-----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, JjMJd1VrckA166m05fxFJrlTjVpoMh8LW6odZL51vXcADChsKUmK+td0nI7kKglW iOZ03PW+1OIkMwniiw+fxQ== 0001094093-02-000014.txt : 20020813 0001094093-02-000014.hdr.sgml : 20020813 20020813114647 ACCESSION NUMBER: 0001094093-02-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 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: 02728455 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 HOLDINGS INC DATE OF NAME CHANGE: 19990830 FORMER COMPANY: FORMER CONFORMED NAME: CP&L ENERGY INC DATE OF NAME CHANGE: 20000314 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: 02728456 BUSINESS ADDRESS: STREET 1: 411 FAYETTEVILLE ST CITY: RALEIGH STATE: NC ZIP: 27601 BUSINESS PHONE: 9195466111 10-Q 1 pei_10qpe-.txt PROGRESS ENERGY FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 July 31, 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.)
1 PROGRESS ENERGY, INC. AND CAROLINA POWER & LIGHT COMPANY FORM 10-Q - For the Quarter Ended June 30, 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 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures 2 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined Form 10-Q are defined below: TERM DEFINITION Code Internal Revenue Service Code CP&L Carolina Power & Light Company 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 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 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 Statements of Financial Accounting Standards No. 133, Accounting for Derivative and Hedging Activities SFAS No. 142 Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets SFAS No. 143 Statements of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations SRS Strategic Resource Solutions Corp. the Company Progress Energy, Inc. and subsidiaries
3 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, changes in technology, 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. 4 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Progress Energy, Inc. CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2002 STATEMENTS OF INCOME Three Months Ended Six Months Ended (Unaudited) June 30, June 30, (In thousands except per share amounts) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 1,600,581 $ 1,565,947 $ 3,098,503 $ 3,197,994 Natural gas 64,498 68,575 150,603 207,149 Diversified businesses 373,185 681,121 677,472 818,591 - ------------------------------------------------------------------------------------------------------------- Total Operating Revenues 2,038,264 2,315,643 3,926,578 4,223,734 - ------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 372,244 378,288 746,438 748,144 Purchased power 224,685 211,876 405,958 429,424 Gas purchased for resale 49,849 57,184 102,772 166,778 Other operation and maintenance 351,526 304,400 686,216 599,497 Depreciation and amortization 215,279 264,131 431,891 580,920 Taxes other than on income 94,436 93,945 191,631 193,592 Diversified businesses 426,875 721,744 798,986 911,447 - ------------------------------------------------------------------------------------------------------------- Total Operating Expenses 1,734,894 2,031,568 3,363,892 3,629,802 - ------------------------------------------------------------------------------------------------------------- Operating Income 303,370 284,075 562,686 593,932 - ------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 6,239 9,445 8,315 19,448 Other, net (1,780) (12,119) 4,890 (9,457) - ------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) 4,459 (2,674) 13,205 9,991 - ------------------------------------------------------------------------------------------------------------- Interest Charges Gross interest charges 176,355 197,269 350,782 360,215 Allowance for borrowed funds used during construction and capitalized interest (5,305) (1,873) (9,081) (5,353) - ------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 171,050 195,396 341,701 354,862 - ------------------------------------------------------------------------------------------------------------- Income before Income Taxes 136,779 86,005 234,190 249,061 Income Tax Expense (Benefit) 16,159 (25,697) (18,957) (16,644) - ------------------------------------------------------------------------------------------------------------- Net Income $ 120,620 $ 111,702 $ 253,147 $ 265,705 - ------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 215,007 200,043 213,999 199,922 Basic and Diluted Earnings per Common Share $ 0.56 $ 0.56 $ 1.18 $ 1.33 Diluted Earnings per Common Share 0.56 0.56 1.18 1.32 Dividends Declared per Common Share $ 0.545 $ 0.530 $ 1.090 $ 1.060 - ------------------------------------------------------------------------------------------------------------- See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.
5 Progress Energy, Inc BALANCE SHEETS (Unaudited) (In thousands except share data) June 30, December 31, Assets 2002 2001 - --------------------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 19,260,446 $ 19,176,021 Gas utility plant in service 521,001 491,903 Accumulated depreciation (10,435,492) (10,096,412) - --------------------------------------------------------------------------------------------------------------- Utility plant in service, net 9,345,955 9,571,512 Held for future use 15,027 15,380 Construction work in progress 1,143,029 1,065,154 Nuclear fuel, net of amortization 224,279 262,869 - --------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 10,728,290 10,914,915 - --------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 304,442 54,419 Accounts receivable 758,985 738,740 Unbilled accounts receivable 229,463 199,593 Taxes receivable - 32,325 Inventory 925,676 886,747 Deferred fuel cost 123,933 146,652 Prepayments 68,513 49,056 Other current assets 135,413 224,409 - --------------------------------------------------------------------------------------------------------------- Total Current Assets 2,546,425 2,331,941 - --------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory Assets 414,625 448,631 Nuclear decommissioning trust funds 839,529 822,821 Diversified business property, net 1,996,130 1,073,046 Miscellaneous other property and investments 507,177 456,880 Goodwill, net 3,722,237 3,690,210 Prepaid pension costs 497,542 489,600 Other assets and deferred debits 516,757 513,099 - --------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 8,493,997 7,494,287 - --------------------------------------------------------------------------------------------------------------- Total Assets $ 21,768,712 $ 20,741,143 - --------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - --------------------------------------------------------------------------------------------------------------- Capitalization Common stock (without par value, 500,000,000 shares authorized, 221,235,262 and 218,725,352 shares issued and outstanding, respectively) $ 4,243,547 $ 4,107,493 Unearned ESOP common stock (104,703) (114,385) Accumulated other comprehensive loss (28,923) (32,180) Retained earnings 2,061,224 2,042,605 - --------------------------------------------------------------------------------------------------------------- Total common stock equity 6,171,145 6,003,533 Preferred stock of subsidiaries-not subject to mandatory redemption 92,831 92,831 Long-term debt, net 10,512,723 9,483,745 - --------------------------------------------------------------------------------------------------------------- Total Capitalization 16,776,699 15,580,109 - --------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 352,860 688,052 Accounts payable 591,660 725,977 Taxes accrued 66,835 - Interest accrued 225,950 212,387 Dividends declared 119,469 117,857 Short-term obligations 346,983 77,529 Customer deposits 159,900 154,343 Other current liabilities 396,609 419,398 - --------------------------------------------------------------------------------------------------------------- Total Current Liabilities 2,260,266 2,395,543 - --------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,407,249 1,434,506 Accumulated deferred investment tax credits 216,159 226,382 Regulatory liabilities 285,014 287,239 Other liabilities and deferred credits 823,325 817,364 - --------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 2,731,747 2,765,491 - --------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 12) - --------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 21,768,712 $ 20,741,143 - --------------------------------------------------------------------------------------------------------------- See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 6 Progress Energy, Inc. STATEMENTS OF CASH FLOWS Six Months Ended (Unaudited) June 30, (In thousands) 2002 2001 - ---------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 253,147 $ 265,705 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 519,390 676,640 Deferred income taxes (42,933) (31,904) Investment tax credit (10,223) (13,216) Deferred fuel cost 22,718 3,973 Net (increase) decrease in accounts receivable (43,627) 79,287 Net increase in inventories (40,729) (177,027) Net decrease in prepaids and other current assets 3,657 23,818 Net decrease in accounts payable (48,951) (181,134) Net increase in other current liabilities 102,503 130,349 Other 5,518 (34,031) - ---------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 720,470 742,460 - ---------------------------------------------------------------------------------------------------------- Investing Activities Gross property additions (495,658) (542,798) Proceeds from sale of assets - 5,532 Nuclear fuel additions (25,593) (78,871) Contributions to nuclear decommissioning trust (19,916) (27,883) Fuel acquisition, net of cash acquired (17,355) - Diversified business property additions and acquisitions (569,574) (120,393) Investments in non-utility activities (2,403) 5,500 - ---------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (1,130,499) (758,913) - ---------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt 1,028,843 3,473,300 Net increase (decrease) in commercial paper reclassified to (254,955) 103,558 long-term debt Net increase (decrease) in short-term indebtedness 269,454 (3,229,253) Net decrease in cash provided by checks drawn in excess of bank (33,525) (64,774) balances Retirement of long-term debt (116,117) (33,914) Dividends paid on common stock (232,916) (212,506) Other (732) (47,587) - ---------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 660,052 (11,176) - ---------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 250,023 (27,629) Cash and Cash Equivalents at Beginning of the Period 54,419 101,296 - ---------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of the Period $ 304,442 $ 73,667 - ---------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest $ 324,234 $ 265,462 income taxes $ 11,320 $ 40,878 See Note 2 for non-cash investing and financing activity. - ---------------------------------------------------------------------------------------------------------- See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 7 Progress Energy, Inc. SUPPLEMENTAL DATA SCHEDULE Three Months Ended Six Months Ended June 30, June 30, (Unaudited) 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) Electric Retail $ 1,313,045 $ 1,295,650 $ 2,573,854 $ 2,622,453 Wholesale 212,572 214,908 407,519 475,555 Unbilled 29,486 15,099 26,226 (46,780) Miscellaneous revenue 45,478 40,290 90,904 146,766 - ----------------------------------------------------------------------------------------------------------------------------- Total Electric 1,600,581 1,565,947 3,098,503 3,197,994 Natural gas 64,498 68,575 150,603 207,149 Diversified businesses 373,185 681,121 677,472 818,591 - ----------------------------------------------------------------------------------------------------------------------------- Total Operating Revenues $ 2,038,264 $ 2,315,643 $ 3,926,578 $ 4,223,734 - ----------------------------------------------------------------------------------------------------------------------------- Energy Sales - Utility Electric (millions of kWh) Retail Residential 7,777 7,204 15,822 15,926 Commercial 5,884 5,682 11,130 10,956 Industrial 4,354 4,401 8,223 8,594 Other retail 1,053 1,007 1,999 1,970 - ----------------------------------------------------------------------------------------------------------------------------- Total retail 19,068 18,294 37,174 37,446 Unbilled 875 624 720 (543) Wholesale 4,471 4,080 8,781 8,859 - ----------------------------------------------------------------------------------------------------------------------------- Total Electric 24,414 22,998 46,675 45,762 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Natural Gas Delivered (thousands of dt) 15,390 11,096 32,498 25,942 - ----------------------------------------------------------------------------------------------------------------------------- Energy Supply - Utility (millions of kWh) Generated - Steam 11,683 11,877 23,098 23,791 Nuclear 7,693 6,813 14,920 13,950 Hydro 107 64 246 117 Combustion turbines 2,162 1,672 3,747 2,809 Purchased 3,857 3,711 6,850 7,385 - ----------------------------------------------------------------------------------------------------------------------------- Total Energy Supply - (Company Share) (a) 25,502 24,137 48,861 48,052 - ----------------------------------------------------------------------------------------------------------------------------- Detail of Income Taxes (in thousands) Income tax expense (credit) - current $ 76,178 $ (6,730) $ 34,199 $ 28,475 deferred (55,289) (12,723) (42,933) (31,904) investment tax credit (4,730) (6,244) (10,223) (13,215) - ----------------------------------------------------------------------------------------------------------------------------- Total Income Tax Expense (Benefit) $ 16,159 $ (25,697) $ (18,957) $ (16,644) - ----------------------------------------------------------------------------------------------------------------------------- (a) Excludes co-owner's share of the energy supplied from the five generating facilities that are jointly owned. 8
Progress Energy, Inc. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION -------------------------------------- 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. 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, gas 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. 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. ACQUISITIONS ------------ 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 cash purchase price of approximately $348 million includes approximately $1.7 million of direct transaction costs. The purchase price 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. No preliminary goodwill has been recorded. 9 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 and six months ended June 30, 2002, or for the comparable periods in the prior year. Fuel Acquisition. On April 26, 2002, Progress Fuels Corporation, a ----------------- subsidiary of Progress Energy, acquired 100% of Westchester Gas Company. The acquisition included approximately 215 producing natural gas wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering systems located within a 25-miles radius of Jonesville, Texas, on the Texas-Louisiana border. The aggregate purchase price of approximately $153 million consisted of cash consideration of approximately $22 million and the issuance of 2.5 million shares of Progress Energy common stock valued at approximately $129 million. The purchase price includes approximately $1.7 million of direct transaction costs. The purchase price was allocated primarily to fixed assets based on the preliminary fair values of the assets acquired. The excess of the purchase price over the preliminary fair value of the net identifiable assets and liabilities acquired has been recorded as goodwill. Based on this preliminary allocation, goodwill of approximately $34 million has been recorded. The preliminary purchase price allocation is subject to adjustment for changes in the preliminary assumptions and analyses used, pending additional information including final asset valuations and allocations to gas properties. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of operations for Westchester have been included in Progress Energy's consolidated financial statements since the date of acquisition. The pro forma results of operations would not be materially different than the reported results of operations for the three and six months ended June 30, 2002, or for the comparable periods in the prior year. 3. 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 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. Hines Unit 2 is a 516 MW combined-cycle unit under construction and currently scheduled for completion in late 2003. 10 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. There was no accelerated depreciation expense recorded for the three and six months ended June 30, 2002. 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 and will be returned to retail customers over an eight-month period ending December 31, 2002. 4. 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, gas 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. The marketing activity refers to soliciting and managing wholesale power supply contracts and to selling excess generation as available, all within the regulated framework. Contracts within this activity are subject to review under SFAS No. 133. The trading activity refers to trading as defined in EITF 98-10. This trading activity has primarily consisted of entering into standardized electric forward contracts. In addition, the trading activity has also included purchasing power for immediate resale. This trading has been conducted on behalf of CP&L and Florida Power, but is outside the regulated framework (i.e., is a non-regulated activity). Progress Ventures also enters into non-regulated trading transactions for its non-regulated merchant plant and fuel businesses. The Rail Services segment operations include railcar repair, rail parts reconditioning and sales, railcar leasing and sales, and scrap metal recycling. These activities include maintenance and reconditioning of salvageable scrap components of railcars, locomotive repair, right-of-way maintenance and operating manufacturing facilities for new rail cars. The Other segment is primarily made up of regulated 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, miscellaneous non-regulated activities and elimination entries. 11 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 Rail Services Segment (in thousands) CP&L Electric Electric Ventures (b) (c) Other Totals - ------------------------------------------------------------------------------------------------------------------------------- Three Months Ended 6/30/02 Revenues Unaffiliated $834,658 $765,923 $137,520 $210,534 $85,082 $2,033,717 Intersegment - - 127,889 855 (124,197) 4,547 ---------------------------------------------------------------------------------------- Total Revenues $834,658 $765,923 $265,409 $211,389 $(39,115) $2,038,264 Net Income (Loss) $131,690 $76,753 $53,467 $2,947 $(144,237) $120,620 Segment Income (Loss)After $109,346 $73,069 $79,495 $2,947 $(144,237) $120,620 Allocation (a) Total Segment Assets $8,669,993 $4,967,998 $2,240,932 $607,617 $5,282,172 $21,768,712 =============================================================================================================================== Florida Power Progress Segment CP&L Electric Electric Ventures Rail Services Other Totals - ------------------------------------------------------------------------------------------------------------------------------- Three Months Ended 6/30/01 Revenues Unaffiliated $782,287 $783,660 $105,805 $520,308 $118,912 $2,310,972 Intersegment - - 111,890 625 (107,844) 4,671 ---------------------------------------------------------------------------------------- Total Revenues $782,287 $783,660 $217,695 $520,933 $11,068 $2,315,643 Net Income (Loss) $84,022 $84,311 $55,671 $(7,533) $(104,769) $111,702 Segment Income (Loss) After $68,987 $80,950 $74,067 $(7,533) $(104,769) $111,702 Allocation (a) Total Segment Assets $8,942,454 $4,925,985 $795,017 $802,536 $4,769,697 $20,235,689 =============================================================================================================================== Florida Power Progress Rail Services Other Segment CP&L Electric Electric Ventures (b) (c) Totals - ------------------------------------------------------------------------------------------------------------------------------- Six Months Ended 6/30/02 Revenues Unaffiliated $1,646,139 $1,452,364 $250,925 $379,903 $187,511 $3,916,842 Intersegment - - 259,819 1,350 (251,433) 9,736 ----------------------------------------------------------------------------------------- Total Revenues $1,646,139 $1,452,364 $510,744 $381,253 $(63,922) $3,926,578 Net Income (Loss) $217,222 $134,496 $92,951 $2,246 $(193,768) $253,147 Segment Income (Loss) After $187,276 $128,226 $129,167 $2,246 $(193,768) $253,147 Allocation (a) Total Segment Assets $8,669,993 $4,967,998 $2,240,932 $607,617 $5,282,172 $21,768,712 =============================================================================================================================== Florida Power Progress Segment CP&L Electric Electric Ventures Rail Services Other Totals - ------------------------------------------------------------------------------------------------------------------------------- Six Months Ended 6/30/01 Revenues Unaffiliated $1,603,861 $1,594,133 $251,256 $520,308 $249,287 $4,218,845 Intersegment - - 192,396 625 (188,132) 4,889 ---------------------------------------------------------------------------------------- Total Revenues $1,603,861 $1,594,133 $443,652 $520,933 $61,155 $4,223,734 Net Income (Loss) $205,491 $155,917 $97,750 $(7,533) $(185,920) $265,705 Segment Income (Loss) After $176,885 $144,202 $138,071 $(7,533) $(185,920) $265,705 Allocation (a) Total Segment Assets $8,942,454 $4,925,985 $795,017 $802,536 $4,769,697 $20,235,689 =============================================================================================================================== (a) After 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 June 30, 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 the Rowan plant from CP&L in the first quarter of 2002. (c) Rail Services total segment assets at June 30, 2002, decreased from the prior year due to the final purchase price allocation being recorded in the fourth quarter of 2001.
12 5. IMPACT OF NEW ACCOUNTING STANDARD --------------------------------- During the second quarter of 2001, the Financial Accounting Standards Board (FASB) issued interpretations of Statements 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 significant 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 generally would be no income statement effect of the mark-to-market because such contracts are generally reflected in fuel adjustment clauses so that the contract's mark-to-market gain or loss would be recorded as a regulatory asset or liability. Any mark-to-market gains or losses in its non-regulated businesses would 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. See Note 6 for more information on SFAS No. 142, "Goodwill and Other Intangible Assets." The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in July 2001. This statement provides accounting requirements for retirement obligations associated with 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 liability is then accreted over time by applying an interest method of allocation to the beginning liability. The Company is in the process of identifying retirement obligations. Areas that are being reviewed include electric transmission and distribution, gas production and distribution, nuclear decommissioning, all generating facilities, coal mines, synthetic fuel facilities, terminals, telecommunication assets, and assets that require special handling under environmental regulations. The Company is also in the process of quantifying the obligations that have been identified under the measurement rules described in the standard. For regulated companies, there is not expected to be any impact on earnings. For non-regulated companies, the Company currently cannot predict the earnings impact. 6. 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 has completed the first step of the initial transitional goodwill impairment test, which indicated that the Company's goodwill was not impaired as of January 1, 2002. The changes in the carrying amount of goodwill for the six months ended June 30, 2002, by reportable segment, are as follows: Florida Power Progress (in thousands) CP&L Electric Electric Ventures Other Total ------------- -------- -------- ----- ----- Balance as of January 1, 2002 $1,921,802 $1,733,448 $ - $34,960 $3,690,210 Acquisitions - - 33,747 - 33,747 Divestitures - - - (1,720) (1,720) --------------- --------------- --------------- --------------- -------------- Balance as of June 30, 2002 $1,921,802 $1,733,448 $33,747 $33,240 $3,722,237
The acquired goodwill relates to the acquisition of Westchester Gas Company in April 2002 (see Note 2). 13 As required by SFAS No. 142, the results for the prior year periods have not been restated. A reconciliation of net income as if SFAS No. 142 had been adopted is presented below for the three and six months ended June 30, 2001, and the years ending December 31, 2001, 2000 and 1999. Three Months Ended Six Months Ended Year Ended Year Ended Year Ended (in thousands, except per share data) June 30, 2001 June 30, 2001 2001 2000 1999 ------------- ------------- ---- ---- ---- Reported net income $ 111,702 $ 265,705 $ 541,610 $ 478,361 $ 379,288 Add back: Goodwill amortization 24,762 47,649 96,828 14,100 3,968 --------- --------- --------- --------- --------- Adjusted net income $ 136,464 $ 313,354 $ 638,438 $ 492,461 $ 383,256 Basic earnings per common share: Reported net income $ 0.56 $ 1.33 $ 2.65 $ 3.04 $ 2.56 Adjusted net income $ 0.68 $ 1.57 $ 3.12 $ 3.13 $ 2.58 Diluted earnings per common share: Reported net income $ 0.56 $ 1.32 $ 2.64 $ 3.03 $ 2.55 Adjusted net income $ 0.68 $ 1.56 $ 3.11 $ 3.12 $ 2.58
The gross carrying amount and accumulated amortization of the Company's intangible assets as of June 30, 2002 and December 31, 2001 are as follows: June 30, 2002 December 31, 2001 --------------------------------------- ------------------------------------------ (in thousands) Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ------------------ --------------------- --------------------- -------------------- Synthetic fuel intangibles (a) $ 140,469 $ (33,713) $ 140,469 $ (22,237) Power sale agreements (b) 31,601 (2,297) - - Customer contracts 17,300 (7,850) 17,300 (5,600) Other 21,136 (471) 18,771 (338) ------------------ --------------------- --------------------- -------------------- Total $ 210,506 $ (44,331) $ 176,540 $ (28,175)
(a) Represents intangibles for synthetic fuel technology. These intangibles are being amortized on a straight-line basis over the period ending with the expiration of tax credits under Section 29 of the Internal Revenue Code on December 31, 2007. (b) Relates to the power sale agreements recorded as part of the acquisition of generating assets from LG&E Energy Corp. (See Note 2), which are amortized on a straight-line basis beginning with the in-service date of these plants through December 31, 2004. Total net intangible assets of $166.2 million and $148.4 million at June 30, 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 and six months ended June 30, 2002 was $8.1 million and $16.2 million, respectively. The estimated amortization expense on intangible assets for the next five years is as follows: (in thousands) 2002 $ 33,663 2003 34,536 2004 36,311 2005 21,087 2006 20,419 7. COMPREHENSIVE INCOME -------------------- Comprehensive income for the three and six months ended June 30, 2002, was $119.6 million and $256.4 million, respectively. Comprehensive income for the three and six months ended June 30, 2001, was $112.5 million and $231.5 million, respectively. Items of other comprehensive income for the three-month and six-month periods consisted primarily of changes in the fair value of derivatives used to hedge cash flows related to interest on long-term debt and the cumulative effect of implementing SFAS No. 133 as of January 1, 2001. 14 8. 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 and June 2002, Progress Ventures, Inc. made draws under this facility of $120 million and $67 million, respectively. 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 June 27, 2002, CP&L announced the redemption of $500 million of CP&L Extendible Notes due October 28, 2009, at 100% of the principal amount of such notes. These notes were redeemed on July 29, 2002 and CP&L funded the redemptions through the issuance of commercial paper. On July 30, 2002, CP&L issued $500 million of senior unsecured notes due 2012 with a coupon of 6.5%. Proceeds from this issuance were used to pay down commercial paper. On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54% Series, matured. Florida Power funded this maturity through the issuance of commercial paper. On July 11, 2002, Florida Power announced the redemption of $108.55 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 A Due January 1, 2027, $90 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 B Due February 1, 2022 and $10.115 million principal amount of Pasco County Pollution Control Refunding Revenue Bonds, Series 1992A Due February 1, 2022, at 102% of the principal amount of such bonds and $32.2 million principal amount of Pinellas County Pollution Control Refunding Revenue Bonds, Series 1991 Due December 1, 2014 at 101% of the principal amount of such bonds. These redemptions were finalized on August 12, 2002. On July 16, 2002, Florida Power issued $108.55 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due January 1, 2027, $100.115 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022 and $32.2 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002C Due January 1, 2018. Proceeds from this issuance were used to redeem Florida Power's pollution control revenue refunding bonds above. On August 5, 2002, CP&L announced the redemption of $150 million of First Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the principal amount of such bonds. CP&L intends to redeem these notes on September 4, 2002. 9. 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, April and May 2002, Progress Energy converted $1.0 billion of fixed rate debt into variable rate debt by executing interest rate derivative agreements with a total notional amount of $1.0 billion with a group of five banks. Under the terms of the agreements, which were scheduled to mature in 2006 and 2007 and coincide with the maturity dates of the related debt issuances, Progress Energy received a fixed rate and paid a floating rate based on three-month LIBOR. These instruments were designated as fair value hedges for accounting purposes. In June 2002, Progress Energy terminated these agreements. As a result of the agreements, at June 30, 2002, Progress Energy had a debt premium of $21.2 million, which will be amortized and recorded as a reduction to interest expense over the life of the related debt issuances. 15 Progress Ventures, Inc. is required to hedge 75 percent of the amounts outstanding under its bank facility pursuant to the terms of the agreement for expansion of its non-regulated generation portfolio. In May 2002, Progress Ventures, Inc. entered into hedges that included a series of zero cost collars that have been designated as cash flow hedges for accounting purposes. The fair value of these instruments was a $2.1 million liability position at June 30, 2002. In April, May and June 2002, CP&L entered into a series of Treasury Rate Locks to hedge its exposure to interest rates with regard to a future issuance of fixed-rate debt. These agreements have a computational period of ten years. The fair value of the swaps was a $8.5 million liability position at June 30, 2002. These instruments were designated as cash flow hedges for accounting purposes. The agreements, with a total notional amount of $350 million, were terminated simultaneously with the pricing of the $500 million CP&L senior unsecured notes in July 2002. CP&L realized a $22.5 million hedging loss, which will be amortized and recorded as an adjustment to interest expense over the life of the notes. In August 2002, Progress Energy converted $400 million of fixed rate debt into variable rate debt by executing interest rate derivative agreements with two counterparties with a total notional amount of $400 million. Under the terms of the agreements, which expire in 2006 and coincide with the maturity date of the related debt issuance, Progress Energy will receive a fixed rate of 3.26% and will pay a floating rate based on three-month LIBOR. These instruments were designated as fair value hedges 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. 10. EARNINGS PER COMMON SHARE ------------------------- Restricted stock awards and contingently issuable shares had a dilutive effect on earnings per share for the six months ended June 30, 2001. As of June 30, 2002, options granted in 2001 and 2002 to purchase 2.4 million shares of common stock with a weighted-average exercise price of $43.73 were outstanding. A reconciliation of the weighted average number of common shares outstanding for basic and dilutive purposes is as follows (in thousands): Three Months Ended, Six Months Ended, June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------- ------------- ------------- ------------- Weighted Average Common Shares - Basic 215,007 200,043 213,999 199,922 Restricted Stock Awards 734 677 690 651 Stock Options 333 - 224 - ---------- ---------- ---------- ---------- Weighted Average Shares - Fully Dilutive 216,074 200,720 214,913 200,573
Employee Stock Ownership Plan shares that have not been committed to be released to participants' accounts are not considered outstanding for the determination of earnings per common share. Those shares totaled 4,759,277 and 5,330,408 at June 30, 2002 and June 30, 2001, respectively. 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. 16 The existence of the Trust is for the sole purpose of issuing the Preferred Securities and the common securities and using the proceeds thereof to purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable Interest Notes (subordinated notes) due 2039, for a principal amount of $309.3 million. The subordinated notes and the Notes Guarantee (as discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds from the sale of the subordinated notes were advanced to Progress Capital and used for general corporate purposes including the repayment of a portion of certain outstanding short-term bank loans and commercial paper. FPC has fully and unconditionally guaranteed the obligations of Funding Corp. under the subordinated notes (the Notes Guarantee). In addition, FPC has guaranteed the payment of all distributions required to be made by the Trust, but only to the extent that the Trust has funds available for such distributions (Preferred Securities Guarantee). The Preferred Securities Guarantee, considered together with the Notes Guarantee, constitutes a full and unconditional guarantee by FPC of the Trust's obligations under the Preferred Securities. The subordinated notes may be redeemed at the option of Funding Corp. beginning in 2004 at par value plus accrued interest through the redemption date. The proceeds of any redemption of the subordinated notes will be used by the Trust to redeem proportional amounts of the Preferred Securities and common securities in accordance with their terms. Upon liquidation or dissolution of Funding Corp., holders of the Preferred Securities would be entitled to the liquidation preference of $25 per share plus all accrued and unpaid dividends thereon to the date of payment. These Preferred Securities are classified as long-term debt on the Company's consolidated balance sheets. 12. COMMITMENTS AND CONTINGENCIES ----------------------------- Contingencies and significant changes to the commitments discussed in Note 20 of the financial statements included in the Company's 2001 Annual Report on Form 10-K are described below. Commitments 1) Guarantees ---------- During the first six months of 2002, Progress Energy issued approximately $582 million of guarantees on behalf of Progress Ventures for obligations under power purchase agreements, tolling agreements, construction agreements and trading operations. Approximately $441 million of these commitments relate to certain guarantee agreements issued to support obligations related to Progress Venture's expansion of its non-regulated generation portfolio. These guarantees ensure performance under generation construction and operating agreements. The remaining $141 million of these new commitments are guarantees issued to support Progress Ventures' energy trading and marketing functions. The contracts supporting the guarantees contain language regarding downgrade events, ratings triggers, and netting and offset provisions. Contingencies 1) Impairment of Long-Lived Assets ------------------------------- Due to the recent decline of the telecommunications industry, the Company has initiated a valuation study to assess the recoverability of Progress Telecom's and Caronet's long-lived assets, which totaled approximately $288 and $111 million, respectively, at June 30, 2002. The Company expects to record an impairment in the third quarter. Progress Telecom is currently providing broadband services to WorldCom Inc. and its subsidiaries. Due to WorldCom Inc.'s bankruptcy filing in July 2002, the Company is assessing what impact, if any, the WorldCom Inc. developments will have on Progress Telecom's operations. Progress Energy does not expect the WorldCom Inc. developments to have a material impact on the Company's consolidated results of operations, financial position or cash flows. 17 2) IRS Audit --------- One of Progress Energy's synthetic fuel entities, Colona Synfuel Limited Partnership, L.L.L.P., is being audited by the IRS. The Company has been allocated approximately $220 million in tax credits to date for this synthetic fuel entity. As provided for in contractual arrangements pertaining to Progress Energy's purchase of Colona, the Company has begun escrowing quarterly royalty payments owed to an unaffiliated entity until final resolution of the audit. In management's opinion, Progress Energy is complying with all the necessary requirements to be allowed such credits and believes it is likely, although it cannot provide certainty, that it will prevail if challenged by the IRS on any credits taken. The timing for the ultimate disposition of this audit is uncertain. 3) Franchise Taxes --------------- CP&L, like other electric power companies in North Carolina, pays a franchise tax levied by the State pursuant to North Carolina General Statutes Section 105-116, a state-level annual franchise tax (State Franchise Tax). Part of the revenue generated by the State Franchise Tax is required by North Carolina General Statutes Section 105-116.1(b) to be distributed to North Carolina cities in which CP&L maintains facilities. CP&L has paid and continues to pay the State Franchise Tax to the state when such taxes are due. However, pursuant to an Executive Order issued on February 5, 2002, by the Governor of North Carolina, the Secretary of Revenue withheld distributions of State Franchise Tax revenues to cities for two quarters of fiscal year 2001-2002 in an effort to balance the state's budget. In response to the state's failure to distribute the State Franchise Tax proceeds, certain cities in which CP&L maintains facilities adopted municipal franchise tax ordinances purporting to impose on CP&L a local franchise tax. The local taxes are intended to be collected for as long as the state withholds distribution of the State Franchise Tax proceeds from the cities. The first local tax payments would be due August 15, 2002. On August 2, 2002, CP&L filed a lawsuit against the cities seeking to enjoin the enforcement of the local taxes and to have the local ordinances struck down because the ordinances are beyond the cities' statutory authority and violate provisions of the North Carolina and United States Constitutions. Progress Energy cannot predict the outcome of this matter. 4) 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). In addition, 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. A discussion of these sites by legal entity follows. 18 CP&L. There are 12 former MGP sites and 14 other active waste ----- sites associated with CP&L that have required or are anticipated to require investigation and/or remediation costs. As of June 30, 2002, CP&L has not recorded any accruals for investigation and/or remediation costs for these sites. CP&L received insurance proceeds to address costs associated with CP&L waste sites. All eligible expenses related to these waste costs are charged against a centralized fund containing these proceeds. As of June 30, 2002, approximately $8.7 million remains in this centralized fund. As costs associated with CP&L's share of investigation and remediation of these sites become known, the fund is assessed to determine if additional accruals will be required. CP&L does not believe that it can provide an estimate of the reasonably possible total remediation costs beyond what remains in the centralized fund. This is due to the fact that the sites are at different stages: investigation has not begun at 15 sites, investigation has begun but remediation cannot be estimated at 7 sites and 4 sites have begun remediation. CP&L measures its liability for these sites based on available evidence including its experience in investigation and remediation of contaminated sites, which also involves assessing and developing cost-sharing arrangements with other potentially responsible parties. Once the centralized fund is depleted, CP&L will accrue costs for the sites to the extent its liability is probable and the costs can be reasonably estimated. Therefore, CP&L cannot currently determine the total costs that may be incurred in connection with the remediation of all sites. According to current information, these future costs at the CP&L sites are not material to the Company's financial condition or results of operations. A rollforward of the balance in this fund is not provided due to the immateriality of this activity in the periods presented. Florida Power. There are two former MGP sites and 8 other active -------------- waste sites or categories of sites associated with Florida Power that have required or are anticipated to require investigation and/or remediation costs. As of June 30, 2002, Florida Power has accrued approximately $8.4 million for probable and reasonably estimable costs at these sites. Florida Power believes that the maximum liability it can currently estimate on these sites is $12.9 million. As more activity occurs at these sites, Florida Power will assess the need to adjust the accruals. These accruals have been recorded on an undiscounted basis. Florida Power measures its liability for these sites based on available evidence including its experience in investigation and/or remediation of contaminated sites, which includes assessing and developing cost-sharing arrangements with other potentially responsible parties. A rollforward of the balance in this accrual is not provided due to the immateriality of this activity in the periods presented. NCNG. There are 5 former MGP sites associated with NCNG that have ----- or are estimated to have investigation or remediation costs associated with them. As of June 30, 2002, NCNG has accrued approximately $2.7 million for probable and reasonably estimable remediation costs at these sites. These accruals have been recorded on an undiscounted basis. NCNG measures its liability for these sites based on available evidence including its experience in investigation and remediation of contaminated sites, which also involves assessing and developing cost-sharing arrangements with other potentially responsible parties. NCNG will accrue costs for the sites to the extent its liability is probable and the costs can be reasonably estimated. NCNG does not believe it can provide an estimate of the reasonably possible total remediation costs beyond the accrual because three of the five sites associated with NCNG have not begun investigation activities. Therefore, NCNG cannot currently determine the total costs that may be incurred in connection with the investigation and/or remediation of all sites. According to current information, these future costs at the NCNG sites are not material to the Company's financial condition or results of operations. A rollforward of the balance in this accrual is not provided due to the immateriality of this activity for the periods presented. NCNG has received insurance proceeds associated with pollution liability settlements. In addition, NCNG is receiving approximately $5,000 per month in its rates to fund expenses associated with its share of costs to investigate, and if necessary, remediate these sites. 19 As part of the sale of the Inland Marine Transportation segment to AEP Resources in 2001, Florida Progress established an accrual to address liabilities which may result from known and unknown environmental liabilities but primarily to address contamination in soil and potentially groundwater at one site. The balance in this accrual is $9.9 million at June 30, 2002. Florida Progress estimates that its maximum contractual liability to AEP Resources associated with Inland Marine Transportation segment is $60 million. These accruals have been determined on an undiscounted basis. Florida Progress measures its liability for this site based on estimable and probable remediation scenarios. A rollforward of the balance in this accrual is not provided due to the immateriality of this activity for the periods presented. The Company believes that it is reasonably possible that additional costs, which cannot be currently estimated, may be incurred related to the environmental indemnification provision beyond the amounts accrued. The Company cannot predict the outcome of this matter. The Company is also currently in the process of assessing potential costs and exposures at other sites it has been notified of. As the assessments are developed and analyzed, the Company will accrue costs for the sites to the extent the costs are probable and can be reasonably estimated. There has been and may be further proposed federal legislation requiring reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon 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 the Company'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 that will be installed on North Carolina fossil generating facilities as part of the North Carolina legislation discussed below may address some of the issues outlined above. 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 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. 20 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 June 20, 2002, legislation was enacted in North Carolina requiring the state's electric utilities to further reduce the emissions of nitrogen oxide and sulfur dioxide from coal-fired power plants. These levels exceed requirements discussed above with regard to the NOx SIP Call, Section 126 petitions or Title IV of the Clean Air Act. Progress Energy expects its capital costs to meet these emission targets will be approximately $813 million. CP&L currently has approximately 5,100 MW of coal-fired generation in North Carolina that is affected by this legislation. The legislation requires the emissions reductions to be completed in phases by 2013, and applies to each utilities' total system rather than setting requirements for individual power plants. The legislation also freezes the utilities' base rates for five years unless there are extraordinary events beyond the control of the utility or unless the utility persistently earns a return substantially in excess of the rate of return established and found reasonable by the NCUC in the utility's last general rate case. Further, the legislation allows the utilities to recover from their retail customers the projected capital costs during the first seven years of the 10-year compliance period beginning on January 1, 2003. The utilities must recover at least 70% of their projected capital costs during the five-year rate freeze period. Pursuant to the new law, CP&L entered into an agreement with the state of North Carolina to transfer to the state all future emissions allowances it generates from over-complying with the new emission limits when these units are completed. The new law also requires the state to undertake a study of mercury and carbon dioxide emissions in North Carolina. Progress Energy cannot predict the future regulatory interpretation, implementation or impact of this new law. 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. 21 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. 22 CAROLINA POWER & LIGHT COMPANY CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2002 STATEMENTS OF INCOME Three Months Ended Six Months Ended (Unaudited) June 30, June 30, (In thousands) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 834,658 $ 782,287 $1,646,139 $1,603,861 Diversified businesses 3,434 1,092 6,823 6,121 - -------------------------------------------------------------------------------------------------------------- Total Operating Revenues 838,092 783,379 1,652,962 1,609,982 - -------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 173,120 157,672 347,023 311,141 Purchased power 90,918 85,273 164,228 177,202 Other operation and maintenance 191,744 179,434 383,004 348,088 Depreciation and amortization 133,459 139,831 274,844 277,792 Taxes other than on income 36,075 35,822 74,843 74,259 Diversified businesses 2,754 957 5,815 5,470 - -------------------------------------------------------------------------------------------------------------- Total Operating Expenses 628,070 598,989 1,249,757 1,193,952 - -------------------------------------------------------------------------------------------------------------- Operating Income 210,022 184,390 403,205 416,030 - -------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 3,202 6,340 4,868 11,025 Other, net 4,652 2,536 1,680 11,921 - -------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) 7,854 8,876 6,548 22,946 - -------------------------------------------------------------------------------------------------------------- Interest Charges Gross interest charges 56,255 65,326 117,899 130,180 Allowance for borrowed funds used during construction (2,779) (1,576) (5,873) (4,349) - -------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 53,476 63,750 112,026 125,831 - -------------------------------------------------------------------------------------------------------------- Income before Income Taxes 164,400 129,516 297,727 313,145 Income Taxes 33,248 44,637 81,456 107,393 - -------------------------------------------------------------------------------------------------------------- Net Income 131,152 84,879 216,271 205,752 Preferred Stock Dividend Requirements (741) (741) (1,482) (1,482) - -------------------------------------------------------------------------------------------------------------- Earnings for Common Stock 130,411 84,138 214,789 204,270 - -------------------------------------------------------------------------------------------------------------- See notes to Carolina Power & Light Company Interim Financial Statements. 23 Carolina Power & Light Company CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) June 30, December 31, Assets 2002 2001 - ----------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 12,054,025 $ 12,024,291 Accumulated depreciation (6,182,956) (5,952,206) - ----------------------------------------------------------------------------------------------- Utility plant in service, net 5,871,069 6,072,085 Held for future use 7,105 7,105 Construction work in progress 698,156 711,129 Nuclear fuel, net of amortization 172,890 200,332 - ----------------------------------------------------------------------------------------------- Total Utility Plant, Net 6,749,220 6,990,651 - ----------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 11,030 21,250 Accounts receivable 324,860 317,714 Unbilled accounts receivable 150,901 136,514 Receivables from affiliated companies 67,503 27,180 Taxes receivable - 17,543 Inventory 358,763 365,501 Deferred fuel cost 118,748 131,505 Prepayments 28,011 11,863 Other current assets 64,960 66,193 - ----------------------------------------------------------------------------------------------- Total Current Assets 1,124,776 1,095,263 - ----------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 263,493 277,550 Nuclear decommissioning trust funds 429,676 416,721 Diversified business property, net 118,630 111,802 Miscellaneous other property and investments 242,807 231,325 Other assets and deferred debits 117,035 135,373 - ----------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 1,171,641 1,172,771 - ----------------------------------------------------------------------------------------------- Total Assets $ 9,045,637 $ 9,258,685 - ----------------------------------------------------------------------------------------------- Capitalization and Liabilities - ----------------------------------------------------------------------------------------------- Capitalization Common stock $ 1,921,068 $ 1,904,246 Unearned ESOP common stock (104,703) (114,385) Retained earnings 1,336,831 1,312,641 Accumulated other comprehensive loss (5,156) (7,046) - ----------------------------------------------------------------------------------------------- Total common stock equity 3,148,040 3,095,456 Preferred stock - not subject to mandatory redemption 59,334 59,334 Long-term debt, net 3,102,181 2,958,853 - ----------------------------------------------------------------------------------------------- Total Capitalization 6,309,555 6,113,643 - ----------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 250,000 600,000 Accounts payable 194,039 300,829 Payables to affiliated companies 151,176 106,114 Notes payable affiliated companies 11,539 47,913 Taxes accrued 82,013 - Interest accrued 65,314 61,124 Other current liabilities 156,702 208,645 - ----------------------------------------------------------------------------------------------- Total Current Liabilities 910,783 1,324,625 - ----------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,304,892 1,316,823 Accumulated deferred investment tax credits 164,062 170,302 Regulatory liabilities 7,774 7,494 Other liabilities and deferred credits 348,571 325,798 - ----------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 1,825,299 1,820,417 - ----------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 7) - ----------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 9,045,637 $ 9,258,685 - ----------------------------------------------------------------------------------------------- See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements. 24 Carolina Power & Light Company STATEMENTS OF CASH FLOWS Six Months Ended (Unaudited) June 30, (In thousands) 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 216,271 $ 205,752 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 313,476 324,996 Deferred income taxes (25,358) (63,765) Investment tax credit (6,240) (9,241) Deferred fuel cost (credit) 12,757 (5,059) Net (increase) decrease in accounts receivable 183,507 (1,266) Net increase in inventories (2,574) (53,729) Net (increase) decrease in prepaids and other current assets (14,916) 12,776 Net decrease in accounts payable (1,012) (295,481) Net increase in other current liabilities 93,501 47,832 Other 15,886 31,124 - ---------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 785,298 193,939 - ---------------------------------------------------------------------------------------------------------------------- Investing Activities Gross property additions (297,761) (387,253) Nuclear fuel additions (25,485) (45,813) Contributions to nuclear decommissioning trust (17,915) (17,899) Net cash flow of company-owned life insurance program (5,178) (6,098) Diversified business property additions (10,439) (1,714) Investments in non-utility activities (1,478) (5,179) - ---------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (358,256) (463,956) - ---------------------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt 47,417 296,747 Net increase (decrease) in commercial paper reclassified to long-term debt (207,535) 103,558 Net increase (decrease) in intercompany notes (36,374) 775 Retirement of long-term debt (48,689) (163) Dividends paid to parent (190,599) (124,466) Dividends paid on preferred stock (1,482) (1,482) - ---------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities (437,262) 274,969 - ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents (10,220) 4,952 Cash and Cash Equivalents at Beginning of the Period 21,250 30,070 - ---------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of the Period $ 11,030 $ 35,022 - ---------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest $ 103,911 $ 117,330 income taxes $ 61,163 $ 127,296 See Note 2 for non-cash investing activity. - ---------------------------------------------------------------------------------------------------------------------- See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements.
25 Carolina Power & Light Company NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION -------------------------------------- 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. 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 CP&L's financial position and results of operations for the interim periods. Due to seasonal weather variations and the timing of outages of electric generating units, especially nuclear-fueled units, the results of operations for interim periods are not necessarily indicative of amounts expected for the entire year. Certain amounts for 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 and six months ended June 30, 2002 and 2001 is as follows: (In thousands) Three Months Ended Six Months Ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------------------------------------------------------------------------------------- Revenues $834,658 $782,287 $1,646,139 $1,603,861 Segment Income $131,690 $84,022 $217,222 $205,491 Total Segment Assets (a) $8,669,993 $8,942,454 $8,669,993 $8,942,454 =========================================================================================== (a) CP&L Electric's total segment assets at June 30, 2002, decreased from the prior year due to the transfer of the Rowan plant to Progress Ventures in February 2002 in the amount of approximately $245 million. The primary differences between the CP&L Electric and CP&L consolidated financial information relate to other non-electric operations and elimination entries.
26 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 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 significant 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 generally would be no income statement effect of the mark-to-market because such contracts are generally reflected in fuel adjustment clauses so that the contract's mark-to-market gain or loss would be recorded as a regulatory asset or liability. Any mark-to-market gains or losses in its non-regulated businesses would 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 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. The liability is then accreted over time by applying an interest method of allocation to the beginning liability. CP&L is in the process of identifying retirement obligations. Areas that are being reviewed include electric transmission and distribution, nuclear decommissioning, all generating facilities, telecommunication assets, and assets that require special handling under environmental regulations. CP&L is also in the process of quantifying the obligations that have been identified under the measurement rules described in the standard. For CP&L's regulated operations, there is not expected to be any impact on earnings. CP&L currently cannot predict the earnings impact on its non-regulated companies. 4. COMPREHENSIVE INCOME -------------------- Comprehensive income for the three and six months ended June 30, 2002 was $129.6 million and $218.2 million, respectively. Comprehensive income for the three and six months ended June 30, 2001 was $84.8 million and $201.1 million, respectively. Items of other comprehensive income for the three-month and six-month periods consisted primarily of changes in fair value of derivatives used to hedge cash flows related to interest on long-term debt, and the cumulative effect of adopting SFAS No. 133 as of January 1, 2001. 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. On June 27, 2002, CP&L announced the redemption of $500 million of CP&L Extendible Notes due October 28, 2009, at 100% of the principal amount of such notes. These notes were redeemed on July 29, 2002 and CP&L funded the redemptions through the issuance of commercial paper. On July 30, 2002, CP&L issued $500 million of senior unsecured notes due 2012 with a coupon of 6.5%. Proceeds from this issuance were used to pay down commercial paper. On August 5, 2002, CP&L announced the redemption of $150 million of First Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the principal amount of such bonds. CP&L intends to redeem these notes on September 4, 2002. 27 6. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS ------------------------------------------------------ In April, May and June 2002, CP&L entered into a series of Treasury Rate Locks to hedge its exposure to interest rates with regard to a future issuance of fixed-rate debt. These agreements have a computational period of ten years. The fair value of the swaps was a $8.5 million liability position at June 30, 2002. These instruments were designated as cash flow hedges for accounting purposes. The agreements, with a total notional amount of $350 million, were terminated simultaneously with the pricing of the $500 million CP&L senior unsecured notes in July 2002. CP&L realized a $22.5 million hedging loss, which will be amortized and recorded as an adjustment to interest expense over the life of the notes. 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. CP&L only enters into swap agreements with strong creditworthy counterparties. 7. 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) Impairment of Long-Lived Assets ------------------------------- Due to the recent decline of the telecommunications industry, CP&L has initiated a valuation study to assess the recoverability of Caronet's long-lived assets, which totaled approximately $111 million at June 30, 2002. CP&L expects to record an impairment in the third quarter. 2) Franchise Taxes --------------- CP&L, like other electric power companies in North Carolina, pays a franchise tax levied by the State pursuant to North Carolina General Statutes Section 105-116, a state-level annual franchise tax (State Franchise Tax). Part of the revenue generated by the State Franchise Tax is required by North Carolina General Statutes Section 105-116.1(b) to be distributed to North Carolina cities in which CP&L maintains facilities. CP&L has paid and continues to pay the State Franchise Tax to the state when such taxes are due. However, pursuant to an Executive Order issued on February 5, 2002, by the Governor of North Carolina, the Secretary of Revenue withheld distributions of State Franchise Tax revenues to cities for two quarters of fiscal year 2001-2002 in an effort to balance the state's budget. In response to the state's failure to distribute the State Franchise Tax proceeds, certain cities in which CP&L maintains facilities adopted municipal franchise tax ordinances purporting to impose on CP&L a local franchise tax. The local taxes are intended to be collected for as long as the state withholds distribution of the State Franchise Tax proceeds from the cities. The first local tax payments would be due August 15, 2002. On August 2, 2002, CP&L filed a lawsuit against the cities seeking to enjoin the enforcement of the local taxes and to have the local ordinances struck down because the ordinances are beyond the cities' statutory authority and violate provisions of the North Carolina and United States Constitutions. CP&L cannot predict the outcome of this matter. 28 3) 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). In addition, 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. There are 12 former MGP sites and 14 other active waste sites associated with CP&L that have required or are anticipated to require investigation and/or remediation costs. As of June 30, 2002, CP&L has not recorded any accruals for investigation and/or remediation costs for these sites. CP&L received insurance proceeds to address costs associated with CP&L waste sites. All eligible expenses related to these waste costs are charged against a centralized fund containing these proceeds. As of June 30, 2002, approximately $8.7 million remains in this centralized fund. As costs associated with CP&L's share of investigation and remediation of these sites become known, the fund is assessed to determine if additional accruals will be required. CP&L does not believe that it can provide an estimate of the reasonably possible total remediation costs beyond what remains in the centralized fund. This is due to the fact that the sites are at different stages: investigation has not begun at 15 sites, investigation has begun but remediation cannot be estimated at 7 sites and 4 sites have begun remediation. CP&L measures its liability for these sites based on available evidence including its experience in investigation and remediation of contaminated sites, which also involves assessing and developing cost-sharing arrangements with other potentially responsible parties. Once the centralized fund is depleted, CP&L will accrue costs for the sites to the extent its liability is probable and the costs can be reasonably estimated. Therefore, CP&L cannot currently determine the total costs that may be incurred in connection with the remediation of all sites. According to current information, these future costs at the CP&L sites are not material to its financial condition or results of operations. A rollforward of the balance in this fund is not provided due to the immateriality of this activity in the periods presented. CP&L is also currently in the process of assessing potential costs and exposures at other sites it has been notified of. As the assessments are developed and analyzed, CP&L will accrue costs for the sites to the extent the costs are probable and can be reasonably estimated. There has been and may be further proposed federal legislation requiring reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon 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 that will be installed on North Carolina fossil generating facilities as part of the North Carolina legislation discussed below may address some of the issues outlined above. CP&L cannot predict the outcome of this matter. 29 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 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. 30 On June 20, 2002, legislation was enacted in North Carolina requiring the state's electric utilities to further reduce the emissions of nitrogen oxide and sulfur dioxide from coal-fired power plants. These levels exceed requirements discussed above with regard to the NOx SIP Call, Section 126 petitions or Title IV of the Clean Air Act. CP&L expects its capital costs to meet these emission targets will be approximately $813 million. CP&L currently has approximately 5,100 MW of coal-fired generation in North Carolina that is affected by this legislation. The legislation requires the emissions reductions to be completed in phases by 2013, and applies to each utilities' total system rather than setting requirements for individual power plants. The legislation also freezes the utilities' base rates for five years unless there are extraordinary events beyond the control of the utility or unless the utility persistently earns a return substantially in excess of the rate of return established and found reasonable by the NCUC in the utility's last general rate case. Further, the legislation allows the utilities to recover from their retail customers the projected capital costs during the first seven years of the 10-year compliance period beginning on January 1, 2003. The utilities must recover at least 70% of their projected capital costs during the five-year rate freeze period. Pursuant to the new law, CP&L entered into an agreement with the state of North Carolina to transfer to the state all future emissions allowances it generates from over-complying with the new emission limits when these units are completed. The new law also requires the state to undertake a study of mercury and carbon dioxide emissions in North Carolina. CP&L cannot predict the future regulatory interpretation, implementation or impact of this new law. 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. 31 Item 2. Management's Discussion and Analysis of Financial Condition ------- ----------------------------------------------------------- and Results of Operations ------------------------- RESULTS OF OPERATIONS --------------------- For the three and six months ended June 30, 2002, as compared to the corresponding period in the prior year Progress Energy, Inc. Operating Results ----------------- Progress Energy's consolidated earnings for the three and six months ended June 30, 2002, were $120.6 million ($0.56 basic earnings per common share) and $253.1 million ($1.18 per share), respectively, compared to earnings of $111.7 ($0.56 per share) and $265.7 million ($1.33 per share) for the same periods ended June 30, 2001. Current year earnings for the three and six months ended June 30, 2002 were favorably impacted by customer growth and improved weather which increased retail and wholesale sales, decreases in depreciation expense for the CP&L Electric and Florida Power Electric segments, decreases in interest charges resulting from lower average interest rates and the elimination of goodwill amortization. Partially offsetting these positive factors were decreases in revenues as part of Florida Power's retail rate settlement and increases in operations and maintenance expenses related to increased benefit costs and additional expenses at Florida Power to improve system reliability and customer service. In addition, the common stock issuance in August 2001 (12.5 million shares) and purchase of Westchester Gas Company in April 2002 (2.5 million shares) resulted in dilution. Management tracks, monitors, and evaluates financial results based on reported earnings and on an ongoing earnings basis. The following reconciles reported earnings to ongoing earnings. Three Months Ended Six Months June 30, Ended June 30, --------------------- ---------------------------- ($ millions, except per share figures) 2002 2001 2002 2001 ---- ---- ---- ---- Reported Earnings $120.6 $111.7 $253.1 $265.7 Intra-period tax allocation adjustment 58.4 25.3 79.6 45.3 Contingent Value Obligations (CVO) mark to market (1.5) 5.9 (12.8) 8.9 Florida Retroactive Retail Rate Refund - - 21.0 - Reclassification of Rail Services from Assets Held for Sale - 10.1 - 10.1 --------------------------------------------------------------------------------- ---------------------------- Ongoing Earnings $177.5 $153.0 $340.9 $330.0 ====== ====== ====== ====== Ongoing Earnings Per Share $0.83 $0.77 $1.59 $1.65 ===== ===== ===== =====
Each of the adjustments to reported earnings and the key business drivers are discussed in more detail in the business segment reviews that follow. CP&L Electric ------------- CP&L Electric contributed net income for the three and six months ended June 30, 2002 of $131.7 million and $217.2 million, respectively, compared to net income of $84.0 million and $205.5 million, respectively, for the same periods in the prior year. 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 for the three and six months ended June 30, 2002 of $22.3 million and $29.9 million, respectively, compared to net income of $15.0 million and $28.6 million, respectively, for the same periods in the prior year. 32 Factors contributing to CP&L Electric's results include favorable electric revenue and margins driven by hotter weather compared to 2001 ($6.6 million and $3.5 million margin gain for the three and six months ended June 30, 2002, respectively); a decrease in accelerated depreciation expense related to the nuclear plants ($13.3 million and $18.3 million decrease for the three and six months ended June 30, 2002, respectively); and a decrease in interest expense resulting from lower debt and an average interest rate reduction (interest decreased by $9.1 million and $12.3 million for the three and six months ended June 30, 2002, respectively). Additionally, CP&L Electric's results for the three and six months ended June 30, 2002 were favorably impacted by a $28.3 million preliminary tax benefit reallocation from the holding company to CP&L. See Other Businesses section below for additional information on the tax benefit reallocation. CP&L Electric's results were negatively affected by a decline in industrial sales driven by a weaker economic environment ($3.8 million and $10.0 million margin decline for the three and six months ended June 30, 2002, respectively). CP&L's electric revenues for the three and six months ended June 30, 2002 and 2001 and the percentage change by customer class are as follows (in millions): --------------------------------- ---------------------------------------- --------------------------------------- Three Months Ended June 30, Six Months Ended June 30, Customer Class ---------------------------------------- --------------------------------------- 2002 % Change 2001 2002 % Change 2001 --------------------------------- ----------- ------------- -------------- ------------ ------------ ------------- Residential $258.5 5.3% $245.5 $567.7 (0.4)% $569.9 Commercial 198.9 5.8 188.0 386.1 3.8 372.0 Industrial 160.2 (1.8) 163.2 305.9 (3.0) 315.5 Governmental 17.9 4.7 17.1 35.5 4.1 34.1 --------------------------------- ----------- -------------- ------------ ------------- Total Retail Revenues 635.5 3.5 613.8 1,295.2 0.3 1,291.5 Wholesale 156.7 2.6 152.7 299.3 (5.2) 315.7 Unbilled 24.1 - (2.4) 14.4 - (42.0) Miscellaneous 18.4 1.1 18.2 37.2 (3.9) 38.7 --------------------------------- ----------- -------------- ------------ ------------- Total Electric Revenues $834.7 6.7% $782.3 $1,646.1 2.6% $1,603.9 --------------------------------- ----------- ------------- -------------- ------------ ------------ ------------- CP&L electric energy sales for the three and six months ended June 30, 2002 and 2001 and the percentage change by customer class are as follows (in thousands of mWh): --------------------------------- --------------------------------------- ---------------------------------------- Three Months Ended June 30, Six Months Ended June 30, Customer Class --------------------------------------- ---------------------------------------- 2002 % Change 2001 2002 % Change 2001 --------------------------------- ----------- ------------- ------------- ------------ ------------- ------------- Residential 3,262 3.9% 3,141 7,247 (2.8)% 7,454 Commercial 3,027 4.3 2,902 5,818 1.1 5,753 Industrial 3,361 (0.9) 3,391 6,347 (3.9) 6,605 Governmental 338 1.8 332 663 (2.4) 679 --------------------------------- ----------- ------------- ------------ ------------- Total Retail Energy Sales 9,988 2.3 9,766 20,075 (2.0) 20,491 Wholesale 3,495 15.7 3,020 6,826 4.8 6,513 Unbilled 431 - 69 245 - (602) --------------------------------- ----------- ------------- ------------ ------------- Total mWh sales 13,914 8.2% 12,855 27,146 2.8% 26,402 --------------------------------- ----------- ------------- ------------- ------------ ------------- -------------
Sales of energy to retail and wholesale customers increased for the three months ended June 30, 2002, when compared to the same period in the prior year 2001 primarily due to the impacts of favorable weather in the current year and customer growth. This was partially offset by a decrease in sales in the industrial customer class, primarily due to a decline in the industrial customer base and the continued overall softness in the industrial markets driven by the weak economic environment. For the year to date comparison period, weather was less of a driver as a milder first quarter 2002 offset much of the second quarter weather gains. 33 CP&L Electric's fuel expense increased $15.4 million for the three months ended June 30, 2002, when compared to $157.7 million in 2001, primarily due to an increase in volume and a change in generation mix, which was partially offset by a decrease in price. Purchased power expense increased $5.6 million for the three months ended June 30, 2002, when compared to $85.3 million in 2001, due to increases in volume and price. CP&L Electric's fuel expense increased $35.9 million for the six months ended June 30, 2002, when compared to $311.1 million in 2001, primarily due to an increase in volume and a change in generation mix, which was partially offset by a decrease in price. The increase was also caused by increased deferred fuel expense resulting from fuel cost collections that reduce previously deferred fuel costs. Purchased power expense decreased $13.0 million for the six months ended June 30, 2002, when compared to $177.2 million in 2001, primarily due to decreases in volume attributable to favorable market conditions and prices 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 by $12.3 million and $34.9 million for the three and six months ended June 30, 2002, respectively, when compared to operations and maintenance expense of $179.4 million and $348.1 million, respectively, for the same periods in the prior year. The increase for the three and six months ended June 30, 2002 was primarily due to increased salary and benefit costs ($5.1 million and $9.0 million for the three and six months ended June 30, 2002); increased insurance costs combined with a lower NEIL refund ($2.2 million for the six months ended June 30, 2002); and increased Service Company costs ($4.5 million and $9.5 million for the three and six months ended June 30, 2002) as a result of lower vacancy rates in the prior year subsequent to the FPC acquisition. Depreciation expense decreased $6.4 million and $2.9 million for the three and six months ended June 30, 2002, when compared to depreciation expense of $139.8 million and $277.8 million, respectively, for the same periods in the prior year. CP&L's accelerated cost recovery program for nuclear generating assets allows flexibility in recording accelerated depreciation expense. The decrease for these periods relates to CP&L Electric's election to depreciate the nuclear assets at the lower end of the allowable range as set by the state utility commissions. See OTHER MATTERS below for additional information on CP&L's accelerated cost recovery program. For the three and six months ended June 30, 2002, CP&L recorded accelerated depreciation expense of $16.7 million and $41.7 million, respectively. For the three and six months ended June 30, 2001, CP&L recorded accelerated depreciation expense of $30 million and $60 million, respectively. As of June 30, 2002, CP&L has recorded cumulative accelerated depreciation expense of approximately $392 million. These reductions are partially offset by increased depreciation costs resulting from the Richmond units being placed into service in May 2001. 34 Florida Power Electric ---------------------- Florida Power Electric contributed net income for the three and six months ended June 30, 2002 of $76.8 million and $134.5 million, respectively, compared to net income of $84.3 million and $155.9 million, respectively for the same periods in the prior year. 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 for the three and six months ended June 30, 2002 of $3.7 million and $6.3 million, respectively, compared to net income of $3.4 million and $11.7 million, respectively, for the same periods in the prior year. Florida Power Electric's earnings for the three and six months ended June 30, 2002, were negatively affected by the outcome of the Florida Power rate case settlement, which included a one-time retroactive revenue refund of $35 million, $21 million after tax, recorded in the first quarter of 2002 and a decrease in retail rates, which was partially offset by reductions in depreciation in accordance with the settlement. See Note 3 to the Progress Energy Consolidated Interim Financial Statements for additional information on the settlement. In addition, Florida Power Electric results for the three months and six months ended were negatively affected by increase in operations and maintenance expense as described more fully below. Florida Power's electric revenues for the three and six months ended June 30, 2002 and 2001 and the percentage change by customer class are as follows (in millions): -------------------------------------- ---------------------------------------- ---------------------------------------- Three Months Ended June 30, Six Months Ended June 30, ---------------------------------------- ---------------------------------------- Customer Class 2002 % Change 2001 2002 % Change 2001 -------------------------------------- -------------- ------------ ------------ ------------- ------------- ------------ Residential $395.6 2.5% $386.0 $774.8 (1.3)% $784.9 Commercial 183.4 (4.7) 192.5 350.2 (0.3) 351.4 Industrial 55.1 (6.9) 59.2 105.1 (6.7) 112.6 Governmental 43.5 (1.6) 44.2 83.5 1.8 82.0 Retroactive Retail Revenue Refund - - - (35.0) - - -------------------------------------- -------------- ------------ ------------- ------------ Total Retail Revenues 677.6 (0.6) 681.9 1,278.6 (3.9) 1,330.9 Wholesale 55.8 (10.3) 62.2 108.3 (32.3) 159.9 Unbilled 5.4 - 17.5 11.8 - (4.8) Miscellaneous 27.1 22.6 22.1 53.7 (50.3) 108.1 -------------------------------------- -------------- ------------ ------------- ------------ Total Electric Revenues $765.9 (2.3)% $783.7 $1,452.4 (8.9)% $1,594.1 -------------------------------------- -------------- ------------ ------------ ------------- ------------- ------------
35 Florida Power's electric energy sales for the three and six months ended June 30, 2002 and 2001, and the percentage change by customer class are as follows (in thousands of mWh): -------------------------------------- ---------------------------------------- ---------------------------------------- Three Months Ended June 30, Six Months Ended June 30, ---------------------------------------- ---------------------------------------- Customer Class 2002 % Change 2001 2002 % Change 2001 -------------------------------------- -------------- ------------ ------------ ------------- ------------- ------------ Residential 4,515 11.1% 4,063 8,575 1.2% 8,472 Commercial 2,857 2.8 2,780 5,313 2.1 5,203 Industrial 994 (1.6) 1,010 1,876 (5.7) 1,989 Governmental 715 5.9 675 1,335 3.4 1,291 -------------------------------------- -------------- ------------ ------------- ------------ Total Retail Energy Sales 9,081 6.5 8,528 17,099 0.8 16,955 Wholesale 976 (7.9) 1,060 1,956 (16.6) 2,346 Unbilled 443 - 555 474 - 59 -------------------------------------- -------------- ------------ ------------- ------------ Total mWh sales 10,500 3.5% 10,143 19,529 0.9% 19,360 -------------------------------------- -------------- ------------ ------------ ------------- ------------- ------------
As a result of the settlement of the Florida Power rate case, effective May 1, 2002, Florida Power reduced its rates by 9.25%. The effect of this reduction was to reduce revenue by $20.6 million for the second quarter of 2002. Partially offsetting the decrease in rates and one-time refund from the settlement detailed above were the impacts of favorable weather and customer growth. In addition, revenues for the first six months of 2002 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. In 2001, the deferred revenues were offset by accelerated amortization of the Tiger Bay regulatory asset, discussed below, and therefore, had no earnings impact. Fuel used in generation and purchased power decreased $14.3 million and $48.1 million for the three and six months ended June 30, 2002, when compared to $347.2 million and $689.2 million, respectively, for the same period in the prior year, primarily due to lower oil and gas prices, partially offset by an increase in coal prices. In addition, the decrease for the three months ended June 30, 2002, was due to the lowered recovery of fuel expense as part of the mid-course correction of Florida Power's fuel cost recovery clause as part of the settlement. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, have no material impact on operating results. Operations and maintenance expense increased by $30.2 million and $50.6 million for the three and six months ended June 30, 2002, respectively, when compared to operations and maintenance expense of $119.8 million and $230.7 million, respectively, for the same periods in the prior year. These amounts have increased due to a decreased pension credit in the current year ($12.2 million and $16.6 million lower for the three and six months ended June 30, 2002); increased other employee benefit costs, primarily driven by medical costs (approximately $3 million and $6 million for the three and six months ended June 30, 2002); increased spending related to system reliability, including the Commitment to Excellence program aimed at increasing Florida Power's customer satisfaction ($7.8 million and $13.0 million for the three and six months ended June 30, 2002); and increased support charges from the Service Company as a result of lower vacancy rates in the prior year subsequent to the FPC acquisition. 36 Depreciation and amortization expense decreased by $19.4 million and $102.1 million for the three and six months ended June 30, 2002, when compared to expense of $94.6 million and $246.7 million, respectively, for the same periods in the prior year. The Florida Power rate case settlement provides for ongoing reductions in depreciation, nuclear decommissioning and fossil dismantlement costs that reduced the amount of depreciation recorded by $19.6 million and $39.2 million for the three and six months ended June 30, 2002. In addition, the first half 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 gas fuel extraction, manufacturing and delivery; coal fuel extraction, manufacturing and delivery, which includes 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 $79.5 million and $129.2 million for the three and six months ended June 30, 2002, respectively, compared to net income of $74.1 million and $138.1 million, respectively, for the same periods in the prior year. For the three months ended June 30, 2002, the majority of the increase relates to the addition of merchant plants in the current year. For the six months ended June 30, 2002, the majority of the decrease relates to minor reductions in the net income related to energy marketing and trading, and in both the coal and gas fuel extraction, manufacturing and delivery operations, partially offset by the additions of merchant plants during the year. Progress Ventures' energy marketing and trading activities generated net income of $25.8 million and $36.0 million for the three and six months ended June 30, 2002, respectively, compared to net income of $18.4 million and $40.3 million, respectively, for the same periods in the prior year. See Note 4 to the Progress Energy Consolidated Interim Financial Statements for additional information on trading and marketing activities. Earnings for the current quarter increased primarily due to an increase in trading gains and a decrease in capacity charges on certain wholesale contracts over the prior year. Earnings for the six months ended June 30, 2002, have decreased primarily due to the completion of certain contracts and the impact of lower natural gas prices on the pricing of certain contracts. Progress Ventures' merchant generation operations generated net income of $7.0 million and $6.8 million for the three and six months ended June 30, 2002, respectively, when compared to net income of $1.4 million and $1.1 million, respectively, for the same periods in the prior year. This increase is due to the completion of construction for certain merchant plants, transfer of generation assets from CP&L and the acquisitions of merchant plants in the current year. See Note 2 to the Progress Energy Consolidated Interim Financial Statements for additional information on this acquisition. Progress Ventures currently has a tolling agreement for output on one of its merchant plants with Dynegy, Inc. through June 2008. This contract is not subject to mark to market accounting under SFAS No. 133. If Dynegy, Inc, was to default on this contract and Progress Ventures was required to replace the contract on this merchant plant, this could negatively impact Progress Ventures' cash flows. Progress Energy does not expect these developments to have a material impact on the Company's consolidated results of operations, financial position or cash flows. Progress Ventures' gas fuel extraction, manufacturing and delivery operations include the operations of Mesa Hydrocarbons, Inc. (Mesa), which owns natural gas reserves and operates wells in Colorado and sells natural gas. These operations also include the activities of the recently acquired Westchester Gas Company. See Note 2 to the Progress Energy Consolidated Interim Financial Statements for additional information on this acquisition. These operations generated net income of $0.9 million and $1.2 million for the three and six months ended June 30, 2002, respectively, when compared to net income of $2.0 million and $4.4 million, respectively, for the same periods in the prior year. Due to the acquisition of Westchester Gas Company in April 2002, the results of these operations are not comparative. However, the current year results have been negatively affected by the decreases in sales price of gas over the prior year. 37 Progress Ventures' coal fuel extraction, manufacturing and delivery operations generated net income of $45.1 million and $84.7 million for the three and six months ended June 30, 2002, when compared to net income of $51.4 million and $90.5 million, respectively, for the same periods in the prior year. The Progress Ventures segment sold 3.4 million and 6.4 million tons of synthetic fuel for the three and six months ended June 30, 2002, respectively, compared to 3.4 million and 6.3 million tons, respectively, for the same periods in the prior year. The sales resulted in tax credits of $91.2 million and $175.1 million being recorded for the three and six months ended June 30, 2002, respectively, compared to tax credits of $92.3 million and $168.9 million, respectively, for the same periods in the prior year. 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. 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. 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. Progress Energy recorded an after-tax charge of $10.1 million in the second quarter of 2001 reflecting the reallocation of the purchase price and the reversal of the effect of net assets held for sale accounting. Therefore the results of Rail Services for the three and six months ended June 30, 2001, are not comparative to the current year operations. Rail Services contributed earnings for the three and six months ended June 30, 2002 of $2.9 million and $2.2 million, respectively. Rail Service's year to year results were impacted by a weak business environment, which resulted in $15.0 million decreased revenues for the quarter and a decrease of $69.4 million for the six months ended June 30, 2002. In addition, Rail Services' transition from acting as a scrap reseller in 2001 to acting as a scrap resale agent in 2002 and asset sales in 2001 decreased revenues. Corresponding decreases in operating costs and the impact of targeted cost cutting measures offset the revenue reductions. 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 $144.2 million and $193.8 million for the three and six months ended June 30, 2002, respectively, compared to a net loss of $104.8 million and $185.9 million, respectively, for the same periods in the prior year. The decrease in earnings for the current quarter of 2002, when compared to the same period in the prior year, was primarily due to the preliminary tax benefit reallocation recorded in the second quarter, partially offset by the elimination of goodwill amortization in 2002. In accordance with SFAS No. 142, effective January 1, 2002, Progress Energy no longer amortizes goodwill. For the three and six months ended June 30, 2001, the Company amortized goodwill of $24.8 million and $47.6 million, respectively. At June 30, 2002, the Company had $3.7 billion of unamortized goodwill. See Note 6 to the Progress Energy Consolidated Interim Financial Statements for additional information on SFAS No. 142. NCNG recorded a net loss of $1.4 million and net income of $7.0 million for the three and six months ended June 30, 2002, respectively, compared to a net loss of $5.3 million and net income of $2.2 million, respectively, for the same periods in the prior year. NCNG's year to year results were impacted most significantly by the decline in gas prices and increased industrial volumes related to the decline in gas prices, which caused NCNG's margin on gas sales to increase by $3.3 million and $7.5 million for the three and six months ended June 30, 2002, respectively, when compared to margin on sales of $11.4 million and $40.4 million for the same periods in the prior year. 38 NCNG's operations and maintenance expense increased $1.9 million and $3.9 million for the three and six months ended June 30, 2002, primarily due to increased staffing and increased operations and maintenance expense associated with a significant increase in its fleet. Additionally, NCNG's results for the three and six months ended June 30, 2002 were favorably impacted by a $1.5 million preliminary tax benefit reallocation from the holding company. See below for additional information on the preliminary tax benefit reallocation. 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. On May 16, 2002, NCNG filed a request to increase its margin rates and rebalance its rates with the NCUC, requesting an annual rate increase of $4.1 million to recover costs associated with specific system improvements. Public hearings on this matter are scheduled for August and September 2002. 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 $58.4 million and $79.6 million for the three and six months ended June 30, 2002, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was increased by $25.3 million and $45.4 million for the three and six months ended June 30, 2001, respectively. 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 is subject to regulation under the Public Utility Holding Company Act (PUHCA) of 1935, as amended, of the SEC. According to a recent SEC order, Progress Energy's tax benefit not related to acquisition interest expense is to be allocated to profitable subsidiaries. Therefore, the tax benefit that was previously held in the holding company, included in the Other segment, has been allocated on a preliminary basis to the profitable subsidiaries effective with the second quarter of 2002. The allocation has no impact on consolidated tax expense or earnings. However, the preliminary allocation decreases CP&L Electric's ($28.3 million) and NCNG's ($1.5 million) tax expense in the second quarter of 2002, with an offsetting increase in the holding company tax expense. 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 June 30, 2002, the CVOs had a fair market value of approximately $29.1 million. Progress Energy recorded gain of $1.5 million and $12.8 million for the three and six months ended June 30, 2002, respectively, compared to charges of $5.9 million and $8.9 million, respectively, for the same periods in the prior year to record the changes in fair value of CVOs. 39 Progress Telecom, including Caronet's operations, recorded revenues of $16.0 million and a net loss of $5.3 million for the quarter compared with revenues of $15.9 million and a net loss of $0.3 million for the same period last year. For the six months ended June 30, 2002, Progress Telecom recorded revenues of $31.6 million and a net loss of $9.3 compared with revenues of $30.6 million and a net loss of $2.2 million for the same period last year. Due to the recent decline of the telecommunications industry, the Company has initiated a valuation study to assess the recoverability of Progress Telecom's and Caronet's long-lived assets, which totaled approximately $288 and $111 million, respectively, at June 30, 2002. The Company expects to record an impairment in the third quarter. Progress Telecom is currently providing broadband services to WorldCom Inc. Due to WorldCom Inc.'s bankruptcy filing in July 2002, the Company is assessing what impact, if any, the WorldCom Inc. developments will have on Progress Telecom's operations. Progress Energy does not expect the WorldCom Inc. developments to have a material impact on the Company's consolidated results of operations, financial position or cash flows. Effective June 28, 2000, Caronet entered into an agreement with Bain Capital where it contributed the net assets used in its application service provider business to a newly formed company for a 35% ownership interest (15% voting interest) named Interpath Communications, Inc. (Interpath). In May 2002, Interpath merged with USinternetworking. Pursuant to the terms of the merger agreement and additional funds being contributed by Bain Capital, CP&L now owns approximately 24% of the company (14% voting interest). LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Progress Energy, Inc. Statement of Cash Flows and Financing Activities ------------------------------------------------ Cash provided by operating activities decreased $22.0 million for the six months ended June 30, 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. 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 $371.6 million for the six months ended June 30, 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 and fuel portfolio (See Note 2 to the Progress Energy Consolidated Interim Financial Statements). During the first six months of 2002, $495.7 million was spent on its utility subsidiaries' construction program and $569.6 million was spent in diversified business property additions. The acquisition of Westchester Gas Company resulted in a net cash outflow of $17.4 million. Net cash provided by financing activities increased $671.2 million for the six months ended June 30, 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. 40 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 and June 2002, Progress Ventures, Inc. made draws under this facility of $120 and $67 million, respectively. Progress Ventures, Inc. is required to hedge 75 percent of the amounts outstanding under its bank facility pursuant to the terms of the agreement for expansion of its non-regulated generation portfolio. In May 2002, Progress Ventures, Inc. entered into hedges that included a series of zero cost collars that have been designated as cash flow hedges for accounting purposes. The fair value of these instruments was a $2.1 million liability position at June 30, 2002. During March, April and May 2002, Progress Energy converted $1.0 billion of fixed rate debt into variable rate debt by executing interest rate derivative agreements with a total notional amount of $1.0 billion with a group of five banks. Under the terms of the agreements, which were scheduled to mature in 2006 and 2007 and coincide with the maturity dates of the related debt issuances, Progress Energy received a fixed rate and paid a floating rate based on three-month LIBOR. These instruments were designated as fair value hedges for accounting purposes. In June 2002, Progress Energy terminated these agreements. As a result of the agreements, at June 30, 2002, Progress Energy had a debt premium of $21.2 million, which will be amortized and recorded as a reduction to interest expense over the life of the related debt issuances. 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 all three entities 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 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. In April, May and June 2002, CP&L entered into a series of Treasury Rate Locks to hedge its exposure to interest rates with regard to a future issuance of fixed-rate debt. These agreements have a computational period of ten years. The fair value of the swaps was a $8.5 million liability position at June 30, 2002. These instruments were designated as cash flow hedges for accounting purposes. The agreements, with a total notional amount of $350 million, were terminated simultaneously with the pricing of the $500 million CP&L senior unsecured notes in July 2002 described below. CP&L realized a $22.5 million hedging loss, which will be amortized and recorded as an adjustment to interest expense over the life of the notes. 41 On June 20, 2002, legislation was enacted in North Carolina requiring the state's electric utilities to reduce the emissions of nitrogen oxide and sulfur dioxide from coal-fired power plants. CP&L expects its capital costs to meet these emission targets will be approximately $813 million. See Note 12 to the Progress Energy Consolidated Interim Financial Statements and OTHER MATTERS below for more information on this legislation. On June 27, 2002, CP&L announced the redemption of $500 million of CP&L Extendible Notes due October 28, 2009, at 100% of the principal amount of such notes. These notes were redeemed on July 29, 2002 and CP&L funded the redemptions through the issuance of commercial paper. On July 30, 2002, CP&L issued $500 million of senior unsecured notes due 2012 with a coupon of 6.5%. Proceeds from this issuance were used to pay down commercial paper. On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54% Series, matured. Florida Power funded this maturity through the issuance of commercial paper. On July 11, 2002, Florida Power announced the redemption of $108.55 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 A Due January 1, 2027, $90 million principal amount of Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 B Due February 1, 2022 and $10.115 million principal amount of Pasco County Pollution Control Refunding Revenue Bonds, Series 1992A Due February 1, 2022, at 102% of the principal amount of such bonds and $32.2 million principal amount of Pinellas County Pollution Control Refunding Revenue Bonds, Series 1991 Due December 1, 2014 at 101% of the principal amount of such bonds. These redemptions were finalized on August 12, 2002. On July 16, 2002, Florida Power issued $108.55 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due January 1, 2027, $100.115 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022 and $32.2 million principal amount of Citrus County Pollution Control Revenue Refunding Bonds, Series 2002C Due January 1, 2018. Proceeds from this issuance were used to redeem Florida Power's pollution control revenue refunding bonds above. On August 5, 2002, CP&L announced the redemption of $150 million of First Mortgage bonds, 8.20% Series, due July 1, 2022 at 103.55% of the principal amount of such bonds. CP&L intends to redeem these notes on September 4, 2002. In August 2002, Progress Energy converted $400 million of fixed rate debt into variable rate debt by executing interest rate derivative agreements with two counterparties with a total notional amount of $400 million. Under the terms of the agreements, which expire in 2006 and coincide with the maturity date of the related debt issuance, Progress Energy will receive a fixed rate of 3.26% and will pay a floating rate based on three-month LIBOR. These instruments were designated as fair value hedges for accounting purposes. Future Commitments ------------------ As of June 30, 2002, Progress Energy's contractual cash obligations have not changed materially from what was reported in the 2001 Annual Report on Form 10-K. The only changes in Progress Energy's contractual cash obligations involve the additional long-term debt issuances made through the second quarter of 2002 that are detailed above, and the finalization of Progress Ventures' purchase obligations related to generation and fuel acquisitions, as detailed in Note 2 to the Progress Energy Consolidated Interim Financial Statements. As of June 30, 2002, Progress Energy's other commercial commitments have changed from what was reported in the 2001 Annual Report on Form 10-K. During the first six months of 2002, Progress Energy issued approximately $582 million of guarantees on behalf of Progress Ventures for obligations under power purchase agreements, tolling agreements, construction agreements and trading operations. Approximately $441 million of these commitments relate to certain guarantee agreements issued to support obligations related to Progress Venture's expansion of its non-regulated generation portfolio. These guarantees ensure performance under generation construction and operating agreements. The remaining $141 million of these new commitments are guarantees issued to support Progress Ventures' energy trading and marketing functions. The contracts supporting the guarantees contain language regarding downgrade events, ratings triggers, and netting and offset provisions. 42 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 3 to the Progress Energy Consolidated Interim Financial Statements for additional information on the Agreement. North Carolina Clean Air Legislation ------------------------------------ On June 20, 2002, legislation was enacted in North Carolina requiring the state's electric utilities to reduce the emissions of nitrogen oxide and sulfur dioxide from coal-fired power plants. Progress Energy expects its capital costs to meet these emission targets will be approximately $813 million. CP&L currently has approximately 5,100 MW of coal-fired generation in North Carolina that is affected by this legislation. The legislation requires the emissions reductions to be completed in phases by 2013, and applies to each utilities' total system rather than setting requirements for individual power plants. The legislation also freezes the utilities' base rates for five years unless there are extraordinary events beyond the control of the utility or unless the utility persistently earns a return substantially in excess of the rate of return established and found reasonable by the NCUC in the utility's last general rate case. Further, the legislation allows the utilities to recover from their retail customers the projected capital costs during the first seven years of the 10-year compliance period beginning on January 1, 2003. The utilities must recover at least 70% of their projected capital costs during the five-year rate freeze period. Pursuant to the new law, CP&L entered into an agreement with the state of North Carolina to transfer to the state all future emissions allowances it generates from over-complying with the new emission limits when these units are completed. The new law also requires the state to undertake a study of mercury and carbon dioxide emissions in North Carolina. Progress Energy cannot predict the future regulatory interpretation, implementation or impact of this new law. On June 14, 2002, the NCUC approved modification of CP&L's ongoing accelerated cost recovery of its nuclear generating assets. Effective January 1, 2003, the NCUC will no longer require a minimum annual depreciation. The aggregate minimum and maximum amounts of accelerated depreciation, $415 million and $585 million respectively, are unchanged from the original NCUC order. The date by which the minimum amount must be depreciated was extended from December 31, 2004 to December 31, 2009. The aggregate minimum and maximum of $115 million and $165 million established for accelerated cost recovery by the SCPSC is unaffected by the NCUC order and will be completed by December 31, 2004. Franchise Taxes --------------- CP&L, like other electric power companies in North Carolina, pays a franchise tax levied by the State pursuant to North Carolina General Statutes Section 105-116, a state-level annual franchise tax (State Franchise Tax). Part of the revenue generated by the State Franchise Tax is required by North Carolina General Statutes Section 105-116.1(b) to be distributed to North Carolina cities in which CP&L maintains facilities. CP&L has paid and continues to pay the State Franchise Tax to the state when such taxes are due. However, pursuant to an Executive Order issued on February 5, 2002, by the Governor of North Carolina, the Secretary of Revenue withheld distributions of State Franchise Tax revenues to cities for two quarters of fiscal year 2001-2002 in an effort to balance the state's budget. In response to the state's failure to distribute the State Franchise Tax proceeds, certain cities in which CP&L maintains facilities adopted municipal franchise tax ordinances purporting to impose on CP&L a local franchise tax. The local taxes are intended to be collected for as long as the state withholds distribution of the State Franchise Tax proceeds from the cities. The first local tax payments would be due August 15, 2002. On August 2, 2002, CP&L filed a lawsuit against the cities seeking to enjoin the enforcement of the local taxes and to have the local ordinances struck down because the ordinances are beyond the cities' statutory authority and violate provisions of the North Carolina and United States Constitutions. The Company cannot predict the outcome of this matter. 43 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. The aggregate cash purchase price of approximately $348 million includes approximately $1.7 million of direct transaction costs. See Note 2 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. The aggregate purchase price of approximately $153 million consisted of cash consideration of approximately $22 million and the issuance of 2.5 million shares of Progress Energy common stock valued at approximately $129 million. The purchase price includes approximately $1.7 million of direct transaction costs. 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. See Note 2 to the Progress Energy Consolidated Interim Financial Statements for additional information on this acquisition. Synthetic Fuels Tax Credits --------------------------- Progress Energy, through the Progress Ventures business unit, produces synthetic fuel from coal. The production and sale of the synthetic fuel qualifies for tax credits under Section 29 of the Internal Revenue 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 of Progress Energy's synthetic fuel facilities have received favorable private letter rulings from the Internal Revenue Service (IRS) with respect to their operations. These tax credits are subject to review by the IRS, and if Progress Energy failed to prevail through the administrative or 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. Tax credits for the year ended December 31, 2001 and the six months ended June 30, 2002, were $349.3 million and $175.1 million, respectively, offset by operating losses, net of tax, of $163.8 million and $91.9 million, respectively, for the same periods. One synthetic fuel entity, Colona Synfuel Limited Partnership, L.L.L.P., from which the Company (and Florida Progress prior to its acquisition by the Company) has been allocated approximately $220 million in tax credits to date, is being audited by the IRS. Total Section 29 credits generated to date are approximately $781 million. In management's opinion, Progress Energy is complying with the private letter rulings and all the necessary requirements to be allowed such credits under Section 29 and believes it is likely, although it cannot provide certainty, that it will prevail if challenged by the IRS on any credits taken. The current Section 29 tax credit program will expire in 2007. Nuclear Matters --------------- On May 31, 2002, the NRC approved CP&L's request to increase the generating capacity at each of the two units at its Brunswick nuclear power facility. These power uprate projects will be implemented in phases over the next several years. Upon successful completion of these power uprates in 2005, the Brunswick units will have an increase in output totaling approximately 208 MWs. In June 2002, CP&L filed a request with the NRC to extend the Robinson Unit No. 2 operating license. The Robinson Unit No. 2 current operating license is scheduled to expire in July 2010. CP&L has requested a 20-year extension of the operating license through July 2030. The Company cannot predict the outcome of this matter. 44 Standard Market Design ---------------------- On July 31, 2002, the Federal Energy Regulatory Commission (FERC) issued its Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design (SMD NOPR). The proposed rules set forth in the SMD NOPR would require, among other things, that 1) all transmission owning utilities transfer control of their transmission facilities to an independent third party; 2) transmission service to bundled retail customers be provided under the FERC-regulated transmission tariff, rather than state-mandated terms and condition; 3) new terms and conditions for transmission service be adopted nationwide, including new provisions for pricing transmission in the event of transmission congestion; 4) new energy markets be established for the buying and selling of electric energy; and 5) load serving entities be required to meet minimum criteria for generating reserves. If adopted as proposed, the rules set forth in the SMD NOPR would materially alter the manner in which transmission and generation services are provided and paid for. Progress Energy is reviewing the SMD NOPR and expects to file comments. Currently, comments are due to be filed on October 14, 2002. FERC also has indicated that it expects to issue final rules during the first quarter of 2003. The Company cannot predict the outcome of this rulemaking or the possible outcome of any further proceedings, including appeals, related to this matter. Regional Transmission Organizations ----------------------------------- On June 18, 2002, the GridSouth RTO sponsors (CP&L, Duke Energy and South Carolina Electric and Gas) announced that they will delay filing applications with their state commissions and will suspend the GridSouth implementation project. Postponing the filings will allow GridSouth time to review the effects of state and federal regulatory initiatives that are ongoing and continuing through the end of 2002. GridSouth will determine the appropriate time to file new applications with the state commissions based on the results of these regulatory developments. The Company cannot predict the outcome or impact of this matter. 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 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. In July 2002, Florida Power reached a settlement with one of the cities and signed a new franchise agreement that includes a purchase option at the end of the 30-year agreement. 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. 45 LIQUIDITY AND CAPITAL RESOURCES ------------------------------- During the first six months of 2002, $297.8 million was spent on CP&L's construction program and $10.4 million was spent on diversified business property additions. As of June 30, 2002, CP&L's contractual cash obligations and other commercial commitments have 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 and June 2002, Progress Ventures, Inc. made draws under this facility of $120 million and $67 million, respectively. Progress Ventures, Inc. is required to hedge 75 percent of the amounts outstanding under its bank facility pursuant to the terms of the agreement for expansion of its non-regulated generation portfolio. In May 2002, Progress Ventures, Inc. entered into hedges that included a series of zero cost collars that have been designated as cash flow hedges for accounting purposes. The fair value of these instruments was a $2.1 million liability position at June 30, 2002. During March, April and May 2002, Progress Energy converted $1.0 billion of fixed rate debt into variable rate debt by executing interest rate derivative agreements with a total notional amount of $1.0 billion with a group of five banks. Under the terms of the agreements, which were scheduled to mature in 2006 and 2007 and coincide with the maturity dates of the related debt issuances, Progress Energy received a fixed rate and paid a floating rate based on three-month LIBOR. These instruments were designated as fair value hedges for accounting purposes. In June 2002, Progress Energy terminated these agreements. As a result of the agreements, at June 30, 2002, Progress Energy had a debt premium of $21.2 million, which will be amortized and recorded as a reduction to interest expense over the life of the related debt issuances. 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. In April, May and June 2002, CP&L entered into a series of Treasury Rate Locks to hedge its exposure to interest rates with regard to a future issuance of fixed-rate debt. These agreements have a computational period of ten years. The fair value of the swaps was a $8.5 million liability position at June 30, 2002. These instruments were designated as cash flow hedges for accounting purposes. The agreements, with a total notional amount of $350 million, were terminated simultaneously with the pricing of the $500 million CP&L senior unsecured notes in July 2002 described above. CP&L realized a $22.5 million hedging loss, which will be amortized and recorded as an adjustment to interest expense over the life of the notes. 46 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 June 30, 2002, has changed from December 31, 2001. The total fixed rate long-term debt at June 30, 2002, was $8.7 billion, with an average interest rate of 6.86% and fair market value of $9.3 billion. The total variable rate long-term debt at June 30, 2002, was $770 million, with an average interest rate of 1.78% and fair market value of $772 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 June 30, 2001, was not materially different than at December 31, 2001. In addition, the Company's exposure on the $500 million notional amount of interest rate swap agreements used to hedge its exposure on variable rate debt positions at June 30, 2002, was not materially different than at December 31, 2001. This instrument expired on July 31, 2002. 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 June 30, 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 June 30, 2002, was not materially different than at December 31, 2001. This instrument expired on July 31, 2002. In April, May and June 2002, CP&L entered into a series of Treasury Rate Locks to hedge its exposure to interest rates with regard to a future issuance of fixed-rate debt. These agreements have a computational period of ten years. The fair value of the swaps was a $8.5 million liability position at June 30, 2002. These instruments were designated as cash flow hedges for accounting purposes. The agreements, with a total notional amount of $350 million, were terminated simultaneously with the pricing of the $500 million CP&L senior unsecured notes in July 2002 described above. CP&L realized a $22.5 million hedging loss, which will be amortized and recorded as an adjustment to interest expense over the life of the notes. 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 7 to the CP&L Consolidated Interim Financial Statements. Item 2. Changes in Securities and Use of Proceeds ------ ----------------------------------------- RESTRICTED STOCK AWARDS: (a) Securities Delivered. On May 8, 2002 and July 10, 2002, 33,500 and --------------------- 5,200 restricted shares, respectively, of the Company's Common Shares were granted to certain key employees pursuant to the terms of the Company's 2002 Equity Incentive Plan (Plan), which was approved by the Company's shareholders on May 8, 2002. Section 9 of the Plan provides for the granting of Restricted Stock by the Organization and Compensation Committee of the Company's Board of Directors, (the Committee) to key employees of the Company, including its Affiliates or any successor, and to outside directors of the Company. 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 employee" as an officer or other employee of the Company who is selected for participation in the Plan. 47 (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 4. Submission of Matters to a Vote of Security Holders ------ --------------------------------------------------- (a) The Annual Meeting of the Shareholders of Progress Energy, Inc. was held on May 8, 2002. (b) The meeting involved the election of five Class I directors to serve for three-year terms. Proxies for the meeting were solicited pursuant to Regulation 14, there was no solicitation in opposition to management's nominees as listed below, and all nominees were elected. (c) The total votes for the election of directors were as follows: Class I Votes For Votes Withheld ---------------------------------------------------------------------- (Term Expiring in 2005) W. D. Frederick, Jr. 182,706,339 5,161,543 William O. McCoy 183,839,158 4,028,724 John H. Mullin, III 182,923,898 4,943,984 Carlos A. Saladrigas 182,674,474 5,193,408 J. Tylee Wilson 183,747,540 4,120,342 The Board of Directors' proposal to approve the 2002 Equity Incentive Plan was approved by the shareholders. The number of shares voted for the proposal was 136,616,357, the number of shares voted against the proposal was 16,007,003, and the number of abstaining votes was 3,770,077. The delivered not voted total was 31,474,444 shares. Item 6. Exhibits and Reports on Form 8-K ------ -------------------------------- (a) Exhibits None (b) Reports on Form 8-K filed during or with respect to the quarter: Progress Energy, Inc. Financial Item Statements Reported Included Date of Event Date Filed 5 No April 17, 2002 April 22, 2002 5 No April 24, 2002 April 25, 2002 9 No May 3, 2002 May 3, 2002 9 No May 30, 2002 May 30, 2002 5 No August 9, 2002 August 9, 2002 Carolina Power & Light Company Financial Item Statements Reported Included Date of Event Date Filed 5 Yes July 24, 2002 July 24, 2002 5 No July 25, 2002 August 5, 2002
48 SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROGRESS ENERGY, INC. --------------------- CAROLINA POWER & LIGHT COMPANY ------------------------------ Date: August 13, 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 49 -----END PRIVACY-ENHANCED MESSAGE-----