-----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, E4bqDpPOYHxXNaEndEBAa4c6iUdjj4ToKyP220/McOCKUNXaGJPFKBk65roDw8NA Knbyn6nYBGIGg/EV6satmA== 0000950168-02-000269.txt : 20020425 0000950168-02-000269.hdr.sgml : 20020425 ACCESSION NUMBER: 0000950168-02-000269 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010810 DATE AS OF CHANGE: 20020321 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: 1934 Act SEC FILE NUMBER: 001-03382 FILM NUMBER: 02556177 BUSINESS ADDRESS: STREET 1: 411 FAYETTEVILLE ST CITY: RALEIGH STATE: NC ZIP: 27601 BUSINESS PHONE: 9195466111 10-Q 1 d10q.txt FORM 10-Q 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, 2001 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ---------- ----------
Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer File Number incorporation, address of principal executive offices, and telephone number Identification Number 1-15929 Progress Energy, Inc. 56-2155481 410 South Wilmington Street Raleigh, North Carolina 27601-1748 Telephone: (919) 546-6111 State of Incorporation: North Carolina 1-3382 Carolina Power & Light Company 56-0165465 410 South Wilmington Street Raleigh, North Carolina 27601-1748 Telephone: (919) 546-6111 State of Incorporation: North Carolina
NONE ---- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- ---- This combined Form 10-Q is filed separately by two registrants: Progress Energy, Inc. (Progress Energy) and Carolina Power & Light Company (CP&L). Information contained herein relating to either individual registrant is filed by such registrant solely on its own behalf. 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. As of July 31, 2001, each registrant had the following shares of common stock outstanding
Registrant Description Shares ---------- ----------- ------ Progress Energy, Inc. Common Stock (Without Par Value) 206,089,274 Carolina Power & Light Company Common Stock (Without Par Value) 159,608,055 (all of which were held by Progress Energy, Inc.)
PROGRESS ENERGY, INC. AND CAROLINA POWER & LIGHT COMPANY FORM 10-Q - For the Quarter Ended June 30, 2001 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 Supplemental Data Schedule Notes to Consolidated Interim Financial Statements Carolina Power & Light Company -------------------------------- 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 PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures 2 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined Form 10-Q are defined below:
TERM DEFINITION APEC Albemarle-Pamlico Economic Development Corporation Code Internal Revenue Service Code CP&L Carolina Power & Light Company CP&L Energy CP&L Energy, Inc., now known as Progress Energy, Inc. CR3 Florida Power's nuclear generating plant, Crystal River Unit No. 3 CVO Contingent value obligation DEP Florida Department of Environment and Protection DOE Department of Energy Dt Dekatherm DWM North Carolina Department of Environment and Natural Resources, Division of Waste Management Electric Fuels Electric Fuels Corporation EasternNC Eastern North Carolina Natural Gas Company Energy Ventures Business segment of Progress Energy primarily made up of merchant energy generation, coal and synthetic fuel operations and energy marketing and trading EPA United States Environmental Protection Agency FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission Florida Power Florida Power Corporation FPC Florida Progress Corporation FPSC Florida Public Service Commission Generally accepted Accounting principles generally accepted in the United States of America accounting principles IRS Internal Revenue Service kWh kilowatt-hour MGP Manufactured Gas Plant Monroe Power Monroe Power Company MW Megawatt NCNG North Carolina Natural Gas Corporation NCUC North Carolina Utilities Commission NOx SIP Call EPA rule which requires 22 states including North and South Carolina to further reduce nitrogen oxide emissions. NRC United States Nuclear Regulatory Commission NSP Northern States Power PLRs Private Letter Rulings Progress Energy Progress Energy, Inc. and subsidiaries Progress Rail Progress Rail Services Corporation Progress Telecom Progress Telecommunications Corporation PUHCA Public Utility Holding Company Act of 1935, as amended RTO Regional Transmission Organization SCPSC Public Service Commission of South Carolina SEC United States Securities and Exchange Commission SFAS No. 133 Statement of Financial Accounting Standards No. 133, Accounting for Derivative and Hedging Activities SFAS No. 138 Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133 SRS Strategic Resource Solutions Corp.
3 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS - - ------------------------------------------ Statements made throughout this Form 10-Q that are not statements of historical facts are forward-looking statements 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. For example, forward-looking statements are made 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" concerning synthetic fuel tax credits and regulatory developments. Any forward-looking statement speaks only as of the date on which such statement is made, and Progress Energy 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 you should consider 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 Securities and Exchange Commission under the Public Utility Holding Company Act of 1935, as amended, the North Carolina Utilities Commission, the Public Service Commission of South Carolina and the Florida Public Service Commission), particularly legislative and regulatory initiatives that may impact the speed and degree of the restructuring of the electricity industry and the results of negotiations related to the expiration of Florida Power's rate stipulation; the outcome of legal and administrative proceedings, including proceedings before our principal regulators; risks associated with operating nuclear power facilities, availability of nuclear waste storage facilities, and nuclear decommissioning costs; changes in the economy of areas served by CP&L, Florida Progress or NCNG; the extent to which we are able to obtain adequate and timely rate recovery of costs, including potential stranded costs arising from the restructuring of the electricity industry; weather conditions and catastrophic weather-related damage; general industry trends, increased competition from energy and gas suppliers, and market demand for energy; inflation and capital market conditions; the extent to which we are able to realize the potential benefits of our recent acquisition of Florida Progress Corporation and successfully integrate it with the remainder of our business; the extent to which we are able to realize the potential benefits of the conversion of Carolina Power & Light Company to a non-regulated holding company structure and the success of our direct and indirect subsidiaries; the extent to which we are able to use tax credits associated with the operations of the synthetic fuel facilities; the extent to which we are able to reduce our capital expenditures through the utilization of the natural gas expansion fund established by the North Carolina Utilities Commission; and unanticipated changes in operating expenses and capital expenditures. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of Progress Energy. 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. 4 PART I. FINANCIAL INFORMATION Item 1. Financial Statements - - ------ -------------------- Progress Energy, Inc. CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited) June 30, 2001 STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, (In thousands except per share amounts) 2001 2000 2001 2000 - - -------------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 1,565,947 $ 773,914 $ 3,197,994 $ 1,555,300 Natural gas 68,575 75,350 207,149 147,448 Diversified businesses 681,121 38,484 818,591 63,618 - - -------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 2,315,643 887,748 4,223,734 1,766,366 - - -------------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 378,288 137,001 748,144 297,388 Purchased power 211,876 85,067 429,424 155,326 Gas purchased for resale 57,184 59,836 166,778 103,734 Other operation and maintenance 304,400 164,989 599,497 363,216 Depreciation and amortization 264,131 136,949 580,920 274,720 Taxes other than on income 93,945 35,511 193,592 72,845 Diversified businesses 721,744 58,767 911,447 102,922 - - -------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 2,031,568 678,120 3,629,802 1,370,151 - - -------------------------------------------------------------------------------------------------------------------- Operating Income 284,075 209,628 593,932 396,215 - - -------------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 7,172 2,048 17,114 5,311 Other, net (13,102) (975) (10,180) 1,101 - - -------------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (5,930) 1,073 6,934 6,412 - - -------------------------------------------------------------------------------------------------------------------- Interest Charges Long-term debt 156,063 54,851 282,506 104,923 Other interest charges 37,950 4,279 74,652 9,280 Allowance for borrowed funds used during construction (1,873) (6,323) (5,353) (10,929) - - -------------------------------------------------------------------------------------------------------------------- Net Interest Charges 192,140 52,807 351,805 103,274 - - -------------------------------------------------------------------------------------------------------------------- Income before Income Taxes 86,005 157,894 249,061 299,353 Income Taxes (25,697) 50,434 (16,644) 106,632 - - -------------------------------------------------------------------------------------------------------------------- Net Income $ 111,702 $ 107,460 $ 265,705 $ 192,721 - - -------------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 200,043 153,311 199,922 153,183 Basic Earnings per Common Share $ 0.56 $ 0.70 $ 1.33 $ 1.26 Diluted Earnings per Common Share $ 0.56 $ 0.70 $ 1.32 $ 1.26 Dividends Declared per Common Share $ 0.530 $ 0.515 $ 1.060 $ 1.030 - - --------------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 5
Progress Energy, Inc BALANCE SHEETS (In thousands) June 30, December 31, Assets 2001 2000 - - ------------------------------------------------------------------------------------------------------------------------ Utility Plant Electric utility plant in service $ 18,716,993 $ 18,124,036 Gas utility plant in service 483,538 378,464 Accumulated depreciation (9,761,687) (9,350,172) - - ------------------------------------------------------------------------------------------------------------------------ Utility plant in service, net 9,438,844 9,152,328 Held for future use 15,380 16,302 Construction work in progress 851,412 1,043,376 Nuclear fuel, net of amortization 243,816 224,692 - - ------------------------------------------------------------------------------------------------------------------------ Total Utility Plant, Net 10,549,452 10,436,698 - - ------------------------------------------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents 73,667 101,296 Accounts receivable 992,059 925,911 Inventory 771,479 420,985 Deferred fuel cost 214,021 217,806 Prepayments 17,304 50,040 Assets held for sale, net 2,504 747,745 Other current assets 191,927 192,347 - - ------------------------------------------------------------------------------------------------------------------------ Total Current Assets 2,262,961 2,656,130 - - ------------------------------------------------------------------------------------------------------------------------ Deferred Debits and Other Assets Income taxes recoverable through future rates 238,876 228,686 Deferred purchased power contract termination costs 148,757 226,656 Harris Plant deferred costs 38,796 44,813 Unamortized debt expense 39,597 38,771 Nuclear decommissioning trust funds 824,854 811,998 Diversified business property, net 1,074,653 720,231 Miscellaneous other property and investments 608,170 636,677 Goodwill, net 3,779,868 3,652,429 Other assets and deferred debits 669,705 657,612 - - ------------------------------------------------------------------------------------------------------------------------ Total Deferred Debits and Other Assets 7,423,276 7,017,873 - - ------------------------------------------------------------------------------------------------------------------------ Total Assets $ 20,235,689 $ 20,110,701 - - ------------------------------------------------------------------------------------------------------------------------ Capitalization and Liabilities - - ------------------------------------------------------------------------------------------------------------------------ Capitalization - - ------------------------------------------------------------------------------------------------------------------------ Common stock equity $ 5,459,040 $ 5,424,201 Preferred stock of subsidiaries-not subject to mandatory redemption 92,831 92,831 Long-term debt, net 9,413,639 5,890,099 - - ------------------------------------------------------------------------------------------------------------------------ Total Capitalization 14,965,510 11,407,131 - - ------------------------------------------------------------------------------------------------------------------------ Current Liabilities Current portion of long-term debt 209,550 184,037 Accounts payable 618,098 828,568 Interest accrued 204,670 121,433 Dividends declared 107,886 107,645 Short-term obligations 744,458 3,972,674 Other current liabilities 571,052 448,302 - - ------------------------------------------------------------------------------------------------------------------------ Total Current Liabilities 2,455,714 5,662,659 - - ------------------------------------------------------------------------------------------------------------------------ Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,680,446 1,807,192 Accumulated deferred investment tax credits 236,051 261,255 Other liabilities and deferred credits 897,968 972,464 - - ------------------------------------------------------------------------------------------------------------------------ Total Deferred Credits and Other Liabilities 2,814,465 3,040,911 - - ------------------------------------------------------------------------------------------------------------------------ Commitments and Contingencies (Note 10) - - ------------------------------------------------------------------------------------------------------------------------ Total Capitalization and Liabilities $ 20,235,689 $ 20,110,701 - - ------------------------------------------------------------------------------------------------------------------------ SCHEDULES OF COMMON STOCK EQUITY (In thousands except share data) Common stock (without par value, authorized 500,000,000, issued and outstanding $ 3,614,279 $ 3,608,902 206,089,274 and 206,089,047 shares, respectively) Unearned ESOP common stock (117,268) (127,211) Accumulated other comprehensive loss (34,214) - Retained earnings 1,996,243 1,942,510 - - ------------------------------------------------------------------------------------------------------------------------ Total Common Stock Equity $ 5,459,040 $ 5,424,201 - - ------------------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 6
Progress Energy, Inc. STATEMENTS OF CASH FLOWS Six Months Ended June 30, (In thousands) 2001 2000 - - ---------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 265,705 $ 192,721 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 628,437 316,914 Deferred income taxes (31,904) (51,106) Investment tax credit (13,216) (5,198) Deferred fuel cost (credit) 5,014 (12,555) Net (increase) decrease in accounts receivable 105,763 (53,134) Net increase in inventories (177,027) (25,350) Net decrease in prepaids and other current assets 39,040 82,283 Net decrease in accounts payable (217,139) (9,087) Net increase in other current liabilities 125,134 83,103 Other 12,653 61,529 - - ---------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 742,460 580,120 - - ---------------------------------------------------------------------------------------------------------- Investing Activities Gross property additions (542,798) (418,321) Proceeds from sale of asset 5,532 - Nuclear fuel additions (78,871) (47,329) Contributions to nuclear decommissioning trust (27,883) (17,979) Increase in cash restricted for redemption of long-term debt - (59,079) Net cash flow of company-owned life insurance program (6,098) (4,963) Diversified business property additions (120,393) (33,468) Investments in non-utility activities 11,598 (28,018) - - ---------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (758,913) (609,157) - - ---------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt 3,473,300 417,383 Net decrease in short-term indebtedness (3,125,695) (57,600) Net increase (decrease) in outstanding payments (64,774) 41,620 Retirement of long-term debt (33,914) (264,717) Dividends paid on common stock (212,506) (158,056) Other (47,587) - - - ---------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (11,176) (21,370) - - ---------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents (27,629) (50,407) Cash and Cash Equivalents at Beginning of the Period 101,296 79,871 - - ---------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of the Period $ 73,667 $ 29,464 - - ---------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest $ 265,462 $ 96,864 income taxes $ 40,878 $ 111,866 - - ----------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 7
Progress Energy, Inc. SUPPLEMENTAL DATA Three Months Ended Six Months Ended June 30 June 30 2001 2000 (a) 2001 2000 (a) - - ------------------------------------------------------------------------------------------------------------------------------ Operating Revenues (in thousands) Electric Retail $ 1,295,650 $ 597,702 $ 2,622,453 $ 1,232,471 Wholesale 214,908 133,725 475,555 265,600 Unbilled 15,099 25,029 (46,780) 24,221 Miscellaneous revenue 40,290 17,458 146,766 33,008 - - ------------------------------------------------------------------------------------------------------------------------------ Total Electric 1,565,947 773,914 3,197,994 1,555,300 Natural gas 68,575 75,350 207,149 147,448 Diversified businesses 681,121 38,484 818,591 63,618 - - ------------------------------------------------------------------------------------------------------------------------------ Total Operating Revenues $ 2,315,643 $ 887,748 $ 4,223,734 $ 1,766,366 - - ------------------------------------------------------------------------------------------------------------------------------ Energy Sales Electric (millions of kWh) Retail Residential 7,204 3,023 15,926 6,951 Commercial 5,682 2,803 10,956 5,359 Industrial 4,401 3,676 8,594 7,077 Other retail 1,007 323 1,970 663 - - ------------------------------------------------------------------------------------------------------------------------------ Total Retail 18,294 9,825 37,446 20,050 Unbilled 624 425 (543) 361 Wholesale 4,080 3,287 8,859 7,004 - - ------------------------------------------------------------------------------------------------------------------------------ Total Electric 22,998 13,537 45,762 27,415 - - ------------------------------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------------------------------ Natural Gas (thousands of dt) 11,096 13,497 25,942 30,841 - - ------------------------------------------------------------------------------------------------------------------------------ Energy Supply (millions of kWh) Generated - steam 11,877 6,885 23,791 14,345 nuclear 6,813 5,433 13,950 11,097 hydro 64 157 117 333 combustion turbines 1,672 282 2,809 316 Purchased 3,711 1,299 7,385 2,331 - - ------------------------------------------------------------------------------------------------------------------------------ Total Energy Supply (Company Share) 24,137 14,056 48,052 28,422 - - ------------------------------------------------------------------------------------------------------------------------------ Detail of Income Taxes (in thousands) Income tax expense (credit) - current $ (6,730) $ 73,099 $ 28,475 $ 162,936 Deferred (12,723) (20,066) (31,904) (51,106) investment tax credit (6,244) (2,599) (13,215) (5,198) - - ------------------------------------------------------------------------------------------------------------------------------ Total Income Tax Expense $ (25,697) $ 50,434 $ (16,644) $ 106,632 - - ------------------------------------------------------------------------------------------------------------------------------ (a) Supplemental data does not include information related to Florida Progress for the three and six months ended June 30, 2000.
8 Progress Energy, Inc. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION -------------------------------------- A. Organization. Progress Energy, Inc. (Progress Energy) is a registered ------------ holding company under the Public Utility Holding Company Act of 1935, as amended (PUHCA). Both Progress Energy and its subsidiaries are subject to the regulatory provisions of the PUHCA. Progress Energy was formed as a result of the reorganization of Carolina Power & Light Company (CP&L) into a holding company structure on June 19, 2000. All shares of common stock of CP&L were exchanged for an equal number of shares of CP&L Energy, Inc (CP&L Energy). On December 4, 2000, CP&L Energy changed its name to Progress Energy, Inc. Through its wholly-owned regulated subsidiaries, CP&L, Florida Power Corporation (Florida Power) and North Carolina Natural Gas Corporation (NCNG), Progress Energy is primarily engaged in the generation, transmission, distribution and sale of electricity in portions of North Carolina, South Carolina and Florida and the transport, distribution and sale of natural gas in portions of North Carolina. Through the Energy Ventures business segment, Progress Energy is involved in merchant energy generation, coal and synthetic fuel operations and energy marketing and trading. Through other business units, Progress Energy engages in other non- regulated business areas, including energy management and related services, railcar operations and telecommunications. Progress Energy's legal structure is not currently aligned with the functional management and financial reporting of the Energy Ventures business segment. Whether, and when, the legal and functional structures will converge depends upon legislative and regulatory action, which cannot currently be anticipated. B. Basis of Presentation. These financial statements have been prepared in --------------------- accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) 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 generally accepted accounting principles for complete financial statements. Because the accompanying consolidated interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles, they should be read in conjunction with the audited financial statements for the period ended December 31, 2000 and notes thereto included in Progress Energy's Form 10-K for the year ended December 31, 2000. The amounts included in the consolidated interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present Progress Energy'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. Certain amounts for 2000 have been reclassified to conform to the 2001 presentation. 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. FLORIDA PROGRESS CORPORATION ---------------------------- On November 30, 2000, Progress Energy completed its acquisition of Florida Progress Corporation (FPC) for an aggregate purchase price of approximately $5.4 billion. Progress Energy paid cash consideration of approximately $3.5 billion and issued approximately 46.5 million common shares valued at approximately $1.9 billion. In addition, Progress Energy issued 98.6 million contingent value obligations (CVOs) valued at approximately $49.3 million. At June 30, 2001, the CVOs had a fair market value of approximately $49.3 million. Charges of $5.9 million and $8.9 million were recorded by Progress Energy for the three and six-month periods ended June 30, 2001 to record the change in fair value of the CVO's. The purchase price includes approximately $18.6 million in direct transaction costs. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of operations for FPC have been included in Progress Energy's consolidated financial statements since the date of acquisition. The excess of the purchase price over the estimated fair value of the net identifiable assets 9 and liabilities acquired has been recorded as goodwill. The goodwill, approximately $3.6 billion, is being amortized on a straight-line basis over a period of primarily 40 years (See Note 5). The fair values of FPC's rate-regulated net assets acquired were considered to be equivalent to book value since book value represents the amount that is expected to be recoverable through regulated rates. The original allocation of the purchase price included estimated amounts expected to be realized from the sale of FPC's Rail Services and Inland Marine Transportation business segments, which were originally classified as net assets held for sale. Progress Energy no longer intends to sell Rail Services within one year of the acquisition date and, therefore, these assets no longer qualify as net assets held for sale. Accordingly, during the quarter ended June 30, 2001, Progress Energy removed amounts related to Rail Services from net assets held for sale resulting in an adjustment to the purchase price allocation (See Note 3). Progress Energy began the implementation of a plan to combine operations of the companies resulting in a non-executive involuntary termination cost accrual of approximately $52.2 million. Approximately $41.8 million is attributable to Florida Power employees and has been reflected as part of the purchase price allocation, while approximately $10.4 million attributable to acquiring company employees and was charged to operating results in 2000. Progress Energy completed the implementation phase of the plan in June 2001 and expects to finalize the plan by the end of 2001. The majority of the related severance payments are expected to occur in 2001 with the remaining payments occurring through 2003. The second quarter activity for the termination costs is detailed in the table below: Non-Executive (In millions) Termination Costs ----------------- Balance at March 31, 2001 $38.6 Payments (4.1) ----------------- Balance at June 30, 2001 $34.5 ================= The final purchase price allocation and estimated life of goodwill are subject to adjustment for changes in Progress Energy's preliminary assumptions and analyses, pending additional information concerning asset and liability valuations and the evaluation of certain pre-acquisition contingent liabilities, including but not limited to: . final actuarial valuations of pension and other postretirement benefit plan obligations . proceeds realized from the disposition of assets held for sale; and . valuations of non-regulated businesses and individual assets and liabilities The following unaudited pro forma combined results of operations for the three and six months ended June 30, 2000, has been prepared assuming the acquisition of FPC had occurred on January 1, 2000. The pro forma results include the effect of including FPC's Rail Services segment in operations. The pro forma results are provided for information purposes only. The results are not necessarily indicative of the actual results that would have been realized had the acquisition occurred on the indicated date, nor are they necessarily indicative of future results of operations of the combined companies.
(in thousands, except per share data) Three Months Ended Six Months Ended June 30, 2000 June 30, 2000 ------------- ------------- Revenues $2,171,343 $3,762,808 Net income $ 155,021 $ 261,505 Basic earnings per share $ 0.78 $ 1.31 Average shares - basic 199,803 199,674 Diluted earnings per share $ 0.77 $ 1.31 Average shares - diluted 200,203 200,044
3. NET ASSETS HELD FOR SALE ------------------------ FPC's Inland Marine Transportation business segment is included in Progress Energy's net assets held for sale. Inland Marine Transportation provides transportation of coal, agriculture and other dry-bulk commodities as well as fleet management services. On July 23, 2001, Progress Energy announced that it had entered into a contract to sell the Inland Marine Transportation business 10 segment to AEP Resources, Inc., a wholly owned subsidiary of American Electric Power, for a purchase price of $270 million. Of the $270 million purchase price, approximately $210 million will be used for the early termination of certain off-balance sheet arrangements for assets currently leased by the segment. The remaining proceeds, after disposition costs, will be used to pay down indebtedness. The transaction is expected to close by the end of September 2001. Progress Energy has adjusted the amount of purchase price allocable to the Inland Marine Transportation business segment, resulting in a decrease in net assets held for sale. Progress Energy had originally included FPC's Rail Services business segment in net assets held for sale. Rail Services' operations include railcar repair, rail parts reconditioning and sales, scrap metal recycling and other rail related services. Progress Energy no longer intends to sell Progress Rail within one year of the acquisition date and, therefore, these assets no longer qualify as net assets held for sale. During the quarter ended June 30, 2001, Progress Energy recorded an after-tax charge of $10.1 million reflecting the reallocation of the purchase price and the reversal of the effect of net assets held for sale accounting. Progress Rail's operations will be included in Progress Energy's consolidated results of operations in the future. Progress Energy's results of operations for the three and six months ended June 30, 2001, exclude net income of $2.3 million and $2.7 million, respectively, from the Inland Marine Transportation business and allocated interest expense, net of tax, for the three and six months totaling approximately $1.2 million and $3.2 million, respectively. Both the expected earnings from this business and allocated interest expense, net of tax, during the holding period on the incremental debt incurred to finance the purchase of this business segments has been included in the determination of net assets held for sale. The table below reflects the adjustments to the carrying value of the net assets held for sale for the three months ended June 30, 2001:
(in thousands) - - ----------------------------------------------------------------------------------------- Carrying value at March 31, 2001 $ 782,763 Adjustment to reclassify Rail Services to operating assets (712,522) Interest allocated, net of tax 747 Cash flows funded by parent (12,484) Adjustment to Inland Marine carrying value (56,000) - - ----------------------------------------------------------------------------------------- Carrying value at June 30, 2001 $ 2,504
4. FINANCIAL INFORMATION BY BUSINESS SEGMENT ----------------------------------------- Effective with the acquisition of FPC on November 30, 2000, Progress Energy changed the basis of segment reporting and measurement of segment profitability beginning with the fourth quarter of 2000. Prior periods have been restated to reflect this change. Progress Energy currently provides services through the following business segments: CP&L Electric, Florida Power Electric, Natural Gas, Energy Ventures, Rail Services and Other. Progress Energy changed its basis of segment reporting in the second quarter of 2001 to include the energy marketing and trading activities performed by Energy Ventures on behalf of CP&L and Florida Power in the Energy Ventures segment. FPC operations are not included in Progress Energy's results of operations prior to the acquisition date of November 30, 2000. The CP&L Electric and Florida Power Electric segments are engaged in the generation, transmission, distribution, and sale of retail electric energy in portions of North Carolina, South Carolina and Florida. Electric retail operations are subject to the rules and regulations of FERC, the NCUC, the SCPSC and the FPSC. The Natural Gas segment is engaged in the transportation, distribution and sale of gas in portions of North Carolina. Gas operations are subject to the rules and regulations of the NCUC. The Energy Ventures segment is primarily made up of merchant energy generation, coal and synthetic fuel operations, and energy marketing and trading. The energy marketing and trading activity is currently performed by Energy Ventures on behalf of the regulated utilities, CP&L and Florida Power, and includes wholesale sales on 11 behalf of these utilities. Electric wholesale operations are subject to the rules and regulations of FERC, the NCUC, the SCPSC and the FPSC. The Rail Services segment operations include railcar repair, rail parts reconditioning and sales, railcar leasing and sales, providing rail and track material, and scrap metal recycling. The Other segment is primarily made up of other diversified businesses and holding company operations. The Other segment includes telecommunication services, energy management services and miscellaneous non-regulated activities and elimination entries. For reportable segments presented in the accompanying table, segment income includes intersegment revenues accounted for at prices representative of unaffiliated party transactions.
CP&L Florida Power Energy (in thousands) Electric Electric Natural Gas Ventures - - ------------------------------------------------------------------------------------------------------------------- Three Months Ended 6/30/01 Revenues Unaffiliated $ 629,582 $ 726,371 $ 63,904 $345,177 Intersegment - - 4,671 111,890 ---------------------------------------------------------------------- Total Revenues $ 629,582 $ 726,371 $ 68,575 $457,067 Segment Income (Loss) $ 69,254 $ 81,011 $ (5,246) $ 74,333 Total Segment Assets $8,942,454 $4,925,985 $671,432 $795,017 =================================================================================================================== CP&L Florida Power Energy Electric Electric Natural Gas Ventures - - ------------------------------------------------------------------------------------------------------------------- Three Months Ended 6/30/00 Revenues Unaffiliated $ 646,470 - $ 72,938 $137,378 Intersegment - - 2,412 - ---------------------------------------------------------------------- Total Revenues $ 646,470 - $ 75,350 $137,378 Segment Income (Loss) $ 93,764 - $ 124 $ 25,879 Total Segment Assets $8,632,699 - $561,680 $208,712 =================================================================================================================== CP&L Florida Power Energy Electric Electric Natural Gas Ventures - - ------------------------------------------------------------------------------------------------------------------- Six Months Ended 6/30/01 Revenues Unaffiliated $1,288,433 $1,454,833 $202,260 $697,155 Intersegment - - 4,889 192,396 ---------------------------------------------------------------------- Total Revenues $1,288,433 $1,454,833 $207,149 $889,551 Segment Income (Loss) $ 174,448 $ 144,216 $ 2,288 $138,050 Total Segment Assets $8,942,454 $4,925,985 $671,432 $795,017 =================================================================================================================== CP&L Florida Power Energy Electric Electric Natural Gas Ventures - - ------------------------------------------------------------------------------------------------------------------- Six Months Ended 6/30/00 Revenues Unaffiliated $1,295,878 - $144,906 $269,247 Intersegment - - 2,542 - ---------------------------------------------------------------------- Total Revenues $1,295,878 - $147,448 $269,247 Segment Income (Loss) $ 170,025 - $ 8,924 $ 39,811 Total Segment Assets $8,632,699 - $561,680 $208,712 =================================================================================================================== Rail Segment (in thousands) Services(a) Other Totals - - ------------------------------------------------------------------------------------ Three Months Ended 6/30/01 Revenues Unaffiliated $520,308 $ 25,630 $ 2,310,972 Intersegment 625 (112,515) 4,671 --------------------------------------- Total Revenues $520,933 $ (86,885) $ 2,315,643 Segment Income (Loss) $ (7,533) $ (100,117) $ 111,702 Total Segment Assets $802,536 $4,098,265 $20,235,689 ==================================================================================== Rail Segment Services Other Totals - - ------------------------------------------------------------------------------------ Three Months Ended 6/30/00 Revenues Unaffiliated - $ 28,550 $ 885,336 Intersegment - - 2,412 --------------------------------------- Total Revenues - $ 28,550 $ 887,748 Segment Income (Loss) - $ (12,307) $ 107,460 Total Segment Assets - $ 368,555 $ 9,771,646 ==================================================================================== Rail Segment Services(a) Other Totals - - ------------------------------------------------------------------------------------ Six Months Ended 6/30/01 Revenues Unaffiliated $520,308 $ 55,856 $ 4,218,845 Intersegment 625 (193,021) 4,889 --------------------------------------- Total Revenues $520,933 $ (137,165) $ 4,223,734 Segment Income (Loss) $ (7,533) $ (185,764) $ 265,705 Total Segment Assets $802,536 $4,098,265 $20,235,689 ==================================================================================== Rail Segment Services Other Totals - - ------------------------------------------------------------------------------------ Six Months Ended 6/30/00 Revenues Unaffiliated - $ 53,793 $ 1,763,824 Intersegment - - 2,542 --------------------------------------- Total Revenues - $ 53,793 $ 1,766,366 Segment Income (Loss) - $ (26,039) $ 192,721 Total Segment Assets - $ 368,555 $ 9,771,646 ====================================================================================
(a) Amounts reflect cumulative operating results of Rail Services since the acquisition date of November 30, 2000 (See Note 3) 5. IMPACT OF NEW ACCOUNTING STANDARDS ---------------------------------- Effective January 1, 2001, Progress Energy adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. 12 As a result of the adoption of SFAS No. 133, Progress Energy recorded a transition adjustment as a cumulative effect of a change in accounting principle of $23.6 million, net of tax, which increased accumulated other comprehensive loss as of January 1, 2001. This amount relates to several derivatives used to hedge cash flows related to interest on long-term debt. The net derivative losses will be reclassified into earnings consistent with hedge designations, primarily over the life of the related debt instruments, which principally range from three to ten years. Progress Energy estimates that approximately $6.8 million of the $23.6 million net losses will be reclassified into earnings during the twelve months ended December 31, 2001. There was no transition adjustment affecting the consolidated statement of income as a result of the adoption of SFAS No. 133. During the second quarter of 2001, the Financial Accounting Standards Board (FASB) issued interpretations of SFAS No. 133 indicating that options in general cannot qualify for the normal purchases and sales exception, but provided an exception that allows certain electricity contracts, including certain capacity-energy contracts, to be excluded from the mark-to-market requirements of SFAS No. 133. These interpretations are effective July 1, 2001. Progress Energy is continuing to review contracts to determine whether they meet the criteria for the normal purchases and sales exception. If an electricity or fuel supply contract in its regulated businesses is subject to mark-to-market accounting, there would be no income statement effect of the mark to market because the contract's mark- to-market gain or loss will be recorded as a regulatory asset or liability. Any mark-to-market gains or losses in its non-regulated businesses will affect income unless those contracts qualify for hedge accounting treatment. The application of the new rules is still evolving, and further guidance from the Financial Accounting Standards Board (FASB) is expected, which could additionally impact Progress Energy's financial statements. On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and clarifies the criteria for recording of other intangible assets separately from goodwill. SFAS No. 142 requires that, effective January 1, 2002, Progress Energy cease amortization of goodwill. It also requires Progress Energy to evaluate goodwill for impairment at least annually, which could result in periodic impairment charges. Goodwill amortization was $24.8 million and $47.6 million for the three and six months ended June 30, 2001, and is expected to be approximately $95.3 million for the year. Progress Energy is currently assessing the impact adoption of these statements will have on the financial statements. In June 2001, the FASB approved the issuance of SFAS No. 143 "Accounting for Asset Retirement Obligations" that provides accounting guidance for the costs of retiring long-lived assets and is effective for fiscal years beginning after June 15, 2002. Progress Energy will assess the impact adoption of this statement will have on the financial statements once a final statement is issued. 6. COMPREHENSIVE INCOME -------------------- Comprehensive income for the three and six months ended June 30, 2001 was $112.5 million and $231.5 million, respectively. Items of other comprehensive income for the three and six month periods consisted primarily of derivatives used to hedge cash flows related to interest on long term debt. Prior to the adoption of SFAS No. 133 (see Note 5) Progress Energy had no other comprehensive income items and therefore comprehensive income for the three and six months ended June 30, 2000 is equal to net income for those periods. 7. FINANCING ACTIVITIES -------------------- On February 22, 2001, Progress Energy issued $3.2 billion of senior unsecured notes with maturities ranging from three to thirty years. Proceeds from this issuance were primarily used to retire short-term obligations issued in connection with the FPC acquisition. Additionally, as part of this transaction, Progress Energy terminated the $1.125 billion notional amount of interest rate forward contracts that were issued in anticipation of the debt issuance. Progress Energy recognized a $45.3 million loss on these contracts, designated as cash flow hedges, that is deferred through accumulated other comprehensive loss and amortized over the life of the associated debt instruments. On April 9, 2001, CP&L issued $300 million of Medium-Term Notes, 6.65% Series D due April 1, 2008. Proceeds from the issuance were primarily used to retire commercial paper. 13 On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds, 6.65% Series due July 15, 2011. Proceeds from the issuance were primarily used to retire commercial paper. On August 6, 2001, Progress Energy announced its plans to sell approximately 11 million shares of common stock to complete the financing of the Florida Progress acquisition. The offering is expected to conclude in mid-August. 8. EARNINGS PER COMMON SHARE ------------------------- Restricted stock awards and contingently issuable shares had a dilutive effect on earnings per share for the six months ended June 30, 2001 and increased the weighted-average number of common shares outstanding for dilutive purposes by 676,639 and 650,645 for the three and six months ended June 30, 2001, respectively, and by 400,256 and 370,149 for the three and six months ended June 30, 2000, respectively. The weighted-average number of common shares outstanding for dilutive purposes was 200.7 million and 200.5 million for the three and six months ended June 30, 2001, respectively, and 153.7 million and 153.5 million for the three and six months ended June 30, 2000. Employee Stock Ownership Plan shares that have not been committed to be released to participants' accounts are not considered outstanding for the determination of earnings per common share. Those shares totaled 5,330,408 and 5,875,527 at June 30, 2001 and June 30, 2000, respectively. 9. FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES (QUIPS) OF ---------------------------------------------------------------------- SUBSIDIARY HOLDING SOLELY FPC GUARANTEED NOTES ---------------------------------------------- In April 1999, FPC Capital I (the Trust), an indirect wholly-owned subsidiary of FPC, issued 12 million shares of $25 par cumulative FPC- obligated mandatorily redeemable preferred securities due 2039 (Preferred Securities), with an aggregate liquidation value of $300 million and a quarterly distribution rate of 7.10%. Currently, all 12 million shares of the Preferred Securities that were issued are outstanding. Concurrent with the issuance of the Preferred Securities, the Trust issued to Florida Progress Funding Corporation (Funding Corp.) all of the common securities of the Trust (371,135 shares) for $9.3 million. Funding Corp. is a direct wholly-owned subsidiary of FPC. The existence of the Trust is for the sole purpose of issuing the Preferred Securities and the common securities and using the proceeds thereof to purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable Interest Notes (subordinated notes) due 2039, for a principal amount of $309.3 million. The subordinated notes and the Notes Guarantee (as discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds from the sale of the subordinated notes were advanced to Progress Capital and used for general corporate purposes including the repayment of a portion of certain outstanding short-term bank loans and commercial paper. FPC has fully and unconditionally guaranteed the obligations of Funding Corp. under the subordinated notes (the Notes Guarantee). In addition, FPC has guaranteed the payment of all distributions required to be made by the Trust, but only to the extent that the Trust has funds available for such distributions (Preferred Securities Guarantee). The Preferred Securities Guarantee, considered together with the Notes Guarantee, constitutes a full and unconditional guarantee by FPC of the Trust's obligations under the Preferred Securities. The subordinated notes may be redeemed at the option of Funding Corp. beginning in 2004 at par value plus accrued interest through the redemption date. The proceeds of any redemption of the subordinated notes will be used by the Trust to redeem proportional amounts of the Preferred Securities and common securities in accordance with their terms. Upon liquidation or dissolution of Funding Corp., holders of the Preferred Securities would be entitled to the liquidation preference of $25 per share plus all accrued and unpaid dividends thereon to the date of payment. 10. COMMITMENTS AND CONTINGENCIES ----------------------------- Contingencies existing as of the date of these statements are described below. No significant changes have occurred since December 31, 2000, with respect to the commitments discussed in Note 19 of the financial statements included in Progress Energy's 2000 Annual Report on Form 10-K. Contingencies 1) Insurance. Progress Energy is a member of Nuclear Electric Insurance --------- Limited (NEIL), which provides primary and excess insurance coverage against property damage to members' nuclear generating facilities. 14 Under the primary program, Progress Energy is insured for $500 million at each of its nuclear plants. In addition to primary coverage, NEIL also provides decontamination, premature decommissioning and excess property insurance with limits of $2.0 billion on the Brunswick and Harris Plants, and $1.1 billion on the Robinson Plant and Crystal River Unit No. 3 (CR3). Insurance coverage against incremental costs of replacement power resulting from prolonged accidental outages at nuclear generating units is also provided through membership in NEIL. Progress Energy is insured thereunder, following a twelve week deductible period, for 52 weeks in the amount of $3.5 million per week at each of the nuclear units. An additional 104 weeks of coverage is provided at 80% of the above weekly amount. For the current policy period, Progress Energy is subject to retrospective premium assessments of up to approximately $15 million with respect to the primary coverage, $16.6 million with respect to the decontamination, decommissioning and excess property coverage, and $11.3 million for the incremental replacement power costs coverage, in the event covered losses at insured facilities exceed premiums, reserves, reinsurance and other NEIL resources. Pursuant to regulations of the NRC, Progress Energy's property damage insurance policies provide that all proceeds from such insurance be applied, first, to place the plant in a safe and stable condition after an accident and, second, to decontamination costs, before any proceeds can be used for decommissioning, plant repair or restoration. Progress Energy is responsible to the extent losses may exceed limits of the coverage described above. Progress Energy is insured against public liability for a nuclear incident up to $9.54 billion per occurrence. Under the provisions of the Price Anderson Act, which limits liability for accidents at nuclear power plants, Progress Energy, as an owner of nuclear plants, can be assessed for 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 $200 million (currently available through commercial insurers), CP&L and Florida Power would be subject to a pro rata assessments of up to $88.1 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. CP&L and Florida Power self-insure their transmission and distribution lines against loss due to storm damage and other natural disasters. Additionally, pursuant to a regulatory order, Florida Power is accruing $6 million annually to a storm damage reserve and may defer any losses in excess of the reserve. 2) Regulatory developments. Florida Power previously operated under an ----------------------- agreement committing several parties not to seek any reduction in its base rates or authorized return on equity. That agreement expired on June 30, 2001. On May 3, 2001, the staff of the Florida Public Service Commission, or FPSC, recommended that the FPSC require Florida Power to submit, by September 14, 2001, minimum filing requirements, based on a 2002 projected calendar year, to initiate a rate proceeding regarding its future base rates. The FPSC staff also recommended to the FPSC that, pending completion of Florida Power's rate case, annual revenues of $114 million should be held subject to refund to its customers. On June 20, 2001, the FPSC issued an order accepting its staff's recommendation that Florida Power be required to hold $114 million of revenue subject to refund and to file, by September 14, 2001, minimum filing requirements based on a projected 2002 test year. On July 2, 2001, Florida Power filed a request for rehearing of the portion of the FPSC's order requiring that it hold $114 million of revenues subject to refund on the grounds that the order contradicted FPSC precedent, was inconsistent with the applicable statutory requirements and violated Florida Power's due process rights. Also, since the FPSC's June 20, 2001 order, Florida Power has been working with FPSC staff and other interested parties to establish special procedures for the filing of the minimum filing requirements. Progress Energy cannot predict the outcome or impact of these matters. 3) Claims and uncertainties. ------------------------ a) Progress Energy 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 federal and state laws. The lead or sole regulatory agency that is responsible for a particular former coal tar site depends largely upon the state in which the site is located. There are several manufactured gas plant (MGP) sites to which both electric utilities and the gas utility have some connection. In this regard, both electric utilities and the gas utility, with other potentially responsible parties, are 15 participating in investigating and, if necessary, remediating former coal tar sites with several regulatory agencies, including, but not limited to, the U.S. Environmental Protection Agency (EPA), the Florida Department of Environment and Protection (DEP) and the North Carolina Department of Environment and Natural Resources, Division of Waste Management (DWM). Although Progress Energy may incur costs at these sites about which it has been notified, based upon current status of these sites, Progress Energy does not expect those costs to be material to its consolidated financial position or results of operations. Both electric utilities, the gas utility and Electric Fuels are periodically notified by regulators such as the EPA and various state agencies of their involvement or potential involvement in sites, other than MGP sites, that may require investigation and/or remediation. Although Progress Energy's subsidiaries may incur costs at the sites about which they have been notified, based upon the current status of these sites, Progress Energy does not expect those costs to be material to the consolidated financial position or results of operations of Progress Energy. The EPA has been conducting an enforcement initiative related to a number of coal-fired utility power plants in an effort to determine whether modifications at those facilities were subject to New Source Review requirements or New Source Performance Standards under the Clean Air Act. Both CP&L and Florida Power have been asked to provide information to the EPA as part of this initiative and have cooperated in providing the requested information. The EPA has initiated enforcement actions against other unaffiliated utilities as part of this initiative, some of which have resulted in settlement agreements calling for expenditures, ranging from $1.0 billion to $1.4 billion. 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. Progress Energy cannot predict the outcome of this matter. In 1998, the EPA published a final rule addressing the issue of regional transport of ozone. This rule is commonly known as the NOx SIP Call. The EPA's rule requires 23 jurisdictions, including North and South Carolina, but not Florida, to further reduce nitrogen oxide emissions in order to attain a pre-set state NOx emission level by May 31, 2004. CP&L is evaluating necessary measures to comply with the rule and estimates its related capital expenditures could be approximately $370 million, which has not been adjusted for inflation. Increased operation and maintenance costs relating to the NOx SIP Call are not expected to be material to Progress Energy's results of operations. Further controls are anticipated as electricity demand increases. Progress Energy cannot predict the outcome of this matter. In July 1997, the EPA issued final regulations establishing a new eight-hour ozone standard. In October 1999, the District of Columbia Circuit Court of Appeals ruled against the EPA with regard to the federal eight-hour ozone standard. The U.S. Supreme Court has upheld, in part, the District of Columbia Circuit Court of Appeals decision. Further litigation and rulemaking are anticipated. North Carolina adopted the federal eight-hour ozone standard and is proceeding with the implementation process. North Carolina has promulgated final regulations, which will require CP&L to install nitrogen oxide controls under the State's eight-hour standard. The cost of those controls are included in the cost estimate of $370 million set forth above. The EPA published a final rule approving petitions under Section 126 of the Clean Air Act, which requires certain sources to make reductions in nitrogen oxide emissions by May 1, 2003. The final rule also includes a set of regulations that affect nitrogen oxide emissions from sources included in the petitions. The North Carolina fossil-fueled 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 126 petitions. CP&L, other utilities, trade organizations and other states are participating in litigation challenging the EPA's action. On May 15, 2001, the District of Columbia Circuit Court of Appeals ruled in favor of the EPA which will require North Carolina to make reductions in nitrogen oxide emissions by May 1, 2003. However, the Court in its May 15th decision rejected the EPA's methodology for estimating the future growth factors the EPA used in calculating the emissions limits for utilities. In June 2001, CP&L and other utilities asked the court to delay the implementation of the 126 Rule by the EPA until the agency sets new emission limits based on a reconsideration of the growth factors mandated by the Court. Progress Energy cannot predict the outcome of this matter. 16 CP&L, Florida Power and NCNG have filed claims with Progress Energy's general liability insurance carriers to recover costs arising out of actual or potential environmental liabilities. Some claims have settled and others are still pending. While management cannot predict the outcome of these matters, the outcome is not expected to have a material effect on the consolidated financial position or results of operations. b) As required under the Nuclear Waste Policy Act of 1982, CP&L and Florida Power each entered into a contract with the 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 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 Court of Claims. In a recent decision, 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 DOE. CP&L and Florida Power are in the process of evaluating whether they should each file a similar action for damages. CP&L and Florida Power also continue to monitor legislation that has been introduced in Congress which might provide some limited relief. CP&L and Florida Power cannot predict the outcome of this matter. With certain modifications, CP&L's spent nuclear fuel storage facilities will be sufficient to provide storage space for spent fuel generated on CP&L's system through the expiration of the current operating licenses for all of CP&L's nuclear generating units. Subsequent to the expiration of these licenses, dry storage may be necessary. CP&L obtained NRC approval to use additional storage space at the Harris Plant in December 2000. Florida Power currently is storing spent nuclear fuel onsite in spent fuel pools. If Florida Power does not seek renewal of the CR3 operating license, with certain modifications to its storage pools currently underway, CR3 will have sufficient storage capacity in place for fuel consumed through the end of the expiration of the license in 2016. If Florida Power extends the CR3 operating license, dry storage may be necessary. c) Progress Energy and its subsidiaries are involved in various litigation matters in the ordinary course of business, some of which involve substantial amounts. Where appropriate, accruals have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. In the opinion of management, the final disposition of pending litigation would not have a material adverse effect on Progress Energy's consolidated results of operations or financial position. 17 CAROLINA POWER & LIGHT COMPANY CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited) June 30, 2001 STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2001 2000 2001 2000 - - ---------------------------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 782,287 $ 778,470 $ 1,603,861 $ 1,558,378 Natural gas - 75,350 - 147,448 Diversified businesses 1,092 38,484 6,121 63,618 - - ---------------------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 783,379 892,304 1,609,982 1,769,444 - - ---------------------------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 157,672 137,001 311,141 297,388 Purchased power 85,273 85,067 177,202 155,326 Gas purchased for resale - 59,836 - 103,734 Other operation and maintenance 179,434 164,989 348,088 363,216 Depreciation and amortization 139,831 136,951 277,792 274,721 Taxes other than on income 35,822 35,511 74,259 72,845 Diversified businesses 957 58,767 5,470 102,922 - - ---------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 598,989 678,122 1,193,952 1,370,152 - - ---------------------------------------------------------------------------------------------------------------------------------- Operating Income 184,390 214,182 416,030 399,292 - - ---------------------------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 6,340 2,048 11,025 5,311 Other, net 2,536 (4,790) 11,921 (494) - - ---------------------------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) 8,876 (2,742) 22,946 4,817 - - ---------------------------------------------------------------------------------------------------------------------------------- Interest Charges Long-term debt 62,698 54,851 125,266 104,923 Other interest charges 2,628 4,278 4,914 9,280 Allowance for borrowed funds used during construction (1,576) (6,322) (4,349) (10,929) - - ---------------------------------------------------------------------------------------------------------------------------------- Net Interest Charges 63,750 52,807 125,831 103,274 - - ---------------------------------------------------------------------------------------------------------------------------------- Income before Income Taxes 129,516 158,633 313,145 300,835 Income Taxes 44,637 50,434 107,393 106,632 - - ---------------------------------------------------------------------------------------------------------------------------------- Net Income 84,879 108,199 205,752 194,203 Preferred Stock Dividend Requirements (741) (742) (1,482) (1,483) - - ---------------------------------------------------------------------------------------------------------------------------------- Earnings for Common Stock $ 84,138 $ 107,457 $ 204,270 $ 192,720 - - ---------------------------------------------------------------------------------------------------------------------------------- See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements.
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Carolina Power & Light Company CONSOLIDATED BALANCE SHEETS (In thousands) June 30, December 31, Assets 2001 2000 - - ---------------------------------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 11,659,934 $ 11,125,901 Accumulated depreciation (5,760,153) (5,505,731) - - ---------------------------------------------------------------------------------------------------------------------------- Utility plant in service, net 5,899,781 5,620,170 Held for future use 7,105 7,105 Construction work in progress 638,068 815,246 Nuclear fuel, net of amortization 181,421 184,813 - - ---------------------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 6,726,375 6,627,334 - - ---------------------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 35,022 30,070 Accounts receivable 444,858 466,774 Receivables from affiliated companies 438,907 362,834 Taxes receivable - 15,412 Inventory 287,098 233,369 Deferred fuel cost 124,912 119,853 Prepayments 11,998 24,284 Other current assets 74,960 75,451 - - ---------------------------------------------------------------------------------------------------------------------------- Total Current Assets 1,417,755 1,328,047 - - ---------------------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Income taxes recoverable through future rates 217,193 210,571 Harris Plant deferred costs 38,796 44,813 Unamortized debt expense 16,498 15,716 Nuclear decommissioning trust funds 420,574 411,279 Diversified business property, net 104,098 102,294 Miscellaneous other property and investments 353,598 395,995 Other assets and deferred debits 117,994 124,339 - - ---------------------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 1,268,751 1,305,007 - - ---------------------------------------------------------------------------------------------------------------------------- Total Assets $ 9,412,881 $ 9,260,388 - - ---------------------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - - ---------------------------------------------------------------------------------------------------------------------------- Capitalization - - ---------------------------------------------------------------------------------------------------------------------------- Common stock $ 1,780,965 $ 1,753,105 Unearned ESOP common stock (117,268) (127,211) Retained earnings 1,286,809 1,226,144 Accumulated other comprehensive loss (4,606) - Preferred stock - not subject to mandatory redemption 59,334 59,334 Long-term debt, net 4,014,938 3,619,984 - - ---------------------------------------------------------------------------------------------------------------------------- Total Capitalization 7,020,172 6,531,356 - - ---------------------------------------------------------------------------------------------------------------------------- Current Liabilities Accounts payable 219,887 281,026 Payables to affiliated companies 7,720 275,976 Taxes accrued 33,584 - Interest accrued 61,654 56,259 Dividends declared 1,482 1,482 Other current liabilities 196,204 146,191 - - ---------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 520,531 760,934 - - ---------------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,399,401 1,491,660 Accumulated deferred investment tax credits 175,988 197,207 Other liabilities and deferred credits 296,789 279,231 - - ---------------------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 1,872,178 1,968,098 - - ---------------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 6) - - ---------------------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 9,412,881 $ 9,260,388 - - ---------------------------------------------------------------------------------------------------------------------------- See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements.
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Carolina Power & Light Company STATEMENTS OF CASH FLOWS Six Months Ended June 30, (In thousands) 2001 2000 - - ------------------------------------------------------------------------------------------------------------------------ Operating Activities Net income $ 205,752 $ 194,203 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 321,767 316,914 Deferred income taxes (63,765) (51,106) Investment tax credit (9,241) (5,198) Deferred fuel credit (5,059) (12,555) Net increase in accounts receivable (6,936) (53,134) Net increase in inventories (53,729) (25,350) Net decrease in prepaids and other current assets 12,776 82,283 Net decrease in accounts payable (290,379) (9,087) Net increase in other current liabilities 49,175 83,103 Other 34,353 61,530 - - ------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 194,714 581,603 - - ------------------------------------------------------------------------------------------------------------------------ Investing Activities Gross property additions (387,253) (418,321) Nuclear fuel additions (45,813) (47,329) Contributions to nuclear decommissioning trust (17,899) (17,979) Increase in cash restricted for redemption of long-term debt - (59,079) Net cash flow of company-owned life insurance program (6,098) (4,963) Diversified business property additions (1,714) (33,468) Investments in non-utility activities (5,179) (28,018) - - ------------------------------------------------------------------------------------------------------------------------ Net Cash Used in Investing Activities (463,956) (609,157) - - ------------------------------------------------------------------------------------------------------------------------ Financing Activities Proceeds from issuance of long-term debt 296,747 417,383 Net increase (decrease) in commercial paper reclassified to long-term debt 103,558 (57,600) Net increase in outstanding payments - 41,620 Retirement of long-term debt (163) (264,717) Dividends paid to parent (124,466) - Dividends paid on common stock - (158,056) Dividends paid on preferred stock (1,482) (1,483) - - ------------------------------------------------------------------------------------------------------------------------ Net Cash Provide by (Used in) Financing Activities 274,194 (22,853) - - ------------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents 4,952 (50,407) Cash and Cash Equivalents at Beginning of the Period 30,070 79,871 - - ------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of the Period $ 35,022 $ 29,464 - - ------------------------------------------------------------------------------------------------------------------------ Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period - interest $ 117,330 $ 96,864 income taxes $ 127,296 $ 111,866 - - ------------------------------------------------------------------------------------------------------------------------ See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements.
20 Carolina Power & Light Company NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION -------------------------------------- A. Organization. Carolina Power & Light Company (CP&L) is a public ------------ service corporation primarily engaged in the generation, transmission, distribution and sale of electricity in portions of North Carolina and South Carolina. CP&L is a wholly-owned subsidiary of Progress Energy, Inc. (Progress Energy), which was formed as a result of the reorganization of CP&L into a holding company structure on June 19, 2000. All shares of common stock of CP&L were exchanged for an equal number of shares of CP&L Energy. On December 4, 2000, CP&L Energy changed its name to Progress Energy, Inc. Progress Energy is a registered holding company under the Public Utility Holding Company Act of 1935, as amended (PUCHA). Both Progress Energy and its subsidiaries are subject to the regulatory provisions of PUCHA. On July 1, 2000, CP&L distributed its ownership interest in the stock of North Carolina Natural Gas (NCNG), Strategic Resource Solutions Corporation (SRS), Monroe Power Company (Monroe Power) and Progress Energy Ventures, Inc. (formerly CPL Energy Ventures, Inc.) to Progress Energy. As a result, those companies are direct subsidiaries of the Progress Energy, Inc. and are not included in CP&L's results of operations and financial position since that date. B. Basis of Presentation. These financial statements have been prepared --------------------- in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) 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 generally accepted accounting principles for complete financial statements. Because the accompanying consolidated interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles, they should be read in conjunction with the audited financial statements for the period ended December 31, 2000 and notes thereto included in CP&L's Form 10-K for the year ended December 31, 2000. The amounts included in the consolidated interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present CP&L'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. Certain amounts for 2000 have been reclassified to conform to the 2001 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. FINANCIAL INFORMATION BY BUSINESS SEGMENT ----------------------------------------- As described in Note 1A, on July 1, 2000, CP&L distributed its ownership interest in the stock of NCNG, SRS, Monroe Power and Progress Energy Ventures, Inc. to Progress Energy. As a result, those companies are direct subsidiaries of Progress Energy and are not included in CP&L's results of operations and financial position since that date. Through June 30, 2000, the operations and assets of Progress Energy and CP&L were substantially the same, except for the energy marketing and trading activities performed by Energy Ventures on behalf of CP&L. Subsequent to July 1, 2000, CP&L's operations consist primarily of the CP&L Utility segment with no other material segments. The CP&L Utility segment includes both retail and wholesale electric operations and trading activities. The energy 21 marketing and trading activities performed by Energy Ventures on CP&L's behalf are included in the Energy Ventures segment in the Progress Energy consolidated financial statements. The financial information by business segment for CP&L Utility for the three and six months ended June 30, 2001 and 2000 is as follows:
Three Months Ended (in thousands) June 30, 2001 June 30, 2000 - - -------------------------------------------------------------------------------------------------------------------------------- Revenues Unaffiliated $ 782,287 $ 778,470 Intersegment - - ----------------------------------------------------------------- Total Revenues $ 782,287 $ 778,470 Segment Income $ 84,254 $ 118,834 Total Segment Assets $8,942,454 $8,632,699 ================================================================================================================================ Six Months Ended (in thousands) June 30, 2001 June 30, 2000 - - -------------------------------------------------------------------------------------------------------------------------------- Revenues Unaffiliated $1,603,861 $1,558,378 Intersegment - - ----------------------------------------------------------------- Total Revenues $1,603,861 $1,558,378 Segment Income $ 203,048 $ 208,797 Total Segment Assets $8,942,454 $8,632,699 ================================================================================================================================
The primary differences between the CP&L Utility and CP&L consolidated financial information relate to other non-electric operations and elimination entries. 3. IMPACT OF NEW ACCOUNTING STANDARDS ---------------------------------- Effective January 1, 2001, CP&L adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. The adoption of SFAS No. 133 did not result in a significant transition adjustment affecting accumulated other comprehensive loss. Additionally, there was no transition adjustment affecting the consolidated statement of income as a result of the adoption of SFAS No. 133. During the second quarter of 2001, the Financial Accounting Standards Board (FASB) issued interpretations of SFAS No. 133 indicating that options in general cannot qualify for the normal purchases and sales exception, but provided an exception that allows certain electricity contracts, including certain capacity-energy contracts, to be excluded from the mark-to-market requirements of SFAS No. 133. These interpretations are effective July 1, 2001. CP&L is continuing to review contracts to determine whether they meet the criteria for the normal purchases and sales exception. If an electricity or fuel supply contract in its regulated business is subject to mark-to-market accounting, there would be no income statement effect of the mark to market because the contract's mark-to-market gain or loss will be recorded as a regulatory asset or liability. Any mark-to-market gains or losses on contracts outside its regulated business will affect income unless those contracts qualify for hedge accounting treatment. The application of the new rules is still evolving and further guidance from the Financial Accounting Standards Board (FASB) is expected, which could additionally impact CP&L's financial statements. On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and clarifies the criteria for recording of other intangible assets separately from goodwill. SFAS No. 142 requires that, effective January 1, 2002, a company cease amortization of goodwill. CP&L does not have any goodwill recorded on its records, and therefore the adoption of these statements will have no impact on CP&L's financial statements. 22 In June 2001, the FASB approved the issuance of SFAS No. 143 "Accounting for Asset Retirement Obligations" that provides accounting guidance for the costs of retiring long-lived assets and is effective for fiscal years beginning after June 15, 2002. CP&L will assess the impact adoption of this statement will have on the financial statements once a final statement is issued. 4. COMPREHENSIVE INCOME -------------------- Comprehensive income for the three and six months ended June 30, 2001 was $84.8 and $201.1 million, respectively. Items of other comprehensive income for the three and six month periods consisted of derivatives used to hedge cash flows related to interest on long term debt. Prior to the adoption of SFAS No. 133 (see Note 3) CP&L had no other comprehensive income items and therefore comprehensive income for the three and six months ended June 30, 2000 is equal to net income for those periods. 5. FINANCING ACTIVITIES -------------------- On April 9, 2001, CP&L issued $300 million of Medium-Term Notes, 6.65% Series D due April 1, 2008. Proceeds from the issuance were primarily used to retire commercial paper. 6. COMMITMENTS AND CONTINGENCIES ----------------------------- Contingencies existing as of the date of these statements are described below. No significant changes have occurred since December 31, 2000, with respect to the commitments discussed in Note 16 of the financial statements included in CP&L's 2000 Annual Report on Form 10-K. Contingencies 1) Insurance. CP&L is a member of Nuclear Electric Insurance Limited --------- (NEIL), which provides primary and excess insurance coverage against property damage to members' nuclear generating facilities. Under the primary program, CP&L is insured for $500 million at each of its nuclear plants. In addition to primary coverage, NEIL also provides decontamination, premature decommissioning and excess property insurance with limits of $2.0 billion on the Brunswick and Harris Plants, and $1.1 million on the Robinson Plant. Insurance coverage against incremental costs of replacement power resulting from prolonged accidental outages at nuclear generating units is also provided through membership in NEIL. CP&L is insured thereunder, following a twelve week deductible period, for 52 weeks in the amount of $3.5 million per week at each of it's nuclear units. An additional 104 weeks of coverage is provided at 80% of the above weekly amount. For the current policy period, CP&L is subject to retrospective premium assessments of up to approximately $11.6 million with respect to the primary coverage, $13.3 million with respect to the decontamination, decommissioning and excess property coverage and $8.9 million for the incremental replacement power costs coverage, in the event covered losses at insured facilities exceed premiums, reserves, reinsurance and other NEIL resources. Pursuant to regulations of the Nuclear Regulatory Commission, CP&L's property damage insurance policies provide that all proceeds from such insurance be applied, first, to place the plant in a safe and stable condition after an accident and, second, to decontamination costs, before any proceeds can be used for decommissioning, plant repair or restoration. CP&L is responsible to the extent losses may exceed limits of the coverage described above. CP&L is insured against public liability for a nuclear incident up to $9.54 billion per occurrence. Under the provisions of the Price Anderson Act, which limits liability for accidents at nuclear power plants, CP&L, as an owner of nuclear plants, can be assessed for 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 $200 million (currently available through commercial insurance), CP&L would be subject to a pro rata assessment of up to $88.1 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. CP&L self-insures its transmission and distribution lines against loss due to storm damage and other natural disasters. 23 2) Claims and uncertainties. ------------------------ a) CP&L 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 federal and state laws. The lead or sole regulatory agency that is responsible for a particular former coal tar site depends largely upon the state in which the site is located. There are several manufactured gas plant (MGP) sites to which CP&L has some connection. In this regard, CP&L, with other potentially responsible parties, are participating in investigating and, if necessary, remediating former coal tar sites with several regulatory agencies, including, but not limited to, the U.S. Environmental Protection Agency (EPA) and the North Carolina Department of Environment and Natural Resources, Division of Waste Management (DWM). Although CP&L may incur costs at these sites about which it has been notified, based upon current status of these sites, CP&L does not expect those costs to be material to its consolidated financial position or results of operations. CP&L is periodically notified by regulators such as the EPA and various state agencies of their involvement or potential involvement in sites, other than MGP sites, that may require investigation and/or remediation. Although CP&L may incur costs at the sites about which they have been notified, based upon the current status of these sites, CP&L does not expect those costs to be material to its consolidated financial position or results of operations. The EPA has been 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. CP&L has been asked to provide information to the EPA as part of this initiative and has cooperated in providing the requested information. The EPA has initiated enforcement actions against other unaffiliated utilities as part of this initiative, some of which have resulted in settlement agreements calling for expenditures, ranging from $1.0 billion to $1.4 billion. 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. CP&L cannot predict the outcome of this matter. In 1998, the EPA published a final rule addressing the issue of regional transport of ozone. This rule is commonly known as the NOx SIP Call. The EPA's rule requires 23 jurisdictions, including North and South Carolina, to further reduce nitrogen oxide emissions in order to attain a pre-set state NOx emission level by May 31, 2004. CP&L is evaluating necessary measures to comply with the rule and estimates its related capital expenditures could be approximately $370 million, which has not been adjusted for inflation. Increased operation and maintenance costs relating to the NOx SIP Call are not expected to be material to CP&L's results of operations. Further controls are anticipated as electricity demand increases. CP&L cannot predict the outcome of this matter. In July 1997, the EPA issued final regulations establishing a new eight-hour ozone standard. In October 1999, the District of Columbia Circuit Court of Appeals ruled against the EPA with regard to the federal eight-hour ozone standard. The U.S. Supreme Court has upheld, in part, the District of Columbia Circuit Court of Appeals decision. Further litigation and rulemaking are anticipated. North Carolina adopted the federal eight-hour ozone standard and is proceeding with the implementation process. North Carolina has promulgated final regulations, which will require CP&L to install nitrogen oxide controls under the State's eight-hour standard. The cost of those controls are included in the cost estimate of $370 million set forth above. The EPA published a final rule approving petitions under Section 126 of the Clean Air Act, which requires certain sources to make reductions in nitrogen oxide emissions by May 1, 2003. The final rule also includes a set of regulations that affect nitrogen oxide emissions from sources included in the petitions. The North Carolina fossil-fueled 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 126 petitions. 24 CP&L, other utilities, trade organizations and other states are participating in litigation challenging the EPA's action. On May 15, 2001, the District of Columbia Circuit Court of Appeals ruled in favor of the EPA which will require North Carolina to make reductions in nitrogen oxide emissions by May 1, 2003. However, the Court in its May 15th decision rejected the EPA's methodology for estimating the future growth factors the EPA used in calculating the emissions limits for utilities. In June 2001, CP&L and other utilities asked the court to delay the implementation of the 126 Rule by the EPA until the agency sets new emission limits based on a reconsideration of the growth factors mandated by the Court. CP&L cannot predict the outcome of this matter. CP&L has filed claims with its general liability insurance carriers to recover costs arising out of actual or potential environmental liabilities. Some claims have settled and others are still pending. While management cannot predict the outcome of these matters, the outcome is not expected to have a material effect on the consolidated financial position or results of operations. b) As required under the Nuclear Waste Policy Act of 1982, CP&L entered into a contract with the 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 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 Court of Claims. In a recent decision, 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 DOE. CP&L is in the process of evaluating whether they should file a similar action for damages. CP&L also continues to monitor legislation that has been introduced in Congress which might provide some limited relief. CP&L cannot predict the outcome of this matter. With certain modifications, CP&L's spent nuclear fuel storage facilities will be sufficient to provide storage space for spent fuel generated on its system through the expiration of the current operating licenses for all of its nuclear generating units. Subsequent to the expiration of these licenses, dry storage may be necessary. CP&L obtained NRC approval to use additional storage space at the Harris Plant in December 2000. c) CP&L is involved in various litigation matters in the ordinary course of business, some of which involve substantial amounts. Where appropriate, accruals have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. In the opinion of management, the final disposition of pending litigation would not have a material adverse effect on CP&L's consolidated results of operations or financial position. 25 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, 2001, as compared to the corresponding periods in the prior year Progress Energy, Inc. Operating Results ----------------- Progress Energy's consolidated earnings for the three months ended June 30, 2001, were $111.7 million, or $0.56 per share, compared to earnings of $107.5 million, or $0.70 per share, for the same period in 2000. Earnings for the six months ended June 30, 2001 were $265.7 million, $1.33 per share, compared to earnings of $192.7 million, or $1.26 per share for the same period in 2000. The increase in Progress Energy's earnings for the six month period is primarily related to Florida Progress being included in Progress Energy's results of operations since the acquisition date of November 30, 2000. Operating results for the three and six months ended June 30, 2001 were also favorably impacted by expanded operations in the Energy Ventures business segment. Earnings from the CP&L Electric segment were negatively impacted during the second quarter by a significant slowdown in industrial sales, and increased operations and maintenance costs for planned nuclear plant outages. Business segment earnings and the factors affecting them are discussed below. CP&L Electric ------------- CP&L Electric contributed net income of $69.3 million and $174.4 million for the three and six months ended June 30, 2001, and $93.8 million and $170.0 million for the same periods in 2000. Wholesale sales are reported in the Energy Ventures segment. The components of retail electric megawatt-hour sales for the three and six months ended June 30, 2001, and 2000 were as follows: (In millions of mWh)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 % Change 2001 2000 % Change ----- ------ ------------ ------ ------ ------------ Residential 3,098 3,172 (2.3)% 7,102 7,061 0.6% Commercial 2,971 2,962 0.3 5,674 5,474 3.7 Industrial 3,411 3,767 (9.5) 6,475 7,191 (10.0) Governmental 335 332 0.9 666 678 (1.8) -------------------------------------------------------------------------------------------------------------- Total Retail mWh Sales 9,815 10,233 (4.1)% 19,917 20,404 (2.4)%
For the year to date, residential and commercial mWh sales reflect continued growth in the number of customers served by CP&L, and increased usage, offset by weather. For the second quarter, residential sales were down when compared to the same period last year due to unfavorable weather. Industrial sales experienced an overall decrease for the quarter and year to date primarily related to the textile, paper and chemical industries, which continue to be negatively affected by the economic downturn that is expected to continue. Fuel used for electric generation, excluding fuel related to wholesale sales, increased for the quarter due to price increases in coal, oil and gas. For the year to date, fuel related to retail sales decreased primarily due to a deferred fuel write-off in June 2000 and a decrease in generation. This decrease was partially offset by price increases in coal, oil and gas. Purchased power, excluding that purchased for wholesale sales, increased for the year to date period primarily due to increases in price and volume, offset by decreases in purchases from co-generators. The decrease in co- generator 26 purchases was due to the termination of two contracts in the fourth quarter of 2000. For the quarter, purchased power increased mainly due to price. Other operation and maintenance expense decreased for the six months ended June 30, 2001, due to the absence of restoration costs associated with the severe winter storm and record breaking snowfall in January 2000. Also, general and administrative expenses decreased due to the establishment of the service company in June 2000, which allocates its costs among all Progress Energy entities. Operation and maintenance expenses in the second quarter, as compared to the prior year, increased primarily due to the timing of planned nuclear plant outage costs, and higher transmission expenses. Interest on long-term debt increased during the three and six months ended June 30, 2001, primarily due to an increase in long-term debt outstanding. Florida Power Electric ---------------------- The results shown in the Progress Energy consolidated financial statements for the Florida Power Electric segment are not comparable to the prior year as the operating results of Florida Power have only been included in Progress Energy's results of operations since the date of acquisition on November 30, 2000. Florida Power Electric contributed net income of $81.0 million and $144.2 million for the three and six months ended June 30, 2001. Wholesale sales are being reported in the Energy Ventures segment. The components of retail electric megawatt-hour sales for the three and six months ended June 30, 2001, and 2000 were as follows: (In millions of mWh)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 % Change 2001 2000 % Change ----- ----- ------------ ------ ------ ------------ Residential 4,375 4,358 0.4% 8,525 8,077 5.5% Commercial 2,900 2,828 2.5 5,231 5,102 2.5 Industrial 995 1,080 (7.9) 1,962 2,164 (9.3) Governmental 690 685 0.7 1,283 1,266 1.3 ------------------------------------------------------------------------------------------------------------ Total Retail mWh Sales 8,960 8,951 0.1% 17,001 16,609 2.4%
Florida Power's retail kilowatt-hour sales increased slightly during the second quarter of 2001 and for the year to date when compared to 2000. Residential and commercial sectors increased due to continued customer growth. Weather, a key factor influencing usage among residential customers, negatively influenced retail sales for the quarter due to cooler than normal temperatures. For the year to date, weather impacts have been flat compared to prior year. Industrial sales declined due to weakness in the phosphate industry. Fuel used in generation and purchased power increased for the second quarter of 2001 and for the year to date when compared to the same periods last year. The increase is due mainly to the increased price of coal, oil and gas when compared to the prior year, and increased usage. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, have no material impact on operating results. Operations and maintenance expense decreased during the quarter and for the year. The decrease is due primarily to lower employee-related costs resulting from the reorganization after the acquisition by Progress Energy. Natural Gas ------------- Natural Gas operations had a net loss of $5.2 million and net income of $2.3 million for the three and six months ended June 30, 2001, respectively. For the same periods in 2000, this segment contributed net income of $.1 million and $8.9 million, respectively. The decreased earnings is mainly due to reduced sales to certain large industrial customers with fuel switching capabilities. Natural gas revenues increased for the six months ended June 30, 2001, when compared to the same period in the prior year, primarily due to increases in the market price of natural gas, which are recovered primarily through cost recovery clauses. Revenues decreased for the three month period due to industrial sales, which are down due to lower consumption because gas prices are higher than alternative fuel prices and a shift from sales to transportation service. 27 Operation and maintenance expenses increased slightly for the three and six months ended June 30, 2001 when compared to the same period in the prior year due to increases in bad debt expense associated with increases in natural gas revenues, increases in staffing levels and associated overhead. Energy Ventures --------------- Energy Ventures contributed net income of $74.3 million and $138.1 million for the three and six months ended June 30, 2001, and $25.9 million and $39.8 million for the same period in 2000. The Energy Ventures operations include fuel extraction, manufacturing and delivery, synthetic fuels production, merchant generation, and energy marketing and trading activities on behalf of the utility operating companies. Energy marketing and trading activities include wholesale sales on behalf of the utilities. Due to the creation of Energy Ventures in 2000 and the acquisition of Electric Fuels' subsidiaries through the FPC acquisition, the results of operations for the Energy Ventures segment are not comparable to the prior year. The increase in earnings for this segment is primarily due to the tax credits generated by Progress Energy's synthetic fuel operations (see "Other Matters" below). The Energy Ventures segment sold 3.4 million and 6.2 million tons of synthetic fuel for the three and six months ended June 30, 2001, respectively, and 0.2 million tons for the quarter and year to date periods ended June 30, 2000. Energy Ventures' energy marketing and trading activities on behalf of CP&L generated net income of $15.0 million and $28.6 million for the three and six months ended June 30, 2001, respectively, compared to net income of $21.0 million and $34.7 million for the same period in the prior year. Earnings from the trading operations decreased over these periods due to softness in the energy market in the current year. Earnings from the term marketing operations were relatively flat compared with the prior year. Earnings for the Florida energy marketing and trading operations for the six months ended June 30, 2001 of $11.7 million increased over the prior year due to increases in peaking demand in January and February of 2001. The fuel extraction, manufacturing and delivery operations were owned by Electric Fuels, and therefore results are not comparable due to the acquisition of FPC in November 2000. Merchant generation operations for the current year were consistent with the prior period results. Progress Energy expects earnings in merchant generation to increase with the addition of a plant in Florida, planned to produce output in June 2002. See "Company Activities" below for Progress Energy's additional merchant plant developments. Rail Services ------------- Progress Energy had originally included FPC's Rail Services business segment in net assets held for sale. Rail Services' operations include railcar repair, rail parts reconditioning and sales, scrap metal recycling and other rail related services. Progress Energy no longer intends to sell Progress Rail in the near future and has therefore included Progress Rail's cumulative revenues and net loss from December 2000 through June 2001 of $520.9 million and $7.5 million, respectively, in the current quarter. Progress Energy also recorded the interest allocated to these assets, which is included in the Other segment. Going forward, Progress Rail's results will be included in consolidated earnings. Due to the acquisition of Progress Rail through the FPC acquisition, the results of operations for the Rail Services segment are not comparable to the prior year. Current year results for Rail Services were negatively affected by the significant downturn in the domestic scrap market and the continuing weak market for railcar parts. Other ----- The Other segment contributed a net loss of $100.1 million and $185.8 million for the three and six months ended June 30, 2001, and $12.3 million and $26.0 million for the same periods in 2000. The other segment primarily includes the operations of Strategic Resource Solutions Corp. (SRS), Progress Telecommunications Corporation (Progress Telecom), Caronet, Inc. and certain holding company results. The operations of SRS, Progress Telecom and Caronet did not have a material impact on Progress Energy's results for the three and six months ended June 30, 2001. The decrease in earnings for this segment is primarily due to the increase in interest expense for holding company debt and goodwill amortization resulting from the acquisition of Florida Progress. See "New Accounting Standards" below for information on recent developments related to goodwill amortization. 28 Progress Energy issued 98.6 million Contingent Value Obligations (CVO's) in connection with the Florida Progress acquisition. Each CVO represents the right to receive contingent payments based on the performance of four synthetic fuel facilities owned by Progress Energy. The payments, if any, are based on the net after-tax cash flows the facilities generate. These CVO's are valued at fair value and unrealized gains and losses from changes in fair value are recognized in earnings. At June 30, 2001, the fair value of these CVO's was $49.3 million. Charges of $5.9 million and $8.9 million were recorded by the holding company for the three and six-month periods ended June 30, 2001 to record the change in fair value of the CVO's. Additionally, the other segment results also include the effect of an intra-period tax allocation adjustment. Generally accepted accounting principles require companies to apply a levelized effective tax rate to interim periods that is consistent with the estimated annual rate. Income tax expense was increased by $25.3 million and $45.4 million for the second quarter and year to date, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. The tax credits associated with Progress Energy's synthetic fuel operations lower the overall effective tax rate. These credits, along with seasonal earnings variations, can also cause large swings in the effective tax rate for interim periods. Therefore, this adjustment will vary each quarter but will have no effect on net income for the year. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Progress Energy, Inc. During the six months ended June 30, 2001, $542.8 million was spent on the utility subsidiaries' construction program and $120.4 million was spent in diversified operations. In February 2001, Progress Energy issued $3.2 billion of senior unsecured notes with maturities ranging from three to thirty years. These notes were issued with a weighted average coupon of 7.06%. Proceeds from this issuance were primarily used to retire commercial paper and other short- term indebtedness issued in connection with the FPC acquisition. As a result of the issuance of $3.2 billion of senior notes, availability under Progress Energy's line of credit, which is used to support its commercial paper borrowings, was reduced to $550 million During the first quarter of 2001, Progress Capital Holdings retired $31 million of Medium-Term Notes. The $6 million of medium-term notes that were retired in January had a 9.95% coupon rate, and the $25 million of medium-term notes that were retired in February had a 6.13% coupon rate. Progress Energy issued commercial paper to fund the maturing medium-term notes. On April 9, 2001, CP&L issued $300 million of Medium-Term Notes, 6.65% Series D due April 1, 2008. Proceeds from the issuance were primarily used to retire commercial paper. On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds, 6.65% Series due July 15, 2011. Proceeds from the issuance were primarily used to retire commercial paper. On August 6, 2001, Progress Energy announced its plans to sell approximately 11 million shares of common stock to complete the financing of the Florida Progress acquisition. The offering is expected to conclude in mid-August. OTHER MATTERS ------------- Company Activities ------------------- In July 2001, Progress Energy announced construction of a 320-megawatt plant in DeSoto County, Florida, Progress Energy's first merchant venture in Florida. This gas-fired plant will be in commercial operation by June 2002, and Energy Ventures is in late-stage negotiations to sell its output and capacity. In June 2001, the NCUC held a hearing concerning Progress Energy's request to transfer certificates granted for eleven generating units in Richmond and Rowan counties, N.C., from the regulated electric utility, CP&L, to Energy Ventures. Progress Energy anticipates a Commission order on this matter during the third quarter. Combined, these natural gas-fired units will be capable of producing approximately 2,200 megawatts of power. Seven of these units, representing approximately 1,100 megawatts of new gas-fired generation, began commercial operation in late May. Progress Energy expects that completion of the transfer, along with the DeSoto project, would bring Energy Ventures' merchant fleet to approximately 2,700 megawatts by the end of 2002. 29 Natural Gas Activities ---------------------- The Eastern North Carolina Natural Gas Co. (EasternNC) is a corporation formed equally between the Albemarle Pamlico Economic Development Corporation (APEC) and Progress Energy to build an 800-mile natural gas pipeline system to serve 14 eastern North Carolina counties. EasternNC has begun surveying, designing, engineering and environmental permitting for the first phase of the project. The initial phase consists of about 125 miles of transmission (6- to 12-inch diameter) pipeline and about 75 miles of distribution (2- to 6-inch diameter) pipe. Construction of the first phase is scheduled to begin in late 2001, and is scheduled to be completed by mid-summer 2002. The entire project should be completed by the end of 2004. Progress Energy has agreed to fund a portion of the project, currently estimated to be approximately $22 million. EasternNC plans to obtain additional capital through bond funding. On March 20, 2001 EasternNC filed its amended application for approval of the route design for Phases 2-7 of the project and additional gas bond funds of $149.6 million to construct this system. By order dated June 7, 2001 the NCUC approved EasternNC's proposed route design for the remaining 8 counties which constitutes Phases 2-7 of the project and awarded EasternNC an additional $149.6 million in bond funds to construct the project. EasternNC has requested a Private Letter Ruling (PLR) from the IRS that the receipt of bond funds will not be considered income subject to federal income tax. If receipt of bond funds is found to be taxable, the design of the EasternNC system will be modified. Progress Energy cannot predict the outcome of this matter. Regulatory Developments ----------------------- Florida Power previously operated under an agreement committing several parties not to seek any reduction in its base rates or authorized return on equity. That agreement expired on June 30, 2001. On May 3, 2001, the staff of the Florida Public Service Commission, or FPSC, recommended that the FPSC require Florida Power to submit, by September 14, 2001, minimum filing requirements, based on a 2002 projected calendar year, to initiate a rate proceeding regarding its future base rates. The FPSC staff also recommended to the FPSC that, pending completion of Florida Power's rate case, annual revenues of $114 million should be held subject to refund to its customers. On June 20, 2001, the FPSC issued an order accepting its staff's recommendation that Florida Power be required to hold $114 million of revenue subject to refund and to file, by September 14, 2001, minimum filing requirements based on a projected 2002 test year. On July 2, 2001, Florida Power filed a request for rehearing of the portion of the FPSC 's order requiring that it hold $114 million of revenues subject to refund on the grounds that the order contradicted FPSC precedent, was inconsistent with the applicable statutory requirements and violated Florida Power's due process rights. Also, since the FPSC's June 20, 2001 order, Florida Power has been working with FPSC staff and other interested parties to establish special procedures for the filing of the minimum filing requirements. Progress Energy cannot predict the outcome or impact of these matters. In its May 3, 2001 recommendation, the FPSC staff expressed concerns related to Florida Power's plans to participate in the creation of the GridFlorida regional transmission organization, or GridFlorida RTO, along with Florida Power & Light Company and Tampa Electric Company. The FPSC staff raised questions about the prudence of establishing the new system and costs associated with the process. Progress Energy is continuing to evaluate the concerns that the FPSC staff has raised about the GridFlorida RTO and the impact those concerns might have on the implementation of the GridFlorida RTO plan this year. On June 27, 2001, the FPSC issued an order establishing a two-phase process for addressing these GridFlorida RTO issues in the context of Florida Power's pending rate case. In the first phase, the FPSC will address the general issues associated with the prudence of the GridFlorida RTO on an expedited basis, with a decision scheduled for October 30, 2001. The second phase will address ratemaking issues and will be decided as part of the general rate proceeding. Progress Energy cannot predict the outcome or impact of these matters. Regional Transmission Organizations ----------------------------------- In October 2000, Florida Power, along with Florida Power & Light Company and Tampa Electric Company filed with the Federal Energy Regulatory Commission, or FERC, an application for approval of a regional transmission organization, or RTO, for peninsular Florida, currently named GridFlorida. On March 28, 2001, FERC issued an order provisionally granting GridFlorida RTO status and directing the GridFlorida applicants to make certain 30 changes in the RTO documents and to file such changes within 60 days. On May 29, 2001, the GridFlorida applicants made the compliance filing as directed by FERC, but FERC has not yet issued an order on that compliance filing. On May 16, 2001, the FPSC initiated dockets to review the prudence of the GridFlorida applicants' decision to form and participate in the GridFlorida RTO. The GridFlorida applicants have announced that they will hold GridFlorida development activities in abeyance. An order on this issue is expected in late October of 2001. Progress Energy cannot predict the outcome of this matter. In October 2000, CP&L, along with Duke Energy Corporation and South Carolina Electric & Gas Company, filed with FERC an application for approval of a for-profit transmission company, currently named GridSouth. On July 12, 2001, FERC issued an order granting GridSouth RTO status and directing that certain modifications to the RTO documents be made and filed within 90 days. CP&L has applied to the North Carolina Utilities Commission, or NCUC, and the South Carolina Public Service Commission, or SCPSC, for permission to transfer operational control of its transmission assets to GridSouth. On June 21, 2001, the Public Staff of the NCUC filed a motion asking the NCUC to hold the GridSouth docket in abeyance until the U.S. Supreme Court had ruled on the appeal of FERC's Order No. 888. That appeal addresses the scope of FERC's jurisdiction over transmission service used to serve retail customers. The appeal of Order No. 888 is expected to be heard by the Court during the fall of 2001, with a decision anticipated in the summer of 2002. CP&L and Duke Energy opposed the Public Staff's motion. The NCUC has not yet ruled on the motion. Progress Energy cannot predict the outcome of this matter. On July 12, 2001, FERC issued an order requiring certain parties, including CP&L, Duke Energy Corporation, South Carolina Electric & Gas Company, Southern Company and Entergy to engage in a mediation to develop a plan for a single RTO for the southeast. The GridFlorida applicants and the parties to the GridFlorida docket before FERC were encouraged to participate, but were not required to do so. Florida Power and CP&L are participating in the mediation. The mediation is scheduled to last 45 days from July 12th, and ten days after the mediation the presiding administrative law judge will submit a proposal to FERC. Progress Energy cannot predict the outcome of this mediation or the effect that it may have on the GridFlorida proceedings currently ongoing before the FERC and the FPSC or the GridSouth proceedings currently ongoing before FERC, the SCPSC or the NCUC. Franchise Litigation -------------------- Five cities, with a total of approximately 36,000 customers, have sued Florida Power in various circuit courts in Florida. The lawsuits principally seek (1) a declaratory judgment that the cities have the right to purchase Florida Power's electric distribution system located within the municipal boundaries of the cities, (2) a declaratory judgment that the value of the distribution system must be determined through arbitration, and (3) injunctive relief requiring Florida Power to continue to collect from Florida Power's customers and remit to the cities franchise fees during the pendency of the litigation and as long as Florida Power continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of the franchise ordinances under which Florida Power had agreed to collect such fees. One circuit court has entered a declaratory judgment and order requiring arbitration to establish the purchase price of Florida Power's facilities within one of the cities. Florida Power has appealed that decision to a district court of appeal. The appeal has been fully briefed and orally argued, and Florida Power is awaiting a decision from the appeals court. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system, nor has there been any proceeding to determine the price at which such a purchase could be made. Progress Energy cannot predict the outcome of these matters. Synthetic Fuels Tax Credits --------------------------- On April 20, 2001 and May 4, 2001, the Internal Revenue Service (IRS) released Revenue Procedure 2001-30 and Revenue Procedure 2001-34, respectively, that outline the conditions that must be met to receive a PLR for Section 31 29 tax credits from the IRS. PLRs represent advance rulings from the IRS applying its interpretation of the tax law to the facts surrounding an entity that desires to qualify for Section 29 tax credits. Progress Energy continues to pursue PLRs for its four majority-owned facilities that have not received PLRs. In management's opinion, Progress Energy is complying with all the necessary requirements to be allowed such credits under Section 29, although it cannot provide certainty that it will receive PLRs or prevail, if challenged by the IRS, on any credits taken. Nuclear -------- Orange County, North Carolina appealed the Nuclear Regulatory Commission (NRC) license amendment to expand spent fuel storage capacity at CP&L's Shearon Harris Nuclear Plant (Harris Plant). On May 31, 2001, Orange County filed a petition for review in the U.S. Court of Appeals for the District of Columbia, and on June 1, 2001, filed a request for stay and expedition of the case with the court. On June 29, 2001, U.S. Court of Appeals denied Orange County's motion for a stay and rejected the request for an expedited schedule for the appeal. The court is expected to issue a briefing schedule for the case in the third quarter. Progress Energy cannot predict the outcome of this matter. NEW ACCOUNTING STANDARDS ------------------------ During the second quarter of 2001, the Financial Accounting Standards Board (FASB) issued interpretations of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138. These interpretations indicate that options in general cannot qualify for the normal purchases and sales exception, but provide an exception that allows certain electricity contracts, including certain capacity-energy contracts, to be excluded from the mark-to-market requirements of SFAS No. 133. These interpretations are effective July 1, 2001. Progress Energy is continuing to review contracts to determine whether they meet the criteria for the normal purchases and sales exception. If an electricity or fuel supply contract in its regulated businesses is subject to mark-to-market accounting, there would be no income statement effect of the mark to market because the contract's mark-to-market gain or loss will be recorded as a regulatory asset or liability. Any mark-to-market gains or losses in its non-regulated businesses will affect income unless those contracts qualify for hedge accounting treatment. On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and clarifies the criteria for recording of other intangible assets separately from goodwill. SFAS No. 142 requires that, effective January 1, 2002, Progress Energy cease amortization of goodwill. It also requires Progress Energy to evaluate goodwill for impairment at least annually, which could result in periodic impairment charges. Goodwill amortization was $24.8 million and $47.6 million for the three and six months ended June 30, 2001, and is expected to be approximately $95.3 million for the year. Progress Energy is still reviewing all impacts of the statement, including impairment testing and allocation to business units, and is currently assessing the impact adoption of these statements will have on the financial statements. CP&L has no goodwill recorded as of June 30, 2001. In June, 2001, the FASB approved the issuance of SFAS No. 143 "Accounting for Asset Retirement Obligations" that provides accounting guidance for the costs of retiring long-lived assets and is effective for fiscal years beginning after June 15, 2002. Progress Energy and CP&L will assess the impact adoption of this statement will have on the financial statements once a final statement is issued. Carolina Power & Light Company The information required by this item is incorporated herein by reference to the following portions of Progress Energy's Management's Discussion and Analysis of Financial Condition and Results of Operations, insofar as they relate to CP&L: RESULTS OF OPERATIONS; LIQUIDITY AND CAPITAL RESOURCES; OTHER MATTERS and NEW ACCOUNTING STANDARDS. RESULTS OF OPERATIONS --------------------- On July 1, 2000, CP&L distributed its ownership interest in the stock of NCNG, SRS, Monroe Power and Progress Energy Ventures, Inc. to Progress Energy. Prior to that date, the consolidated operations of CP&L and Progress Energy were substantially the same. Subsequent to that date, the operations of these subsidiaries are no longer included in CP&L's results of operations and financial position. 32 The CP&L Utility segment includes both retail and wholesale electric operations and trading activities. The results of operations for the CP&L Utility segment are identical to the CP&L Electric segment at the Progress Energy level, except for the energy marketing and trading activities performed by Energy Ventures on behalf of CP&L. The energy marketing and trading activity is included in the Energy Ventures segment at the Progress Energy level. The results of operations for CP&L's non-utility subsidiaries are not material to CP&L's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The statement of cash flows for CP&L does not include amounts related to NCNG, SRS, Monroe Power and Progress Energy Ventures, Inc. after July 1, 2000. Additionally, the CP&L statement of cash flows for the six months ended June 30, 2001 does not reflect any amounts related to the acquisition of FPC, issuance of long-term debt as part of the transaction, and capital expenditures made for other Progress Energy subsidiaries. Item 3. Quantitative and Qualitative Disclosures About Market Risk ------ ---------------------------------------------------------- Progress Energy, Inc. Market risk represents the potential loss arising from adverse changes in market rates and prices. Certain market risks are inherent in Progress Energy's financial instruments, which arise from transactions entered into in the normal course of business. Progress Energy's primary exposures are changes in interest rates with respect to long-term debt and commercial paper and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. Progress Energy manages its market risk in accordance with its established risk management policies, which may include entering into various derivative transactions. Progress Energy's exposure to return on marketable securities for the decommissioning trust funds has not changed materially since December 31, 2000. The fair value of the CVOs issued in connection with the FPC acquisition increased from $40.4 million at December 31, 2000 to $49.3 million at June 30, 2001. In February 2001, Progress Energy issued $3.2 billion of fixed-rate senior unsecured notes with maturities ranging from three to thirty years. The proceeds from this issuance were primarily used to retire commercial paper and other short-term indebtedness issued in connection with the FPC acquisition. Additionally, as part of this transaction, Progress Energy terminated the $1.125 billion notional amount of interest rate forward contracts that were issued in anticipation of the debt issuance. Progress Energy recognized a $45.3 million loss on these contracts that is deferred through accumulated other comprehensive loss and amortized over the life of the associated debt instruments. On April 9, 2001, CP&L issued $300 million of Medium-Term Notes, 6.65% Series D due April 1, 2008. Proceeds from the issuance were primarily used to retire commercial paper. As a result of these issuances, the exposure to changes in interest rates from Progress Energy's long-term debt at June 30, 2001, has changed from December 31, 2000. The total fixed rate long-term debt at June 30, 2001, was $7.2 billion, with an average interest rate of 7.00% and fair market value of $7.2 billion. The exposure to changes in interest rates from Progress Energy's variable rate long-term debt, commercial paper, extendible notes and FPC mandatorily redeemable securities of trust at June 30, 2001, was not materially different than at December 31, 2000. The total variable rate long-term debt and commercial paper outstanding at June 30, 2001, was $620 million, with an average interest rate of 2.90%, and $1.1 billion, with an average interest rate of 4.19%, respectively. The total extendible notes and FPC mandatorily redeemable securities of trust outstanding at June 30, 2001, was $500 million, with an average interest rate of 4.86%, and $300 million, with a fixed interest rate of 7.10%, respectively. Progress Energy's exposure on the $500 million notional amount of interest rate swap agreements used to hedge its exposure on variable rate debt positions was not materially different than at December 31, 2000. The fair value of the swaps was a $15.0 million liability position at June 30, 2001. 33 Carolina Power & Light Company CP&L has certain market risks inherent in its financial instruments, which arise from transactions entered into in the normal course of business. CP&L's primary exposures are changes in interest rates with respect to long-term debt and commercial paper, and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. CP&L's exposure to return on marketable securities for the decommission trust funds has not changed materially since December 31, 2000. On April 9, 2001, CP&L issued $300 million of Medium-Term Notes, 6.65% Series D due April 1, 2008. Proceeds from the issuance were primarily used to retire commercial paper. As a result of this issuance, the exposure to changes in interest rates from CP&L's long-term debt at June 30, 2001, has changed from December 31, 2000. The total fixed rate long-term debt at June 30, 2001, was $2.3 billion, with an average interest rate of 7.07% and fair market value of $2.3 billion. The exposure to changes in interest rates from CP&L's variable rate debt and commercial paper at June 30, 2001, was not materially different than at December 31, 2000. The total variable rate debt and commercial paper outstanding at June 30, 2001, was $1.1 billion, with an average interest rate of 3.78%, and $590 million, with an average interest rate of 4.15%, respectively. CP&L's exposure on the $500 million notional amount of interest rate swap agreements used to hedge its exposure on variable rate debt positions was not materially different than at December 31, 2000. The fair value of the swaps was a $15.0 million liability position at June 30, 2001. PART II. OTHER INFORMATION Item 1. Legal Proceedings ------ ----------------- Legal aspects of certain matters are set forth in Part I, Item 1. See Note 10 to the Progress Energy, Inc. Consolidated Interim Financial Statements and Note 6 to the CP&L Consolidated Interim Financial Statements. Item 2. Changes in Securities and Use of Proceeds ------ ----------------------------------------- RESTRICTED STOCK AWARDS (a) Securities Delivered. On May 23, 2001, 3,700 restricted shares of -------------------- Progress Energy's Common Shares were granted to a certain key employee pursuant to the terms of Progress Energy's 1997 Equity Incentive Plan (Plan), which was approved by Progress Energy's shareholders on May 7, 1997. (Sponsorship of the Plan was transferred from CP&L to Progress Energy effective August 1, 2000.) Section 9 of the Plan provides for the granting of Restricted Stock by the Personnel, Executive Development and Compensation Committee (currently the Committee on Organization and Compensation), (the Committee) to key employees of Progress Energy, including its Affiliates and Subsidiaries. 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 Progress Energy. (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 certain a key employee of Progress Energy. The Plan defines "key employees" as an officer or other employee of Progress Energy who, in the opinion of the Committee, can contribute significantly to the growth and profitability of, or perform services of major importance to, Progress Energy. (c) Consideration. The Common Shares were delivered to provide an ------------- incentive to the employee recipient to exert his utmost efforts on Progress Energy's behalf and thus enhance Progress Energy's performance while aligning the employee's interest with those of Progress Energy'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. 34 STRATEGIC RESOURCE SOLUTIONS CORP.: (a) Securities Delivered. On June 15, 2001, Progress Energy issued 6,325 -------------------- 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 Progress Energy (CaroCapital, Inc., a North Carolina Enterprise Corporation since renamed Strategic Resource Solutions Corp.) Of these, 6,174 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 151 shares were issued as incentive compensation payments based upon the 2000 performance of SRS and its subsidiaries arising under incentive compensation agreements entered into pursuant to the merger 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 2000 performance of SRS. (c) Consideration. The consideration for 6,174 of the Common Shares issued ------------- was the cancellation of former shares of KBI in the merger. The other 151 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. Item 4. Submission of Matters to a Vote of Security Holders ------- --------------------------------------------------- Progress Energy, Inc. (a) The Annual Meeting of the Shareholders of Progress Energy, Inc. was held on May 9, 2001. (b) The meeting involved the election of two Class I directors to serve for one-year terms, one Class II director to serve a two-year term and four Class III directors to serve 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 I Votes For Votes Withheld - - ------------------------------------------------------------- (Term Expiring in 2002) W. D. Frederick, Jr. 167,723,416 3,202,285 Richard Korpan 165,242,127 5,683,574 Class II Votes For Votes Withheld ------------------------------------------------------------- (Term Expiring in 2003) Richard A. Nunis 167,607,265 3,318,436 Class III Votes For Votes Withheld ------------------------------------------------------------- (Term Expiring in 2004) William Cavanaugh III 167,782,614 3,143,087 Charles W. Coker 167,986,510 2,939,191 E. Marie McKee 167,909,462 3,016,239 Jean Giles Wittner 167,648,884 3,240,817 35 A shareholder proposal requiring Progress Energy to invest in solar and wind powered sources of electrical generation was presented, but was not approved by the shareholders. The number of shares voted for the proposal was 8,591,190 and the number of shares voted against the proposal was 127,616,369. Carolina Power & Light Company (a) The Annual Meeting of the Shareholders of Carolina Power & Light Company was held on May 9, 2001. (b) The meeting involved the election of two Class I directors to serve for one-year terms, one Class II director to serve a two-year term and four Class III directors to serve 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 I Votes For Votes Withheld ------------------------------------------------------------- (Term Expiring in 2002) W. D. Frederick, Jr. 159,814,447 1,610 Richard Korpan 159,814,451 1,606 Class II Votes For Votes Withheld ------------------------------------------------------------- (Term Expiring in 2003) Richard A. Nunis 159,814,456 1,601 Class III Votes For Votes Withheld ------------------------------------------------------------- (Term Expiring in 2004) William Cavanaugh III 159,814,453 1,604 Charles W. Coker 159,814,439 1,618 E. Marie McKee 159,814,439 1,618 Jean Giles Wittner 159,814,456 1,601 Item 6. Exhibits and Reports on Form 8-K - - ------ --------------------------------- (a) Exhibits None (b) Reports on Form 8-K filed during or with respect to the quarter: Progress Energy, Inc. ---------------------
Financial Item Statements Reported Included Date of Event Date Filed -------- ---------- ------------- ---------- 9 No May 30, 2001 May 30, 2001 9 No June 11, 2001 June 11, 2001 9 Yes July 25, 2001 August 6, 2001 9 No August 6, 2001 August 7, 2001
36 Carolina Power & Light Company ------------------------------
Financial Item Statements Reported Included Date of Event Date Filed -------- -------- ------------- ---------- 5 No April 4, 2001 April 16, 2001
37 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. PROGRESS ENERGY, INC. --------------------- CAROLINA POWER & LIGHT COMPANY ------------------------------ Date: August 10, 2001 (Registrants) By: /s/ Peter M. Scott III ---------------------------- Executive Vice President and Chief Financial Officer By: /s/ Robert H. Bazemore, Jr. ---------------------------- Vice President and Controller Chief Accounting Officer 38 -----END PRIVACY-ENHANCED MESSAGE-----