operates a surface mine and may operate others in the
future. The final EIS, when published, may affect regulations for the
permitting of mines and the cost of compliance with environmental
regulations. Regulatory changes for mining may also affect the cost of fuel
for the coal-fueled electric generating plants. The Company cannot predict
the outcome of this matter.
23
Other Environmental Matters
The Kyoto Protocol was adopted in 1997 by the United Nations to address
global climate change by reducing emissions of carbon dioxide and other
greenhouse gases. The United States has not adopted the Kyoto Protocol;
however, a number of carbon dioxide emissions control proposals have been
advanced in Congress and by the Bush administration. The Bush
administration favors voluntary programs. Reductions in carbon dioxide
emissions to the levels specified by the Kyoto Protocol and some
legislative proposals could be materially adverse to the Company's
consolidated financial position or results of operations if associated
costs cannot be recovered from customers. The Company favors the voluntary
program approach recommended by the administration and is evaluating
options for the reduction, avoidance and sequestration of greenhouse gases.
However, the Company cannot predict the outcome of this matter.
Other Contingencies
1. As required under the Nuclear Waste Policy Act of 1982, PEC and PEF each
entered into a contract with the United States Department of Energy (DOE)
under which the DOE agreed to begin taking spent nuclear fuel by no later
than January 31, 1998. All similarly situated utilities were required to
sign the same standard contract.
In 1995, the DOE issued a final interpretation that it did not have an
unconditional obligation to take spent nuclear fuel by January 31, 1998. In
Indiana Michigan Power v. DOE, the Court of Appeals vacated the DOE's final
interpretation and ruled that the DOE had an unconditional obligation to
begin taking spent nuclear fuel. The Court did not specify a remedy because
the DOE was not yet in default.
After the DOE failed to comply with the decision in Indiana Michigan Power
v. DOE, a group of utilities petitioned the Court of Appeals in Northern
States Power (NSP) v. DOE, seeking an order requiring the DOE to begin
taking spent nuclear fuel by January 31, 1998. The DOE took the position
that their delay was unavoidable, and the DOE was excused from performance
under the terms and conditions of the contract. The Court of Appeals found
that the delay was not unavoidable, but did not order the DOE to begin
taking spent nuclear fuel, stating that the utilities had a potentially
adequate remedy by filing a claim for damages under the contract.
After the DOE failed to begin taking spent nuclear fuel by January 31,
1998, a group of utilities filed a motion with the Court of Appeals to
enforce the mandate in NSP v. DOE. Specifically, this group of utilities
asked the Court to permit the utilities to escrow their waste fee payments,
to order the DOE not to use the waste fund to pay damages to the utilities,
and to order the DOE to establish a schedule for disposal of spent nuclear
fuel. The Court denied this motion based primarily on the grounds that a
review of the matter was premature, and that some of the requested remedies
fell outside of the mandate in NSP v. DOE.
Subsequently, a number of utilities each filed an action for damages in the
Federal Court of Claims. The U.S. Circuit Court of Appeals (Federal
Circuit) ruled that utilities may sue the DOE for damages in the Federal
Court of Claims instead of having to file an administrative claim with the
DOE.
In January 2004, PEC and PEF filed a complaint with the DOE claiming that
the DOE breached the Standard Contract for Disposal of Spent Nuclear Fuel
by failing to accept spent nuclear fuel from various Progress Energy
facilities on or before January 31, 1998. Damages due to DOE's breach will
likely exceed $100 million. Similar suits have been initiated by over two
dozen other utilities.
In July 2002, Congress passed an override resolution to Nevada's veto of
DOE's proposal to locate a permanent underground nuclear waste storage
facility at Yucca Mountain, Nevada. DOE plans to submit a license
application for the Yucca Mountain facility by the end of 2004. In November
2003, Congressional negotiators approved $580 million for fiscal year 2004
for the Yucca Mountain project, $123 million more than the previous year.
PEC and PEF cannot predict the outcome of this matter.
24
With certain modifications and additional approval by the NRC including the
installation of onsite dry storage facilities at Robinson (2005) and
Brunswick (2008), PEC's spent nuclear fuel storage facilities will be
sufficient to provide storage space for spent fuel generated on PEC's
system through the expiration of the operating licenses for all of PEC's
nuclear generating units.
PEF is currently storing spent nuclear fuel onsite in spent fuel pools.
PEF's nuclear unit, Crystal River Unit No. 3 (CR3), has sufficient storage
capacity in place for fuel consumed through the end of the expiration of
the current license in 2016. PEF will seek renewal of the CR3 operating
license and if approved, additional dry storage may be necessary.
2. In November 2001, Strategic Resource Solutions Corp. (SRS) filed a claim
against the San Francisco Unified School District (the District) and other
defendants claiming that SRS is entitled to approximately $10 million in
unpaid contract payments and delay and impact damages related to the
District's $30 million contract with SRS. In March 2002, the District filed
a counterclaim, seeking compensatory damages and liquidated damages in
excess of $120 million, for various claims, including breach of contract
and demand on a performance bond. SRS has asserted defenses to the
District's claims. SRS has amended its claims and asserted new claims
against the District and other parties, including a former SRS employee and
a former District employee.
In March 2003, the City Attorney and the District filed new claims in the
form of a cross-complaint against SRS, Progress Energy, Inc., Progress
Energy Solutions, Inc., and certain individuals, alleging fraud, false
claims, violations of California statutes, and seeking compensatory
damages, punitive damages, liquidated damages, treble damages, penalties,
attorneys' fees and injunctive relief. The filing states that the City and
the District seek "more than $300 million in damages and penalties." PEC
was added as a cross-defendant later in 2003.
The Company, SRS, Progress Energy Solutions, Inc. and PEC all have denied
the District's allegations and cross-claims. Discovery is in progress in
the matter. The case has been assigned to a judge under the Sacramento
County superior court's case management rules, and the judge and the
parties have been conferring on scheduling and processes to narrow or
resolve issues, if possible, and to get the case ready for trial. No trial
date has been set. SRS and the Company are vigorously defending and
litigating all of these claims. In November 2003, PEC filed a motion to
dismiss the plaintiffs' first amended complaint. The Company cannot predict
the outcome of this matter, but will vigorously defend against the
allegations.
3. In August 2003, PEC was served as a co-defendant in a purported class
action lawsuit styled as Collins v. Duke Energy Corporation et al, in South
Carolina's Circuit Court of Common Pleas for the Fifth Judicial Circuit.
PEC is one of three electric utilities operating in South Carolina named in
the suit. The plaintiffs are seeking damages for the alleged improper use
of electric easements but have not asserted a dollar amount for their
damage claims. The complaint alleges that the licensing of attachments on
electric utility poles, towers and other structures to nonutility third
parties or telecommunication companies for other than the electric
utilities' internal use along the electric right-of-way constitutes a
trespass.
In September 2003, PEC filed a motion to dismiss all counts of the
complaint on substantive and procedural grounds. In October 2003, the
plaintiffs filed a motion