-----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, PrZlvd9M47Fi2Igo+PDRwWC07BaPrGXQv/Ybr7TLNIDYf5OTMYzxSMfRmgIJRitM q7RzUJPNiQX4RgTD+KpNug== 0001021408-02-007045.txt : 20020515 0001021408-02-007045.hdr.sgml : 20020515 ACCESSION NUMBER: 0001021408-02-007045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 02648591 BUSINESS ADDRESS: STREET 1: 411 FAYETTEVILLE ST CITY: RALEIGH STATE: NC ZIP: 27601 BUSINESS PHONE: 9195466111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROGRESS ENERGY INC CENTRAL INDEX KEY: 0001094093 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 562155481 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15929 FILM NUMBER: 02648590 BUSINESS ADDRESS: STREET 1: 410 S WILMINGTON ST CITY: RALEIGH STATE: NC ZIP: 27601 BUSINESS PHONE: 9195466463 MAIL ADDRESS: STREET 1: 410 S WILMINGTON ST CITY: RALEIGH STATE: NC ZIP: 27601 FORMER COMPANY: FORMER CONFORMED NAME: CP&L ENERGY INC DATE OF NAME CHANGE: 20000314 FORMER COMPANY: FORMER CONFORMED NAME: CP&L HOLDINGS INC DATE OF NAME CHANGE: 19990830 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 March 31, 2002 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. Each registrant makes no representation as to information relating exclusively to the other registrant. 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 April 30, 2002, each registrant had the following shares of common stock outstanding
Registrant Description Shares ---------- ----------- ------ Progress Energy, Inc. Common Stock (Without Par Value) 221,235,262 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 March 31, 2002 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 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 EasternNC Eastern North Carolina Natural Gas Company, formerly referred to as ENCNG 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 Accounting principles generally accepted in the United States of America 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 PCH Progress Capital Holdings, Inc. PLRs Private Letter Rulings Progress Energy Progress Energy, Inc. Progress Fuels Progress Fuels Corporation, formerly referred to as Electric Fuels Corporation Progress Rail Progress Rail Services Corporation Progress Telecom Progress Telecommunications Corporation Progress Ventures Business segment of Progress Energy primarily made up of merchant energy generation, coal and synthetic fuel operations and energy marketing and trading, formerly referred to as Energy Ventures Progress Ventures, Inc. Legal entity holding certain non-regulated operations and part of Progress Ventures business segment (formerly referred to as CPL Energy Ventures, Inc.) 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 Service Company Progress Energy Service Co., LLC SFAS No. 133 Statement of Financial Accounting Standards No. 133, Accounting for Derivative and Hedging Activities SFAS No. 142 Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
3 SFAS No. 143 Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations SRS Strategic Resource Solutions Corp. the Company Progress Energy, Inc. and subsidiaries
4 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS ------------------------------------------ The matters discussed throughout this combined Form 10-Q that are not historical facts are forward-looking and, accordingly, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. In addition, forward-looking statements are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" including, but not limited to, statements under the sub-heading "Other Matters" 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 neither Progress Energy nor CP&L undertakes any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made. Examples of factors that you should consider with respect to any forward-looking statements made throughout this document include, but are not limited to, the following: 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 regarding the restructuring of the electricity industry or potential national deregulation legislation; the outcome of legal and administrative proceedings, including proceedings before our principal regulators, and the impact of the settlement of Florida Power's rate case; risks associated with operating nuclear power facilities, availability of nuclear waste storage facilities, and nuclear decommissioning costs; terrorist threats and activities, economic uncertainty caused by such activities on the United States, and potential adverse reactions to United States anti-terrorism activities; changes in the economy of areas served by CP&L, Florida Power 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 and future acquisitions and successfully integrate them with the remainder of our business; the extent to which we are able to realize the potential benefits of our conversion to a non-regulated holding company structure and the success of our direct and indirect subsidiaries; the extent to which we are able to continue 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 and CP&L. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the effect of each such factor on Progress Energy and CP&L. 5 PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ------- -------------------- Progress Energy, Inc. CONSOLIDATED INTERIM FINANCIAL STATEMENTS March 31, 2002 STATEMENTS OF INCOME Three Months Ended (Unaudited) March 31, (In thousands except per share amounts) 2002 2001 - --------------------------------------------------------------------- Operating Revenues Electric $1,497,923 $1,632,048 Natural gas 86,105 138,573 Diversified businesses 304,287 137,469 - --------------------------------------------------------------------- Total Operating Revenues $1,888,315 1,908,090 - --------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 366,849 369,856 Purchased power 188,618 217,548 Gas purchased for resale 52,923 109,593 Other operation and maintenance 334,690 295,097 Depreciation and amortization 216,612 316,789 Taxes other than on income 97,195 99,646 Diversified businesses 372,111 189,706 - --------------------------------------------------------------------- Total Operating Expenses $1,628,998 1,598,235 - --------------------------------------------------------------------- Operating Income 259,317 309,855 - --------------------------------------------------------------------- Other Income (Expense) Interest income 2,063 9,943 Other, net 5,406 2,923 - --------------------------------------------------------------------- Total Other Income (Expense) 7,469 12,866 - --------------------------------------------------------------------- Net Interest Charges 169,375 159,665 - --------------------------------------------------------------------- Income before Income Taxes 97,411 163,056 Income Tax Expense (Benefit) (35,116) 9,053 - --------------------------------------------------------------------- Net Income $ 132,527 $ 154,003 ===================================================================== Average Common Shares Outstanding 212,979 199,799 Basic and Diluted Earnings per Common Share $ 0.62 $ 0.77 Dividends Declared per Common Share $ 0.545 $ 0.530 ===================================================================== See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 6 Progress Energy, Inc BALANCE SHEETS (Unaudited)
(In thousands except share data) March 31, December 31, Assets 2002 2001 - -------------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 19,166,593 $ 19,176,021 Gas utility plant in service 515,048 491,903 Accumulated depreciation (10,267,483) (10,096,412) - -------------------------------------------------------------------------------------------------------- Utility plant in service, net 9,414,158 9,571,512 Held for future use 15,027 15,380 Construction work in progress 987,255 1,065,154 Nuclear fuel, net of amortization 238,359 262,869 - -------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 10,654,799 10,914,915 - -------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 361,309 54,419 Accounts receivable 969,203 944,753 Taxes receivable 57,602 32,325 Inventory 921,194 886,747 Deferred fuel cost 119,442 146,652 Prepayments 44,335 36,150 Other current assets 205,995 226,947 - -------------------------------------------------------------------------------------------------------- Total Current Assets 2,679,080 2,327,993 - -------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory Assets 420,195 455,325 Nuclear decommissioning trust funds 839,604 822,821 Diversified business property, net 1,721,755 1,073,046 Miscellaneous other property and investments 466,201 456,880 Goodwill, net 3,690,210 3,690,210 Prepaid pension costs 491,377 489,600 Other assets and deferred debits 544,061 509,001 - -------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 8,173,403 7,496,883 - -------------------------------------------------------------------------------------------------------- Total Assets $ 21,507,282 $ 20,739,791 ======================================================================================================== Capitalization and Liabilities - -------------------------------------------------------------------------------------------------------- Capitalization Common stock (without par value, 500,000,000 shares authorized, 218,712,088 and 218,725,352 shares issued and outstanding, respectively) $ 4,109,099 $ 4,107,493 Unearned ESOP common stock (107,285) (114,385) Accumulated other comprehensive loss (27,932) (32,180) Retained earnings 2,058,583 2,042,605 - -------------------------------------------------------------------------------------------------------- Total common stock equity 6,032,465 6,003,533 Preferred stock of subsidiaries-not subject to mandatory redemption 92,831 92,831 Long-term debt, net 9,822,005 9,483,745 - -------------------------------------------------------------------------------------------------------- Total Capitalization 15,947,301 15,580,109 - -------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 703,374 688,052 Accounts payable 597,613 709,906 Interest accrued 149,381 212,387 Dividends declared 118,031 117,857 Short-term obligations 680,151 77,529 Customer deposits 161,719 154,343 Other current liabilities 398,297 431,522 - -------------------------------------------------------------------------------------------------------- Total Current Liabilities 2,808,566 2,391,596 - -------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,420,951 1,434,506 Accumulated deferred investment tax credits 220,894 226,382 Regulatory liabilities 279,734 287,138 Other liabilities and deferred credits 829,836 820,060 - -------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 2,751,415 2,768,086 - -------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 12) - -------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 21,507,282 $ 20,739,791 ========================================================================================================
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 7
Progress Energy, Inc. STATEMENTS OF CASH FLOWS Three Months Ended (Unaudited) March 31, (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------ Operating Activities Net income $ 132,527 $ 154,003 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 248,018 336,810 Deferred income taxes 12,356 (19,182) Investment tax credit (5,483) (6,973) Deferred fuel cost 57,714 27,040 Net (increase) decrease in accounts receivable (24,450) 28,568 Net increase in inventories (35,693) (115,188) Net decrease in prepaids and other current assets 12,110 32,273 Net decrease in accounts payable (47,585) (59,630) Net decrease in other current liabilities (100,319) (16,060) Other 45,229 3,344 - ----------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 294,424 365,005 - ----------------------------------------------------------------------------------------------------- Investing Activities Gross property additions (267,018) (270,922) Nuclear fuel additions (33,458) (61,161) Contributions to nuclear decommissioning trust (12,226) (15,220) Diversified business property additions (456,131) (35,554) Investments in non-utility activities (9,191) (19,220) - ----------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (778,024) (402,077) - ----------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt 167,419 3,176,010 Net increase in commercial paper reclassified to long-term debt 289,680 191,555 Net increase (decrease) in short-term indebtedness 602,622 (3,105,396) Net decrease in cash provided by checks drawn in excess of bank balances (40,046) (89,015) Retirement of long-term debt (112,329) (31,110) Dividends paid on common stock (116,375) (106,163) Other (481) (46,532) - ----------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 790,490 (10,651) - ----------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 306,890 (47,723) Cash and Cash Equivalents at Beginning of the Period 54,419 101,296 - ----------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of the Period $ 361,309 $ 53,573 ===================================================================================================== Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest $ 231,067 $ 159,269 income taxes $ 4,334 $ 8,307 =====================================================================================================
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 8
Progress Energy, Inc. SUPPLEMENTAL DATA SCHEDULE Three Months Ended March 31, (Unaudited) 2002 2001 - --------------------------------------------------------------------------------- Operating Revenues (in thousands) Electric Retail $1,260,809 $1,326,805 Wholesale 194,946 260,645 Unbilled (3,259) (61,878) Miscellaneous revenue 45,427 106,476 - --------------------------------------------------------------------------------- Total Electric 1,497,923 1,632,048 Natural gas 86,105 138,573 Diversified businesses 304,287 137,469 - --------------------------------------------------------------------------------- Total Operating Revenues $1,888,315 $1,908,090 ================================================================================= Energy Sales - Utility Electric (millions of kWh) Retail Residential 8,045 8,722 Commercial 5,246 5,274 Industrial 3,869 4,194 Other retail 946 962 - --------------------------------------------------------------------------------- Total retail 18,106 19,152 Unbilled (156) (1,168) Wholesale 4,311 4,779 - --------------------------------------------------------------------------------- Total Electric 22,261 22,763 - --------------------------------------------------------------------------------- ================================================================================= Natural Gas Delivered (thousands of dt) 17,108 14,845 ================================================================================= Energy Supply - Utility (millions of kWh) Generated - steam 11,414 11,913 Nuclear 7,228 7,138 Hydro 139 53 Combustion turbines 1,585 1,137 Purchased 2,993 3,674 - --------------------------------------------------------------------------------- Total Energy Supply - (Company Share) (a) 23,359 23,915 ================================================================================= Detail of Income Taxes (in thousands) Income tax expense (credit) - current $ (41,989) $ 35,208 Deferred 12,356 (19,182) investment tax credit (5,483) (6,973) - --------------------------------------------------------------------------------- Total Income Tax Expense (Benefit) $ (35,116) $ 9,053 =================================================================================
(a) Excludes co-owner's share of the energy supplied from the five generating facilities that are jointly owned. 9 Progress Energy, Inc. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION -------------------------------------- A. Organization. Progress Energy, Inc. (the Company) is a registered ------------ holding company under the Public Utility Holding Company Act (PUHCA) of 1935, as amended. Both the Company and its subsidiaries are subject to the regulatory provisions of PUHCA. The Company 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 the Company. On December 4, 2000, the Company changed its name from CP&L Energy, Inc. to Progress Energy, Inc. Through its wholly owned subsidiaries, CP&L, Florida Power Corporation (Florida Power) and North Carolina Natural Gas Corporation (NCNG), the Company 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 Progress Ventures business unit, the Company is involved in merchant energy generation, coal and synthetic fuel operations and energy marketing and trading. Through other business units, the Company engages in other non-regulated business areas, including energy management and related services, rail services and telecommunications. Progress Energy's legal structure is not currently aligned with the functional management and financial reporting of the Progress Ventures business 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, 2001 and notes thereto included in Progress Energy's Form 10-K for the year ended December 31, 2001. The amounts included in the consolidated interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods. Due to 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 2001 have been reclassified to conform to the 2002 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, the Company completed its acquisition of Florida Progress Corporation (FPC) for an aggregate purchase price of approximately $5.4 billion. The Company paid cash consideration of approximately $3.5 billion and issued 46.5 million common shares valued at approximately $1.9 billion. In addition, the Company issued 98.6 million contingent value obligations (CVO) valued at approximately $49.3 million. The excess of the purchase price over the fair value of the net identifiable assets and liabilities acquired has been recorded as goodwill. The goodwill, of approximately $3.6 billion, was being amortized on a straight-line basis over a period of 40 years. Effective January 1, 2002, goodwill is no longer subject to amortization (See Note 7). During 2000, the Company began the implementation of a plan to combine operations of the companies resulting in an original non-executive involuntary termination cost accrual of approximately $52.2 million. Approximately $41.8 million was attributable to Florida Power employees and was reflected as part of the purchase price allocation, while approximately $10.4 million attributable to the acquiring company's employees was charged to operating results in 10 2000. During 2001, the Company finalized the plan to combine operations of the companies with final termination payments occurring in 2002. The first quarter activity for the non-executive involuntary termination costs is detailed in the table below: (in millions) Balance at January 1, 2002 $ 8.2 Payments (4.4) Adjustments 0.3 ----- Balance at March 31, 2002 $ 4.1 ===== 3. GENERATION ACQUISITION ---------------------- On February 15, 2002, Progress Ventures, Inc. acquired 100% of two electric generating projects located in Georgia from LG&E Energy Corp., a subsidiary of Powergen plc. The two projects consist of 1) Walton County Power, LLC in Monroe, Georgia, a 460 megawatt natural gas-fired plant placed in service in June 2001 and 2) Washington County Power, LLC in Washington County, Georgia, a planned 600 megawatt natural gas-fired plant expected to be operational by June 2003. The Walton and Washington projects have been included in the consolidated financial statements since the acquisition date. The acquisition furthers Progress Ventures' expansion into merchant energy operations and positions it as a growing provider of wholesale energy in the Southeast. The aggregate purchase price of approximately $358 million was allocated primarily to fixed assets based on the preliminary fair values of the assets acquired. The transaction also included tolling and power sale agreements with LG&E Energy Marketing, Inc. for each project through December 31, 2004. In addition, Progress Ventures entered into a project management and completion agreement whereby LG&E has agreed to manage the completion of the Washington site construction for Progress Ventures. The estimated costs to complete the Washington project at the time the acquisition was completed were approximately $167.6 million. The preliminary purchase price allocation is subject to adjustment for changes in the Company's preliminary assumptions and analyses, pending additional information including asset valuations. The pro forma results of operations would not be materially different than the reported results of operations for the three months ended March 31, 2002. 4. FLORIDA POWER RATE CASE SETTLEMENT ---------------------------------- On March 27, 2002, the parties in Florida Power's rate case entered into a Stipulation and Settlement Agreement (the Agreement) related to retail rate matters. The Agreement was approved by the Florida Public Service Commission (FPSC) on April 23, 2002. The Agreement is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if Florida Power's base rate earnings fall below a 10% return on equity, Florida Power may petition the FPSC to amend its base rates. The Agreement provides that Florida Power will reduce its retail revenues from the sale of electricity by an annual amount of $125 million. The Agreement also provides that Florida Power will operate under a Revenue Sharing Incentive Plan (the Plan) through 2005, and thereafter until terminated by the FPSC, that establishes annual revenue caps and sharing thresholds. The Plan provides that retail base rate revenues between the sharing thresholds and the retail base rate revenue caps will be divided into two shares - a 1/3 share to be received by Florida Power's shareholders, and a 2/3 share to be refunded to Florida Power's retail customers; provided, however, that for the year 2002 only, the refund to customers will be limited to 67.1% of the 2/3 customer share. The retail base rate revenue sharing threshold amounts for 2002 will be $1,296 million and will increase $37 million each year thereafter. The Plan also provides that all retail base rate revenues above the retail base rate revenue caps established for each year will be refunded to retail customers on an annual basis. For 2002, the refund to customers will be limited to 67.1% of the retail base rate revenues that exceed the 2002 cap. The retail base revenue caps for 2002 will be $1,356 million and will increase $37 million each year thereafter. The Agreement also provides that beginning with the in-service date of Florida Power's Hines Unit 2, currently expected to be late 2003, and continuing through December 31, 2005, Florida Power will be allowed to recover through the fuel cost recovery clause a return on average investment and depreciation expense for Hines Unit 2, to the extent such costs do not exceed the Unit's cumulative fuel savings over the recovery period. 11 Additionally, the Agreement provides that Florida Power will effect a mid-course correction of its fuel cost recovery clause to reduce the fuel factor by $50 million for the remainder of 2002. The fuel cost recovery clause will operate as it normally does, including, but not limited to any additional mid-course adjustments that may become necessary, and the calculation of true-ups to actual fuel clause expenses. Florida Power will suspend accruals on its reserves for nuclear decommissioning and fossil dismantlement through December 31, 2005. Additionally, for each calendar year during the term of the Agreement, Florida Power will record a $62.5 million depreciation expense reduction, and may, at its option, record up to an equal annual amount as an offsetting accelerated depreciation expense. In addition, Florida Power is authorized, at its discretion, to accelerate the amortization of certain regulatory assets over the term of the Agreement. Under the terms of the Agreement, Florida Power agreed to continue the implementation of its four-year Commitment to Excellence Reliability Plan and expects to achieve a 20% improvement in its annual System Average Interruption Duration Index by no later than 2004. If this improvement level is not achieved for calendar years 2004 or 2005, Florida Power will provide a refund of $3 million for each year the level is not achieved to 10% of its total retail customers served by its worst performing distribution feeder lines. The Agreement also provides that Florida Power will refund to customers $35 million of revenues Florida Power collected during the interim period since March 13, 2001. This one-time retroactive revenue refund was recorded in the first quarter of 2002. 5. FINANCIAL INFORMATION BY BUSINESS SEGMENT ----------------------------------------- The Company currently provides services through the following business segments: CP&L Electric, Florida Power Electric, Progress Ventures, Rail Services and Other. The prior period has been restated to reflect the current reportable segments. The CP&L Electric and Florida Power Electric segments are engaged in the generation, transmission, distribution, and sale of electric energy in portions of North Carolina, South Carolina and Florida. Electric operations are subject to the rules and regulations of FERC, the NCUC, the SCPSC and the FPSC. The Progress Ventures segment is primarily engaged in merchant energy generation and coal and synthetic fuel operations. Management reviews the operations of the Progress Ventures segment after the allocation of energy marketing and trading activities which Progress Ventures performs on behalf of the regulated utilities, CP&L and Florida Power. These activities include wholesale sales on 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 natural gas, other diversified businesses and holding company operations, which includes the transportation, distribution and sale of natural gas in portions of North Carolina, telecommunication services, energy management services, miscellaneous non-regulated activities and elimination entries. 12 For reportable segments presented in the accompanying table, segment income includes intersegment revenues accounted for at prices representative of unaffiliated party transactions. Intersegment revenues that are not eliminated represent natural gas sales to the CP&L Electric and the Florida Power Electric segments.
Florida Power Progress Segment (in thousands) CP&L Electric Electric Ventures(b) Rail Services (c) Other Totals - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended 3/31/02 Revenues Unaffiliated $ 811,482 $ 686,441 $ 113,404 $169,369 $ 102,430 $ 1,883,126 Intersegment -- -- 131,930 495 (127,236) 5,189 ----------------------------------------------------------------------------------------- Total Revenues $ 811,482 $ 686,441 $ 245,334 $169,864 $ (24,806) $ 1,888,315 Net Income (Loss) $ 85,534 $ 57,743 $ 39,484 $ (701) $ (49,533) $ 132,527 Segment Income (Loss) After Allocation (a) $ 77,940 $ 55,159 $ 49,662 $ (701) $ (49,533) $ 132,527 Total Segment Assets $9,092,069 $5,039,094 $1,900,752 $596,765 $4,878,602 $21,507,282 =========================================================================================================================
Florida Power Progress Segment CP&L Electric Electric Ventures Rail Services (c) Other Totals - --------------------------------------------------------------------------------------------------------------------- Three Months Ended 3/31/01 Revenues Unaffiliated $ 821,574 $ 810,474 $111,220 -- $ 164,604 $ 1,907,872 Intersegment -- -- 76,465 -- (76,247) 218 ------------------------------------------------------------------------------------- Total Revenues $ 821,574 $ 810,474 $187,685 -- $ 88,357 $ 1,908,090 Net Income (Loss) $ 121,470 $ 71,606 $ 41,717 -- $ (80,790) $ 154,003 Segment Income (Loss) After Allocation (a) $ 107,897 $ 63,206 $ 63,690 -- $ (80,790) $ 154,003 Total Segment Assets $8,713,177 $4,829,168 $701,024 -- $5,808,683 $20,052,052 =====================================================================================================================
(a) Includes allocation of energy trading and marketing net income managed by Progress Ventures on behalf of the electric utilities. (b) Progress Ventures total segment assets at March 31, 2002, increased from the prior year due to the addition of non-regulated generating assets including Effingham, DeSoto, Walton and Washington, as well as the transfer of Rowan from CP&L in the first quarter of 2002. (c) As of March 31, 2001, the Rail Services segment was included as Net Assets Held for Sale and therefore no operations or assets are reflected for this segment for this period. 6. IMPACT OF NEW ACCOUNTING STANDARD --------------------------------- During the second quarter of 2001, the Financial Accounting Standards Board (FASB) issued interpretations of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities," (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. The interpretations were effective July 1, 2001. Those interpretations did not require the Company to mark-to-market any of its electricity capacity-energy contracts currently outstanding. In December 2001, the FASB revised the criteria related to the exception for certain electricity contracts, with the revision to be effective April 1, 2002. The revised interpretation did not result in any changes to the Company's assessment of mark-to-market requirements for its current contracts. 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 FASB is expected, which could additionally impact the Company's financial statements. Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This statement clarifies the criteria for recording of other intangible assets separately from goodwill. See Note 7 for more information. The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in July 2001. This statement provides accounting requirements for retirement obligations associated with tangible long-lived assets and is effective January 1, 2003. This statement requires that the present value of retirement costs for which the Company has a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period. The Company is currently assessing the effects this statement may ultimately have on the Company's accounting for decommissioning, dismantlement and other retirement costs. 13 7. GOODWILL AND OTHER INTANGIBLE ASSETS ------------------------------------ Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This statement clarifies the criteria for recording of other intangible assets separately from goodwill. Effective January 1, 2002, goodwill is no longer subject to amortization over its estimated useful life. Instead, goodwill is subject to at least an annual assessment for impairment by applying a two-step fair-value based test. This assessment could result in periodic impairment charges. The Company is in the process of performing the first step of the initial transitional goodwill impairment test. This test will be as of January 1, 2002, and will be completed by June 30, 2002. The Company has not yet determined the impact, if any, to the Company's consolidated financial position or results of operations. There were no changes in the carrying amount of goodwill for the three months ended March 31, 2002. The Company's $3.7 billion of goodwill is assigned to the following three reportable segments: CP&L Electric, Florida Power Electric and Other. As required by SFAS No. 142, the results for the prior year's quarter have not been restated. A reconciliation of net income as if SFAS No. 142 had been adopted is presented below for the three months ended March 31, 2001. (in thousands, except per share data) Three Months Ended March 31, 2001 ------------------ Reported net income $154,003 Add back: Goodwill amortization 22,887 -------- Adjusted net income $176,890 Basic earnings per common share: Reported net income $ 0.77 Adjusted net income $ 0.89 Diluted earnings per common share: Reported net income $ 0.77 Adjusted net income $ 0.88 The gross carrying amount and accumulated amortization of the Company's intangible assets as of March 31, 2002 and December 31, 2001 are as follows:
March 31, 2002 December 31, 2001 ----------------------------- ----------------------------- (in thousands) Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ----------------------------- ----------------------------- Synthetic fuel intangibles 140,469 (27,975) 140,469 (22,237) Customer contracts 17,300 (6,725) 17,300 (5,600) Other 51,338 (1,529) 18,771 (338) ----------------------------- ----------------------------- Total 209,107 (36,229) 176,540 (28,175)
Total net intangible assets of $172.9 million and $148.4 million at March 31, 2002, and December 31, 2001, respectively, are included in other assets and deferred debits in the accompanying balance sheets. Amortization expense recorded on intangible assets for the three months ended March 31, 2002 was $8.1 million. The estimated amortization expense on intangible assets for the next five years is as follows: (in thousands) 2002 34,236 2003 34,390 2004 36,061 2005 20,838 2006 20,169 14 8. COMPREHENSIVE INCOME -------------------- Comprehensive income for the three months ended March 31, 2002 and 2001 was $136.8 million and $119.0 million, respectively. Items of other comprehensive income for the three month periods consisted primarily of changes in the fair value of derivatives used to hedge cash flows related to interest on long-term debt. 9. FINANCING ACTIVITIES -------------------- On February 6, 2002, CP&L issued $48.5 million principal amount of First Mortgage Bonds, Pollution Control Series W, Wake County Pollution Control Revenue Refunding Bonds, 5.375% Series 2002 Due February 1, 2017. On March 1, 2002, CP&L redeemed $48.5 million principal amount of Pollution Control Revenue Bonds, Wake County (Carolina Power & Light Company Project) Adjustable Rate Option Bond 1983 Series Due April 1, 2019, at 101.5% of the principal amount of such bonds. In February 2002, $50 million of Progress Capital Holdings, Inc. (PCH) medium-term notes, 5.78% Series, matured. Progress Energy funded this maturity through the issuance of commercial paper. In March 2002, Progress Ventures, Inc. obtained a $440 million bank facility that will be used exclusively for expansion of its non-regulated generation portfolio. Borrowings under this facility are secured by the assets in the generation portfolio. In March 2002, Progress Ventures, Inc. made draws under this facility of $120 million. On April 17, 2002, Progress Energy issued $350 million of senior unsecured notes due 2007 with a coupon of 6.05% and $450 million of senior secured notes due 2012 with a coupon of 6.85%. Proceeds from this issuance were used to pay down commercial paper. 10. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS ------------------------------------------------------ Progress Energy uses interest rate derivative instruments to adjust the fixed and variable rate debt components of its debt portfolio. During March 2002, Progress Energy converted $800 million of fixed rate debt into variable rate debt by executing interest rate derivative agreements with a total notional amount of $800 million with a group of five banks. Under the terms of the agreements, which mature in 2006, Progress Energy will receive a fixed rate of 4.87% and will pay a floating rate based on three-month LIBOR (pay rate of 2.03% at March 31, 2002). These instruments were designated as fair value hedges for accounting purposes. The fair value of these instruments was a $3.3 million liability position at March 31, 2002. On April 30, 2002, Progress Energy converted $100 million of fixed rate debt into variable rate debt by executing an interest rate derivative agreement with a counterparty with a total notional amount of $100 million. Under the terms of the agreement, which expires in 2007, Progress Energy will receive a fixed rate of 4.869% and will pay a floating rate based on three-month LIBOR (pay rate of 1.92% at April 30, 2002). This instrument was designated as a fair value hedge for accounting purposes. The notional amount of the above contracts is not exchanged and does not represent exposure to credit loss. In the event of default by a counterparty, the risk in the transaction is the cost of replacing the agreements at current market rates. Progress Energy only enters into swap agreements with strong creditworthy counterparties. 11. FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A SUBSIDIARY ------------------------------------------------------------------------- HOLDING SOLELY FPC GUARANTEED NOTES ----------------------------------- In April 1999, FPC Capital I (the Trust), an indirect wholly-owned subsidiary of FPC, issued 12 million shares of $25 par cumulative FPC-obligated mandatorily redeemable preferred securities (Preferred Securities) due 2039, with an aggregate liquidation value of $300 million and an annual distribution rate of 7.10%. Currently, all 12 million shares of the Preferred Securities that were issued are outstanding. Concurrent with the issuance of the Preferred Securities, the Trust issued to Florida Progress Funding Corporation (Funding Corp.) all of the common securities of the Trust (371,135 shares) for $9.3 million. Funding Corp. is a direct wholly owned subsidiary of FPC. The existence of the Trust is for the sole purpose of issuing the Preferred Securities and the common securities and using the proceeds thereof to purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable Interest Notes (subordinated notes) due 2039, for a principal amount of $309.3 million. The subordinated notes and the Notes Guarantee (as discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds from the sale of the 15 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. 12. COMMITMENTS AND CONTINGENCIES ----------------------------- Contingencies existing as of the date of these statements are described below. No significant changes have occurred since December 31, 2001, with respect to the commitments discussed in Note 20 of the financial statements included in the Company's 2001 Annual Report on Form 10-K. Contingencies 1) Claims and Uncertainties. ------------------------ a) The Company is subject to federal, state and local regulations addressing air and water quality, hazardous and solid waste management and other environmental matters. Various organic materials associated with the production of manufactured gas, generally referred to as coal tar, are regulated under 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 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 Environmental Protection (FDEP) and the North Carolina Department of Environment and Natural Resources, Division of Waste Management (DWM). Although the electric utilities and gas utility may incur costs at these sites about which it has been notified, based upon current status of these sites, the Company does not expect those costs to be material to its consolidated financial position or results of operations. The Company has accrued probable costs at certain of these sites. Both electric utilities, the gas utility and Progress Ventures 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 the Company's subsidiaries may incur costs at the sites about which they have been notified, based upon the current status of these sites, the Company does not expect those costs to be material to the consolidated financial position or results of operations of the Company. There has been and may be further proposed federal legislation requiring reductions in air emissions for nitrogen oxides, sulfur dioxide and mercury setting forth national caps and emission levels over an extended period of time. This national multi-pollutant approach would have significant costs which could be material to CP&L's consolidated financial position or results of operations. Some companies may seek recovery of the related cost through rate adjustments or similar mechanisms. Control equipment which may be installed on North Carolina fossil generating facilities as part of the Governor's proposal below may address some of the issues outlined above. The Company cannot predict the outcome of this matter. 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 16 Power were asked to provide information to the EPA as part of this initiative and cooperated in providing the requested information. The EPA has initiated civil 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. A utility that was not subject to a civil enforcement action settled its New Source Review issues with the EPA for $300 million. These settlement agreements have generally called for expenditures to be made over extended time periods, and some of the companies may seek recovery of the related cost through rate adjustments or similar mechanisms. The Company cannot predict the outcome of this matter. In 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 Carolina, South Carolina and Georgia, 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 to meet these measures in North and South Carolina 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 the Company's results of operations. Further controls are anticipated as electricity demand increases. The Company 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 participated 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 August 2001, the Court granted a request by CP&L and other utilities to delay the implementation of the 126 Rule for electric generating units pending resolution by the EPA of the growth factor issue. The Court's order tolls the three-year compliance period (originally set to end on May 1, 2003) for electric generating units as of May 15, 2001. On April 30, 2002, the EPA published a final rule harmonizing the dates for the Section 126 Rule and the NOx SIP Call. In addition, the EPA determined in this rule that the future growth factor estimation methodology was appropriate. The new compliance date for all affected sources is now May 31, 2004, rather than May 1, 2003. The Company cannot predict the outcome of this matter. On April 25, 2002, North Carolina Governor Mike Easley announced a framework for a reduction in emissions for the state's coal-burning electric plants. The proposal would require lower sulfur dioxide and nitrogen oxide emissions from CP&L's fossil generating facilities. To finance the capital expenditures utilities would be required to make, electric utility rates would be frozen for at least a 5-year period beginning on an enactment of the legislation. In addition, compliance costs would be amortized on an accelerated basis, replacing certain existing expenses as they expire. The Company cannot predict the final outcome or impact of this matter. On November 1, 2001, the Company completed the sale of the Inland Marine Transportation segment to AEP Resources, Inc. In connection with the sale, the Company entered into environmental indemnification provisions covering both unknown and known sites. The Company has recorded an accrual to cover estimated probable future environmental expenditures. The Company believes that it is reasonably possible that additional costs, which cannot be currently estimated, may be incurred related to the environmental 17 indemnification provision beyond the amounts accrued. The Company cannot predict the outcome of this matter. CP&L, Florida Power, Progress Ventures and NCNG have filed claims with the Company's general liability insurance carriers to recover costs arising out of actual or potential environmental liabilities. Some claims have been settled and others are still pending. While 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) The Company 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 the Company's consolidated results of operations or financial position. 13. SUBSEQUENT EVENT ---------------- On April 26, 2002, Progress Energy finalized the acquisition of Westchester Gas Company, which includes approximately 215 producing natural gas wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems. Total consideration of $148 million included $128 million in Company common stock and $20 million in cash. The properties are located within a 25-mile radius of Jonesville, Texas, on the Texas-Louisiana border. 18 CAROLINA POWER & LIGHT COMPANY CONSOLIDATED INTERIM FINANCIAL STATEMENTS March 31, 2002 STATEMENTS OF INCOME Three Months Ended (Unaudited) March 31, (In thousands) 2002 2001 - -------------------------------------------------------------------------------- Operating Revenues Electric $811,482 $821,574 Diversified businesses 3,389 5,029 - -------------------------------------------------------------------------------- Total Operating Revenues 814,871 826,603 - -------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 173,902 153,470 Purchased power 73,309 91,929 Other operation and maintenance 191,260 168,654 Depreciation and amortization 141,386 137,960 Taxes other than on income 38,768 38,436 Diversified businesses 3,061 4,513 - -------------------------------------------------------------------------------- Total Operating Expenses 621,686 594,962 - -------------------------------------------------------------------------------- Operating Income 193,185 231,641 - -------------------------------------------------------------------------------- Other Income (Expense) Interest income 1,666 4,685 Other, net (2,973) 9,357 - -------------------------------------------------------------------------------- Total Other Income (Expense) (1,307) 14,042 - -------------------------------------------------------------------------------- Net Interest Charges 58,551 62,082 - -------------------------------------------------------------------------------- Income before Income Taxes 133,327 183,601 Income Taxes 48,208 62,756 - -------------------------------------------------------------------------------- Net Income 85,119 120,845 Preferred Stock Dividend Requirements (741) (741) - -------------------------------------------------------------------------------- Earnings for Common Stock $ 84,378 $120,104 ================================================================================ See Notes to Carolina Power & Light Company Consolidated Interim Finanial Statements. 19 Carolina Power & Light Company CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
March 31, December 31, Assets 2002 2001 - ------------------------------------------------------------------------------------ Utility Plant Electric utility plant in service $11,984,417 $12,024,291 Accumulated depreciation (6,064,191) (5,952,206) - ------------------------------------------------------------------------------------ Utility plant in service, net 5,920,226 6,072,085 Held for future use 7,105 7,105 Construction work in progress 619,488 711,129 Nuclear fuel, net of amortization 181,468 200,332 - ------------------------------------------------------------------------------------ Total Utility Plant, Net 6,728,287 6,990,651 - ------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents 116,403 21,250 Accounts receivable 447,077 454,228 Receivables from affiliated companies 409,823 31,707 Taxes receivable -- 17,543 Inventory 374,583 365,501 Deferred fuel cost 119,442 131,505 Prepayments 22,358 11,863 Other current assets 69,322 66,193 - ------------------------------------------------------------------------------------ Total Current Assets 1,559,008 1,099,790 - ------------------------------------------------------------------------------------ Deferred Debits and Other Assets Regulatory assets 267,810 277,550 Nuclear decommissioning trust funds 422,320 416,721 Diversified business property, net 118,578 111,802 Miscellaneous other property and investments 228,789 231,325 Other assets and deferred debits 130,209 135,373 - ------------------------------------------------------------------------------------ Total Deferred Debits and Other Assets 1,167,706 1,172,771 - ------------------------------------------------------------------------------------ Total Assets $ 9,455,001 $ 9,263,212 ==================================================================================== Capitalization and Liabilities - ------------------------------------------------------------------------------------ Capitalization Common stock $ 1,914,999 $ 1,904,246 Unearned ESOP common stock (107,285) (114,385) Retained earnings 1,266,019 1,312,641 Accumulated other comprehensive loss (3,631) (7,046) - ------------------------------------------------------------------------------------ Total common stock equity 3,070,102 3,095,456 Preferred stock - not subject to mandatory redemption 59,334 59,334 Long-term debt, net 3,203,078 2,958,853 - ------------------------------------------------------------------------------------ Total Capitalization 6,332,514 6,113,643 - ------------------------------------------------------------------------------------ Current Liabilities Current portion of long-term debt 600,000 600,000 Accounts payable 235,165 300,829 Payables to affiliated companies 179,551 157,423 Taxes accrued 60,619 -- Interest accrued 59,412 61,124 Other current liabilities 156,329 209,776 - ------------------------------------------------------------------------------------ Total Current Liabilities 1,291,076 1,329,152 - ------------------------------------------------------------------------------------ Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,319,537 1,316,823 Accumulated deferred investment tax credits 166,805 170,302 Regulatory liabilities 7,479 7,494 Other liabilities and deferred credits 337,590 325,798 - ------------------------------------------------------------------------------------ Total Deferred Credits and Other Liabilities 1,831,411 1,820,417 - ------------------------------------------------------------------------------------ Commitments and Contingencies (Note 6) - ------------------------------------------------------------------------------------ Total Capitalization and Liabilities $ 9,455,001 $ 9,263,212 ====================================================================================
See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements. 20
Carolina Power & Light Company STATEMENTS OF CASH FLOWS Three Months Ended (Unaudited) March 31, (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------ Operating Activities Net income $ 85,119 $ 120,845 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 166,194 159,878 Deferred income taxes (12,891) (31,051) Investment tax credit (3,496) (4,984) Deferred fuel cost (credit) 12,063 (3,838) Net (increase) decrease in accounts receivable (65,535) 132,481 Net increase in inventories (18,394) (37,743) Net (increase) decrease in prepaids and other current assets (13,622) 5,925 Net increase (decrease) in accounts payable 76,909 (317,332) Net increase (decrease) in other current liabilities (61,337) 78,610 Other 43,591 4,759 - ------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 208,601 107,550 - ------------------------------------------------------------------------------------------ Investing Activities Gross property additions (176,230) (204,266) Nuclear fuel additions (33,336) (25,142) Contributions to nuclear decommissioning trust (10,225) (10,228) Net cash flow of company-owned life insurance program 540 417 Diversified business property additions (8,350) (1,225) Investments in non-utility activities 3,177 (3,406) - ------------------------------------------------------------------------------------------ Net Cash Used in Investing Activities (224,424) (243,850) - ------------------------------------------------------------------------------------------ Financing Activities Proceeds from issuance of long-term debt 47,419 185 Net increase in commercial paper reclassified to long-term debt 243,930 191,555 Retirement of long-term debt (48,632) (109) Dividends paid to parent (131,000) (69,854) Dividends paid on preferred stock (741) (741) - ------------------------------------------------------------------------------------------ Net Cash Provided by Financing Activities 110,976 121,036 - ------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents 95,153 (15,264) Cash and Cash Equivalents at Beginning of the Period 21,250 30,070 - ------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of the Period $ 116,403 $ 14,806 ========================================================================================== Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period - interest $ 58,410 $ 69,016 income taxes $ (31,307) $ (6,382) ==========================================================================================
See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements. 21 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. (the Company or Progress Energy). The Company is a registered holding company under the Public Utility Holding Company Act (PUCHA) of 1935, as amended. Both the Company and its subsidiaries are subject to the regulatory provisions of PUCHA. 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, 2001 and notes thereto included in CP&L's Form 10-K for the year ended December 31, 2001. The amounts included in the consolidated interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods. Due to 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 2001 have been reclassified to conform to the 2002 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 ----------------------------------------- CP&L's operations consist primarily of the CP&L Electric segment with no other material segments. The financial information by business segment for CP&L Electric for the three months ended March 31, 2002 and 2001 is as follows: (In thousands) March 31, 2002 March 31, 2001 ------------------------------------------------------ Revenues $ 811,482 $ 821,574 Segment Income $ 85,534 $ 121,470 Total Segment Assets $9,092,069 $8,713,177 ====================================================== The primary differences between the CP&L Electric and CP&L consolidated financial information relate to other non-electric operations and elimination entries. 3. IMPACT OF NEW ACCOUNTING STANDARD --------------------------------- During the second quarter of 2001, the Financial Accounting Standards Board (FASB) issued interpretations of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities," (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. The interpretations were effective July 1, 2001. Those 22 interpretations did not require CP&L to mark-to-market any of its electricity capacity-energy contracts currently outstanding. In December 2001, the FASB revised the criteria related to the exception for certain electricity contracts, with the revision to be effective April 1, 2002. The revised interpretation did not result in any changes to CP&L's assessment of mark-to-market requirements for its current contracts. 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 FASB is expected, which could additionally impact CP&L's financial statements. The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in July 2001. This statement provides accounting requirements for retirement obligations associated with tangible long-lived assets and is effective January 1, 2003. This statement requires that the present value of retirement costs for which CP&L has a legal obligation be recorded as liabilities with an equivalent amount added to the asset cost and depreciated over an appropriate period. CP&L is currently assessing the effects this statement may ultimately have on accounting for decommissioning, dismantlement and other retirement costs. 4. COMPREHENSIVE INCOME -------------------- Comprehensive income for the three months ended March 31, 2002 and 2001 was $88.5 million and $116.3 million, respectively. Items of other comprehensive income for the three month periods consisted primarily of changes in fair value of derivatives used to hedge cash flows related to interest on long-term debt. 5. FINANCING ACTIVITIES -------------------- On February 6, 2002, CP&L issued $48.5 million principal amount of First Mortgage Bonds, Pollution Control Series W, Wake County Pollution Control Revenue Refunding Bonds, 5.375% Series 2002 Due February 1, 2017. On March 1, 2002, CP&L redeemed $48.5 million principal amount of Pollution Control Revenue Bonds, Wake County (Carolina Power & Light Company Project) Adjustable Rate Option Bond 1983 Series Due April 1, 2019, at 101.5% of the principal amount of such bonds. 6. COMMITMENTS AND CONTINGENCIES ----------------------------- Contingencies existing as of the date of these statements are described below. No significant changes have occurred since December 31, 2001, with respect to the commitments discussed in Note 15 of the financial statements included in CP&L's 2001 Annual Report on Form 10-K. Contingencies 1) 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. 23 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. There has been and may be further proposed federal legislation requiring reductions in air emissions for nitrogen oxides, sulfur dioxide and mercury setting forth national caps and emission levels over an extended period of time. This national multi-pollutant approach would have significant costs which could be material to CP&L's consolidated financial position or results of operations. Some companies may seek recovery of the related cost through rate adjustments or similar mechanisms. Control equipment which may be installed on North Carolina fossil generating facilities as part of the Governor's proposal below may address some of the issues outlined above. CP&L cannot predict the outcome of this matter. 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 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. A utility that was not subject to a civil enforcement action settled its New Source Review issues with the EPA for $300 million. These settlement agreements have generally called for expenditures to be made over extended time periods, and some of the utilities may seek recovery of the related cost through rate adjustments. 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 Carolina 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 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 August 2001, the court granted a request by CP&L and other utilities to delay the implementation of the 126 Rule for electric generating units pending resolution by the EPA of the growth factor issue. The court's order tolls the three-year compliance period (originally set to end on May 1, 2003) for electric generating units as of May 15, 2001. On April 30, 2002, the EPA published a final rule harmonizing the dates for the Section 126 Rule and the NOx SIP Call. In addition, the EPA determined in this rule that the future growth factor estimation 24 methodology was appropriate. The new compliance date for all affected sources is now May 31, 2004, rather than May 1, 2003. CP&L cannot predict the outcome of this matter. On April 25, 2002, North Carolina Governor Mike Easley announced a framework for a reduction in emissions for the state's coal-burning electric plants. The proposal would require lower sulfur dioxide and nitrogen oxide emissions from CP&L's fossil generating facilities. To finance the capital expenditures utilities would be required to make, electric utility rates would be frozen for at least a 5-year period beginning on an enactment of the legislation. In addition, compliance costs would be amortized on an accelerated basis, replacing certain existing expenses as they expire. CP&L cannot predict the final outcome or impact 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) 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 months ended March 31, 2002, as compared to the corresponding period in the prior year Progress Energy, Inc. Operating Results ----------------- Progress Energy's consolidated earnings for the three months ended March 31, 2002 were $132.5 million, or $0.62 per share, compared to earnings of $154.0 million, or $0.77 per share, for the same period in 2001. Earnings for the quarter were negatively affected by a $35 million one-time retroactive revenue refund ($21 million after-tax) resulting from Florida Power's rate settlement, milder weather in the first quarter of 2002, when compared to 2001, that resulted in lower retail and wholesale sales, and unfavorable economic conditions that resulted in reduced sales to industrial customers in 2002. In addition, other operation and maintenance (O&M) expense increased in 2002 when compared to the prior year due to lower staffing levels that existed at the time of the merger with Florida Progress. The common stock issuance in August 2001 also resulted in dilution of basic earnings per share in the current period. Partially offsetting these items were the elimination of goodwill amortization and certain ongoing depreciation expense reductions as part of Florida Power's rate settlement. Business segment earnings and the factors affecting them are discussed below. CP&L Electric ------------- CP&L Electric contributed net income of $85.5 and $121.5 million for the three months ended March 31, 2002 and 2001, respectively. Included in these amounts are energy marketing and trading activities, which are managed by Progress Ventures on behalf of CP&L, that had net income of $7.6 million and $13.6 million for the three months ended March 31, 2002 and 2001, respectively. Factors contributing to this quarter's results were higher O&M expenses over the first quarter of 2001, mild weather and continued weakness in industrial and wholesale sales, as detailed in the tables below. CP&L's electric revenues for the three months ended March 31, 2002 and 2001 and the percentage change by customer class are as follows (in millions): ------------------------------------------------------- Customer Class 2002 % Change 2001 ------------------------------------------------------- Residential $309.3 (4.7)% $324.5 Commercial 187.3 1.8 184.0 Industrial 145.7 (4.3) 152.3 Governmental 17.5 3.6 16.9 ----------------------------------- ------ Total Retail Revenues 659.8 (2.6) 677.7 Wholesale 142.6 (12.5) 163.0 Unbilled (9.7) 75.6 (39.6) Miscellaneous 18.8 (8.3) 20.5 ----------------------------------- ------ Total Electric Revenues $811.5 (1.2)% $821.6 ------------------------------------------------------- CP&L electric energy sales for the three months ended March 31, 2002 and 2001 and the percentage change by customer class are as follows (in thousands of mWh): ---------------------------------------------------------- Customer Class 2002 % Change 2001 ---------------------------------------------------------- Residential 3,985 (7.6)% 4,313 Commercial 2,790 (2.2) 2,852 Industrial 2,987 (7.1) 3,214 Governmental 325 (6.3) 347 ------------------------------------- ------ Total Retail Energy Sales 10,087 (6.0) 10,726 Wholesale 3,331 (4.6) 3,493 Unbilled (187) 72.2 (672) ------------------------------------- ------ Total mWh sales 13,231 (2.3)% 13,547 ---------------------------------------------------------- 26 Sales of energy to retail customers were down for the first quarter of 2002 when compared to 2001 primarily due to the impacts of a weaker economy on the industrial customer class. Mild weather caused decreased usage by both the residential and commercial customer classes, which was partially offset by an increase in customer growth of both these customer classes. Sales to wholesale customers decreased in 2002 when compared to the prior year, primarily due to the impact of weather and decreases in supplemental energy sales. CP&L Electric's fuel expense increased $20.4 million for the three months ended March 31, 2002, when compared to $153.5 million in 2001, primarily due to increased deferred fuel expense resulting from fuel cost collections that reduce previously deferred fuel costs. Purchased power expense decreased $18.6 million for the three months ended March 31, 2002, when compared to $91.9 million in 2001, primarily due to volume decreases attributable to favorable market conditions that existed in the first quarter of 2001. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, have no material impact on operating results. CP&L Electric's operations and maintenance expense increased $22.6 million for the three months ended March 31, 2002, when compared to $168.7 million in 2001, primarily due to an increase in Service Company costs from an increase in employee headcount in the current quarter when compared to the prior quarter. In addition, higher benefit costs and the timing of the Nuclear Electric Insurance Limited (NEIL) refund contributed to the increase. The current year NEIL refund was not received until April 2002; however, the prior year refund was received in March 2001. CP&L Electric's earnings for the three months ended March 31, 2002, were also unfavorably impacted by lower AFUDC credits in 2002 when compared to the same period in the prior year. Florida Power Electric ---------------------- Florida Power Electric contributed net income of $57.7 million and $71.6 million for the three months ended March 31, 2002 and 2001, respectively. Included in these amounts are energy marketing and trading activities, which are managed by Progress Ventures on behalf of Florida Power, that had net income of $2.6 million and $8.4 million for the three months ended March 31, 2002, and 2001, respectively. Quarterly earnings were negatively affected by the outcome of the Florida Power rate case settlement, which included a one-time retroactive revenue refund of $35 million, as well as the impact of mild weather. See Note 4 to the Progress Energy Consolidated Interim Financial Statements for additional information on the settlement. Earnings for the three months ended March 31, 2002, were positively impacted by lower ongoing depreciation expense in accordance with the rate case settlement and increased revenues from customer growth and usage. The tables below detail Florida Power's sales by customer class. Florida Power's electric revenues for the three months ended March 31, 2002 and 2001 and the percentage change by customer class are as follows (in millions): --------------------------------------------------------------- Customer Class 2002 % Change 2001 --------------------------------------------------------------- Residential $379.2 (4.9)% $398.9 Commercial 166.8 5.0 158.9 Industrial 50.0 (6.5) 53.5 Governmental 39.9 5.6 37.8 Retroactive Retail Revenue Refund (35.0) -- -- ------------------------------------------ ------ Total Retail Revenues 600.9 (7.4) 649.1 Wholesale 52.4 (46.4) 97.7 Unbilled 6.5 129.2 (22.3) Miscellaneous 26.6 (69.1) 86.0 ------------------------------------------ ------ Total Electric Revenues $686.4 (15.3)% $810.5 --------------------------------------------------------------- 27 Florida Power's electric energy sales for the three months ended March 31, 2002 and 2001, and the percentage change by customer class are as follows (in thousands of mWh): ------------------------------------------------------- Customer Class 2002 % Change 2001 ------------------------------------------------------- Residential 4,060 (7.9)% 4,409 Commercial 2,456 1.4 2,422 Industrial 882 (9.9) 979 Governmental 621 0.8 616 ------------------------------------ ----- Total Retail Energy Sales 8,019 (4.8) 8,426 Wholesale 979 (23.9) 1,286 Unbilled 32 106.5 (495) ------------------------------------ ----- Total mWh sales 9,030 (2.0)% 9,217 ------------------------------------------------------- As a result of the settlement of the Florida Power rate case, Florida Power Electric recognized a one-time retroactive revenue refund of $35 million to its retail customers in the first quarter of 2002. In addition, the first quarter 2002 revenues decreased when compared to the same period in the prior year due to the recognition of $63 million of deferred revenue in the first quarter of 2001, which is included in miscellaneous revenues in the table above. Milder weather conditions in the first quarter of 2002, when compared to the same period in the prior year, negatively affected energy sales, which was partially offset by an increase in Florida Power's customer base. A weaker economy negatively impacted the industrial customer class. Fuel used in generation and purchased power decreased $33.7 million for the three months ended March 31, 2002, when compared to $342.0 million in the prior year, primarily due to lower oil and gas prices and a decrease in system requirements. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, have no material impact on operating results. Other operation and maintenance expense increased $20.5 million for the three months ended March 31, 2002, when compared to $110.9 million in the prior year, primarily due to a decrease in pension credits and increases in other benefit costs and Service Company costs due to an increase in employee headcount in the current quarter when compared to the prior quarter. Depreciation and amortization expense decreased $82.8 million for the three months ended March 31, 2002, when compared to $152.1 million in the prior year. The Florida Power rate case settlement provides for ongoing reductions in depreciation which reduced the amount of depreciation recorded in the first quarter of 2002 by $15.6 million. In addition, the first quarter of 2001 depreciation includes $63 million of accelerated amortization on the Tiger Bay regulatory asset associated with deferred revenue from 2000. Progress Ventures ----------------- The Progress Ventures segment 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 as well as for its non-regulated plants. Progress Ventures contributed segment income, including allocation of energy marketing and trading on behalf of the utilities, of $49.7 million for the three months ended March 31, 2002 and $63.7 million for the same period in 2001. The majority of the decrease in segment income is due to the energy marketing and trading function. Progress Ventures' energy marketing and trading activities on behalf of CP&L and Florida Power generated net income of $7.6 million and $2.6 million, respectively, for the quarter ended March 31, 2002, compared to net income of $13.6 million and $8.4 million, respectively, for the comparable period in 2001. Earnings from the trading operations decreased over these periods due to the impact of mild weather conditions, the completion of certain contracts, and the impact of lower natural gas prices on the pricing of certain contracts. Progress Ventures operates facilities that produce synthetic fuel, as defined under the Internal Revenue Service Code (Code). The production and sale of the synthetic fuel from these facilities qualifies for tax credits under Section 29 of the Code. See "Synthetic Fuels" under OTHER MATTERS below for additional discussion of these tax credits. The Progress Ventures segment sold 3.0 million and 2.9 million tons of synthetic fuel for the three months ended March 31, 2002 and 2001, respectively, that resulted in tax credits of $83.8 million and $76.6 million being recorded for the first quarter of 2002 and 2001, respectively. 28 Rail Services ------------- Rail Services' operations represent the activities of Progress Rail Services Corporation (Progress Rail) and include railcar repair, rail parts reconditioning and sales, scrap metal recycling and other rail related services. Rail Services had a net loss of $0.7 million for the three months ended March 31, 2002. In the first quarter of 2001, Progress Rail was recorded as net assets held for sale. Therefore, the operations of Rail Services had no impact on the first quarter 2001 earnings. In the second quarter of 2001, Rail Services was reclassified from net assets held for sale and the cumulative Rail Services' operations since the acquisition date of November 30, 2000, were included in Progress Energy's consolidated results of operations. Rail Services' first quarter 2002 revenues of $169.9 million decreased from the prior year due to the sale of the Louisville Scrap and Metal operations in November 2001 and the transition from acting as a scrap reseller in 2001 to acting as a scrap resale agent in 2002. Rail Services results for the three months ended March 31, 2002, have been favorably impacted by the implementation of cost control programs. Other Businesses ---------------- The Other segment primarily includes the operations of North Carolina Natural Gas Corporation (NCNG), Strategic Resource Solutions Corp. (SRS), Progress Telecommunications Corporation (Progress Telecom) and Caronet, Inc. (Caronet). This segment also includes other non-regulated operations of CP&L and FPC as well as holding company results. The Other segment generated a net loss of $49.5 million for the three months ended March 31, 2002, and a net loss of $80.8 million for the same period in 2001. The increase in earnings for the first quarter of 2002, when compared to the same period in the prior year, was primarily due to the elimination of the goodwill amortization in 2002. In accordance with SFAS No. 142, effective January 1, 2002, Progress Energy no longer amortizes goodwill. The Company amortized $22.9 million of goodwill in the first quarter of 2001. At March 31, 2002, the Company had $3.7 billion of unamortized goodwill. See Note 7 to the Progress Energy Consolidated Interim Financial Statements for additional information on SFAS No. 142. NCNG had net income of $8.4 million and $7.5 million for the three months ended March 31, 2002 and 2001, respectively, and the increase in net income is primarily due to an increase in margin. NCNG's margin on gas sales increased $4.2 million for the three months ended March 31, 2002, when compared to $29.0 million in the prior year, due to an increase in natural gas sale volumes. Natural gas sales of $86.1 million decreased $52.5 million from $138.6 million in the prior year primarily due to the sharp decline in natural gas prices when compared to the prior year, which also decreased gas purchased for resale. In February 2002, NCNG filed a general rate case with the North Carolina Utilities Commission (NCUC) requesting an annual rate increase of $47.6 million. On May 3, 2002, NCNG withdrew the application, based upon the NCUC Public Staff's and other parties' interpretation of the order approving the merger of CP&L and NCNG that such a case was not permitted until 2003. NCNG plans to file an application with the NCUC in the near future, consistent with the other parties' interpretation of the NCUC's order. Progress Energy cannot predict the outcome of this matter. 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 $21.2 for the first quarter of 2002 and $20.0 million for the first quarter of 2001 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. Fluctuations in estimated earnings and tax credits 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. Progress Energy issued 98.6 million CVOs 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 CVOs are recorded at fair value based on published prices and unrealized gains and losses from changes in fair value are recognized in earnings. At March 31, 2002, the CVOs had a fair market value of approximately $30.6 million. Progress Energy recorded a gain of $11.3 million for the three months ended March 31, 2002 to record the change in fair value of CVOs. A loss of $3.0 million was recorded for the same period in 2001. 29 The operations of SRS, Progress Telecom and Caronet did not have a material impact on Progress Energy's results for the three months ended March 31, 2002 or 2001. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Progress Energy, Inc. Statement of Cash Flows and Financing Activities ------------------------------------------------ Cash provided by operating activities decreased $70.6 million for the three months ended March 31, 2002, when compared to the corresponding period in the prior year. The decrease in cash from operating activities for the 2002 period is due to a decrease in operating income from the impact of the Florida Power rate case settlement and the impact of unfavorable weather in the current quarter. In addition, changes in the balances of certain current assets and liabilities due to operational fluctuations decreased cash provided by operating activities. Net cash used in investing activities increased $375.9 million for the three months ended March 31, 2002, when compared to the corresponding period in the prior year. The increase in cash used in investing activities is primarily due to an expansion of Progress Ventures' generation portfolio (See Note 3 to the Progress Energy Consolidated Interim Financial Statements). During the first three months of 2002, $267.0 million was spent on its utility subsidiaries' construction program and $456.1 million was spent in diversified business property additions. Net cash provided by financing activities increased $801.1 million for the three months ended March 31, 2002, when compared to the corresponding period in the prior year. The increase in cash provided by financing activities is primarily due to an increase in short-term obligations as well as an increase in long-term debt, the details of which are described below. On February 6, 2002, CP&L issued $48.5 million principal amount of First Mortgage Bonds, Pollution Control Series W, Wake County Pollution Control Revenue Refunding Bonds, 5.375% Series 2002 Due February 1, 2017. On March 1, 2002, CP&L redeemed $48.5 million principal amount of Pollution Control Revenue Bonds, Wake County (Carolina Power & Light Company Project) Adjustable Rate Option Bond 1983 Series Due April 1, 2019, at 101.5% of the principal amount of such bonds. In February 2002, $50 million of Progress Capital Holdings, Inc. (PCH) medium-term notes, 5.78% Series, matured. Progress Energy funded this maturity through the issuance of commercial paper. In March 2002, Progress Ventures, Inc. obtained a $440 million bank facility that will be used exclusively for expansion of its non-regulated generation portfolio. Borrowings under this facility are secured by the assets in the generation portfolio. In March 2002, Progress Ventures, Inc. made draws under this facility of $120 million. During March 2002, Progress Energy converted $800 million of fixed rate debt into variable rate debt by executing interest rate derivative agreements with a group of five banks. Under the terms of the agreements, Progress Energy will receive a fixed rate of 4.87% and will pay a floating rate based on three-month LIBOR (pay rate of 2.03% at March 31, 2002). These instruments were designated as fair value hedges for accounting purposes. On March 28, 2002, Standard & Poor's affirmed Progress Energy's corporate credit rating of BBB+ and the ratings of Florida Power and CP&L but revised the outlook for Progress Energy to negative from stable. S&P stated that its change in outlook reflects the increased business risk at Progress Ventures and lower-than-projected credit protection measures. S&P stated that Progress Energy's plan to divest of non-core assets and use the proceeds to pay down acquisition-related debt is moving slower than S&P had expected. On April 10, 2002, Moody's revised its outlook to negative from stable on Progress Energy's senior unsecured debt rating of Baa1. Moody's maintained a stable outlook for both Florida Power and CP&L. Moody's stated that its change in outlook to negative was in response to the increased level of debt incurred by the company, primarily to finance the expansion of its Progress Ventures unregulated generation portfolio. The change in outlook by the rating agencies has not affected Progress Energy's access to liquidity nor the cost of its short-term borrowings. Progress Energy is committed to maintaining its current ratings and is currently assessing the 30 situation with both rating agencies to determine an appropriate course of action, if necessary, to address their concerns. On April 17, 2002, Progress Energy issued $350 million of senior unsecured notes due 2007 with a coupon of 6.05% and $450 million of senior secured notes due 2012 with a coupon of 6.85%. Proceeds from this issuance were used to pay down commercial paper. On April 25, 2002, North Carolina Governor Mike Easley announced a framework for a reduction in emissions for the state's coal-burning electric plants. The proposal would require lower sulfur dioxide and nitrogen oxide emissions from CP&L's fossil generating facilities. To finance the capital expenditures utilities would be required to make, electric utility rates would be frozen for at least a 5-year period beginning on an enactment of the legislation. In addition, compliance costs would be amortized on an accelerated basis, replacing certain existing expenses as they expire. Progress Energy cannot predict the final outcome or impact of this matter. On April 30, 2002, Progress Energy converted $100 million of fixed rate debt into variable rate debt by executing an interest rate derivative agreement with a counterparty with a total notional amount of $100 million. Under the terms of the agreement, which expires in 2007, Progress Energy will receive a fixed rate of 4.869% and will pay a floating rate based on three-month LIBOR (pay rate of 1.92% at April 30, 2002). This instrument was designated as a fair value hedge for accounting purposes. Future Commitments ------------------ As of March 31, 2002, Progress Energy's contractual cash obligations and other commercial commitments has not changed materially from what was reported in the 2001 Annual Report on Form 10-K. The only changes in Progress Energy's future commitments involve the additional first quarter 2002 long-term debt issuances that are detailed above and the finalization of Progress Ventures' purchase obligation related to generation acquisition, as detailed in Note 3 to the Progress Energy Consolidated Interim Financial Statements OTHER MATTERS ------------- Florida Power Rate Case Settlement ---------------------------------- On March 27, 2002, the parties in Florida Power's rate case entered into a Stipulation and Settlement Agreement (the Agreement) related to retail rate matters. The Agreement was approved by the FPSC on April 23, 2002. The Agreement is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if Florida Power's base rate earnings fall below a 10% return on equity, Florida Power may petition the FPSC to amend its base rates. See Note 4 to the Progress Energy Consolidated Interim Financial Statements for additional information on the Agreement. Generation Acquisition ---------------------- During February 2002, Progress Ventures, Inc. completed the acquisition of two electric generating projects located in Georgia from LG&E Energy Corp., a subsidiary of Powergen plc. The two projects consist of 1) the Walton project in Monroe, Georgia, a 460 megawatt natural gas-fired plant placed in service in June 2001 and 2) the Washington project in Washington County, Georgia, a planned 600 megawatt natural gas-fired plant expected to be operational by June 2003. The transaction included tolling and power sale agreements with LG&E Energy Marketing, Inc. for both projects through December 31, 2004. See Note 3 to the Progress Energy Consolidated Interim Financial Statements for additional information on this acquisition. Fuel Acquisition ---------------- On April 26, 2002, Progress Energy finalized the acquisition of Westchester Gas Company, which includes approximately 215 producing natural gas wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems. Total consideration of $148 million included $128 million in Company common stock and $20 million in cash. The properties are located within a 25-mile radius of Jonesville, Texas, on the Texas-Louisiana border. This transaction added 140 billion cubic feet (Bcf) of gas reserves to Progress Ventures' growing energy portfolio. 31 EasternNC 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 750-mile natural gas pipeline system to serve 14 eastern North Carolina counties. On March 21, 2002, EasternNC filed a request with the NCUC to lay natural gas pipelines in more than one phase of the project simultaneously and to adjust the sequence of the phases of the project. The NCUC approved this request and issued an order to that effect on April 17, 2002. Synthetic Fuels Tax Credits --------------------------- Progress Energy, through its subsidiaries, is a majority owner in five entities and a minority owner in one entity that own facilities that produce synthetic fuel, as defined under the Internal Revenue Service Code (Code). The production and sale of the synthetic fuel from these facilities qualifies for tax credits under Section 29 of the Code (Section 29) if certain requirements are satisfied, including a requirement that the synthetic fuel differs significantly in chemical composition from the coal used to produce such synthetic fuel. All entities have received private letter rulings (PLRs) from the Internal Revenue Service (IRS) with respect to their synthetic fuel operations. The PLRs do not limit the production on which synthetic fuel tax credits may be claimed. These tax credits are scheduled to expire in 2007. Should the tax credits be denied on future audits, and Progress Energy fails to prevail through the audit/legal process, there could be a significant tax liability owed for previously taken Section 29 credits, with a significant impact on earnings and cash flows. In management's opinion, Progress Energy is complying with all the necessary requirements to be allowed such credits under Section 29 and believes it is probable, although it cannot provide certainty, that it will prevail if challenged by the IRS on any credits taken. Nuclear Matters --------------- On April 1, 2002, the Company filed a response to an industry-wide request from the Nuclear Regulatory Commission (NRC) concerning potential degradation of the reactor vessel heads of pressurized water reactors (PWRs). Inspections of the vessel heads at the Company's PWR plants have been performed during previous outages. At the Crystal River plant (CR3), one nozzle was found to have a crack and was repaired; however, no degradation of the reactor vessel head was identified. Current plans are to replace the vessel head at CR3 during its next regularly scheduled refueling outage in 2003. At the Robinson plant, an inspection was completed and no penetration nozzle cracking was identified and there was no degradation of the reactor vessel head. At the Harris plant, sufficient inspections were completed during the last refueling outage to conclude there is no degradation of the reactor vessel head. On February 25, 2002, the NRC issued orders formalizing many of the security enhancements made at the Company's nuclear plants since September 2001. These orders include additional restrictions on access, increased security presence and closer coordination with the Company's partners in intelligence, military, law enforcement and emergency response at the federal, state and local levels. The Company is currently reviewing the new requirements to determine the cost to implement these orders. The Company does not expect those costs to be material to the Company's consolidated financial position or results of operations. As the NRC, other governmental entities, and the industry continue to consider security issues, it is possible that more extensive security plans could be required. Franchise Litigation -------------------- Seven cities, with a total of approximately 59,000 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 pending 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. Three circuit courts have entered orders requiring arbitration to establish the purchase price of Florida Power's electric distribution facilities within three cities. One appellate court has held that one city has the right to determine the value of Florida Power's facilities within the city through arbitration. 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 32 any proceeding to determine the value at which such a purchase could be made. Arbitration in one of the cases is scheduled to occur in the third quarter of 2002. Progress Energy cannot predict the outcome of these matters. 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 and OTHER MATTERS. RESULTS OF OPERATIONS --------------------- The results of operations for the CP&L Electric segment are identical between CP&L and Progress Energy. 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 ------------------------------- During the first three months of 2002, $176.2 million was spent on CP&L's construction program and $8.4 million was spent on diversified business property additions. As of March 31, 2002, CP&L's contractual cash obligations and other commercial commitments has not changed materially from what was reported in the 2001 Annual Report on Form 10-K. 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 the Company's financial instruments, which arise from transactions entered into in the normal course of business. The Company's primary exposures are changes in interest rates with respect to its long-term debt and commercial paper, and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. The Company manages its market risk in accordance with its established risk management policies, which may include entering into various derivative transactions. The Company's exposure to return on marketable securities for the decommissioning trust funds has not changed materially since December 31, 2001. The Company's exposure to market value risk with respect to the CVOs has also not changed materially since December 31, 2001. In March 2002, Progress Ventures, Inc. obtained a $440 million bank facility that will be used exclusively for expansion of its non-regulated generation portfolio. In March 2002, Progress Ventures, Inc. made draws under this facility of $120 million. During March 2002, Progress Energy converted $800 million of fixed rate debt into variable rate debt by executing interest rate derivative agreements with a group of five banks. Under the terms of the agreements, Progress Energy will receive a fixed rate of 4.87% and will pay a floating rate based on three-month LIBOR (pay rate of 2.03% at March 31, 2002). These instruments were designated as fair value hedges for accounting purposes. The fair value of these instruments was a $3.3 million liability position at March 31, 2002. As a result of these issuances, the exposure to changes in interest rates from the Company's fixed rate and variable rate long-term debt at March 31, 2002, has changed from December 31, 2001. The total fixed rate long-term debt at March 31, 2002, was $7.9 billion, with an average interest rate of 6.89% and fair market value of $8.2 billion. The total variable rate long-term debt at March 31, 2002, was $740 million, with an average interest rate of 4.98% and fair market value of $741 million. The exposure to changes in interest rates from the Company's commercial paper reclassified as long-term debt, extendible notes and FPC mandatorily redeemable securities of trust at March 31, 2001, was not materially different than at December 31, 2001. In addition, the Company's exposure on the $500 million notional amount of interest 33 rate swap agreements used to hedge its exposure on variable rate debt positions at March 31, 2002, was not materially different than at December 31, 2001. 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 reclassified as long-term debt, 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, 2001. The exposure to changes in interest rates from the Company's fixed rate long-term debt, variable rate long-term debt, commercial paper reclassified as long-term debt and extendible notes at March 31, 2002, was not materially different than at December 31, 2001. In addition, 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 at March 31, 2002, was not materially different than at December 31, 2001. PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------ ----------------- Legal aspects of certain matters are set forth in Part I, Item 1. See Note 12 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 January 14, 2002, February 22, 2002, March 11, -------------------- 2002, March 20, 2002 and April 8, 2002, 13,920, 20,800, 4,500, 76,200 and 4,500 restricted shares, respectively, of the Company's Common Shares were granted to certain key employees pursuant to the terms of the Company's 1997 Equity Incentive Plan (Plan), which was approved by the Company's shareholders on May 7, 1997. (Sponsorship of the Plan was transferred from CP&L to the Company 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 the Company, including its Affiliates and Subsidiaries. The Common Shares delivered pursuant to the Plan were acquired in market transactions directly for the accounts of the recipients and do not represent newly issued shares of the Company. (b) Underwriters and Other Purchasers. No underwriters were used in --------------------------------- connection with the delivery of Common Shares described above. The Common Shares were delivered to certain key employees of the Company. The Plan defines "key employees" as an officer or other employee of the Company who, in the opinion of the Committee, can contribute significantly to the growth and profitability of, or perform services of major importance to, the Company. (c) Consideration. The Common Shares were delivered to provide an incentive ------------- to the employee recipients to exert their utmost efforts on the Company's behalf and thus enhance the Company's performance while aligning the employee's interest with those of the Company's shareholders. (d) Exemption from Registration Claimed. The Common Shares described in ----------------------------------- this Item were delivered on the basis of an exemption from registration under Section 4(2) of the Securities Act of 1933. Receipt of the Common Shares required no investment decision on the part of the recipients. All award decisions were made by the Committee, which consists entirely of non-employee directors. Item 6. Exhibits and Reports on Form 8-K - ------ -------------------------------- (a) Exhibits None 34 (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 January 11, 2002 January 11, 2002 5 No December 12, 2001 January 17, 2002 5 Yes January 23, 2002 February 6, 2002 7 Yes February 26, 2002 February 26, 2002 5 No April 17, 2002 April 22, 2002 5 No April 24, 2002 April 25, 2002 9 No May 3, 2002 May 3, 2002 Carolina Power & Light Company ------------------------------ None 35 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: May 15, 2002 (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 36 -----END PRIVACY-ENHANCED MESSAGE-----