-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NJ6/fuCm6nkfECPZGSY4i4S9ZcRocsIdcbribnNlF7eAsG77cyRL7UvzexRKkvmJ pzkyh1MY3SUgKlGXWWcuHA== 0000017797-99-000009.txt : 19990813 0000017797-99-000009.hdr.sgml : 19990813 ACCESSION NUMBER: 0000017797-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAROLINA POWER & LIGHT CO CENTRAL INDEX KEY: 0000017797 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 560165465 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03382 FILM NUMBER: 99685851 BUSINESS ADDRESS: STREET 1: 411 FAYETTEVILLE ST CITY: RALEIGH STATE: NC ZIP: 27601 BUSINESS PHONE: 9195466111 10-Q 1 CAROLINA POWER & LIGHT COMPANY'S 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 1-3382 ------ CAROLINA POWER & LIGHT COMPANY ------------------------------ (Exact name of registrant as specified in its charter) North Carolina 56-0165465 -------------- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 411 Fayetteville Street, Raleigh, North Carolina 27601-1748 ------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) 919-546-6111 ------------ (Registrant's telephone number, including area code) NONE ---- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No . --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock (Without Par Value) shares outstanding at July 31, 1999: 159,581,559. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS ------------------------------------------ The matters discussed throughout this 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. Examples of forward-looking statements discussed in this Form 10-Q, PART 1, ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", include, but are not limited to, statements under the heading "Other Matters" concerning the effects of electric utility industry restructuring and the outcome of the Company's Year 2000 compliance efforts. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no 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 should be considered with respect to any forward-looking statements made throughout this document include, but are not limited to, the following: Governmental policies and regulatory actions (including those of the Federal Energy Regulatory Commission, the Environmental Protection Agency, the Nuclear Regulatory Commission, the Department of Energy, the North Carolina Utilities Commission and the South Carolina Public Service Commission); general industry trends; operation of nuclear power facilities; availability of nuclear waste storage facilities; nuclear decommissioning costs; changes in the economy of areas served by the Company; legislative and regulatory initiatives that impact the speed and degree of industry restructuring; ability to obtain adequate and timely rate recovery of costs, including potential stranded costs arising from industry restructuring; competition from other energy suppliers; ability of the Company and its suppliers and customers to successfully address Year 2000 readiness issues; weather conditions and catastrophic weather-related damage; market demand for energy; inflation; capital market conditions; the success of the Company's diversified businesses; unanticipated changes in operating expenses and capital expenditures and legal and administrative proceedings. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of the Company. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the effect of each such factor on the Company. PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements - ------------------------------------------------------------------------------------------------------------ Carolina Power & Light Company (ORGANIZED UNDER THE LAWS OF NORTH CAROLINA) CONSOLIDATED INTERIM FINANCIAL STATEMENTS (NOT AUDITED BY INDEPENDENT AUDITORS) JUNE 30, 1999 - ------------------------------------------------------------------------------------------------------------
Statements of Income Three Months Ended Six Months Ended June 30 June 30 (In thousands except per share amounts) 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 733,999 $ 736,151 $1,472,558 $1,488,447 Diversified businesses 28,823 12,790 53,166 21,990 - ----------------------------------------------------------------------------------------------------------- Total Operating Revenues 762,822 748,941 1,525,724 1,510,437 Operating Expenses Fuel 142,918 135,903 281,882 279,705 Purchased power 96,961 102,711 182,183 188,052 Other operation and maintenance 164,819 165,607 307,786 322,400 Depreciation and amortization 121,284 123,597 241,840 245,610 Taxes other than on income 34,669 34,571 70,670 69,451 Harris Plant deferred costs, net 1,964 2,028 3,488 3,807 Diversified businesses 42,836 24,931 81,096 47,552 - ----------------------------------------------------------------------------------------------------------- Total Operating Expenses 605,451 589,348 1,168,945 1,156,577 - ----------------------------------------------------------------------------------------------------------- Operating Income 157,371 159,593 356,779 353,860 - ----------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 2,270 1,037 4,563 4,474 Other, net (8,250) (3,395) (15,246) (11,424) - ----------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (5,980) (2,358) (10,683) (6,950) - ----------------------------------------------------------------------------------------------------------- Income before Interest Charges and Income Taxes 151,391 157,235 346,096 346,910 - ----------------------------------------------------------------------------------------------------------- Interest Charges Long-term debt 43,993 43,998 86,394 86,820 Other interest charges 3,042 2,719 5,803 5,330 Allowance for borrowed funds used during (2,964) (1,487) (4,792) (2,898) construction - ----------------------------------------------------------------------------------------------------------- Net Interest Charges 44,071 45,230 87,405 89,252 - ----------------------------------------------------------------------------------------------------------- Income before Income Taxes 107,320 112,005 258,691 257,658 Income Taxes 44,161 46,536 103,320 105,619 - ----------------------------------------------------------------------------------------------------------- Net Income 63,159 65,469 155,371 152,039 Preferred Stock Dividend Requirements 742 741 1,483 1,483 - ----------------------------------------------------------------------------------------------------------- Earnings for Common Stock $ 62,417 $ 64,728 $ 153,888 $ 150,556 - ----------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 144,466 143,892 144,380 143,829 Basic Earnings per Common Share $ 0.43 $ 0.45 $ 1.07 $ 1.05 Diluted Earnings per Common Share $ 0.43 $ 0.45 $ 1.06 $ 1.05 Dividends Declared per Common Share $ 0.500 $ 0.485 $ 1.000 $ 0.970 - ----------------------------------------------------------------------------------------------------------- See Supplemental Data and Notes to Consolidated Interim Financial Statements.
Carolina Power & Light Company BALANCE SHEETS June 30 December 31 (In thousands) 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------------ ASSETS Electric Utility Plant Electric utility plant in service $ 10,418,318 $ 10,199,995 $10,280,638 Accumulated depreciation (4,685,796) (4,358,703) (4,496,632) - ------------------------------------------------------------------------------------------------------------------------ Electric utility plant in service, net 5,732,522 5,841,292 5,784,006 Held for future use 11,984 11,886 11,984 Construction work in progress 408,959 196,555 306,866 Nuclear fuel, net of amortization 184,095 218,506 196,684 - ------------------------------------------------------------------------------------------------------------------------ Total Electric Utility Plant, Net 6,337,560 6,268,239 6,299,540 - ------------------------------------------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents 81,303 40,336 28,872 Accounts receivable 448,655 484,812 406,418 Taxes receivable - - 21,000 Fuel 90,806 88,595 78,086 Materials and supplies 142,458 143,707 146,615 Deferred fuel cost 44,411 25,914 42,647 Prepayments 8,175 2,282 18,446 Other current assets 82,680 68,781 58,772 - ------------------------------------------------------------------------------------------------------------------------ Total Current Assets 898,488 854,427 800,856 - ------------------------------------------------------------------------------------------------------------------------ Deferred Debits and Other Assets Income taxes recoverable through future rates 253,000 302,904 277,894 Abandonment costs 9,005 24,397 16,083 Harris Plant deferred costs 58,341 61,839 60,021 Unamortized debt expense 16,922 37,712 27,010 Nuclear decommissioning trust funds 345,947 286,301 310,702 Miscellaneous other property and investments 398,087 253,380 294,678 Other assets and deferred debits 248,767 293,946 260,622 - ------------------------------------------------------------------------------------------------------------------------ Total Deferred Debits and Other Assets 1,330,069 1,260,479 1,247,010 - ------------------------------------------------------------------------------------------------------------------------ Total Assets $ 8,566,117 $ 8,383,145 $8,347,406 - ------------------------------------------------------------------------------------------------------------------------ CAPITALIZATION AND LIABILITIES Capitalization Common stock equity $ 2,975,565 $ 2,836,285 $ 2,949,305 Preferred stock - redemption not required 59,376 59,376 59,376 Long-term debt, net 2,716,447 2,581,325 2,614,414 - ------------------------------------------------------------------------------------------------------------------------ Total Capitalization 5,751,388 5,476,986 5,623,095 - ------------------------------------------------------------------------------------------------------------------------ Current Liabilities Current portion of long-term debt 201,610 168,075 53,172 Accounts payable 231,787 277,812 265,163 Taxes accrued 35,280 46,431 - Interest accrued 47,104 43,034 39,941 Dividends declared 74,385 72,101 74,400 Other current liabilities 114,282 99,451 108,824 - ------------------------------------------------------------------------------------------------------------------------ Total Current Liabilities 704,448 706,904 541,500 - ------------------------------------------------------------------------------------------------------------------------ Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,636,415 1,689,799 1,678,924 Accumulated deferred investment tax credits 206,722 216,925 211,822 Other liabilities and deferred credits 267,144 292,531 292,065 - ------------------------------------------------------------------------------------------------------------------------ Total Deferred Credits and Other Liabilities 2,110,281 2,199,255 2,182,811 - ------------------------------------------------------------------------------------------------------------------------ Total Capitalization and Liabilities $ 8,566,117 $ 8,383,145 $ 8,347,406 - ------------------------------------------------------------------------------------------------------------------------ SCHEDULES OF COMMON STOCK EQUITY (In thousands) Common stock (without par value, authorized 200,000,000, issued and $ 1,383,143 $ 1,369,636 $ 1,374,773 outstanding 151,337,503, 151,330,894 and 151,337,503 shares, respectively) Unearned ESOP common stock (144,254) (157,306) (152,979) Capital stock issuance expense (790) (790) (790) Retained earnings 1,737,466 1,624,745 1,728,301 - ------------------------------------------------------------------------------------------------------------------------ Total Common Stock Equity $ 2,975,565 $ 2,836,285 $ 2,949,305 - ------------------------------------------------------------------------------------------------------------------------ See Supplemental Data and Notes to Consolidated Interim Financial Statements.
Carolina Power & Light Company STATEMENTS OF CASH FLOWS Three Months Ended Six Months Ended June 30 June 30 (In thousands) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 63,159 $ 65,469 $ 155,371 $ 152,039 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 143,534 144,886 286,905 290,047 Harris Plant deferred costs 1,065 1,074 1,679 1,887 Deferred income taxes (15,407) (13,145) (32,805) (36,602) Investment tax credit (2,550) (2,551) (5,100) (5,103) Deferred fuel cost (credit) (2,172) (11,862) (1,765) (5,284) Net (increase) decrease in receivables, inventories, prepaid expenses and other current assets (61,429) (117,960) (69,861) (140,392) Net increase (decrease) in payables and accrued 36,676 50,781 55,432 94,011 expenses Miscellaneous 32,260 10,085 27,080 (3,046) - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 195,136 126,777 416,936 347,557 - -------------------------------------------------------------------------------------------------------------------- Investing Activities Gross property additions (139,938) (94,464) (309,004) (171,798) Nuclear fuel additions (5,439) (15,179) (32,573) (71,283) Contributions to nuclear decommissioning trust (7,712) (7,688) (17,995) (17,939) Net cash flow of company-owned life insurance program (6,729) (2,797) (6,850) (2,524) Investment in non-electric activities (41,611) (20,084) (106,545) (40,055) - -------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (201,429) (140,212) (472,967) (303,599) - -------------------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt - 1,001 400,970 1,001 Net increase (decrease) in commercial paper classified as long-term debt 117,500 130,270 (144,750) 164,400 Retirement of long-term debt (47) (40,000) (1,683) (41,476) Dividends paid on common and preferred stock (73,264) (70,712) (146,219) (141,340) Miscellaneous (187) (633) 144 (633) - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing 44,002 19,926 108,462 (18,048) Activities - -------------------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 37,709 6,491 52,431 25,910 Cash and Cash Equivalents at Beginning of the Period 43,594 33,845 28,872 14,426 - -------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of the Period $ 81,303 $ 40,336 $ 81,303 $ 40,336 - -------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest $ 28,351 $ 35,170 $ 81,370 $ 91,127 income taxes $ 108,337 $ 120,724 $ 109,493 $ 126,794 - -------------------------------------------------------------------------------------------------------------------- See Supplemental Data and Notes to Consolidated Interim Financial Statements.
Carolina Power & Light Company SUPPLEMENTAL DATA Three Months Ended Six Months Ended June 30 June 30 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) Retail $ 580,155 $ 593,570 $ 1,182,419 $ 1,191,332 Wholesale 136,832 128,355 258,120 263,775 Miscellaneous revenue 17,012 14,226 32,019 33,340 - ----------------------------------------------------------------------------------------------------------- Total Electric 733,999 736,151 1,472,558 1,488,447 Diversified businesses 28,823 12,790 53,166 21,990 - ----------------------------------------------------------------------------------------------------------- Total Operating Revenues $ 762,822 $ 748,941 $ 1,525,724 $ 1,510,437 - ----------------------------------------------------------------------------------------------------------- Energy Sales (millions of kWh) Retail Residential 2,753 2,868 6,416 6,306 Commercial 2,689 2,640 5,121 4,999 Industrial 3,827 3,904 7,111 7,383 Other 326 318 638 632 - ----------------------------------------------------------------------------------------------------------- Total Retail 9,595 9,730 19,286 19,320 Wholesale 3,772 3,447 7,042 7,316 - ----------------------------------------------------------------------------------------------------------- Total Energy Sales 13,367 13,177 26,328 26,636 - ----------------------------------------------------------------------------------------------------------- Energy Supply (millions of kWh) Generated - coal 6,840 6,779 13,392 13,565 nuclear 5,405 5,069 11,145 10,658 hydro 145 266 355 641 combustion turbines 47 140 67 159 Purchased 1,392 1,415 2,320 2,571 - ----------------------------------------------------------------------------------------------------------- Total Energy Supply (Company Share) 13,829 13,669 27,279 27,594 - ----------------------------------------------------------------------------------------------------------- Detail of Income Taxes (in thousands) Income tax expense (credit) - current $ 62,118 $ 62,232 $ 141,225 $ 147,324 deferred (15,407) (13,145) (32,805) (36,602) investment tax credit (2,550) (2,551) (5,100) (5,103) - ----------------------------------------------------------------------------------------------------------- Total Income Tax Expense $ 44,161 $ 46,536 $ 103,320 $ 105,619 - ----------------------------------------------------------------------------------------------------------- See Notes to Consolidated Interim Financial
Carolina Power & Light Company NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION -------------------------------------- A. Organization. Carolina Power & Light Company (the Company) is ------------- a public service corporation primarily engaged in the generation, transmission, distribution and sale of electricity in portions of North and South Carolina. The Company has no other material segments of business. Operating income on the Statements of Income includes approximately $171 million and $172 million attributable to the electric segment for the three months ended June 30, 1999 and 1998, respectively, and $385 million and $379 million for the six months ended June 30, 1999 and 1998, respectively. B. Basis of Presentation. These consolidated interim financial ---------------------- statements should be read in conjunction with the Company's consolidated financial statements included in the Company's 1998 Annual Report on Form 10-K. The amounts are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods. Due to temperature variations between seasons of the year 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. Certain amounts for 1998 have been reclassified to conform to the 1999 presentation, with no effect on previously reported net income or common stock equity. In preparing financial statements that conform with generally accepted accounting principles, management must make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses reflected during the reporting period. Actual results could differ from those estimates. 2. NCNG MERGER ----------- On July 15, 1999, the Company completed the acquisition of North Carolina Natural Gas Corporation (NCNG) pursuant to the terms of an Agreement and Plan of Merger by and between the Company and NCNG dated November 10, 1998, as amended and restated April 22, 1999. Each outstanding share of NCNG common stock was converted into the right to receive 0.8054 shares of Company common stock which amounted to 8,244,056 Company shares, with cash being paid in lieu of fractional shares. NCNG is operating as a wholly-owned subsidiary of the Company. In conjunction with the merger, the Company and NCNG signed a joint stipulation agreement with the Public Staff of the North Carolina Utilities Commission (NCUC) in which the Company agreed to cap base retail electric rates, with limited exceptions, through December 2004, and NCNG agreed to cap margin rates for gas sales and transportation services, with limited exceptions, through November 1, 2003. Management is of the opinion that this agreement will not have a material adverse effect on the consolidated results of operations or financial position of the Company. 3. NUCLEAR DECOMMISSIONING ----------------------- In the Company's retail jurisdictions, provisions for nuclear decommissioning costs are approved by the NCUC and the South Carolina Public Service Commission and are based on site-specific estimates that include the costs for removal of all radioactive and other structures at the site. In the wholesale jurisdiction, the provisions for nuclear decommissioning costs are based on amounts agreed upon in applicable rate agreements. Based on the site-specific estimates discussed below, and using an assumed after-tax earnings rate of 7.75% and an assumed cost escalation rate of 4%, current levels of rate recovery for nuclear decommissioning costs are adequate to provide for decommissioning of the Company's nuclear facilities. The Company's most recent site-specific estimates of decommissioning costs were developed in 1998, using 1998 cost factors, and are based on prompt dismantlement decommissioning, which reflects the cost of removal of all radioactive and other structures currently at the site, with such removal occurring shortly after operating license expiration. These estimates, in 1998 dollars, are $279.8 million for Robinson Unit No. 2, $299.6 million for Brunswick Unit No. 1, $298.7 million for Brunswick Unit No. 2 and $328.1 million for the Harris Plant. The estimates are subject to change based on a variety of factors including, but not limited to, cost escalation, changes in technology applicable to nuclear decommissioning and changes in federal, state or local regulations. The cost estimates exclude the portion attributable to North Carolina Eastern Municipal Power Agency, which holds an undivided ownership interest in the Brunswick and Harris nuclear generating facilities. Operating licenses for the Company's nuclear units expire in the year 2010 for Robinson Unit No. 2, 2016 for Brunswick Unit No. 1, 2014 for Brunswick Unit No. 2 and 2026 for the Harris Plant. The Financial Accounting Standards Board is proceeding with its project regarding accounting practices related to obligations associated with the retirement of long-lived assets, and an exposure draft of a proposed accounting standard is expected to be issued during the last half of 1999. It is uncertain when the final statement will be issued and what effects it may ultimately have on the Company's accounting for nuclear decommissioning and other retirement costs. 4. COMMITMENTS AND CONTINGENCIES ----------------------------- Contingencies existing as of the date of these statements are described below. No significant changes have occurred since December 31, 1998, with respect to the commitments discussed in Note 12 of the financial statements included in the Company's 1998 Annual Report on Form 10-K. A. Applicability of SFAS-71. As a regulated entity, the Company ------------------------- is subject to the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS-71). Accordingly, the Company records certain assets and liabilities resulting from the effects of the ratemaking process, which would not be recorded under generally accepted accounting principles for unregulated entities. The Company's ability to continue to meet the criteria for application of SFAS-71 may be affected in the future by competitive forces, deregulation and restructuring in the electric utility industry. In the event that SFAS-71 no longer applied to a separable portion of the Company's operations, related regulatory assets and liabilities would be eliminated unless an appropriate regulatory recovery mechanism is provided. Additionally, these factors could result in an impairment of electric utility plant assets as determined pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company's regulatory assets totaled $426 million, $493 million and $480 million as of June 30, 1999 and 1998 and December 31, 1998, respectively. B. Claims and Uncertainties. a) The Company is subject to --------------------------- federal, state and local regulations addressing air and water quality, hazardous and solid waste management and other environmental matters. Various organic materials associated with the production of manufactured gas, generally referred to as coal tar, are regulated under various federal and state laws. There are several manufactured gas plant (MGP) sites to which the Company and certain entities that were later merged into the Company had some connection. In this regard, the Company, along with others, is participating in a cooperative effort with the North Carolina Department of Environment and Natural Resources, Division of Waste Management (DWM), which has established a uniform framework to address MGP sites. The investigation and remediation of specific MGP sites will be addressed pursuant to one or more Administrative Orders on Consent (AOC) between the DWM and the potentially responsible party or parties. The Company has signed AOCs to investigate certain sites and anticipates signing AOCs to remediate sites as well. The Company continues to identify parties connected to individual MGP sites, and to determine the relative relationships of the Company and other parties to those sites and the degree to which the Company will undertake efforts with others at individual sites. The Company does not expect the costs associated with these sites to be material to the financial position and results of operations of the Company. The Company has been notified by regulators such as the North Carolina Department of Environment and Natural Resources, the South Carolina Department of Health and Environmental Control, and the United States Environmental Protection Agency of its involvement or potential involvement in several sites, other than MGP sites, that may require investigation and/or remediation. Although the Company may incur costs at these sites, based upon the current status of the sites, the Company does not expect those costs to be material to the results of operations of the Company. The Company carries a liability for the estimated costs associated with certain remedial activities. This liability is not material to the financial position of the Company. b) As required under the Nuclear Waste Policy Act of 1982, the Company entered into a contract with the U.S. 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 April of 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 U.S. 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 (including the ---------------------- Company) petitioned the U.S. 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. 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 issued an order which precluded DOE from treating the delay as an unavoidable delay. However, the Court of Appeals 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 (including the Company) filed a motion with the U.S. Court of Appeals to enforce the mandate in NSP v. DOE. Specifically, the 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 Court of Claims and before the Court of Appeals. The Company is in the process of evaluating whether it should file a similar action for damages. In NSP v. United ------------- States, the United States Court of Claims decided that NSP ------ must pursue its administrative remedies instead of filing an action in the Court of Claims. NSP has filed an interlocutory appeal to the U.S. Court of Appeals based on NSP's position that the Court of Claims has jurisdiction to decide the matter. A group of utilities (including the Company) has submitted an amicus brief in support of NSP's position. The Company also continues to monitor legislation that has been introduced in Congress which might provide some limited relief. The Company cannot predict the outcome of this matter. c) In the opinion of management, liabilities, if any, arising under other pending claims would not have a material effect on the financial position and results of operations of the Company. 5. EARNINGS PER COMMON SHARE ------------------------- Restricted stock awards and contingently issuable shares had a dilutive effect on earnings per share and increased the weighted-average number of common shares outstanding for dilutive purposes by 289,087 and 282,988 for the three and six months ended June 30, 1999, respectively, and by 260,173 and 237,980 for the three and six months ended June 30, 1998, respectively. The weighted-average number of common shares outstanding for dilutive purposes was 144.8 million and 144.7 million for three and six months ended June 30, 1999, respectively, and 144.2 million and 144.1 million for the three and six months ended June 30, 1998, respectively. 6. NEW ACCOUNTING STANDARD ----------------------- The Financial Accounting Standards Board (FASB) has delayed the effective date for Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". The delay, published as SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB statement No. 133", changes the effective date to fiscal years beginning after June 15, 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------------------- RESULTS OF OPERATIONS For the Three and Six Months Ended June 30, 1999, As Compared With the Corresponding Periods One Year Earlier ----------------------------------------------------------- Operating Revenues - Electric ----------------------------- For the three and six months ended June 30, 1999, electric operating revenues were affected by the following factors (in millions): Three Months Six Months ------------ ---------- Weather $ (20) $ (18) Customer growth/changes in usage patterns 13 31 Price 2 (15) Sales to other utilities 1 (13) Sales to North Carolina Eastern Municipal Power Agency (1) - Other 3 (1) - --- Total $ (2) $ (16) === ==== The decrease in the weather component of revenue for both periods is the result of milder than normal temperatures in the current periods as compared to prior periods. The increase in the customer growth/changes in usage patterns component of revenue for both comparison periods reflects continued growth in the number of customers served by the Company; while residential and commercial sales increased for the six-month period, industrial sales have decreased, primarily reflecting a cyclical decline in the chemical and textile industries. During the three-month period, the price component of revenues was negatively impacted by the effect of real-time pricing on sales to industrial customers which was more than offset by other price-related increases, primarily due to changes in the price structure of the contract between the Company and North Carolina Electric Membership Corporation. The price-related decrease for the six-month period is primarily due to the effect of real-time pricing on sales to industrial customers. The decrease in sales to other utilities for the six-month period is primarily due to milder temperatures in the Northeast and Midwest during the first quarter of 1999 and to the expiration of long-term sales agreements. Operating Expenses - Electric ----------------------------- Other operation and maintenance expense decreased during the six months ended June 30, 1999 primarily due to the timing of plant outages. Diversified Business Operations ------------------------------- Operating revenues and expenses of diversified business operations primarily reflect results of two of the Company's subsidiaries, Strategic Resource Solutions Corp. (SRS) and Interpath Communications, Inc. (Interpath). The increase in operating revenues for the three- and six-month periods is primarily due to an increase in the customer base of both subsidiaries. The increase in operating expenses for the three- and six-month periods is primarily attributable to Interpath's business expansion program. Operating expenses at SRS did not increase significantly due to cost-cutting measures implemented during 1998 and early 1999. MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES For the Three and Six Months Ended June 30, 1999 --------------------------------------------------- Cash Flow and Financing ----------------------- On March 5, 1999 the Company issued $400 million principal amount of Senior Notes, 5.95% Series due March 1, 2009. The net proceeds from the issuance were used to reduce commercial paper borrowings. As of June 30, 1999, the Company's revolving credit facilities totaled $750 million, all of which are long-term agreements supporting its commercial paper borrowings. The Company is required to pay minimal annual commitment fees to maintain its credit facilities. Consistent with management's intent to maintain its commercial paper on a long-term basis, and as supported by its long-term revolving credit facilities, the Company included in long-term debt all commercial paper outstanding of approximately $337 million, $410 and $488 million as of June 30, 1999, June 30, 1998 and December 31, 1998, respectively. The Company's First Mortgage Bonds are currently rated "A2" by Moody's Investors Service, "A" by Standard and Poor's and "A+" by Duff and Phelps. Moody's Investors Service, Standard and Poor's and Duff and Phelps have rated the Company's commercial paper "P-1", "A-1" and "D-1", respectively. OTHER MATTERS ------------- NCNG Merger ----------- On July 15, 1999, the Company completed the acquisition of NCNG pursuant to the terms of an Agreement and Plan of Merger by and between the Company and NCNG dated November 10, 1998, as amended and restated April 22, 1999. Each outstanding share of NCNG common stock was converted into the right to receive 0.8054 shares of Company common stock which amounted to 8,244,056 Company shares, with cash being paid in lieu of fractional shares. NCNG is operating as a wholly-owned subsidiary of the Company. In conjunction with the merger, the Company and NCNG signed a joint stipulation agreement with the Public Staff of the NCUC in which the Company agreed to cap base retail electric rates, with limited exceptions, through December 2004, and NCNG agreed to cap margin rates for gas sales and transportation services, with limited exceptions, through November 1, 2003. Management is of the opinion that this agreement will not have a material adverse effect on the consolidated results of operations or financial position of the Company. Competition ----------- Wholesale Competition --------------------- On May 13, 1999, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) on Regional Transmission Organizations (RTOs). This NOPR proposes to set minimum characteristics and functions for transmission entities, including independent system operators and transmission companies, to become FERC-approved RTOs. The NOPR does not require RTO membership for all utilities by a certain date. Initial comments on the NOPR are due on August 23, 1999 and reply comments are due on September 29, 1999. The FERC is expected to issue a final rule by the end of this year. The Company will submit comments regarding the NOPR and may file reply comments as well. The Company continues to evaluate the potential effects of this NOPR. The Company cannot predict the outcome of this matter. North Carolina Activities ------------------------- In May 1999, the North Carolina General Assembly approved legislation that expanded from 23 to 29 members the study commission it established to evaluate the future of electric service in the state. All 29 study commission members have been appointed. The study commission is expected to resume its meetings in August and to make its final report to the North Carolina General Assembly during 2000. The Company cannot predict the outcome of this matter. South Carolina Activities ------------------------- The 1999 session of the South Carolina General Assembly adjourned in June 1999, without approving any legislation regarding electric industry restructuring. The South Carolina General Assembly is expected to continue considering the electric industry restructuring bills that were introduced this year during its 2000 legislative session. The Company cannot predict the outcome of this matter. Federal Activities ------------------ Several bills regarding electric industry restructuring have been introduced in Congress this year. A draft bill is expected to be introduced in the House Commerce Committee sometime during the fall of 1999. The Company cannot predict the outcome of this matter. Company Activities ------------------- The Company and Southern Natural Gas Company, a subsidiary of SONAT, Inc., have delayed the planned-in-service date of the Palmetto Interstate Pipeline. In conjunction with this delay, on-going route selection and survey activities have been suspended. Since the announcement of the Palmetto Interstate Pipeline in March, two other competing pipelines have been proposed. The delay with allow the Company to analyze those alternatives. The Company cannot predict the outcome of this matter. Year 2000 --------- Background ---------- The Company's overall goal is to be Year 2000 ready, and its efforts to reach this goal are on target. "Year 2000 ready" means that critical systems, devices, applications or business relationships have been evaluated and are expected to be suitable for continued use into and beyond the Year 2000, or contingency plans are in place. Critical systems are defined as those that (i) directly relate to the safe and reliable generation and delivery of electricity and (ii) support the Company's ability to provide high-quality customer service. The Company began addressing the Year 2000 issue in 1994 by beginning to assess its business computer systems, such as general ledger, payroll, customer billing and inventory control. The majority of these systems were corrected and have been running in the Company's day-to-day computing environment since 1996. Also, by the mid-1990s, two major accounting systems were replaced with systems that were designed to be Year 2000 ready. The Company has addressed the remaining business systems and will conduct supplementary testing, as appropriate. During mid-1997, a Corporate Year 2000 Project was established to provide leadership and direction to the Year 2000 efforts throughout the Company and its subsidiaries. Also, the project scope was expanded to include "embedded" systems (such as process control computers, chart recorders, data loggers, calibration equipment and chemical analysis equipment), end-user computing hardware and software (including personal computers, spreadsheets, word processing and other personal and workgroup applications), plant and corporate facilities (such as security systems, elevators and heating and cooling systems) and business relationships with key suppliers and customers. The Company has used a multi-step approach in conducting its Year 2000 Project. These steps are: inventory, assessment, remediation and testing, and contingency planning. The first step, an inventory of all systems and devices with potential Year 2000 problems, was completed in January 1998. The next step, completed in the first half of 1998, was to conduct an initial assessment of the inventory to determine the state of its Year 2000 readiness. As part of the assessment phase, remediation strategies were identified and remediation cost estimates were developed. The Company has utilized both internal and external resources to remediate and test for Year 2000 readiness. The Company's primary approach has been for the Corporate Year 2000 Program Office to provide overall leadership and direction and assign responsibility to individual departments and business units for Year 2000 readiness in their respective areas. Staffing decisions regarding the labor required to complete the project have been made at the department/business unit level. Several hundred of the Company's employees as well as contract personnel have been used on this effort. Vendor labor has also been occasionally used. The Company achieved its goal of Year 2000 readiness for all critical systems by the June 30,1999 target date with one exception. This exception is a power plant system that will be replaced during a planned outage this fall. Supplementary testing to maintain Year 2000 readiness will continue through 1999, as appropriate. Several external reviews of the project have been conducted to validate the reliability of risk and cost estimates as well as work processes and work products. These have included project reviews by two consulting firms, an embedded systems audit by an engineering firm and a legal review by an external law firm. In addition, the Company is actively conducting formal communications with the suppliers and customers with which it has active contracts to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company ranked its vendors and suppliers to identify those considered to be critical. Those identified as critical include telecommunications providers, fuel suppliers (nuclear, coal, natural gas and other), transportation carriers, vendors of certain nuclear systems and components, vendors of fossil power plant digital control systems and financial services suppliers. The Company cannot predict the outcome of other companies' remediation efforts. Costs ----- As of June 30, 1999, the total remaining cost of the Year 2000 Project is estimated at $7 million. To date, the Company has incurred and expensed approximately $13 million related to the inventory, assessment and remediation of non-compliant systems, equipment and applications. The remaining $7 million budgeted for the Year 2000 Project includes the following expenditures: $2.5 million for meters to be installed during the remainder of 1999, $1.5 million for compliance efforts at non-regulated subsidiaries of the Company, $2 million for remaining project costs to be incurred during the balance of 1999 and into 2000, and $1 million for Year 2000 readiness contingencies. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived using assumptions of future events including the continued availability of certain resources, third parties' Year 2000 readiness and other factors. Risk Assessment --------------- At this time, the Company believes its most reasonably likely worst case scenario is that key customers could experience significant reductions in their power needs due to their own Year 2000 issues. The Company is conducting informal meetings with its largest wholesale, industrial and commercial customers and is holding information sharing forums to gather information on Year 2000 readiness. Based on the information provided through these contacts, the Company has not identified any major customer that appears to be at significant risk of not being Year 2000 ready. For this reason, the Company does not believe that this scenario is likely to occur. Nonetheless, the Company has assessed the effect of such a scenario by using current financial data. That data indicates that if the Company's twenty key industrial customers experienced significant reduced power needs for a period of one month, the Company's revenues would decrease by approximately 6% for that month. An alternative worst-case scenario includes the effect of cascading disruptions caused by other entities whose electrical systems are connected to the Company's. The Company has assessed the risk of this scenario, believes that its contingency plans would mitigate the long-term occurrence of such a scenario, and does not expect that it would have a material adverse effect on its financial position and results of operations. Contingency Plans ----------------- Contingency plans have been prepared to help ensure that the Company's critical business processes will continue to function on January 1, 2000 and beyond. The Company's contingency plans are structured to address both remediation of systems and their components and overall business operating risk. These plans are intended to mitigate internal risks, as well as potential risks in the supply chain of the Company's suppliers and customers. The Company's contingency plans were developed by June 30, 1999 in accordance with the target dates established by the Nuclear Regulatory Commission and the North American Electric Reliability Council (NERC). The Company has developed contingency plans to mitigate the risk associated with the failure of critical vendors or suppliers. Based on the Company's on-going assessment of the risk of non-compliance, the Company will take action up to and including entering into a business relationship with an alternate vendor or supplier. One of the Company's emergency contingency plans specifically addresses emergency scenarios that may arise due to the fact that electric utility systems throughout the southeast region of the United States are interconnected. The Company has been working actively with the NERC and the Southeastern Electric Reliability Council to address the issue of overall grid reliability and protection. In order to mitigate the risk of cascading regional electric failures, the Company can, as a last resort, isolate its transmission system either automatically or manually. The Company's emergency readiness contingency plan includes the performance of regular training exercises that include simulated disaster recovery scenarios. As part of its Year 2000 contingency planning, the Company is reviewing its disaster recovery scenarios to identify those that can be used specifically for Year 2000 readiness training. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- During the six months ended June 30, 1999, the Company's market risk exposure was affected by the issuance of $400 million principal amount of Senior Notes, 5.95% Series due March 1, 2009. Total fixed rate long-term debt at June 30, 1999 was $1.975 billion, with an average interest rate of 7.02%. Related to the issuance, the Company settled its interest rate lock, receiving approximately $9.7 million which will reduce interest expense over the 10-year debt term. The proceeds from the issuance were used to reduce commercial paper borrowings. Total commercial paper outstanding at June 30, 1999 was $337 million, with an average interest rate of 5.03%. PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings ------- ----------------- Legal aspects of certain matters are set forth in Part I, Item I Notes to the Consolidated Interim Financial Statements, Note 4: Commitments and Contingencies. Item 2. Changes in Securities and Use of Proceeds ------- ----------------------------------------- STRATEGIC RESOURCE SOLUTIONS CORP. (a) Securities Issued. On August 9, 1999, the Company issued 4,239 ------------------- shares of its Common Stock (Common Shares) in connection with the June 5, 1997 merger of Knowledge Builders, Inc. (KBI) into a wholly-owned subsidiary of the Company (CaroCapital, Inc., a North Carolina Enterprise Corporation since renamed Strategic Resource Solutions Corp). Of these, 3,903 shares were issued as post-closing merger consideration to the former holders of KBI common stock for KBI shares that were canceled in the merger. The remaining 336 shares were issued as incentive compensation payments based upon the 1998 performance of SRS and its subsidiaries arising under incentive compensation agreements entered into pursuant to the merger agreement with KBI. (b) Underwriters and Other Purchasers. No underwriters were used in ------------------------------------ connection with this issuance of Common Shares. The Common Shares were issued (A) as merger consideration to former holders of KBI common stock whose KBI shares were canceled in the merger and (B) as incentive compensation payments to certain SRS employees based upon the 1998 performance of SRS. (c) Consideration. The consideration for 3,903 of the Common Shares -------------- issued was the cancellation of former shares of KBI in the merger. The other 336 Common Shares were issued as compensation pursuant to certain incentive compensation award agreements. (d) Exemption from Registration Claimed. The Common Shares described -------------------------------------- above were issued on the basis of an exemption from registration under Section 4(2) of the Securities Act of 1933. The Common Shares were issued to a limited number of persons and subjected to restrictions on resale appropriate for private placements, and appropriate disclosure was made to all persons to whom Common Shares were issued. RESTRICTED STOCK AWARDS: (a) Securities Delivered. On July 21, 1999, 10,400 shares of the ---------------------- Company's Common Shares were delivered to a certain key employee of the Company pursuant to the terms of the Company's 1997 Equity Incentive Plan (Plan), which was approved by the Company's shareholders on May 7, 1997. Section 9 of the Plan provides for the granting of Restricted Stock by the Personnel, Executive Development and Compensation Committee (now known as the Committee on Organization and Compensation), (the Committee) to key employees of the Company. The Common Shares delivered pursuant to the Plan were acquired in market transactions directly for the account of the recipient and do not represent newly-issued shares of the Company. (b) Underwriters and Other Purchasers. No underwriters were used in ------------------------------------ connection with the delivery of Common Shares described above. The Common Shares were delivered to a certain key employee of the Company. The Plan defines "key employee" as an officer or other employee of the Company who, in the opinion of the Committee, can contribute significantly to the growth and profitability of, or perform services of major importance to, the Company. (c) Consideration. The Common Shares were delivered to provide an -------------- incentive to the employee recipient to exert their utmost efforts on the Company's behalf and thus enhance the Company's performance while aligning the employee's interest with those of the Company's shareholders. (d) Exemption from Registration Claimed. The Common Shares described in ------------------------------------ this Item were delivered on the basis of an exemption from registration under Section 4(2) of the Securities Act of 1933. Receipt of the Common Shares required no investment decision on the part of the recipient. All award decisions were made by the Committee, which consists entirely of non-employee directors. Item 4. Submission of Matter to a Vote of Security Holders ------- -------------------------------------------------- a) The Annual Meeting of the Shareholders was held on May 12, 1999. b) The meeting involved the election of one Class II director to serve a one-year term and four Class I directors to serve for three-year terms. Proxies for the meeting were solicited pursuant to Regulation 14. There was no solicitation in opposition to management's nominees as listed below, and all nominees were elected c) The total votes for the election of directors were as follows: Class II Votes For Votes Withheld -------- --------- -------------- (Term expiring in 2000) Sherwood H. Smith Jr. 130,726,989 1,993,640 Class I ------- (Term expiring in 2002) Leslie M. Baker Jr. 130,817,610 1,903,019 John H. Mullin II 130,592,003 2,128,626 William O. McCoy 130,742,209 1,978,420 J. Tylee Wilson 130,726,517 1,994,112 Item 5. Other Information ------- ----------------- POTENTIAL TRANSITION TO HOLDING COMPANY STRUCTURE ------------------------------------------------- The Company is considering the formation of a holding company structure, in which the Company would become a subsidiary of a newly formed holding company. This conversion is being considered because of the advantages it might offer as the Company continues to confront the rapidly changing environment facing electric utilities. The holding company structure would allow greater organizational flexibility, including a clearer separation of regulated businesses from each other and from unregulated businesses such as energy services, telecommunications, and electric generation projects for wholesale markets. This structure would also offer greater financing flexibility, because the holding company would not be required to obtain utility commission approval each time it seeks to issue securities to raise cash or as consideration in acquisitions. The Company's shareholders would have to approve formation of a holding company structure, as would various regulatory authorities. If the Company converts to a holding company structure, each share of the Company's common stock will automatically be exchanged for one share of common stock of the new holding company. There can be no assurance as to when or whether the contemplated holding company structure will be submitted for shareholder approval or be established. SALE OF SRS's Lighting Division ------------------------------- On July 2, 1999, SRS completed the sale of its lighting division to SLI, Inc. CONTINUED OWNERSHIP OF INTERPATH -------------------------------- The Company is currently examining strategic options regarding continued ownership of Interpath and expects to announce its intentions later this year. Item 6. Exhibits and Reports on Form 8-K ------- -------------------------------- (a) See EXHIBIT INDEX (b) Reports on Form 8-K filed during or with respect to the quarter: The Company filed a Current Report on Form 8-K on July 22, 1999, reporting under Item 5 the July 15, 1999 completion of the Company's acquisition of NCNG. Exhibits related to the issuance were listed under Item 7 of the Report. SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAROLINA POWER & LIGHT COMPANY ------------------------------ (Registrant) By /s/ Glenn E. Harder ----------------------------------- Glenn E. Harder Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: August 12, 1999 EXHIBIT INDEX Exhibit Number Description 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JUN-30-1999 PER-BOOK $6,337,560 $398,087 $898,488 $337,268 $594,714 $8,566,117 $1,238,889 ($790) $1,737,466 $2,975,565 $0 $59,376 $2,716,447 $0 $0 $0 $201,610 $0 $0 $0 $2,613,119 $8,566,117 $1,525,724 $103,320 $1,168,945 $1,272,265 $356,779 ($10,683) $242,776 $87,405 $155,371 ($1,483) $153,888 $144,721 $66,701 $416,936 1.07 1.06
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