-----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, SsSQ4teXoreBz9d2VOC8celhp19p1hoW8lbXQHzHyQzdvbUQ0DPr61Ngf5pW3+cE wlQqC1MdwbZbd9+U2/GhWw== 0001094093-02-000030.txt : 20021118 0001094093-02-000030.hdr.sgml : 20021118 20021115085325 ACCESSION NUMBER: 0001094093-02-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02828288 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: 02828289 BUSINESS ADDRESS: STREET 1: 411 FAYETTEVILLE ST CITY: RALEIGH STATE: NC ZIP: 27601 BUSINESS PHONE: 9195466111 10-Q 1 pei_10q-.txt PGN/CPL 3RD QTR 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 September 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 October 31, 2002, each registrant had the following shares of common stock outstanding Registrant Description Shares ---------- ----------- ------ Progress Energy, Inc. Common Stock (Without Par Value) 222,152,799 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 September 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 Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 6. Exhibits and Reports on Form 8-K Signatures Certifications 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 United States 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 EITF 98-10 Accounting for Contracts Involved in Energy Trading and Risk Management Activities EPA United States Environmental Protection Agency FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission Florida Power Florida Power Corporation FPC Florida Progress Corporation FPSC Florida Public Service Commission Generally accepted Accounting principles generally accepted in the United States of America accounting principles IBEW International Brotherhood of Electrical Workers 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. PLR Private Letter Ruling 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 non-regulated 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 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 SFAS No. 144 Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets 3 SFAS No. 145 Statements of Financial Accounting Standards No. 145, Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections SFAS No. 146 Statements of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities SRS Strategic Resource Solutions Corp. the Company Progress Energy, Inc. and subsidiaries 4
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS This combined report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The matters discussed throughout this combined Form 10-Q that are not historical facts are forward-looking and, accordingly, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. In addition, forward-looking statements are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" including, but not limited to, statements under the sub-heading "Other Matters" 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 (the Company) 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: the impact of fluid and complex government laws and regulations, including those relating to the environment; the impact of recent events in the energy markets that have increased the level of public and regulatory scrutiny in the energy industry and in the capital markets; deregulation or restructuring in the electric industry that may result in increased competition and unrecovered (stranded) costs; the uncertainty regarding the timing, creation and structure of regional transmission organizations; weather conditions that directly influence the demand for electricity and natural gas; recurring seasonal fluctuations in demand for electricity and natural gas; fluctuations in the price of energy commodities and purchased power; economic fluctuations and the corresponding impact on the Company's and CP&L's commercial and industrial customers; the ability of the Company's subsidiaries to pay upstream dividends or distributions to it; the impact on the facilities and the businesses of the Company and CP&L from a terrorist attack; the inherent risks associated with the operation of nuclear facilities, including environmental, health, regulatory and financial risks; the ability to successfully access capital markets on favorable terms; the impact that increases in leverage may have on the Company and CP&L; the ability of the Company and CP&L to maintain their current credit ratings; the impact of derivative contracts used in the normal course of business by the Company and CP&L; the Company's continued ability to use Section 29 tax credits related to its coal and synthetic fuels businesses; the continued depressed state of the telecommunications industry and the Company's ability to realize future returns from Progress Telecom and Caronet, Inc.; the Company's ability to successfully integrate newly acquired businesses, including Westchester Gas Company, into its operations as quickly or as profitably as expected; the Company's ability to successfully complete the sale of North Carolina Natural Gas and apply the proceeds therefrom to reduce outstanding indebtedness; the Company's ability to manage the risks involved with the construction and operation of its non-regulated plants, including construction delays, dependence on third parties and related counter-party risks, and a lack of operating history; the Company's ability to manage the risks associated with its energy marketing and trading operations; the extent to which the Company is able to reduce its 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. Many of these risks similarly impact the Company's subsidiaries. These and other risk factors are detailed from time to time in the Progress Energy and CP&L SEC reports. You should closely read these SEC reports, including, particularly, Progress Energy's current report on Form 8-K filed with the SEC on August 9, 2002. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of Progress Energy and CP&L. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the effect of each such factor on Progress Energy and CP&L. 5 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Progress Energy, Inc. CONSOLIDATED INTERIM FINANCIAL STATEMENTS September 30, 2002 CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended (Unaudited) September 30, September 30, (In thousands except per share amounts) 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 1,908,817 $ 1,879,934 $ 5,007,321 $ 5,077,928 Natural gas 60,568 51,671 211,171 258,820 Diversified businesses 383,141 398,942 1,060,613 1,217,532 - ----------------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 2,352,526 2,330,547 6,279,105 6,554,280 - ----------------------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 459,293 446,309 1,205,731 1,194,453 Purchased power 269,108 268,794 675,066 698,218 Gas purchased for resale 47,505 36,282 150,277 203,060 Other operation and maintenance 324,880 290,651 1,011,096 890,148 Depreciation and amortization 211,088 268,475 642,979 849,395 Taxes other than on income 106,144 105,125 297,775 298,716 Diversified businesses 737,243 461,393 1,536,229 1,372,840 - ----------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 2,155,261 1,877,029 5,519,153 5,506,830 - ----------------------------------------------------------------------------------------------------------------------------- Operating Income 197,265 453,518 759,952 1,047,450 - ----------------------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 3,002 5,549 11,317 24,997 Other, net (13,394) 16,671 (8,505) 7,214 - ----------------------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (10,392) 22,220 2,812 32,211 - ----------------------------------------------------------------------------------------------------------------------------- Interest Charges Net interest charges 149,431 170,044 498,475 530,259 Allowance for borrowed funds used during construction (3,721) (4,206) (11,064) (9,559) - ----------------------------------------------------------------------------------------------------------------------------- Total Interest Charges 145,710 165,838 487,411 520,700 - ----------------------------------------------------------------------------------------------------------------------------- Income before Income Taxes 41,163 309,900 275,353 558,961 Income Tax Benefit (110,771) (56,543) (129,728) (73,187) - ----------------------------------------------------------------------------------------------------------------------------- Net Income $ 151,934 $ 366,443 $ 405,081 $ 632,148 - ----------------------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 216,079 205,866 214,700 201,925 Basic Earnings per Common Share $ 0.71 $ 1.78 $ 1.89 $ 3.13 Diluted Earnings per Common Share $ 0.70 $ 1.77 $ 1.88 $ 3.12 Dividends Declared per Common Share $ 0.545 $ 0.530 $ 1.635 $ 1.590 - ----------------------------------------------------------------------------------------------------------------------------- See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 6 Progress Energy, Inc CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands except share data) September 30, December 31, Assets 2002 2001 - --------------------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 19,764,622 $ 19,176,021 Gas utility plant in service 540,693 491,903 Accumulated depreciation (10,522,018) (10,096,412) - --------------------------------------------------------------------------------------------------------------- Utility plant in service, net 9,783,297 9,571,512 Held for future use 15,027 15,380 Construction work in progress 806,922 1,065,154 Nuclear fuel, net of amortization 215,493 262,869 - --------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 10,820,739 10,914,915 - --------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 58,940 54,419 Accounts receivable 794,659 723,807 Unbilled accounts receivable 231,393 199,593 Taxes receivable - 32,325 Inventory 918,297 893,971 Deferred fuel cost 183,942 146,652 Prepayments 62,740 49,056 Other current assets 190,358 224,409 - --------------------------------------------------------------------------------------------------------------- Total Current Assets 2,440,329 2,324,232 - --------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 403,168 448,631 Nuclear decommissioning trust funds 790,858 822,821 Diversified business property, net 1,768,477 1,073,046 Miscellaneous other property and investments 515,613 464,589 Goodwill, net 3,785,073 3,690,210 Prepaid pension costs 503,357 489,600 Restricted cash 73,821 - Other assets and deferred debits 479,321 513,099 - --------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 8,319,688 7,501,996 - --------------------------------------------------------------------------------------------------------------- Total Assets $ 21,580,756 $ 20,741,143 - --------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - --------------------------------------------------------------------------------------------------------------- Capitalization Common stock (without par value, 500,000,000 shares authorized, 221,933,138 and 218,725,352 shares issued and outstanding, respectively) $ 4,278,913 $ 4,107,493 Unearned ESOP common stock (101,560) (114,385) Accumulated other comprehensive loss (39,102) (32,180) Retained earnings 2,094,639 2,042,605 - --------------------------------------------------------------------------------------------------------------- Total common stock equity 6,232,890 6,003,533 Preferred stock of subsidiaries-not subject to mandatory redemption 92,831 92,831 Long-term debt, net 9,735,025 8,618,960 - --------------------------------------------------------------------------------------------------------------- Total Capitalization 16,060,746 14,715,324 - --------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 375,202 688,052 Accounts payable 657,572 725,977 Taxes accrued 123,645 - Interest accrued 153,903 212,387 Dividends declared 120,001 117,857 Short-term obligations 1,060,267 942,314 Customer deposits 159,920 154,343 Other current liabilities 391,470 419,398 - --------------------------------------------------------------------------------------------------------------- Total Current Liabilities 3,041,980 3,260,328 - --------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,157,446 1,434,506 Accumulated deferred investment tax credits 211,446 226,382 Regulatory liabilities 292,544 287,239 Other liabilities and deferred credits 816,594 817,364 - --------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 2,478,030 2,765,491 - --------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 13) - --------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 21,580,756 $ 20,741,143 - --------------------------------------------------------------------------------------------------------------- See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 7 Progress Energy, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended (Unaudited) September 30, (In thousands) 2002 2001 - ---------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 405,081 $ 632,148 Adjustments to reconcile net income to net cash provided by Operating activities Impairment of long-lived assets and investments 329,997 - Depreciation and amortization 801,157 997,680 Deferred income taxes (312,020) (78,987) Investment tax credit (14,930) (18,479) Deferred fuel cost (credit) (37,290) 25,616 Net increase in accounts receivable (96,005) (48,536) Net increase in inventories (29,069) (252,505) Net increase in prepaids and other current assets (23,169) (1,815) Net increase (decrease) in accounts payable 13,605 (60,828) Net increase in other current liabilities 99,521 65,630 Other 69,457 (24,281) - ---------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 1,206,335 1,235,643 - ---------------------------------------------------------------------------------------------------------- Investing Activities Gross property additions (738,559) (884,837) Diversified business property additions and acquisitions (764,553) (194,661) Proceeds from sale of assets 670 5,532 Nuclear fuel additions (56,102) (113,099) Net contributions to nuclear decommissioning trust (13,367) (40,540) Fuel acquisition, net of cash acquired (17,355) - Net cash flow of company-owned life insurance program (4,086) (5,137) Investments in non-utility activities (5,068) 3,390 Net increase in restricted cash (73,821) - Other 388 - - ---------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (1,671,853) (1,229,352) - ---------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt 1,787,711 3,772,376 Net increase (decrease) in short-term indebtedness 117,953 (3,632,802) Net decrease in cash provided by checks drawn in excess of bank (37,471) (78,816) balances Retirement of long-term debt (1,049,918) (186,295) Issuance of common stock - 488,290 Dividends paid on common stock (350,903) (318,910) Other 2,667 (47,567) - ---------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 470,039 (3,724) - ---------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 4,521 2,567 Cash and Cash Equivalents at Beginning of the Period 54,419 101,296 - ---------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of the Period $ 58,940 $ 103,863 - ---------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest $ 540,512 $ 507,284 income taxes $ 104,863 $ 31,664 See Note 2 for non-cash investing and financing activity. - ---------------------------------------------------------------------------------------------------------- See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 8 Progress Energy, Inc. SUPPLEMENTAL DATA SCHEDULE Three Months Ended Nine Months Ended September 30, September 30, (Unaudited) 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) Electric Retail $ 1,602,600 $ 1,591,713 $ 4,176,454 $ 4,214,165 Wholesale 251,797 254,054 659,316 729,608 Unbilled 2,542 (7,493) 28,769 (54,272) Miscellaneous revenue 51,878 41,660 142,782 188,427 - ----------------------------------------------------------------------------------------------------------------------------- Total Electric 1,908,817 1,879,934 5,007,321 5,077,928 Natural gas 60,568 51,671 211,171 258,820 Diversified businesses 383,141 398,942 1,060,613 1,217,532 - ----------------------------------------------------------------------------------------------------------------------------- Total Operating Revenues $ 2,352,526 $ 2,330,547 $ 6,279,105 $ 6,554,280 - ----------------------------------------------------------------------------------------------------------------------------- Energy Sales - Utility Electric (millions of kWh) Retail Residential 9,988 9,385 25,810 25,310 Commercial 6,881 6,597 18,012 17,553 Industrial 4,552 4,473 12,776 13,068 Other retail 1,185 1,164 3,183 3,135 - ----------------------------------------------------------------------------------------------------------------------------- Total retail 22,606 21,619 59,781 59,066 Unbilled (3) (350) 716 (893) Wholesale 5,550 5,087 14,331 13,946 - ----------------------------------------------------------------------------------------------------------------------------- Total Electric 28,153 26,356 74,828 72,119 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Natural Gas Delivered (thousands of dt) 19,965 13,080 52,463 39,022 - ----------------------------------------------------------------------------------------------------------------------------- Energy Supply - Utility (millions of kWh) Generated - Steam 14,529 13,451 37,628 37,242 Nuclear 7,720 7,553 22,640 21,503 Hydro 51 83 297 200 Combustion turbines 3,121 2,461 6,868 5,270 Purchased 4,142 3,945 10,991 11,330 - ----------------------------------------------------------------------------------------------------------------------------- Total Energy Supply - (Company Share) (a) 29,563 27,493 78,424 75,545 - ----------------------------------------------------------------------------------------------------------------------------- Detail of Income Taxes (in thousands) Income tax expense (credit) - current $ 163,024 $ (4,197) $ 197,212 $ 24,279 deferred (269,087) (47,082) (312,020) (78,987) investment tax credit (4,708) (5,264) (14,920) (18,479) - ----------------------------------------------------------------------------------------------------------------------------- Total Income Tax Benefit $ (110,771) $ (56,543) $ (129,728) $ (73,187) - ----------------------------------------------------------------------------------------------------------------------------- (a) Excludes co-owner's share of the energy supplied from the five generating facilities that are jointly owned.
9 Progress Energy, Inc. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION 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, Carolina Power & Light Company (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 non-regulated 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. Effective with the quarter ended September 30, 2002, the Company will no longer reclassify commercial paper as long-term debt. 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 non-regulated energy operations and positions it as a growing provider of energy in the Southeast. The aggregate cash purchase price of approximately $348 million included approximately $1.7 million of direct transaction costs. The purchase price was primarily allocated 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. 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 $64.1 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. 10 In addition, Progress Ventures, Inc. 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 of acquisition were approximately $167.6 million. The pro forma results of operations would not be materially different than the reported results of operations for the three and nine months ended September 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 included approximately $1.7 million of direct transaction costs. The purchase price was primarily allocated 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 $33 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 nine months ended September 30, 2002, or for the comparable periods in the prior year. 3. IMPAIRMENT OF LONG-LIVED ASSETS, INVESTMENTS AND OTHER ONE-TIME CHARGES Due to the decline of the telecommunications industry and continued operating losses, the Company initiated a valuation study to assess the recoverability of Progress Telecom's and Caronet's long-lived assets. Based on this assessment, the Company recorded asset impairments and other one-time charges totaling $330.4 million on a pre-tax basis in the third quarter of 2002 ($208.5 million after-tax). The asset write-downs and other one-time charges are included in diversified businesses expenses on the Consolidated Statements of Income. The results of Progress Telecom and Caronet are included in the Other segment (See Note 5). This write-down constitutes a significant reduction in the book value of these long-lived assets. The long-lived asset write-downs of $305.0 million on a pre-tax basis include an impairment of property, plant and equipment, construction work in process and intangible assets. The impairment charge represents the difference between the fair value and carrying amount of these long-lived assets. The fair value of these assets was determined using a valuation study heavily weighted on the discounted cash flow methodology and using market approaches as supporting information. The other one-time charges of $25.4 million on a pre-tax basis primarily relate to inventory adjustments. 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, Inc. Pursuant to the terms of the merger agreement and additional funds being contributed by Bain Capital, CP&L now owns approximately 19% of the company (7% voting interest). As a result of the merger, the Company reviewed the Interpath investment for impairment and wrote off the remaining amount of its cost-basis investment in Interpath, recording a pre-tax impairment of $25.0 million in the third quarter of 2002 ($16.3 million after-tax). The investment write-down is included in other, net on the Consolidated Statements of Income. 4. FLORIDA POWER RATE CASE SETTLEMENT On March 27, 2002, the parties in Florida Power's rate case entered into a Stipulation and Settlement Agreement (the Agreement) related to retail rate matters. The Agreement was approved by the Florida Public Service Commission (FPSC) on April 23, 2002. The Agreement is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if 11 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. Any amounts above the retail base revenue caps will be refunded 100 percent to customers. 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. 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 or amortization expense recorded for the three and nine months ended September 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. Any additional refunds under the Agreement will be recorded as they become probable. No additional refunds have been accrued at September 30, 2002. 5. FINANCIAL INFORMATION BY BUSINESS SEGMENT The Company currently provides services through the following business segments: CP&L Electric, Florida Power Electric, Progress Ventures, Rail Services and Other. The prior period has been restated to reflect the current reportable segments. The CP&L Electric and Florida Power Electric segments are engaged in the generation, transmission, distribution, and sale of electric energy in portions of North Carolina, South Carolina and Florida. Electric operations are subject to the rules and regulations of FERC, the NCUC, the SCPSC and the FPSC. The Progress Ventures segment is primarily engaged in non-regulated energy generation and coal, gas and synthetic fuel operations. Management reviews the operations of the Progress Ventures segment after the allocation of 12 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 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. 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 (d) Totals - ------------------------------------------------------------------------------------------------------------------------------ Three Months Ended 9/30/02 Revenues Unaffiliated $1,045,180 $863,637 $168,777 $194,611 $70,902 $2,343,107 Intersegment - - 135,029 1,282 (126,892) 9,419 ---------------------------------------------------------------------------------------- Total Revenues $1,045,180 $863,637 $303,806 $195,893 $(55,990) $2,352,526 Net Income (Loss) $179,308 $123,774 $72,976 $733 $(224,857) $151,934 Segment Income (Loss) After $167,974 $120,513 $87,571 $733 $(224,857) $151,934 Allocation (a) Total Segment Assets $8,785,416 $5,079,719 $2,381,706 $579,947 $4,753,968 $21,580,756 ============================================================================================================================== Florida Power Progress Segment CP&L Electric Electric Ventures Rail Services Other Totals - ------------------------------------------------------------------------------------------------------------------------------ Three Months Ended 9/30/01 Revenues Unaffiliated $973,803 $906,131 $144,511 $219,554 $77,926 $2,321,925 Intersegment - - 88,014 478 (79,870) 8,622 ---------------------------------------------------------------------------------------- Total Revenues $973,803 $906,131 $232,525 $220,032 $(1,944) $2,330,547 Net Income (Loss) $168,456 $114,079 $61,660 $(2,165) $24,413 $366,443 Segment Income (Loss) After $156,725 $107,397 $80,073 $(2,165) $24,413 $366,443 Allocation (a) Total Segment Assets $9,101,248 $5,044,029 $1,005,962 $828,384 $4,693,366 $20,672,989 ============================================================================================================================== 13 CP&L Electric Florida Power Progress Rail Services Other (d) Segment Electric Ventures (b) (c) Totals --------------------------------------------------------------------------------------------------------------------------- Nine Months Ended 9/30/02 Revenues Unaffiliated $2,691,320 $2,316,001 $419,702 $574,514 $258,413 $6,259,950 Intersegment - - 394,848 2,632 (378,325) 19,155 ------------------------------------------------------------------------------------- Total Revenues $2,691,320 $2,316,001 $814,550 $577,146 $(119,912) $6,279,105 Net Income (Loss) $396,530 $258,271 $165,928 $2,979 $(418,627) $405,081 Segment Income (Loss) After $355,251 $248,741 $216,737 $2,979 $(418,627) $405,081 Allocation (a) Total Segment Assets $8,785,416 $5,079,719 $2,381,706 $579,947 $4,753,968 $21,580,756 =========================================================================================================================== Florida Power Progress Segment CP&L Electric Electric Ventures Rail Services Other Totals --------------------------------------------------------------------------------------------------------------------------- Nine Months Ended 9/30/01 Revenues Unaffiliated $2,577,664 $2,500,265 $395,767 $739,863 $327,211 $6,540,770 Intersegment - - 280,410 1,102 (268,002) 13,510 ------------------------------------------------------------------------------------- Total Revenues $2,577,664 $2,500,265 $676,177 $740,965 $59,209 $6,554,280 Net Income (Loss) $373,949 $269,996 $161,026 $(9,698) $(163,125) $632,148 Segment Income Loss) After $334,593 $251,601 $218,777 $(9,698) $(163,125) $632,148 Allocation (a) Total Segment Assets $9,101,248 $5,044,029 $1,005,962 $828,384 $4,693,366 $20,672,989 =========================================================================================================================== (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 September 30, 2002, increased from the prior year due to the addition of non-regulated generating assets including Effingham, DeSoto, Walton and Washington, the transfer of the Rowan plant from CP&L in the first quarter of 2002 and the acquisition of Westchester Gas Company (See Note 2). The Effingham and Washington units are still under construction. (c) Rail Services total segment assets at September 30, 2002, decreased from the prior year due to the final purchase price allocation being recorded in the fourth quarter of 2001. (d) All goodwill is included in the Other Segment herein (See Note 7).
6. IMPACT OF NEW ACCOUNTING STANDARDS 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 7 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 and disclosure 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 and telecommunication assets. 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. 14 Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides guidance for the accounting and reporting of impairment or disposal of long-lived assets. The statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." It also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" related to the disposal of a segment of a business. Adoption of this statement did not have a material effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" This standard will require gains and losses from extinguishment of debt to be classified as extraordinary items only if they meet the criteria of unusual and infrequent in Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Any gain or loss on extinguishment will be recorded in the most appropriate line item to which it relates within net income before extraordinary items. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002; however, certain sections are effective for transactions occurring after May 15, 2002. The Company does not have any transactions that are affected by this statement as of September 30, 2002. For regulated companies, any expenses or call premiums associated with the reacquisition of debt obligations are amortized over the remaining life of the original debt using the straight-line method consistent with ratemaking treatment. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." This statement supercedes Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability is recognized at the date an entity commits to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS No. 146 will be effective for any exit and disposal activities covered under the scope of this standard and initiated after December 31, 2002. 7. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This statement clarifies the criteria for recording of other intangible assets separately from goodwill. Effective January 1, 2002, goodwill is no longer subject to amortization over its estimated useful life. Instead, goodwill is subject to at least an annual assessment for impairment by applying a two-step fair-value based test. This assessment could result in periodic impairment charges. The Company 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. In addition, the Company performed the annual goodwill impairment test for the CP&L Electric and Florida Power Electric segments as of April 1, 2002, and for the Other segment as of July 1, 2002. The changes in the carrying amount of goodwill for the nine months ended September 30, 2002, by reportable segment, are as follows: Florida CP&L Power Progress (in thousands) Electric Electric Ventures Other Total -------- -------- -------- ----- ----- Balance as of January 1, 2002 $1,921,802 $1,733,448 $ - $34,960 $3,690,210 Acquisitions - - 96,583 - 96,583 Divestitures - - - (1,720) (1,720) ----------------------------------------------------------------------------- Balance as of September 30, 2002 $1,921,802 $1,733,448 $96,583 $33,240 $3,785,073
The acquired goodwill relates to the acquisition of Westchester Gas Company in April 2002 and the acquisition of generating assets from LG&E Energy Corp in February 2002 (See Note 2). 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 nine months ended September 30, 2001, and the years ending December 31, 2001, 2000 and 1999. 15 Three Months Ended Nine Months Ended Year Ended Year Ended Year Ended (in thousands, except per share data) September 30, 2001 September 30, 2001 2001 2000 1999 ------------------ ------------------ ---- ---- ---- Reported net income $ 366,443 $ 632,148 $ 541,610 $ 478,361 $ 379,288 Add back: Goodwill amortization 24,927 75,576 96,828 14,100 3,968 Adjusted net income $ 391,370 $ 707,724 $ 638,438 $ 492,461 $ 383,256 Basic earnings per common share: Reported net income $ 1.78 $ 3.13 $ 2.65 $ 3.04 $ 2.56 Adjusted net income $ 1.90 $ 3.50 $ 3.12 $ 3.13 $ 2.58 Diluted earnings per common share: Reported net income $ 1.77 $ 3.12 $ 2.64 $ 3.03 $ 2.55 Adjusted net income $ 1.89 $ 3.49 $ 3.11 $ 3.12 $ 2.58
The gross carrying amount and accumulated amortization of the Company's intangible assets as of September 30, 2002 and December 31, 2001 are as follows: September 30, 2002 December 31, 2001 ------------------------------------------- ------------------------------------------ (in thousands) Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization -------------------------------- --------------------- --------------------- --------------------- -------------------- Synthetic fuel intangibles (a) $ 140,469 $ (39,450) $ 140,469 $ (22,237) Power sale agreements (b) 34,074 (3,912) - - Customer contracts (c) 11,500 (6,200) 17,300 (5,600) Other 21,546 (626) 18,771 (338) -------------------------------- --------------------- --------------------- --------------------- -------------------- Total $ 207,589 $ (50,188) $ 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. (c) Decrease at September 30, 2002 relates to the write-down of Progress Telecom assets (See Note 3). Total net intangible assets of $157.4 million and $148.4 million at September 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 nine months ended September 30, 2002 was $8.3 million and $24.5 million, respectively. The estimated amortization expense on intangible assets for the next five years is as follows: (in thousands) 2002 $32,822 2003 33,817 2004 36,542 2005 20,333 2006 19,864 8. COMPREHENSIVE INCOME Comprehensive income for the three and nine months ended September 30, 2002, was $141.8 million and $398.2 million, respectively. Comprehensive income for the three and nine months ended September 30, 2001, was $363.0 million and $594.5 million, respectively. Items of other comprehensive income for the three-month and nine-month periods consisted primarily of changes in the fair value of derivatives used to hedge cash flows related to interest on long-term debt, the cumulative effect of implementing SFAS No. 133 as of January 1, 2001 and reclassification of amounts into income. 9. FINANCING ACTIVITIES On February 6, 2002, CP&L issued $48.5 million principal amount of First Mortgage Bonds, Pollution Control Series W, Wake County Pollution Control Revenue Refunding Bonds, 5.375% Series 2002 Due February 1, 2017. On March 16 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, a Progress Ventures, Inc. subsidiary, Progress Genco Ventures, LLC, obtained a $440 million bank facility that was to 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, June 2002 and September 2002, Progress Genco Ventures, LLC made draws under this facility of $120 million, $67 million and $25 million, respectively. In September 2002, Progress Genco Ventures, LLC terminated $130 million of the bank facility, reducing it from $440 million to $310 million. Borrowings under the facility are restricted for the operations, construction, repayments and other related charges of the credit facility for development projects, including DeSoto County Generating Company, LLC, Effingham County Power, LLC, MPC Generating Company, LLC and Rowan County Power, LLC. Cash held and restricted to operations was $13.0 million at September 30, 2002, and is included in other current assets. Cash held and restricted for long-term purposes was $73.8 million at September 30, 2002 and is included in deferred debits and other assets. 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 unsecured 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 redeemed these notes on September 4, 2002 through the issuance of commercial paper. Progress Energy's 364-day revolving credit facility expired on November 12, 2002. In connection with the renewal, the facility was reduced in size from $550 million to approximately $430 million. In addition, the permitted debt to capital ratio was lowered from 70% to 68% effective June 30, 2003; Progress Energy's debt to capital ratio as of September 30, 2002, was 65.3%. Finally, a minimum EBITDA to interest expense ratio of 2.5x to 1 was imposed; for the twelve months ended September 30, 2002, Progress Energy's ratio of EBITDA to interest expense was 3.28x to 1. On November 13, 2002, Progress Energy issued 14.7 million shares of common stock at $40.90 per share for net proceeds of $600.0 million. Proceeds from the issuance will be used to retire commercial paper. 17 10. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS Progress Energy uses interest rate derivative instruments to adjust the fixed and variable rate debt components of its debt portfolio. During March, 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. The terminations resulted in a $21.2 million deferred hedging gain reflected in long-term debt, which will be amortized and recorded as a reduction to interest expense over the life of the related debt issuances. Progress Genco Ventures, LLC is required to hedge 75 percent of the amounts outstanding under its bank facility through September 2005 and 50 percent thereafter pursuant to the terms of the agreement for expansion of its non-regulated generation portfolio. In May 2002, Progress Genco Ventures, LLC 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 $10.9 million liability position at September 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 had a computational period of ten years. 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 increase to interest expense over the life of the notes. In August 2002, Progress Energy converted $800 million of fixed rate debt into variable rate debt by executing interest rate derivative agreements with four counterparties with a total notional amount of $800 million. Under the terms of the agreements, which were scheduled to expire in 2006 and coincide with the maturity date of the related debt issuance, Progress Energy received a fixed rate of 3.38% and paid a floating rate based on three-month LIBOR. These instruments were designated as fair value hedges for accounting purposes. The fair value of these instruments was a $14.2 million asset position at September 30, 2002. In November 2002, Progress Energy terminated these agreements. The terminations resulted in a $14.0 million deferred hedging gain reflected in long-term debt, which will be amortized and recorded as a reduction to interest expense over the life of the related debt issuance. Progress Ventures periodically enters into derivative instruments to hedge its exposure to price fluctuations on natural gas sales. During 2002, Progress Ventures has executed cash flow hedges on approximately 17.3 Bcf of natural gas sales for the fourth quarter of 2002 and entire year 2003. These instruments did not have a material impact on the Company's consolidated financial position or results of operations. 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. 11. EARNINGS PER COMMON SHARE Restricted stock awards and contingently issuable shares had a dilutive effect on earnings per share for the three and nine months ended September 30, 2002 and 2001. At September 30, 2002, there were options outstanding to purchase 2.5 million shares of common stock with a weighted average exercise price of $43.81. A reconciliation of the weighted average number of common shares outstanding for basic and dilutive earnings per share purposes is as follows (in thousands): Three Months Ended, Nine Months Ended, September 30, September 30, September 30, September 30, -------------- -------------- -------------- ------------- 2002 2001 2002 2001 ---- ---- ---- ---- Weighted Average Common Shares - Basic 216,079 205,866 214,700 201,925 Restricted Stock Awards 746 673 709 658 Stock Options 59 - 173 - --------- --------- --------- --------- Weighted Average Shares - Fully Dilutive 216,884 206,539 215,582 202,583
18 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 4,616,400 and 5,223,387 at September 30, 2002 and September 30, 2001, respectively. 12. FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A SUBSIDIARY HOLDING SOLELY FPC GUARANTEED NOTES In April 1999, FPC Capital I (the Trust), an indirect wholly-owned subsidiary of FPC, issued 12 million shares of $25 par cumulative FPC-obligated mandatorily redeemable preferred securities (Preferred Securities) due 2039, with an aggregate liquidation value of $300 million and an annual distribution rate of 7.10%. Currently, all 12 million shares of the Preferred Securities that were issued are outstanding. Concurrent with the issuance of the Preferred Securities, the Trust issued to Florida Progress Funding Corporation (Funding Corp.) all of the common securities of the Trust (371,135 shares) for $9.3 million. Funding Corp. is a direct wholly owned subsidiary of FPC. The existence of the Trust is for the sole purpose of issuing the Preferred Securities and the common securities and using the proceeds thereof to purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable Interest Notes (subordinated notes) due 2039, for a principal amount of $309.3 million. The subordinated notes and the Notes Guarantee (as discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds from the sale of the 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. 13. 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 Guarantees During the first nine months of 2002, Progress Energy issued approximately $363 million of guarantees on behalf of Progress Ventures and its subsidiaries for obligations under power purchase agreements, tolling agreements, construction agreements and trading operations. Approximately $184 million of these commitments relate to certain guarantee agreements issued to support obligations related to Progress Ventures' expansion of its non-regulated generation portfolio. These guarantees ensure performance under generation construction and operating agreements. The remaining $179 million of these new commitments are guarantees issued to support Progress Ventures' energy trading and marketing functions. The majority of the trading and marketing contracts supported by the guarantees contain language regarding downgrade events, ratings triggers, monthly netting of exposure and/or payments and offset provisions in the event of a default. Based upon the amount of trading positions outstanding at October 31, 2002, if Progress Energy's ratings were to decline below investment grade, the Company would have to deposit cash or provide letters of credit or other cash collateral for approximately $17 million for the benefit of the Company's counterparties. 19 Contingencies 1) IRS Audit One of Progress Energy's synthetic fuel entities, Colona Synfuel Limited Partnership, L.L.L.P., is being audited by the Internal Revenue Service (IRS). The audit of Colona was not unexpected. The Company is audited regularly in the normal course of business as are most similarly situated companies. The Company (including Florida Progress prior to its acquisition by the Company) has been allocated approximately $241 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 September 2002, all of Progress Energy's majority-owned synthetic fuel entities were accepted into the IRS's Pre-Filing Agreement (PFA) program. The PFA program allows taxpayers to voluntarily accelerate the IRS exam process in order to seek resolution of specific issues. Either the Company or the IRS can withdraw from the program at any time, and issues not resolved through the program may proceed to the next level of the IRS exam process. While the ultimate outcome is uncertain, the Company believes that participation in the PFA program will likely shorten the tax exam process. 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. 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 ss. 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 ss. 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 were 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. On September 14, 2002, the Governor of North Carolina signed into law a provision that prevents cities and counties from levying local franchise taxes on electric utilities. The new law is also intended to prevent a recurrence of the withholding of utility franchise tax payments by the state. This new legislation makes it likely that the lawsuit CP&L filed in August against certain cities that were seeking to enforce local franchise tax ordinances will become moot. 3) 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 20 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. 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 September 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 September 30, 2002, approximately $8.3 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 expected to be 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 10 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 September 30, 2002, Florida Power has accrued approximately $11.1 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 $17.0 million. Florida Power has filed for recovery of approximately $4.0 million of these costs. 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 September 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 expected to be 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. On October 16, 2002, the Company announced plans to sell NCNG to Piedmont Natural Gas Company, Inc. See Note 14 for more information. 21 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 September 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. 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. Designation of areas that do not attain the standard is proceeding, and further litigation and rulemaking on this and other aspects of the standard 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; however, further technical analysis and rulemaking may result in a requirement for additional controls at some units. The Company cannot predict the outcome of this matter. 22 The EPA published a final rule approving petitions under Section 126 of the Clean Air Act. This rule as originally promulgated required certain sources to make reductions in 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 of Title IV of the Clean Air Act pertaining to control of acid rain as well as the requirements discussed above with regard to the NOx SIP Call, 8-hour ozone standard and Section 126 petitions. 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 federal 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. 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. 14. SUBSEQUENT EVENT On October 16, 2002, the Company announced the Board of Directors' approval to sell NCNG, and the Company's ownership interest in EasternNC, to Piedmont Natural Gas Company, Inc., for approximately $425 million in gross cash proceeds. The sale is expected to close in mid-2003 and must be approved by North Carolina and federal regulatory agencies. The Company expects to report NCNG as a discontinued operation in the fourth quarter of 23 2002. The carrying amounts for the assets and liabilities of the discontinued operations disposal group included in the Consolidated Balance Sheets, are as follows: September 30, December 31, (in thousands) 2002 2001 ---------------------------------------------- ------------- ------------ Total Utility plant, net $ 393,889 $ 393,149 Total Current Assets 58,952 118,378 Total Deferred Debits and Other Assets 42,474 42,419 Total Capitalization 389,715 387,981 Total Current Liabilities 66,813 129,027 Total Deferred Credits and Other Liabilities 38,787 36,938 24 CAROLINA POWER & LIGHT COMPANY CONSOLIDATED INTERIM FINANCIAL STATEMENTS September 30, 2002 CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended (Unaudited) September 30, September 30, (In thousands) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 1,045,180 $ 973,803 $ 2,691,320 $ 2,577,664 Diversified businesses 4,304 3,088 11,127 9,208 - --------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 1,049,484 976,891 2,702,447 2,586,872 - --------------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 222,273 186,546 569,295 497,687 Purchased power 123,365 113,837 287,593 291,038 Other operation and maintenance 181,007 167,153 564,011 515,241 Depreciation and amortization 130,530 143,720 405,375 421,513 Taxes other than on income 43,502 40,872 118,345 115,130 Diversified businesses 108,756 2,286 114,571 7,756 - --------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 809,433 654,414 2,059,190 1,848,365 - --------------------------------------------------------------------------------------------------------------------- Operating Income 240,051 322,477 643,257 738,507 - --------------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 330 2,660 5,198 13,686 Other, net (30,562) 4,610 (28,881) 16,530 - --------------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (30,232) 7,270 (23,683) 30,216 - --------------------------------------------------------------------------------------------------------------------- Interest Charges Net interest charges 49,390 63,010 167,289 193,189 Allowance for borrowed funds used during construction 276 (3,777) (5,597) (8,125) - --------------------------------------------------------------------------------------------------------------------- Total Interest Charges 49,666 59,233 161,692 185,064 - --------------------------------------------------------------------------------------------------------------------- Income before Income Taxes 160,153 270,514 457,882 583,659 Income Taxes 66,014 102,640 147,471 210,033 - --------------------------------------------------------------------------------------------------------------------- Net Income 94,139 167,874 310,411 373,626 Preferred Stock Dividend Requirements (741) (741) (2,223) (2,223) - --------------------------------------------------------------------------------------------------------------------- Earnings for Common Stock $ 93,398 $ 167,133 $ 308,188 $ 371,403 - --------------------------------------------------------------------------------------------------------------------- See notes to Carolina Power & Light Company Interim Financial Statements. 25 Carolina Power & Light Company CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) September 30, December31, Assets 2002 2001 - ----------------------------------------------------------------------------------------------------------------- Utility Plant Electric utility plant in service $ 12,390,340 $ 12,024,291 Accumulated depreciation (6,272,139) (5,952,206) - ----------------------------------------------------------------------------------------------------------------- Utility plant in service, net 6,118,201 6,072,085 Held for future use 7,105 7,105 Construction work in progress 463,408 711,129 Nuclear fuel, net of amortization 169,806 200,332 - ----------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 6,758,520 6,990,651 - ----------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 13,911 21,250 Accounts receivable 331,214 302,781 Unbilled accounts receivable 145,047 136,514 Receivables from affiliated companies 75,314 26,182 Notes receivable from affiliated companies 67,722 998 Taxes receivable - 17,543 Inventory 351,520 372,725 Deferred fuel cost 154,101 131,505 Prepayments 21,170 11,863 Other current assets 68,956 66,193 - ----------------------------------------------------------------------------------------------------------------- Total Current Assets 1,228,955 1,087,554 - ----------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 260,651 277,550 Nuclear decommissioning trust funds 413,620 416,721 Diversified business property, net 8,437 111,802 Miscellaneous other property and investments 238,647 239,034 Other assets and deferred debits 97,253 135,373 - ----------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 1,018,608 1,180,480 - ----------------------------------------------------------------------------------------------------------------- Total Assets $ 9,006,083 $ 9,258,685 - ----------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ----------------------------------------------------------------------------------------------------------------- Capitalization Common stock $ 1,926,999 $ 1,904,246 Unearned ESOP common stock (101,560) (114,385) Retained earnings 1,320,829 1,312,641 Accumulated other comprehensive loss (9,574) (7,046) - ----------------------------------------------------------------------------------------------------------------- Total common stock equity 3,136,694 3,095,456 Preferred stock - not subject to mandatory redemption 59,334 59,334 Long-term debt, net 3,047,857 2,698,318 - ----------------------------------------------------------------------------------------------------------------- Total Capitalization 6,243,885 5,853,108 - ----------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 100,000 600,000 Accounts payable 230,292 300,829 Payables to affiliated companies 120,998 106,114 Notes payable affiliated companies - 47,913 Taxes accrued 91,265 - Interest accrued 48,584 61,124 Short-term obligations 252,285 260,535 Other current liabilities 165,016 208,645 - ----------------------------------------------------------------------------------------------------------------- Total Current Liabilities 1,008,440 1,585,160 - ----------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,238,114 1,316,823 Accumulated deferred investment tax credits 161,017 170,302 Regulatory liabilities 7,774 7,494 Other liabilities and deferred credits 346,853 325,798 - ----------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 1,753,758 1,820,417 - ----------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 8) - ----------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 9,006,083 $ 9,258,685 - ----------------------------------------------------------------------------------------------------------------- See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements. 26 Carolina Power & Light Company CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended (Unaudited) September 30, (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 310,411 $ 373,626 Adjustments to reconcile net income to net cash provided by operating activities Impairment of long-lived assets and investments 126,262 - Depreciation and amortization 489,581 494,996 Deferred income taxes (73,640) (93,073) Investment tax credit (9,285) (12,518) Deferred fuel cost (credit) (22,596) (12,217) Net decrease in accounts receivable 159,263 84,570 Net (increase) decrease in inventories 11,893 (95,209) Net (increase) decrease in prepaids and other current assets (9,173) 2,607 Net decrease in accounts payable (4,547) (198,543) Net increase in other current liabilities 89,205 137,804 Other 52,874 45,704 - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 1,120,248 727,747 - ------------------------------------------------------------------------------------------------------------------ Investing Activities Gross property additions (405,179) (615,554) Diversified business property additions (10,840) (5,311) Nuclear fuel additions (55,982) (70,316) Contributions to nuclear decommissioning trust (25,573) (25,564) Net cash flow of company-owned life insurance program (9,998) (5,137) Investments in non-utility activities (10,701) (18,827) - ------------------------------------------------------------------------------------------------------------------ Net Cash Used in Investing Activities (518,273) (740,709) - ------------------------------------------------------------------------------------------------------------------ Financing Activities Proceeds from issuance of long-term debt 543,967 296,124 Net decrease in short-term obligations (8,250) (181,860) Net decrease in intercompany notes (114,638) (6,543) Retirement of long-term debt (705,681) (217) Payment for termination of hedge (22,489) - Equity contribution from parent - 115,000 Dividends paid to parent (300,000) (197,664) Dividends paid on preferred stock (2,223) (2,223) - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Financing Activities (609,314) 22,617 - ------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents (7,339) 9,655 Cash and Cash Equivalents at Beginning of the Period 21,250 30,070 - ------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of the Period $ 13,911 $ 39,725 - ------------------------------------------------------------------------------------------------------------------ Supplemental Disclosures of Cash Flow Information Cash paid during the period - interest $ 169,092 $ 178,463 income taxes $ 181,444 $ 118,206 See Note 2 for non-cash investing activity. - ------------------------------------------------------------------------------------------------------------------ See Notes to Carolina Power & Light Company Consolidated Interim Financial Statements.
27 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 (PUHCA) of 1935, as amended. Both the Company and its subsidiaries are subject to the regulatory provisions of PUHCA. 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. Effective with the quarter ended September 30, 2002, CP&L will no longer reclassify commercial paper as long-term debt. 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 nine months ended September 30, 2002 and 2001 is as follows: (In thousands) Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------ Revenues $1,045,180 $973,803 $2,691,320 $2,577,664 Segment Income $179,308 $168,456 $396,530 $373,949 Total Segment Assets (a) $8,785,416 $9,101,248 $8,785,416 $9,101,248 ============================================================================================================ (a) CP&L Electric's total segment assets at September 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. For the three and nine months ended September 30, 2002, the primary difference relates to asset impairments and other one-time charges recorded in the third quarter related to its Caronet, Inc. (Caronet) subsidiary and its investment in Interpath (See Note 3). 28 3. IMPAIRMENT OF LONG-LIVED ASSETS, INVESTMENTS AND ONE-TIME CHARGES Due to the decline of the telecommunications industry and continued operating losses, CP&L initiated a valuation study to assess the recoverability of Caronet's long-lived assets. Based on this assessment, CP&L recorded asset impairments and other one-time charges totaling $108.3 on a pre-tax basis in the third quarter of 2002 ($71.1 million after-tax). The asset write-downs and other one-time charges are included in diversified business expenses on the Consolidated Statements of Income. This write-down constitutes a significant reduction in the book value of these long-lived assets. The long-lived asset write-downs of $101.3 million on a pre-tax basis include an impairment of property, plant and equipment and construction work in process. The impairment charge represents the difference between the fair value and carrying amount of these long-lived assets. The fair value of these assets was determined using a valuation study heavily weighted on the discounted cash flow methodology and using market approaches as supporting information. The other one-time charges of $7.0 million on a pre-tax basis primarily relate to inventory adjustments. 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, Inc. Pursuant to the terms of the merger agreement and additional funds being contributed by Bain Capital, CP&L now owns approximately 19% of the company (7% voting interest). As a result of the merger, CP&L reviewed the Interpath investment for impairment and wrote off the remaining amount of its cost-basis investment in Interpath, recording a pre-tax impairment of $25.0 million in the third quarter of 2002 ($16.3 million after-tax). The investment write-down is included in other, net on the Consolidated Statements of Income. 4. IMPACT OF NEW ACCOUNTING STANDARDS 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 and disclosure 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 and telecommunication assets. 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, if any, on its non-regulated companies. Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides guidance for the accounting and reporting of impairment or disposal of 29 long-lived assets. The statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." It also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" related to the disposal of a segment of a business. Adoption of this statement did not have a material effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" This standard will require gains and losses from extinguishment of debt to be classified as extraordinary items only if they meet the criteria of unusual and infrequent in Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Any gain or loss on extinguishment will be recorded in the most appropriate line item to which it relates within net income before extraordinary items. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002; however, certain sections are effective for transactions occurring after May 15, 2002. CP&L does not have any transactions that are affected by this statement as of September 30, 2002. For CP&L, any expenses or call premiums associated with the reacquisition of debt obligations are amortized over the remaining life of the original debt using the straight-line method consistent with ratemaking treatment. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." This statement supercedes Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability is recognized at the date an entity commits to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS No. 146 will be effective for any exit and disposal activities covered under the scope of this standard and initiated after December 31, 2002. 5. COMPREHENSIVE INCOME Comprehensive income for the three and nine months ended September 30, 2002 was $89.7 million and $307.9 million, respectively. Comprehensive income for the three and nine months ended September 30, 2001 was $164.1 million and $365.2 million, respectively. Items of other comprehensive income for the three-month and nine-month periods consisted primarily of changes in fair value of derivatives used to hedge cash flows related to interest on long-term debt, the cumulative effect of adopting SFAS No. 133 as of January 1, 2001 and reclassification of amounts into income. 6. 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 redeemed these notes on September 4, 2002 through the issuance of commercial paper. 7. 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 had a computational period of 30 ten years. 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 increase 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. 8. 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) 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 ss. 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 ss. 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 were 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. On September 14, 2002, the Governor of North Carolina signed into law a provision that prevents cities and counties from levying local franchise taxes on electric utilities. The new law is also intended to prevent a recurrence of the withholding of utility franchise tax payments by the state. This new legislation makes it likely that the lawsuit CP&L filed in August against certain cities that were seeking to enforce local franchise tax ordinances will become moot. 2) Claims and Uncertainties a) CP&L is subject to federal, state and local regulations addressing air and water quality, hazardous and solid waste management and other environmental matters. Various organic materials associated with the production of manufactured gas, generally referred to as coal tar, are regulated under federal and state laws. The lead or sole regulatory agency that is responsible for a particular former coal tar site depends largely upon the state in which the site is located. There are several manufactured gas plant (MGP) sites to which CP&L has some connection. In this regard, CP&L, with other potentially responsible parties, are participating in investigating and, if necessary, remediating former coal tar sites with several regulatory agencies, including, but not limited to, the U.S. Environmental Protection Agency (EPA) and the North Carolina Department of Environment and Natural Resources, Division of Waste Management (DWM). 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. 31 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 September 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 September 30, 2002, approximately $8.3 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 expected to be 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 of which it has been notified. 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. 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. Designation of areas that do not attain the standard is proceeding, and further litigation and rulemaking on this and other aspects of the standard are anticipated. North Carolina adopted the federal eight-hour ozone standard and is proceeding with the implementation process. North Carolina has 32 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; however, further technical analysis and rulemaking may result in a requirement for additional controls at some units. CP&L cannot predict the outcome of this matter. The EPA published a final rule approving petitions under Section 126 of the Clean Air Act. This rule as originally promulgated required certain sources to make reductions in 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 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. CP&L 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 of Title IV of the Clean Air Act pertaining to control of acid rain as well as the requirements discussed above with regard to the NOx SIP Call, 8-hour ozone standard and Section 126 petitions. 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 federal 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. 33 Item 2. Management's Discussion and Analysis of Financial Condition and ------ --------------------------------------------------------------- Results of Operations --------------------- RESULTS OF OPERATIONS For the three and nine months ended September 30, 2002, as compared to the corresponding periods in the prior year Progress Energy, Inc. Operating Results Progress Energy's consolidated earnings for the three and nine months ended September 30, 2002, were $151.9 million ($0.71 basic earnings per common share) and $405.1 million ($1.89 per share), respectively, compared to earnings of $366.4 million ($1.78 per share) and $632.1 million ($3.13 per share) for the same periods ended September 30, 2001. Current year earnings for the three and nine months ended September 30, 2002 were negatively impacted by the recognition of an impairment of the long-lived assets in the telecommunications business, decreases in revenues as part of Florida Power's retail rate settlement and increases in operations and maintenance expenses related to increased benefit costs and decreased pension credits. In addition, the common stock issuance in August 2001 (12.5 million shares) and purchase of Westchester Gas Company in April 2002 (2.5 million shares) resulted in dilution. Offsetting these negative factors were customer growth and improved weather which increased retail and wholesale sales, decreases in depreciation expense for the CP&L Electric and Florida Power Electric segments, decreases in interest charges resulting from lower average interest rates and additional capitalized interest as well as the elimination of goodwill amortization. Management tracks, monitors, and evaluates financial results based on reported earnings and ongoing earnings basis. The following reconciles reported earnings to ongoing earnings. ---------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------------------------------------------------------------------------------- ($ millions, except per share figures) 2002 2001 2002 2001 ---- ---- ---- ---- Reported Earnings $151.9 $366.4 $405.1 $632.1 Intra-period tax allocation adjustment (39.0) (72.8) 40.5 (27.4) Contingent Value Obligations (CVO) mark to market (9.4) (16.8) (22.2) (7.9) Florida Retroactive Retail Rate Refund - - 21.0 - Progress Telecom/Caronet Asset Impairment and One-time Charges 224.8 - 224.8 - ---------------------------------------------------------------------------------------------------------------- Ongoing Earnings $328.3 $276.8 $669.2 $596.8 ====== ====== ====== ====== Ongoing Earnings Per Share $1.53 $1.34 $3.12 $2.96 ===== ===== ===== ===== ----------------------------------------------------------------------------------------------------------------
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 nine months ended September 30, 2002 of $179.3 million and $396.5 million, respectively, compared to net income of $168.5 million and $373.9 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 CP&L, that had net income for the three and nine months ended September 30, 2002 of $11.3 million and $41.3 million, respectively, compared to net income of $11.7 million and $39.4 million, respectively, for the same periods in the prior year. Factors contributing to CP&L Electric's results include favorable electric revenue and margins driven by favorable weather compared to 2001 ($20.5 million and $22.7 million margin gain for the three and nine months ended September 30, 2002, respectively); a decrease in accelerated depreciation expense related to the nuclear plants ($16.8 million and $35.1 million decrease for the three and nine months ended September 30, 2002, respectively); and a decrease in interest expense resulting from lower debt and an average interest rate reduction (interest decreased by $13.6 million and $25.9 million for the three and nine months ended September 30, 2002, respectively). Additionally, CP&L Electric's results for the nine months ended September 30, 2002 were favorably impacted by a $25.7 million tax benefit reallocation from the holding company to CP&L. See Other Businesses section below for additional information on the tax benefit reallocation. 34 CP&L's electric revenues for the three and nine months ended September 30, 2002 and 2001 and the percentage change by customer class are as follows (in millions): ------------------------------------------------------------------------------------------------------------------ Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------------------------------------------------- Customer Class 2002 % Change 2001 2002 % Change 2001 ------------------------------------------------------------------------------------------------------------------ Residential $384.6 12.6% $341.7 $952.4 4.5% $911.6 Commercial 244.6 8.0 226.5 630.7 5.4 598.5 Industrial 183.0 0.3 182.4 488.9 (1.8) 497.9 Governmental 23.5 4.0 22.6 58.9 3.7 56.8 ---------------------------------------------- ------------------------ ----------------- Total Retail Revenues 835.7 8.1 773.2 2,130.9 3.2 2,064.8 Wholesale 193.9 6.6 181.9 493.2 (0.9) 497.6 Unbilled (5.8) 28.0 (0.2) 8.5 - (42.3) Miscellaneous 21.4 13.2 18.9 58.7 1.9 57.6 ---------------------------------------------- ------------------------ ----------------- Total Electric Revenues $1,045.2 7.3% $973.8 $2,691.3 4.4% $2,577.7 ------------------------------------------------------------------------------------------------------------------ CP&L electric energy sales for the three and nine months ended September 30, 2002 and 2001 and the percentage change by customer class are as follows (in thousands of mWh): ------------------------------------------------------------------------------------------------------------------ Three Months Ended September 30, Nine Months Ended June 30, -------------------------------------------------------------------------------- Customer Class 2002 % Change 2001 2002 % Change 2001 ------------------------------------------------------------------------------------------------------------------ Residential 4,485 11.7% 4,015 11,732 2.3% 11,469 Commercial 3,675 7.0 3,433 9,493 3.3 9,186 Industrial 3,569 0.8 3,540 9,917 (2.2) 10,145 Governmental 425 2.7 414 1,087 (0.4) 1,093 ---------------------------------------------- ------------------------ ----------------- Total Retail Energy Sales 12,154 6.6 11,402 32,229 1.1 31,893 Wholesale 4,530 20.3 3,766 11,356 10.5 10,280 Unbilled (218) 29.0 (169) 27 - (771) ---------------------------------------------- ------------------------ ----------------- Total mWh sales 16,466 9.8% 14,999 43,612 5.3% 41,402 ------------------------------------------------------------------------------------------------------------------
Sales of energy to retail and wholesale customers increased for the three and nine months ended September 30, 2002, when compared to the same period in the prior year primarily due to the impacts of favorable weather in the current year and customer growth. In addition, an increase in the fuel factor for electric retail rates caused retail revenues to increase over the prior year. For the nine months ended, this was partially offset by a decrease in sales in the industrial customer class, primarily due to a decline in the industrial customer base (largely textiles customers) and the continued overall softness in the industrial markets driven by the weak economic environment. Wholesale energy sales growth rates for the three and nine months ended September 30, 2002 exceeded wholesale energy revenue growth rates as sales to other utilities were negatively impacted by a depressed market in 2002 and higher market prices in 2001. CP&L Electric's fuel expense increased $35.7 million for the three months ended September 30, 2002, when compared to $186.5 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 $9.5 million for the three months ended September 30, 2002, when compared to $113.8 million in 2001, due to increases in volume and price. CP&L Electric's fuel expense increased $71.6 million for the nine months ended September 30, 2002, when compared to $497.7 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 decreased $3.4 million for the nine months ended September 30, 2002, when compared to $291.0 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 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 $13.9 million and $48.8 million for the three and nine months ended September 30, 2002, respectively, when compared to operations and maintenance expense of $167.2 million and $515.2 million, respectively, for the same periods in the prior year. The increase for the three and nine months ended September 30, 2002 was primarily due to increased salary and benefit costs ($6.3 million and $15.0 million for the three and nine months ended September 30, 35 2002); increased insurance costs combined with a lower NEIL refund ($2.0 million and $4.2 million for the three and nine months ended September 30, 2002); costs incurred to prepare for a nuclear outage ($4.5 million for the three and nine months ended September 30, 2002); costs related to a boiler overhaul ($9.4 million for the nine months ended September 30, 2002) and increased support charges from the Service Company as a result of higher vacancy rates in the prior year. Depreciation expense decreased $13.2 million and $16.1 million for the three and nine months ended September 30, 2002, when compared to depreciation expense of $143.7 million and $421.5 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 nine months ended September 30, 2002, CP&L recorded accelerated depreciation expense of $13.2 million and $54.9 million, respectively. For the three and nine months ended September 30, 2001, CP&L recorded accelerated depreciation expense of $30.0 million and $90.0 million, respectively. These reductions are partially offset by increased depreciation costs resulting from the first phase of the Richmond units being placed into service in May 2001. Florida Power Electric Florida Power Electric contributed net income for the three and nine months ended September 30, 2002 of $123.8 million and $258.3 million, respectively, compared to net income of $114.1 million and $270.0 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 nine months ended September 30, 2002 of $3.3 million and $9.5 million, respectively, compared to net income of $6.7 million and $18.4 million, respectively, for the same periods in the prior year. Additionally, Florida Power Electric's results for the three and nine months ended September 30, 2002 were favorably impacted by a $13.4 million tax benefit reallocation from the holding company to Florida Power Electric. See Other Businesses section below for additional information on the tax benefit reallocation. Florida Power Electric's earnings for the three and nine months ended September 30, 2002, were negatively affected by the outcome of the Florida Power rate case settlement, which included a one-time retroactive revenue refund of $35.0 million, $21.0 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, Inc. Consolidated Interim Financial Statements for additional information on the settlement. In addition, Florida Power Electric results for the three months and nine months ended were negatively affected by increases in operations and maintenance expense as described more fully below. Florida Power's electric revenues for the three and nine months ended September 30, 2002 and 2001 and the percentage change by customer class are as follows (in millions): --------------------------------------------------------------------------------------------------------------- Three Months Ended September 30, Nine Months Ended September 30, ---------------------------------------------------------------------------- Customer Class 2002 % Change 2001 2002 % Change 2001 --------------------------------------------------------------------------------------------------------------- Residential $469.8 (5.7)% $498.2 $1,244.7 (3.0)% $1,283.2 Commercial 199.5 (8.0) 216.9 549.7 (3.3) 568.2 Industrial 52.6 (4.0) 54.8 157.7 (5.8) 167.5 Governmental 45.1 (7.2) 48.6 128.5 (1.6) 130.6 Retroactive Retail Revenue Refund - - - (35.0) - - ---------------------------------------------- ------------------------ ------------ Total Retail Revenues 767.0 (6.3) 818.5 2,045.6 (4.8) 2,149.5 Wholesale 57.8 (19.9) 72.2 166.1 (28.4) 232.0 Unbilled 8.4 - (7.3) 20.2 - (12.1) Miscellaneous 30.4 33.9 22.7 84.1 (35.8) 130.9 ---------------------------------------------- ------------------------ ------------ Total Electric Revenues $863.6 (4.7)% $906.1 $2,316.0 (7.4)% $2,500.3 --------------------------------------------------------------------------------------------------------------- 36 Florida Power's electric energy sales for the three and nine months ended September 30, 2002 and 2001, and the percentage change by customer class are as follows (in thousands of mWh): --------------------------------------------------------------------------------------------------------------- Three Months Ended September 30, Nine Months Ended September 30, ---------------------------------------------------------------------------- 2002 % Change 2001 2002 % Change 2001 --------------------------------------------------------------------------------------------------------------- Residential 5,503 2.5% 5,370 14,078 1.7% 13,841 Commercial 3,207 1.4 3,164 8,519 1.8 8,367 Industrial 983 5.3 934 2,859 (2.2) 2,923 Governmental 759 1.2 750 2,095 2.6 2,042 ---------------------------------------------- ------------------------ ------------ Total Retail Energy Sales 10,452 2.3 10,218 27,551 1.4 27,173 Wholesale 1,020 (22.7) 1,320 2,975 (18.8) 3,666 Unbilled 214 - (181) 689 - (122) ---------------------------------------------- ------------------------ ------------ Total mWh sales 11,686 2.9% 11,357 31,215 1.6% 30,717 ---------------------------------------------------------------------------------------------------------------
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 $30.9 million for the third quarter of 2002 and $51.4 million for the nine months ended September 30, 2002, when compared to the same periods in the prior year. Partially offsetting the decrease in rates and the one-time refund from the settlement detailed above were the impacts of favorable weather and customer growth. In addition, revenues for the first nine 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 net earnings impact. Wholesale electric revenues and sales decreased from the prior year due to the expiration of specific contracts. Fuel used in generation and purchased power decreased $32.0 million and $80.0 million for the three and nine months ended September 30, 2002, respectively, when compared to $414.7 million and $1,103.9 million, respectively, for the same periods in the prior year, primarily due to lower oil and gas prices and purchased power costs, partially offset by an increase in coal prices and volume from higher system requirements. In addition, the decrease for the three months ended September 30, 2002, was due to the lowered recovery of fuel expense as a result 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 $19.2 million and $69.9 million for the three and nine months ended September 30, 2002, respectively, when compared to operations and maintenance expense of $119.9 million and $350.6 million, respectively, for the same periods in the prior year. These amounts have increased due to a decreased pension credit in the current year ($6.5 million and $22.8 million lower for the three and nine months ended September 30, 2002); increased other employee benefit costs, primarily driven by medical costs (approximately $6.1 million and $15.6 million for the three and nine months ended September 30, 2002); increased spending related to Florida Power's Commitment to Excellence Program which is aimed at improving system reliability and customer satisfaction ($2.9 million and $8.5 million for the three and nine months ended September 30, 2002); and increased support charges from the Service Company as a result of higher vacancy rates in the prior year. Depreciation and amortization expense decreased by $21.7 million and $123.8 million for the three and nine months ended September 30, 2002, respectively, when compared to expense of $95.1 million and $341.8 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 $19.5 million and $58.9 million for the three and nine months ended September 30, 2002, respectively. In addition, the first half of 2001 depreciation and amortization 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 natural gas exploration and production; coal fuel extraction, manufacturing and delivery, which includes synthetic fuels production; non-regulated generation; and energy marketing and trading activities on behalf of the utility operating 37 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 $87.6 million and $216.7 million for the three and nine months ended September 30, 2002, respectively, compared to net income of $80.1 million and $218.8 million, respectively, for the same periods in the prior year. For the three months ended September 30, 2002, the majority of the increase relates to the addition of non-regulated plants in the current year. For the nine months ended September 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 non-regulated plants during the year. Progress Ventures' energy marketing and trading activities, including activities on behalf of CP&L and Florida Power, generated net income of $13.1 million and $49.1 million for the three and nine months ended September 30, 2002, respectively, compared to net income of $18.4 million and $57.8 million, respectively, for the same periods in the prior year. See Note 5 to the Progress Energy, Inc. Consolidated Interim Financial Statements for additional information on trading and marketing activities. Earnings for the three and nine months ended September 30, 2002, have decreased primarily due to the expiration of specific contracts and the impact of lower natural gas prices on the pricing of certain contracts. Progress Ventures' non-regulated generation operations generated net income of $16.5 million and $23.3 million for the three and nine months ended September 30, 2002, respectively, when compared to net income of $2.3 million and $3.4 million, respectively, for the same periods in the prior year. This increase is due to the completion of construction of additional non-regulated plants, transfer of generation assets from CP&L and the acquisitions of non-regulated plants in the current year. See Note 2 to the Progress Energy, Inc. Consolidated Interim Financial Statements for additional information on this acquisition. Progress Ventures, Inc.'s subsidiary, MPC Generating, LLC, currently has two tolling agreements for output on one of its non-regulated plants with Dynegy, Inc. through June 2008. These contracts are 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 non-regulated 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' natural gas exploration and production 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, Inc. Consolidated Interim Financial Statements for additional information on this acquisition. These operations generated net income of $2.5 million and $3.7 million for the three and nine months ended September 30, 2002, respectively, when compared to net income of $0.7 million and $5.1 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. Progress Ventures periodically enters into derivative instruments to hedge its exposure to price fluctuations on natural gas sales. During 2002, Progress Ventures has entered into cash flow hedges for approximately 81 percent and 56 percent, respectively, of Mesa and Westchester's total projected natural gas sales for the fourth quarter of 2002 and the entire year 2003. See Note 10 to the Progress Energy consolidated interim financial statements for more information on these instruments. Progress Ventures' coal fuel extraction, manufacturing and delivery operations generated net income of $55.1 million and $139.9 million for the three and nine months ended September 30, 2002, when compared to net income of $57.3 million and $147.9 million, respectively, for the same periods in the prior year. The Progress Ventures segment sold 3.0 million and 9.4 million tons of synthetic fuel for the three and nine months ended September 30, 2002, respectively, compared to 4.0 million and 10.4 million tons, respectively, for the same periods in the prior year. The sales resulted in tax credits of $78.7 million and $253.8 million being recorded for the three and nine months ended September 30, 2002, respectively, compared to tax credits of $102.9 million and $271.8 million, respectively, for the same periods in the prior year. The synthetic fuel production and related tax credits are lower in 2002 than in 2001 because the production schedule in 2002 has been evenly distributed based on anticipated full-year production whereas in 2001 excess production in the first nine months of the year mandated lower fourth quarter production. 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. Results for the three and nine months ended September 30, 2002 were also favorably impacted from $10.2 million of interest being capitalized in accordance with SFAS No. 34. 38 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. In the third quarter of 2001 and 2002, Rail Services was accounted for as an ongoing operation. As a result of the classification to net assets held for sale in November 2000 and the reversal of that designation in 2001, Rail Services year to date 2001 activity includes activity from December 2000. Rail Services contributed earnings for the three and nine months ended September 30, 2002 of $0.7 million and $3.0 million, respectively, compared to losses of $2.2 million and $9.7 million for the comparable periods in 2001. Rail Service's year to year results were impacted by a weak business environment, which resulted in $24.1 million decreased revenues for the quarter and a decrease of $93.5 million for the nine months ended September 30, 2002 when compared to 2001. 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 contributed to the revenue decrease. 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 $224.9 million and $418.6 million for the three and nine months ended September 30, 2002, respectively, compared to net income of $24.4 million and a net loss of $163.1 million, respectively, for the same periods in the prior year. The decrease in earnings for the three and nine months ended September 30, 2002, when compared to the same periods in the prior year, was primarily due to the recognition of long-lived asset impairments and one time charges in the telecommunications businesses (total impairment and one-time charges of $355.4 million offset by $130.6 million tax benefit for a $224.8 million after-tax impact), partially offset by the elimination of goodwill amortization in 2002. Other segment earnings for the three and nine months ended September 30, 2002 were also positively impacted from $11.8 million of interest being capitalized in accordance with SFAS No. 34. In accordance with SFAS No. 142, effective January 1, 2002, Progress Energy no longer amortizes goodwill. For the three and nine months ended September 30, 2001, the Company amortized goodwill of $24.9 million and $75.6 million, respectively. At September 30, 2002, the Company had approximately $3.8 billion of unamortized goodwill. See Note 7 to the Progress Energy, Inc. Consolidated Interim Financial Statements for additional information on SFAS No. 142. NCNG recorded a net loss of $5.3 million and net income of $1.7 million for the three and nine months ended September 30, 2002, respectively, compared to net losses of $3.2 million and $1.0 million, respectively, for the same periods in the prior year. NCNG's margin on gas sales decreased by $2.3 million and increased by $5.2 million for the three and nine months ended September 30, 2002, respectively, when compared to margin on sales of $15.4 million and $55.8 million for the same periods in the prior year. The third quarter margin decrease resulted primarily from a retroactive rate reduction for one customer. The year-to-date margin increase resulted primarily from an increase in industrial volumes related to a decline in gas prices. NCNG's operations and maintenance expense decreased $0.2 million for the three months and increased $3.7 million for the nine months ended September 30, 2002, respectively. The increase for the nine months ended September 30, 2002 was primarily due to increased staffing and increased operations and maintenance expense associated with an increase in its fleet. 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 39 $4.1 million to recover costs associated with specific system improvements. On September 23, 2002, the NCUC issued its order approving the $4.1 million rate increase. The rate increase was effective October 1, 2002. On October 16, 2002, the Company announced plans to sell NCNG, and the Company's ownership interest in EasternNC, to Piedmont Natural Gas Company, Inc. for approximately $425 million in gross cash proceeds. See Note 14 to the Progress Energy, Inc. Consolidated Interim Financial Statements for further discussion on the planned sale. Generally accepted accounting principles require companies to apply a levelized effective tax rate to interim periods that is consistent with the estimated annual effective tax rate. Income tax expense was decreased by $39.0 million for the three months and increased $40.5 million for the nine months ended September 30, 2002, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was decreased by $72.6 million and $27.2 million for the three and nine months ended September 30, 2001, respectively. The tax credits associated with Progress Energy's synthetic fuel operations lower the overall effective tax rate. Fluctuations in estimated annual 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, was 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, in the nine months ended September 30, 2002, the allocation increased the holding company's tax expense $40.6 million with offsetting decreases in other segments. 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 September 30, 2002, the CVOs had a fair market value of approximately $19.7 million. Progress Energy recorded a gain of $9.4 million and $22.2 million for the three and nine months ended September 30, 2002, respectively, compared to a gain of $16.8 million and $7.9 million, respectively, for the same periods in the prior year to record the changes in fair value of CVOs. Progress Telecom, including Caronet's operations, had net losses of $225.3 million and $234.6 million for the three and nine months ended September 30, 2002, respectively. This compares to net losses of $2.4 million and $4.6 million for the same periods in 2001. The decrease in earnings in 2002, when compared to 2001, is primarily due to long-lived asset impairments and other one-time after tax charges of $208.5 million that resulted from a valuation study of the unit's long-lived assets. See Note 3 to the Progress Energy, Inc. Consolidated Interim Financial Statements for further discussion of these charges. This write-down constitutes a significant reduction in the book value of these assets and the ongoing operations are expected to have a negligible impact on Progress Energy's net income. 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, Inc. Pursuant to the terms of the merger agreement and additional funds being contributed by Bain Capital, CP&L now owns approximately 19% of the company (7% voting interest). As a result of the merger, the Company reviewed the Interpath investment for impairment and wrote off the remaining amount of its cost-basis investment in Interpath, recording a pre-tax impairment of $25.0 million in the third quarter of 2002 ($16.3 million after-tax). Excluding the asset impairments and one-time charges, Progress Telecom's (including Caronet's operations) third quarter 2002 loss of $0.5 million compares to the prior year's comparable period loss of $2.4 million. The reduced loss resulted primarily from lower depreciation charges as a consequence of the asset writedown. A loss for the nine months ended September 30, 2002 (excluding the one-time charges) of $9.7 million compares to a loss of $4.6 million for the comparable period in 2001. The depreciation reduction related to the asset writedown was more than offset by depreciation on additional fiber optics that were placed into service in the first half of the year. 40 LIQUIDITY AND CAPITAL RESOURCES Progress Energy, Inc. Statement of Cash Flows and Financing Activities Cash provided by operating activities decreased $29.3 million for the nine months ended September 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 $442.5 million for the nine months ended September 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, Inc. Consolidated Interim Financial Statements). During the first nine months of 2002, $738.6 million was spent on its utility subsidiaries' construction program and $764.6 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 $473.8 million for the nine months ended September 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. In March 2002, a Progress Ventures, Inc. subsidiary, Progress Genco Ventures, LLC, obtained a $440 million bank facility that was to 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, June and September 2002, Progress Genco Ventures, LLC made draws under this facility of $120 million, $67 million and $25 million, respectively. In September 2002, Progress Genco Ventures, LLC terminated $130 million of the bank facility, reducing it from $440 million to $310 million. Progress Genco Ventures, LLC is required to hedge 75 percent of the amounts outstanding under its bank facility through September 2005 and 50 percent thereafter pursuant to the terms of the agreement for expansion of its non-regulated generation portfolio. In May 2002, Progress Genco Ventures, LLC 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 $10.9 million liability position at September 30, 2002. 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. The terminations resulted in a $21.2 million deferred hedging gain reflected in long-term debt, 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 41 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 September 4, 2002, S&P reaffirmed Progress Energy's credit ratings and maintained the negative outlook. On April 10, 2002, Moody's Investors Services 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. On October 18, 2002, Moody's announced that it had placed Progress Energy's senior unsecured debt rating (Baa1) on review for possible downgrade. As its basis for review, Moody's cited primarily Progress Energy's recent writedown of the value of its long-lived telecommunications assets and the related delay in its deleveraging plan. Moody's further indicated that it did not expect its review to result in more than a one notch downgrade of Progress Energy's senior unsecured debt rating. Moody's confirmed its ratings of Progress Energy's commercial paper (P-2) and the ratings of its two operating utilities, CP&L (senior secured--A-3, commercial paper--P-2, stable outlook) and Florida Power (senior secured--A-1, commercial paper--P-1, stable outlook). The change in outlook by the rating agencies has not materially affected Progress Energy's access to liquidity nor the cost of its short-term borrowings. 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 unsecured 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 had a computational period of ten years. 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 increase to interest expense over the life of the notes. 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 13 to the Progress Energy, Inc. 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. 42 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 redeemed these notes on September 4, 2002 through the issuance of commercial paper. In August 2002, Progress Energy converted $800 million of fixed rate debt into variable rate debt by executing interest rate derivative agreements with four counterparties with a total notional amount of $800 million. Under the terms of the agreements, which were scheduled to expire in 2006 and coincide with the maturity date of the related debt issuance, Progress Energy received a fixed rate of 3.38% and paid a floating rate based on three-month LIBOR. These instruments were designated as fair value hedges for accounting purposes. In November 2002, Progress Energy terminated these agreements. The terminations resulted in a $14.0 million deferred hedging gain reflected in long-term debt, which will be amortized and recorded as a reduction to interest expense over the life of the related debt issuance. Progress Energy's 364-day revolving credit facility expired on November 12, 2002. In connection with the renewal, the facility was reduced in size from $550 million to approximately $430 million. In addition, the permitted debt to capital ratio was lowered from 70% to 68% effective June 30, 2003; Progress Energy's debt to capital ratio as of September 30, 2002, was 65.3%. Finally, a minimum EBITDA to interest expense ratio of 2.5x to 1 was imposed; for the twelve months ended September 30, 2002, Progress Energy's ratio of EBITDA to interest expense was 3.28x to 1. On November 13, 2002, Progress Energy issued 14.7 million shares of common stock at $40.90 per share for net proceeds of $600.0 million. Proceeds from the issuance will be used to retire commercial paper. Future Commitments As of September 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 third 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, Inc. Consolidated Interim Financial Statements. As of September 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 nine months of 2002, Progress Energy issued approximately $363 million of guarantees on behalf of Progress Ventures for obligations under power purchase agreements, tolling agreements, construction agreements and trading operations. Approximately $184 million of these commitments relate to certain guarantee agreements issued to support obligations related to Progress Ventures' expansion of its non-regulated generation portfolio. These guarantees ensure performance under generation construction and operating agreements. The remaining $179 million of these new commitments are guarantees issued to support Progress Ventures' energy trading and marketing functions. The majority of the trading and marketing contracts supported by the guarantees contain language regarding downgrade events, ratings triggers, netting of exposure and/or payments and offset provisions in the event of a default. Based upon the amount of trading positions outstanding at October 31, 2002, if Progress Energy's ratings were to decline below investment grade, the Company would have to deposit cash or provide letters of credit or other cash collateral for approximately $17 million for the benefit of the Company's counterparties. OTHER MATTERS Florida Power Rate Case Settlement On March 27, 2002, the parties in Florida Power's rate case entered into a Stipulation and Settlement Agreement (the Agreement) related to retail rate matters. The Agreement was approved by the FPSC on April 23, 2002. The Agreement is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if Florida Power's base rate earnings fall below a 10% return on equity, Florida Power may petition the FPSC to amend its base rates. See Note 4 to the Progress Energy, Inc. Consolidated Interim Financial Statements for additional information on the Agreement. 43 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 federal 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. On October 29, 2002, the SCPSC approved a similar modification. The order is effective as of November 1, 2002, and the aggregate minimum and maximum of $115 million and $165 million established for accelerated cost recovery by the SCPSC is unaffected by the order. As of September 30, 2002, CP&L has recorded cumulative accelerated depreciation expense of approximately $405 million. 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 ss. 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 ss. 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 were 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. On September 14, 2002, the Governor of North Carolina signed into law a provision that prevents cities and counties from levying local franchise taxes on electric utilities. The new law is also intended to prevent a recurrence of the withholding of utility franchise tax payments by the state. This new legislation makes it likely that the lawsuit CP&L filed in August against certain cities that were seeking to enforce local franchise tax ordinances will become moot. 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 44 December 31, 2004. The aggregate cash purchase price of approximately $348 million included approximately $1.7 million of direct transaction costs. See Note 2 to the Progress Energy, Inc. 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 included 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, Inc. 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 nine months ended September 30, 2002 and 2001, were $253.8 million and $271.8 million, respectively, offset by operating losses, net of tax, of $121.9 million and $128.1 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 $241 million in tax credits to date, is being audited by the IRS. The audit of Colona was not unexpected. The Company is audited regularly in the normal course of business as are most similarly situated companies. Total Section 29 credits generated to date (including Florida Progress prior to its acquisition by the Company) are approximately $963 million. In September 2002, all of Progress Energy's majority-owned synthetic fuel entities were accepted into the Internal Revenue Service's (IRS) Pre-Filing Agreement (PFA) program. The PFA program allows taxpayers to voluntarily accelerate the IRS exam process in order to seek resolution of specific issues. Either the Company or the IRS can withdraw from the program at any time, and issues not resolved through the program may proceed to the next level of the IRS exam process. While the ultimate outcome is uncertain, the Company believes that participation in the PFA program will likely shorten the tax exam process. 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 expires in 2007. Nuclear Matters Spent Fuel Storage On December 21, 2000, CP&L received permission from the NRC to increase its storage capacity for spent fuel rods in Wake County, North Carolina. The NRC's decision came two years after CP&L asked for permission to open two unused storage pools at the Shearon Harris Nuclear Plant (Harris Plant). The approval means CP&L can complete cooling systems and install storage racks in its third and fourth storage pools at the Harris Plant. Orange County, North Carolina appealed the NRC license amendment to expand spent fuel storage capacity at the Harris Plant. On May 31, 2001, Orange County filed a petition for review in the U.S. Court of Appeals for the District of Columbia, and on June 1, 2001, filed a request for stay and expedition of the case with the court. 45 On June 29, 2001, the U.S. Court of Appeals denied Orange County's motion for a stay and rejected the request for an expedited schedule for the appeal. The parties filed briefs, and the court heard oral arguments on September 5, 2002. The court issued its ruling on September 19, 2002, denying Orange County's petitions for review of NRC orders, finding no error in the NRC's determinations. Pressurized Water Reactors On March 18, 2002 the Nuclear Regulatory Commission (NRC) sent a bulletin to companies that hold licenses for pressurized water reactors (PWRs) requiring information on the structural integrity of the reactor vessel head and a basis for concluding that the vessel head will continue to perform its function as a coolant pressure boundary. The Company filed responses as required. Inspections of the vessel heads at the Company's PWR plants have been performed during previous outages. In October 2001 at the Crystal River plant (CR3), one nozzle was found to have a crack and was repaired; however, no degradation of the reactor vessel head was identified. Current plans are to replace the vessel head at CR3 during its next regularly scheduled refueling outage in 2003. At the Robinson plant, an inspection was completed in April 2001 and no penetration nozzle cracking was identified and there was no degradation of the reactor vessel head. At the Harris plant, sufficient inspections were completed during the last refueling outage in the fourth quarter of 2001 to conclude there is no degradation of the reactor vessel head. The Company's Brunswick plant has a different design and is not affected by the issue. On August 9, 2002, the NRC issued an additional Bulletin dealing with head leakage due to cracks near the control rod nozzles. The NRC has asked licensees to commit to high inspection standards to ensure the more susceptible plants have no cracks. The Robinson plant is in this category and had a refueling outage in October 2002. The Company completed a series of examinations in October 2002 of the entire reactor pressure vessel head and found no indications of control rod drive mechanism cracking and no corrosion of the head itself. During the outage, a boric acid leakage walkdown of the reactor coolant pressure boundary was completed and no corrosion was found. For CR3, the Company has responded to the NRC that previous inspections are sufficient until the reactor head is replaced in the fall of 2003. For the Harris plant, the Company does not plan further inspections until its next regularly scheduled outage in Spring 2003. Security On February 25, 2002, the NRC issued orders formalizing many of the security enhancements made at the Company's nuclear plants since September 2001. These orders include additional restrictions on access, increased security presence and closer coordination with the Company's partners in intelligence, military, law enforcement and emergency response at the federal, state and local levels. These interim security measures were required to be completed at each nuclear site by August 31, 2002. The Company completed the requirements by the deadline and expects the NRC to perform an inspection for compliance in the near future. As the NRC, other governmental entities, and the industry continue to consider security issues, it is possible that more extensive security plans could be required. 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 conditions; 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 thereto, portions of which are due on November 15, 2002 and January 10, 2003. FERC also has indicated that it expects to issue final rules during the third 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. 46 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 GridFlorida applicants filed a revised RTO proposal with the FPSC on March 20, 2002 incorporating certain changes required by the FPSC's December 2001 order. The FPSC then conducted a series of workshops and meetings to allow parties an opportunity to comment on the applicants' March 20 compliance filing. As a result of these comments, the GridFlorida applicants filed modifications to certain aspects of the compliance filing on June 21, 2002. On September 3, 2002, the FPSC issued an order addressing the compliance of the applicants' modified filing with the FPSC's December 2001 order through final agency action, requiring additional revisions to the applicants' modified filing through proposed agency action, and scheduling an expedited hearing for late October 2002 to consider the applicants' revised market design proposal and other proposed agency action revisions protested by the parties. On October 3, 2002, the Office of Public Counsel filed a Notice of Appeal to the Florida Supreme Court regarding the FPSC's September 3rd order. At a public meeting on October 15, 2002, the FPSC voted to hold further proceedings in the GridFlorida docket in abeyance pending the outcome of the Office of Public Counsel's appeal. The actual structure of GridSouth, GridFlorida or any alternative combined transmission structure, as well as the date it may become operational, depends upon the resolution of all regulatory approvals and technical issues. Given the regulatory uncertainty of the ultimate timing, structure and operations of GridSouth, GridFlorida or an alternate combined transmission structure, the Company cannot predict whether their creation will have any material adverse effect on its future consolidated results of operations, cash flows or financial condition. Franchise Litigation Six cities, with a total of approximately 49,000 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. Two appellate courts have upheld those circuit court decisions and authorized cities to determine the value of Florida Power's facilities within the cities through arbitration. To date, no city has attempted to actually exercise the right to purchase any portion of Florida Power's electric distribution system. An arbitration in one of the cases was held in August 2002 and an award was issued in October 2002 setting the value of Florida Power's distribution system within one city at approximately $22 million. At this time, whether and when there will be further proceedings following this award cannot be determined. Additional arbitrations have been scheduled to occur in the fourth quarter of 2002 and second quarter of 2003. Progress Energy cannot predict the outcome of these matters. Union Contract Approximately 2,100 employees at Florida Power are represented by the International Brotherhood of Electrical Workers (IBEW). The current union contract was ratified in December 1999 and expires on December 1, 2002. Florida Power is currently in negotiations with the IBEW, but the Company cannot predict the outcome or impact of this matter. 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 47 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. For the three and nine months ended September 30, 2002, the operations for CP&L's non-utility subsidiaries primarily relate to asset impairments and one-time charges recorded in the third quarter of 2002 related to its Caronet, Inc. subsidiary and its investment in Interpath (See Note 3 to the CP&L Consolidated Interim Financial Statements). The results of operations for CP&L's non-utility subsidiaries for the three and nine months ended September 30, 2001 are not material to CP&L's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 2002, $405.2 million was spent on CP&L's construction program and $10.8 million was spent on diversified business property additions. As of September 30, 2002, CP&L's liquidity, 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, a Progress Ventures, Inc. subsidiary, Progress Genco Ventures, LLC, obtained a $440 million bank facility that was to be used exclusively for expansion of its non-regulated generation portfolio. In March, June and September 2002, Progress Genco Ventures, LLC made draws under this facility of $120 million, $67 million and $25 million, respectively. In September 2002, Progress Genco Ventures, LLC terminated $130 million of the bank facility, reducing it from $440 million to $310 million. Progress Genco Ventures, LLC is required to hedge 75 percent of the amounts outstanding under its bank facility through September 2005 and 50% thereafter pursuant to the terms of the agreement for expansion of its non-regulated generation portfolio. In May 2002, Progress Genco Ventures, LLC 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 $10.9 million liability position at September 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 $21.2 million deferred hedging gain reflected in long-term debt, 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 unsecured notes due 2012 with a coupon of 6.85%. Proceeds from this issuance were used to pay down commercial paper. 48 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 had a computational period of ten years. 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 increase to interest expense over the life of the notes. 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 redeemed these notes on September 4, 2002 through the issuance of commercial paper. In August 2002, Progress Energy converted $800 million of fixed rate debt into variable rate debt by executing interest rate derivative agreements with four counterparties with a total notional amount of $800 million. Under the terms of the agreements, which were scheduled to expire in 2006 and coincide with the maturity date of the related debt issuance, Progress Energy received a fixed rate of 3.38% and paid a floating rate based on three-month LIBOR. These instruments were designated as fair value hedges for accounting purposes. The fair value of these instruments was a $14.2 million asset position at September 30, 2002. In November 2002, Progress Energy terminated these agreements. The terminations resulted in a $14.0 million deferred hedging gain reflected in long-term debt, which will be amortized and recorded as a reduction to interest expense over the life of the related debt issuance. Progress Ventures periodically enters into derivative instruments to hedge its exposure to price fluctuations on natural gas sales. During 2002, Progress Ventures has executed cash flow hedges on approximately 17.3 Bcf of natural gas sales for the fourth quarter of 2002 and entire year 2003. These instruments did not have a material impact on the Company's consolidated financial position or results of operations. As a result of these issuances and redemptions, the exposure to changes in interest rates from the Company's fixed rate and variable rate long-term debt at September 30, 2002, has changed from December 31, 2001. The total fixed rate long-term debt at September 30, 2002, was $8.9 billion, with an average interest rate of 6.85% and fair market value of $9.9 billion. The total variable rate long-term debt at September 30, 2002, was $1.1 billion, with an average interest rate of 1.78% and fair market value of $1.1 billion. The exposure to changes in interest rates from FPC mandatorily redeemable securities of trust at September 30, 2002, was not materially different than at December 31, 2001. Effective with the quarter ended September 30, 2002, the Company will no longer reclassify commercial paper as long-term debt. At December 31, 2001, the Company had reclassified $865 million of commercial paper to long-term debt. At September 30, 2002, the exposure to changes in interest rates from the Company's commercial paper facilities was not materially different than at December 31, 2001. Carolina Power & Light Company CP&L has certain market risks inherent in its financial instruments, which arise from transactions entered into in the normal course of business. CP&L's primary exposures are changes in interest rates with respect to long-term debt and commercial paper reclassified as long-term debt, and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. CP&L's exposure to return on marketable securities for the decommission trust funds has not changed materially since December 31, 2001. 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. 49 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 had a computational period of ten years. 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 increase to interest expense over the life of the notes. 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 redeemed these notes on September 4, 2002 through the issuance of commercial paper. The exposure to changes in interest rates from CP&L's fixed rate long-term debt and variable rate long-term debt at September 30, 2002, was not materially different than at December 31, 2001. Effective with the quarter ended September 30, 2002, CP&L will no longer reclassify commercial paper as long-term debt. At December 31, 2001, CP&L had reclassified $261 million of commercial paper to long-term debt. At September 30, 2002, the exposure to changes in interest rates from CP&L's commercial paper facilities was not materially different than at December 31, 2001. Item 4. Controls and Procedures ------- ----------------------- Progress Energy, Inc. Within the 90 days prior to the filing date of this report, Progress Energy carried out an evaluation, under the supervision and with the participation of its management, including Progress Energy's chief executive officer and chief financial officer, of the effectiveness of the design and operation of Progress Energy's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, Progress Energy's chief executive officer and chief financial officer concluded that its disclosure controls and procedures are effective in timely alerting them to material information relating to Progress Energy (including its consolidated subsidiaries) required to be included in its periodic SEC filings. Since the date of the evaluation, there have been no significant changes in Progress Energy's internal controls or in other factors that could significantly affect these controls. Carolina Power & Light Company Within the 90 days prior to the filing date of this report, CP&L carried out an evaluation, under the supervision and with the participation of its management, including CP&L's chief executive officer and chief financial officer, of the effectiveness of the design and operation of CP&L's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, CP&L's chief executive officer and chief financial officer concluded that its disclosure controls and procedures are effective in timely alerting them to material information relating to CP&L (including its consolidated subsidiaries) required to be included in its periodic SEC filings. Since the date of the evaluation, there have been no significant changes in CP&L's internal controls or in other factors that could significantly affect these controls. 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 8 to the CP&L Consolidated Interim Financial Statements. Strategic Resource Solutions Corp. (SRS) was charged in a criminal complaint filed on October 9, 2002 by the San Francisco District Attorney's 50 office. Working with the San Francisco District Attorney's office, SRS has pled guilty to two charges, taking responsibility for the misconduct of one of its former employees. This proceeding occurred on October 15, 2002. SRS has agreed to pay a fine of $500,000. Although SRS did not receive any funds, because of the involvement of a former employee, SRS has accepted corporate criminal responsibility and agreed to pay an additional $500,000 as restitution. SRS will also be placed on probation and continue cooperating with the District Attorney's investigation and prosecution of other defendants. Item 2. Changes in Securities and Use of Proceeds ------- ----------------------------------------- RESTRICTED STOCK AWARDS: (a) Securities Delivered. On September 9, 2002 and October 1, 2002, 3,600 and 180,000 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. (c) Consideration. The Common Shares were delivered to provide an incentive to the employee recipients to exert their utmost efforts on the Company's behalf and thus enhance the Company's performance while aligning the employee's interest with those of the Company's shareholders. (d) Exemption from Registration Claimed. The Common Shares described in this Item were delivered on the basis of an exemption from registration under Section 4(2) of the Securities Act of 1933. Receipt of the Common Shares required no investment decision on the part of the recipients. All award decisions were made by the Committee, which consists entirely of non-employee directors. Item 6. Exhibits and Reports on Form 8-K ------- -------------------------------- (a) Exhibits Exhibit Description Progress CP&L Number ----------- Energy, Inc. ---- ------ ------------ 10(i) Amendment and Restatement dated July 26, 2002 to Progress X Energy Inc.'s $450,000,000 3-Year Revolving Credit Agreement dated November 13, 2001, as amended February 13, 2002. 10(ii) Assumption Agreement from Barclays Bank PLC dated December X 17, 2001 for an additional commitment of $50 million, increasing the amount of the Progress Energy, Inc. 364-Day Revolving Credit Agreement, dated November 13, 2001, to $550 million. 10(iii) Carolina Power & Light Company $272,500,000 364-Day X Revolving Credit Agreement dated as of July 31, 2002. 10(iv) Carolina Power & Light Company $272,500,000 3-Year X Revolving Credit Agreement dated as of July 31, 2002. 10(v) Assumption Agreement from the Bank of New York dated August X 5, 2002 for a total commitment of $25 million, increasing the amount of the CP&L 364-Day and 3-Year Revolving Credit Agreements dated as of July 31, 2002, to $285,000,000 each. 51 10(vi) Progress Energy, Inc. 2002 Equity Incentive Plan (Amended X X and Restated Effective July 10, 2002) 10(vii) 2002 Performance Share Sub-Plan (effective July 9, 2002), X X Exhibit A to the Progress Energy, Inc. 2002 Equity Incentive Plan
(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 August 9, 2002 August 9, 2002 9 No August 13, 2002 August 13, 2002 9 No August 29, 2002 August 29, 2002 5 Yes October 16, 2002 November 6, 2002 5 No November 7, 2002 November 7, 2002 5 No November 6, 2002 November 13, 2002 Carolina Power & Light Company Financial Item Statements Reported Included Date of Event Date Filed 9 No August 13, 2002 August 13, 2002
52 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: November 14, 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 53 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, William Cavanaugh III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Progress Energy, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ William Cavanaugh III ------------------------- William Cavanaugh III Chairman and Chief Executive Officer 54 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter M. Scott III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Progress Energy, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Peter M. Scott III ---------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer 55 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, William Cavanaugh III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Carolina Power & Light Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ William Cavanaugh III ------------------------- William Cavanaugh III Chairman and Chief Executive Officer 56 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter M. Scott III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Carolina Power & Light Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Peter M. Scott III ---------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer 57 EX-10 3 pei_10qexhibit10i-.txt EXHIBIT 10(I) [EXECUTION VERSION] ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT Dated as of July 26, 2002 PROGRESS ENERGY, INC. (Borrower) and THE BANKS LISTED ON THE SIGNATURE PAGES HEREOF (Banks) and CITIBANK, N.A. (Administrative Agent) and SUNTRUST BANK (Issuing Bank) ================================================================================ SALOMON SMITH BARNEY INC. (Lead Arranger) TABLE OF CONTENTS Section Page Article I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms..........................................1 Section 1.02. Computation of Time Periods...................................12 Section 1.03. Accounting Terms..............................................12 Article II AMOUNTS AND TERMS OF THE EXTENSIONS OF CREDIT Section 2.01. The Commitments...............................................12 Section 2.02. The Advances..................................................12 Section 2.03. Making the Advances...........................................12 Section 2.04. Fees..........................................................14 Section 2.05. Reduction of the Commitments..................................14 Section 2.06. Repayment of Advances.........................................15 Section 2.07. Interest on Advances..........................................15 Section 2.08. Additional Interest on Eurodollar Rate Advances...............15 Section 2.09. Interest Rate Determination...................................15 Section 2.10. Voluntary Conversion of Advances..............................17 Section 2.11. Prepayments of Advances.......................................17 Section 2.12. Increased Costs...............................................18 Section 2.13. Illegality....................................................19 Section 2.14. Payments and Computations.....................................19 Section 2.15. Sharing of Payments, Etc......................................20 Section 2.16. Letters of Credit.............................................20 Article III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Initial Extension of Credit...........25 Section 3.02. Conditions Precedent to Each Extension of Credit..............25 Article IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of the Borrower................26 Article V COVENANTS OF THE COMPANY Section 5.01. Affirmative Covenants.........................................28 Section 5.02. Negative Covenants............................................30 Article VI EVENTS OF DEFAULT Section 6.01. Events of Default.............................................32 Article VII THE ADMINISTRATIVE AGENT Section 7.01. Authorization and Action......................................34 Section 7.02. The Administrative Agent's Reliance, Etc......................34 Section 7.03. The Administrative Agent and its Affiliates...................35 Section 7.04. Lender Credit Decision........................................35 Section 7.05. Indemnification...............................................35 Section 7.06. Successor Administrative Agent................................36 Article VIII MISCELLANEOUS Section 8.01. Amendments, Etc...............................................36 Section 8.02. Notices, Etc..................................................37 Section 8.03. No Waiver; Remedies...........................................37 Section 8.04. Costs, Expenses, Taxes and Indemnification....................37 Section 8.05. Right of Set-off..............................................40 Section 8.06. Binding Effect................................................40 Section 8.07. Assignments and Participations................................41 Section 8.08. Governing Law.................................................44 Section 8.09. Waiver of Jury Trial..........................................45 Section 8.10. Execution in Counterparts.....................................45 Section 8.11. Severability..................................................45 Section 8.12. Headings......................................................45 Section 8.13. Entire Agreement..............................................45 SCHEDULES Schedule I - List of Commitments and Applicable Lending Offices Schedule II - Permitted Existing Indebtedness EXHIBITS Exhibit A-1 - Form of Notice of Borrowing Exhibit A-2 - Form of Notice of Conversion Exhibit B - Form of Assignment and Acceptance Exhibit C-1 - Form of Opinion of General Counsel to the Borrower Exhibit C-2 - Form of Opinion of Special Counsel for the Borrower Exhibit D - Form of Opinion of Counsel for the Administrative Agent and the Lead Arranger Exhibit E - Form of Compliance Certificate AMENDED AND RESTATED CREDIT AGREEMENT Dated as of July 26, 2002 This AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") is made by PROGRESS ENERGY, INC., a North Carolina corporation (the "Borrower"), the banks listed on the signature pages hereof (the "Banks"), CITIBANK, N.A. ("Citibank"), as administrative agent (the "Administrative Agent") for the Lenders (as hereinafter defined), and SUNTRUST BANK, as Issuing Bank (as hereinafter defined). RECITALS WHEREAS, the Borrower, certain banks and the Administrative Agent entered into the Credit Agreement dated as of November 13, 2001 (the "Original Agreement"), pursuant to which the lenders thereunder agreed to extend credit to the Borrower in an aggregate amount at any time outstanding not in excess of $450,000,000; and WHEREAS, the Original Agreement was amended pursuant to an Amendment, dated as of February 13, 2002 (the "Amendment"), among the Borrower and the Lenders named therein; and WHEREAS, the Majority Lenders consented to a departure by the Borrower from certain of the terms of the Original Agreement pursuant to a Consent, dated as of January 29, 2002 (the "Consent"), among the Borrower and the Lenders named therein; and WHEREAS, the parties hereto now wish to amend the Original Agreement, as modified by the Consent and the Amendment, to provide for the issuance of Letters of Credit in an aggregate amount not in excess of $125,000,000. In order to provide for the issuance of such Letters of Credit as well as to reflect the Consent and the Amendment, the parties hereto now wish to amend and restate the Original Agreement as herein set forth: Article I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Administrative Agent" has the meaning specified in the preamble to this Agreement. "Advance" means an advance by a Lender to the Borrower as part of a Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of Advance. 2 "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by, or is under common control with such Person or is a director or officer of such Person. "Applicable Lending Office" means, with respect to each Lender, (i) such Lender's Domestic Lending Office in the case of a Base Rate Advance, or (ii) such Lender's Eurodollar Lending Office, in the case of a Eurodollar Rate Advance. "Applicable Margin" means for each Type of Advance at all times during which any Applicable Rating Level set forth below is in effect, the interest rate per annum set forth below next to such Applicable Rating Level : - -------------------------- -------------------------- ------------------------- Applicable Margin for Applicable Margin for Applicable Rating Level Eurodollar Rate Advances Base Rate Advances - -------------------------- -------------------------- ------------------------- 1 0.275% 0% - -------------------------- -------------------------- ------------------------- 2 0.390% 0% - -------------------------- -------------------------- ------------------------- 3 0.625% 0% - -------------------------- -------------------------- ------------------------- 4 0.725% 0% - -------------------------- -------------------------- ------------------------- 5 0.925% 0% - -------------------------- -------------------------- ------------------------- 6 1.250% 0% - -------------------------- -------------------------- ------------------------- provided, that (i) the Applicable Margins for Eurodollar Rate Advances set forth above for each Applicable Rating Level shall increase at any time the aggregate principal amount of Advances outstanding is greater than 33% of the aggregate Commitments by 0.125% at Levels 1, 2, 3, 4 and 5 and by 0.250% at Level 6, (ii) the Applicable Margins set forth above for each Applicable Rating Level shall increase upon the occurrence and during the continuance of any Event of Default by 2.0%, and (iii) any change in the Applicable Margin resulting from a change in the Applicable Rating Level shall become effective upon the date of announcement of a change in the Moody's Rating or the S&P Rating that results in a change in the Applicable Rating Level. "Applicable Rating Level" at any time shall be determined in accordance with the then-applicable S&P Rating and the then-applicable Moody's Rating as follows: 3 - ----------------------------------------- ----------------------------------- S&P Rating/Moody's Rating Applicable Rating Level - ----------------------------------------- ----------------------------------- A or higher or A2 or higher 1 - ----------------------------------------- ----------------------------------- A- or A3 2 - ----------------------------------------- ----------------------------------- BBB+ or Baa1 3 - ----------------------------------------- ----------------------------------- BBB or Baa2 4 - ----------------------------------------- ----------------------------------- BBB- and Baa3 5 - ----------------------------------------- ----------------------------------- lower than BBB- and Baa3 or unrated 6 - ----------------------------------------- ----------------------------------- In the event that the S&P Rating and the Moody's Rating are not at the same Applicable Rating Level but differ by only one Applicable Rating Level, then the higher of the two ratings shall determine the Applicable Rating Level. In the event that the S&P Rating and the Moody's Rating differ by more than one Applicable Rating Level, then the Applicable Rating Level immediately below the higher of the two ratings shall be the Applicable Rating Level. The Applicable Rating Level shall be redetermined on the date of announcement of a change in the S&P Rating or the Moody's Rating. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit B hereto. "Banks" has the meaning specified in the preamble to this Agreement. "Base Rate" means, for any Interest Period or any other period, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the higher from time to time of: (i) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; and (ii) 1/2 of one percent per annum above the Federal Funds Rate in effect from time to time. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.07(a). "Base Rate Borrowing" means a Borrowing comprising Base Rate Advances. "Borrower" has the meaning specified in the preamble to this Agreement. 4 "Borrowing" means a borrowing consisting of simultaneous Advances of the same Type made by each of the Lenders pursuant to Section 2.02 or Converted pursuant to Section 2.09 or 2.10. "Business Day" means a day of the year on which banks are not required or authorized to close at the principal office of any Lender and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Change of Control" means the occurrence, after the date of this Agreement, of (i) any Person or "group" (within the meaning of Rule 13(d) or 14(d) of the Securities and Exchange Commission under the Exchange Act), directly or indirectly, acquiring beneficial ownership of or control over securities of the Borrower (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Borrower entitled to vote in the election of directors. "Citibank" has the meaning specified in the preamble to this Agreement. "Commitment" has the meaning specified in Section 2.01. "Consent" has the meaning specified in the recitals to this Agreement. "Consolidated" refers to the consolidation of the accounts of the Borrower and its subsidiaries in accordance with generally accepted accounting principles, including principles of consolidation, consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type, or the selection of a new, or the renewal of the same, Interest Period for Eurodollar Rate Advances, pursuant to Section 2.09(g) or 2.10. "CP&L" means the Carolina Power & Light Company. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eligible Assignee" means (i) any other Lender or any Affiliate of a Lender and (ii) (A) any other commercial bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator), (B) a commercial bank organized under the laws of any other country that is a member of the OECD or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow of the Cayman Islands, or a political subdivision of any such country, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator); provided that such bank is acting through a branch or agency located 5 in the United States or in the country in which it is organized or another country that is described in this clause (B), (C) the central bank of any country that is a member of the OECD or (D) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership or other entity) that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business, whose outstanding unsecured indebtedness is rated AA- or better by S&P or Aa3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured indebtedness). "Environmental Laws" means any federal, state or local laws, ordinances or codes, rules, orders, or regulations relating to pollution or protection of the environment, including, without limitation, laws relating to hazardous substances, laws relating to reclamation of land and waterways and laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollution, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to each Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1/8 of 1% per annum, if such average is not such a multiple) of the rates per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London Interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period for a period equal to such Interest Period and in an amount substantially equal to the amount of such Eurodollar Rate Advance comprising part of such Borrowing to be outstanding during such Interest Period from such Reference Bank. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing shall be determined by the Administrative Agent on the basis of the applicable rates furnished to and received by the Administrative Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.09. "Eurodollar Rate Advance" means an Advance that bears interest as provided in Section 2.07(b). 6 "Eurodollar Rate Reserve Percentage" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning assigned to that term in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934, and the regulations promulgated thereunder, in each case as amended and in effect from time to time. "Extension of Credit" means (i) the making of an Advance or (ii) the issuance of a Letter of Credit or the amendment of any Letter of Credit having the effect of extending the stated termination date thereof or increasing the maximum amount to be drawn thereunder. "Facility Fee Percentage" means, at all times during which any Applicable Rating Level set forth below is in effect, the rate per annum set forth below next to such Applicable Rating Level: - -------------------- ------------------- Applicable Rating Facility Fee Level Percentage - -------------------- ------------------- 1 0.100% - -------------------- ------------------- 2 0.110% - -------------------- ------------------- 3 0.125% - -------------------- ------------------- 4 0.150% - -------------------- ------------------- 5 0.200% - -------------------- ------------------- 6 0.250% - -------------------- ------------------- provided, that a change in the Facility Fee Percentage resulting from a change in the Applicable Rating Level shall become effective upon the date of announcement of a change in the Moody's Rating or the S&P Rating that results in a change in the Applicable Rating Level. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. 7 "First Mortgage Bonds" means those bonds issued from time to time by CP&L pursuant to the Mortgage. "Florida Power" means Florida Power Corporation. "Florida Power Mortgage" means the Indenture, dated as of January 1, 1944, between Florida Power, Guaranty Trust Company of New York and the Florida National Bank of Jacksonville, as modified, amended or supplemented from time to time. "Florida Power Mortgage Bonds" means those bonds issued from time to time by Florida Power pursuant to the Florida Power Mortgage. "FPC" means Florida Progress Corporation. "GenCo Financing" means up to $500,000,000 original principal amount of Indebtedness incurred by or created for the benefit of Progress GenCo Ventures, LLC, an indirect wholly owned Subsidiary of the Borrower, secured by liens and security interests on the property of Progress Ventures, Inc. and its Subsidiaries, including Progress GenCo Ventures, LLC, as to which neither the Borrower nor any Subsidiary of the Borrower that is not also a Subsidiary of Progress Ventures, Inc. shall be liable, except as otherwise contemplated by the Consent. "Guaranty" of any Person means any obligation, contingent or otherwise, of such Person (i) to pay any Liability of any other Person or to otherwise protect, or having the practical effect of protecting, the holder of any such Liability against loss (whether such obligation arises by virtue of such Person being a partner of a partnership or participant in a joint venture or by agreement to pay, to keep well, to purchase assets, goods, securities or services or to take or pay, or otherwise) or (ii) incurred in connection with the issuance by a third Person of a Guaranty of any Liability of any other Person (whether such obligation arises by agreement to reimburse or indemnify such third Person or otherwise). The word "Guarantee" when used as a verb has the correlative meaning. "Indebtedness" of any Person means (i) any obligation of such Person for borrowed money, (ii) any obligation of such Person evidenced by a bond, debenture, note or other similar instrument, (iii) any obligation of such Person to pay the deferred purchase price of property or services, except a trade account payable that arises in the ordinary course of business but only if and so long as the same is payable on customary trade terms, (iv) any obligation of such Person as lessee under a capital lease, (v) any Mandatorily Redeemable Stock of such Person (the amount of such Mandatorily Redeemable Stock to be determined for this purpose as the higher of the liquidation preference and the amount payable upon redemption of such Mandatorily Redeemable Stock), (vi) any obligation of such Person to purchase securities or other property that arises out of or in connection with the sale of the same or substantially similar securities or property, (vii) any non-contingent obligation of such Person to reimburse any other Person in respect of amounts paid under a letter of credit or other Guaranty issued by such other Person to the extent that such reimbursement obligation remains outstanding after it becomes non-contingent, (viii) any Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) a mortgage, lien, pledge, charge or other encumbrance on any asset of such Person, 8 (ix) any Liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA, (x) any Synthetic Lease Obligations of such Person and (xi) any Indebtedness of others Guaranteed by such Person. "Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Advance or the date of the Conversion of any Advance into such an Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as the Borrower may, in the Notice of Borrowing given by the Borrower to the Administrative Agent pursuant to Section 2.03, select; provided, however, that: (i) the Borrower may not select any Interest Period that ends after the Termination Date; (ii) Interest Periods commencing on the same date for Advances comprising the same Borrowing shall be of the same duration; and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day; provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. The Administrative Agent shall promptly advise each Lender by or telecopy transmission of each Interest Period so selected by the Borrower. "Issuing Bank" shall mean SunTrust Bank, as issuer of Letters of Credit, or any other Lender that agrees to act as Issuing Bank hereunder. "LC Commitment" shall mean that portion of the Commitment that may be used by the Borrower for the issuance of Letters of Credit in an aggregate face amount not to exceed $125,000,000. "LC Disbursement" shall mean a payment made by the Issuing Bank pursuant to a Letter of Credit. "LC Documents" shall mean the Letters of Credit and all applications, agreements and instruments relating to the Letters of Credit. "LC Exposure" shall mean, at any time, the sum of (i) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (ii) the aggregate amount of all LC Disbursements that have not been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Lender shall be its Pro Rata Share of the total LC Exposure at such time. "Lenders" means the Lenders listed on the signature pages hereof and each Eligible Assignee that shall become a party hereto pursuant to Section 8.07. 9 "Letter of Credit" shall mean any letter of credit issued pursuant to Section 2.16 by the Issuing Bank for the account of the Borrower. "Liability" of any Person means any indebtedness, liability or obligation of or binding upon, such Person or any of its assets, of any kind, nature or description, direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, whether arising under contract, applicable law, or otherwise, whether now existing or hereafter arising. "Majority Lenders" means at any time Lenders holding at least 66-2/3% of the aggregate principal amount of the Advances then outstanding, or, if no such principal amount is then outstanding, Lenders having at least 66-2/3% of the Commitments (provided that, for purposes hereof, neither the Borrower, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders holding such amount of the Advances or having such amount of the Commitments or (ii) determining the aggregate unpaid principal amount of the Advances or the total Commitments). "Mandatorily Redeemable Stock" means, with respect to any Person, any share of such Person's capital stock to the extent that it is (i) redeemable, payable or required to be purchased or otherwise retired or extinguished, or convertible into any Indebtedness or other Liability of such Person, (A) at a fixed or determinable date, whether by operation of a sinking fund or otherwise, (B) at the option of any Person other than such Person or (C) upon the occurrence of a condition not solely within the control of such Person, such as a redemption required to be made out of future earnings or (ii) convertible into Mandatorily Redeemable Stock. "Moody's" means Moody's Investors Service, Inc., or any successor thereto. "Moody's Rating" means, on any date of determination, the debt rating most recently announced by Moody's with respect to the Borrower's long-term senior unsecured non-credit-enhanced debt. "Mortgage" means the Mortgage and Deed of Trust, dated as of May 1, 1940, from CP&L to The Bank of New York (formerly Irving Trust Company) and to Frederick G. Herbst (W.T. Cunningham, successor), as modified, amended or supplemented from time to time. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Notice of Borrowing" has the meaning specified in Section 2.03(a). "Notice of Conversion" has the meaning specified in Section 2.10. "OECD" means the Organization for Economic Cooperation and Development. "Original Agreement" has the meaning specified in the recitals hereto. "Outstanding Credits" means, on any date of determination, an amount equal to the sum of (i) the aggregate principal amount of all Advances outstanding on 10 such date plus (ii) the LC Exposure on such date. The "Outstanding Credits" of any Lender means, on any date of determination, an amount equal to the sum of (A) the aggregate principal amount of all outstanding Advances made by such Lender plus (B) such Lender's LC Exposure on such date. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Plan" means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Borrower or any of its Affiliates and covered by Title IV of ERISA. "Progress Capital" means Progress Capital Holdings, Inc. "Portfolio Transaction" means the sale of Florida Progress's and CP&L's portfolio of affordable housing investments. "Pro Rata Share" shall mean, with respect to any Commitment of any Lender at any time, a percentage, the numerator of which shall be such Lender's Commitment (or if the Commitments have been terminated or expired or the Advances have been declared to be due and payable, the Advances made by such Lender), and the denominator of which shall be the sum of the Commitments of all Lenders (or if the Commitments have been terminated or expired or the Advances have been declared to be due and payable, the Advances made by all Lenders). "Rail Transaction" means the sale of substantially all of the assets or capital stock of Progress Rail Services, Inc. "Reference Banks" means Citibank and JPMorgan Chase Bank. "Register" has the meaning specified in Section 8.07(c). "Responsible Officer" means the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller or any Assistant Treasurer of the Borrower the signatures of whom, in each case, have been certified to the Administrative Agent and each other Lender pursuant to Section 3.01(c), or in a certificate delivered to the Administrative Agent replacing or amending such certificate. Each Lender may conclusively rely on each certificate so delivered until it shall have received a copy of a certificate from the Secretary or an Assistant Secretary of the Borrower amending, canceling or replacing such certificate. "S&P" means Standard & Poor's Ratings Group or any successor thereto. "S&P Rating" means, on any date of determination, the debt rating most recently announced by S&P with respect to the Borrower's long-term senior unsecured non-credit-enhanced debt. "SEC Order" means Order Nos. 35-27440 and 70-9909 of the Securities and Exchange Commission issued September 20, 2001. 11 "Significant Subsidiary" means CP&L, FPC, Florida Power, Progress Capital and any other Subsidiary of the Borrower that at any time constitutes a "significant subsidiary", as such term is defined in Regulation S-X of the Securities and Exchange Commission as in effect on the date hereof (17 C.F.R. Part 210). "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether at the time capital stock (or comparable interest) of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by said Person (whether directly or through one or more other Subsidiaries). "Synthetic Lease" means a lease transaction under which the parties intend that (i) the lease will be treated as an "operating lease" by the lessee pursuant to Statement of Financial Accounting Standards No. 13, as amended, and (ii) the lessee will be entitled to various tax and other benefits ordinarily available to owners (as opposed to lessees) of like property. "Synthetic Lease Obligations" means, with respect to any Person, the sum of (i) all remaining rental obligations of such Person as lessee under Synthetic Leases that are attributable to principal and, without duplication, (ii) all rental and purchase price payment obligations of such Person under such Synthetic Leases assuming such Person exercises the option to purchase the lease property at the end of the lease term. "Termination Date" means, with respect to a Lender, the earlier to occur of (i) November 13, 2004 and (ii) the date of termination in whole of the Commitments pursuant to Section 2.05 or 6.01. "Termination Event" means (i) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation under such regulations), or (ii) the withdrawal of the Borrower or any of its Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the Pension Benefit Guaranty Corporation, or (v) any other event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Total Capitalization" means the sum of the value of the common stock, retained earnings, and preferred and preference stock of the Borrower (in each case, determined in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e)), plus Consolidated Indebtedness of the Borrower. 12 Section 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Section 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). Article II AMOUNTS AND TERMS OF THE EXTENSIONS OF CREDIT Section 2.01. The Commitments. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Advances to the Borrower and to purchase participations in Letters of Credit from time to time on any Business Day during the period from the date hereof to and including the Termination Date, in an aggregate amount outstanding not to exceed at any time the amount set forth opposite such Lender's name on Schedule I hereto or, if such Lender has entered into any Assignment and Acceptance, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c), as such amount may be reduced pursuant to Section 2.05 (such Lender's "Commitment"), and the Issuing Bank agrees to issue Letters of Credit for the account of the Borrower from time to time on any Business Day during the period from the date hereof until the tenth Business Day prior to the Termination Date in an aggregate amount not to exceed the LC Commitment. Section 2.02. The Advances. (a) Each Borrowing shall be in an aggregate amount not less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Advances of the same Type made on the same day by the Lenders ratably according to their respective Commitments. Until the Termination Date, within the limits of each Lender's Commitment, the Borrower may from time to time borrow, repay pursuant to Section 2.06 or prepay pursuant to Section 2.11(b) and reborrow under this Section 2.02. (b) Any Lender may request that any Advances made by it be evidenced by one or more promissory notes. In such event, the Borrower shall prepare, execute and deliver to such Lender one or more promissory notes payable to the order of such Lender (or, if requested by such Lender, to such Lender and its assignees) and in a form approved by the Administrative Agent. Section 2.03. Making the Advances. (a) Each Borrowing shall be made on notice, given not later than 10:00 A.M. (New York City time) on the day of such proposed Borrowing, in the case of a Borrowing comprised of Base Rate Advances, or on the third Business Day prior to the date of the proposed Borrowing, in the case of a Borrowing comprised of 13 Eurodollar Rate Advances, by the Borrower to the Administrative Agent, which shall give to each Lender prompt notice thereof by telecopier. Each such notice of a Borrowing (a "Notice of Borrowing") shall be by telecopier, confirmed promptly in writing, in substantially the form of Exhibit A-1 hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing comprised of Eurodollar Rate Advances, the Interest Period for each such Advance. In the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the Administrative Agent shall promptly notify each Lender of the applicable interest rate under Section 2.07(b). Each Lender shall, before 12:00 P.M. (New York City time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. (b) Each Notice of Borrowing shall be irrevocable and binding on the Borrower and, in respect of any Borrowing comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss or expense incurred by such Lender as a result of any failure by the Borrower to fulfill on or before the date specified for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (c) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.03 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent (without duplication), forthwith on demand, such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (x) in the case of the Borrower, the interest rate applicable at the time to Advances comprising such Borrowing and (y) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement. (d) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. 14 (e) If, for any reason, a Borrowing is not made on the date specified in any Notice of Borrowing, the Administrative Agent hereby agrees to repay to each Lender the amount, if any, that such Lender has made available to the Administrative Agent as such Lender's ratable portion of such Borrowing, together with interest thereon for each day from the date such amount is made available to the Administrative Agent until the date such amount is repaid to such Lender, at the Federal Funds Rate. Section 2.04. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee on each Lender's Commitment, irrespective of usage, from the date hereof, in the case of each Bank, and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender, in the case of each other Lender, until the Termination Date at the rate per annum equal to the Facility Fee Percentage from time to time in effect. Such fee shall be calculated on the basis of actual number of days elapsed in a year of 365 or 366 days. Such fee shall be payable quarterly in arrears on the last day of each March, June, September and December during the term of such Lender's Commitment, and on the Termination Date. (b) The Borrower agrees to pay to the Administrative Agent an agency fee in such amounts and payable at such times, as shall be agreed to between them in writing. (c) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a letter of credit fee at a rate per annum equal to the Applicable Margin for Eurodollar Rate Advances in effect from time to time on the average daily amount of each such Lender's LC Exposure from the date hereof until the later to occur of the Termination Date and the date on which there is no amount remaining available to be drawn under any Letter of Credit. Such fee shall be calculated on the basis of actual number of days elapsed in a year of 365 or 366 days. Such fee shall be payable quarterly in arrears on the last day of each March, June, September and December and on the later to occur of the Termination Date and the date on which there is no amount remaining available to be drawn under any Letter of Credit. (d) The Borrower agrees to pay to the Issuing Bank for its own account a fronting fee and such other customary fees relating to the issuance and maintenance of Letters of Credit, in such amounts and payable at such times as shall be agreed between them in writing. Section 2.05. Reduction of the Commitments. The Borrower shall have the right, upon at least three Business Days' notice to the Administrative Agent, irrevocably to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders; provided that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount that is less than the Outstanding Credits; and provided, further, that each partial reduction of Commitments shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof. Once terminated or reduced, the Commitments may not be reinstated. 15 Section 2.06. Repayment of Advances. The Borrower shall repay the principal amount of each Advance made by each Lender on the Termination Date. Section 2.07. Interest on Advances. The Borrower shall pay interest on the unpaid principal amount of each Advance made by each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, plus the Applicable Margin, payable quarterly in arrears on the last day of each March, June, September and December and on the date such Base Rate Advance shall be paid in full; provided, however, that if and for so long as an Event of Default has occurred and is continuing, interest on the unpaid principal amount of each Base Rate Advance shall be payable on demand. (b) Eurodollar Rate Advances. If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of the Eurodollar Rate for such Interest Period, plus the Applicable Margin for such Eurodollar Rate Advance in effect from time to time, payable on the last day of such Interest Period and, if such Interest Period for such Advance has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period; provided, however, that if and for so long as an Event of Default has occurred and is continuing, interest on the unpaid amount of each Eurodollar Rate Advance shall be payable on demand. Section 2.08. Additional Interest on Eurodollar Rate Advances. The Borrower shall pay to each Lender additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Advance. All claims for such additional interest shall be submitted by such Lender to the Borrower (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within 90 days after the first day of such Interest Period; provided, however, that if a claim is not submitted to the Borrower within such 90-day period, such Lender shall thereby waive its claim to such additional interest incurred during such 90-day period but not to any such additional interest incurred thereafter. A certificate as to the amount of such additional interest, submitted to the Borrower (with a copy to the Administrative Agent) by such Lender, shall be conclusive and binding for all purposes, absent manifest error. Section 2.09. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining the Eurodollar Rate. If any 16 one or more of the Reference Banks shall not furnish such timely information to the Administrative Agent for determination of any such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Administrative Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.07(a) or (b), and the applicable rate, if any, furnished by each Reference Bank for determining the applicable interest rate under Section 2.07(b). (c) If fewer than two Reference Banks furnish timely information to the Administrative Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Administrative Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (e) If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Administrative Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. (f) On the date on which the aggregate unpaid principal amount of Advances comprising any Borrowing shall be reduced, by prepayment or otherwise, to less than $20,000,000, such Advances shall, if they are Advances of a Type other than Base Rate Advances, automatically Convert into Base Rate Advances, and on and after such date the right of the Borrower to Convert such Advances into Advances 17 of a Type other than Base Rate Advances shall terminate; provided, however, that if and so long as each such Advance shall be of the same Type and have the same Interest Period as Advances comprising another Borrowing or other Borrowings, and the aggregate unpaid principal amount of all such Advances shall equal or exceed $20,000,000, the Borrower shall have the right to continue all such Advances as, or to Convert all such Advances into, Advances of such Type having such Interest Period. (g) If an Event of Default has occurred and is continuing, (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended. Section 2.10. Voluntary Conversion of Advances. The Borrower may, on any Business Day prior to the Termination Date, upon notice given to the Administrative Agent not later than 10:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion, in the case of any proposed Conversion into Eurodollar Rate Advances, and on the date of the proposed Conversion, in the case of any proposed Conversion into Base Rate Advances, and subject to the provisions of Sections 2.09 and 2.13, Convert all Advances of one Type comprising the same Borrowing into Advances of another Type; provided, however, that any Conversion of any Eurodollar Rate Advances into Advances of another Type shall be made on, and only on, the last day of an Interest Period for such Eurodollar Rate Advances, except as otherwise provided in Section 2.13. Each such notice of a Conversion (a "Notice of Conversion") shall be by telecopier, confirmed promptly in writing, in substantially the form of Exhibit A-2 hereto and shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the aggregate amount of, Type of, and Interest Periods applicable to the Advances to be Converted, (iii) the Type of Advance to which such Advances (or portions thereof) are proposed to be Converted, and (iv) if such Conversion is into or with respect to Eurodollar Rate Advances, the duration of the Interest Period for each such Advance. Section 2.11. Prepayments of Advances. (a) The Borrower shall have no right to prepay any principal amount of any Advances other than as provided in subsection (b) below. (b) The Borrower may, upon notice given to the Administrative Agent at least two Business Days prior to the proposed prepayment, in the case of any Eurodollar Rate Advance, and on the date of the proposed prepayment, in the case of any Base Rate Advance, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Advances comprising the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the amount prepaid and, in the case of any Eurodollar Rate Advance, any amount payable pursuant to Section 8.04(b); provided, however, that (i) each partial prepayment shall be in an aggregate principal amount not less than $5,000,000 and in integral multiples of $1,000,000 in excess thereof and (ii) in the case of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such prepayment. 18 Section 2.12. Increased Costs. (a) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage), in or in the interpretation of any law or regulation, or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances or any increase in the cost to such Lender or the Issuing Bank of participating in or issuing any Letter of Credit, then the Borrower shall from time to time, upon demand by such Lender or the Issuing Bank (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender or Issuing Bank additional amounts sufficient to reimburse such Lender or Issuing Bank for such increased cost. All claims for increased cost shall be submitted by such Lender or Issuing Bank to the Borrower (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within 90 days after such introduction, such change, or the beginning of such compliance, the occurrence of which resulted in such increased cost, and the Borrower shall make such payment within five Business Days after notice of such claim is received; provided, however, that if a claim is not submitted to the Borrower within such 90-day period, such Lender or Issuing Bank shall thereby waive its claim to such increased cost incurred during such 90-day period but not to any such increased cost incurred thereafter. A certificate as to the amount of such increased cost, submitted to the Borrower (with a copy to the Administrative Agent) by such Lender or Issuing Bank, shall be conclusive and binding for all purposes, absent manifest error. (b) If any Lender or the Issuing Bank determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or Issuing Bank or any corporation controlling such Lender or Issuing Bank and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend or participate in Letters of Credit or the obligation of Issuing Bank to issue Letters of Credit hereunder and other commitments of this type, then, upon demand by such Lender or the Issuing Bank (with a copy of such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Lender or Issuing Bank, from time to time as specified by such Lender or Issuing Bank, additional amounts sufficient to compensate such Lender or Issuing Bank or such corporation in the light of such circumstances, to the extent that such Lender or Issuing Bank reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment to lend or participate in Letters of Credit or the obligation of the Issuing Bank to issue Letters of Credit hereunder. All claims for such additional amounts shall be submitted by such Lender or Issuing Bank (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within 90 days after such determination by such Lender or Issuing Bank, and the Borrower shall make such payment within five Business Days after notice of such claim is received; provided, however, that if a claim is not submitted to the Borrower within such 90-day period, such Lender or Issuing Bank shall thereby waive its claim to such additional amounts incurred during such 90-day period but not to any such additional amounts incurred thereafter. A certificate as to such amounts submitted to the Borrower 19 and the Administrative Agent by such Lender or Issuing Bank shall be conclusive and binding for all purposes, absent manifest error. Section 2.13. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of, any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of the Lenders to make Eurodollar Rate Advances or to Convert Advances into Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, and (ii) the Borrower shall forthwith prepay in full all Eurodollar Rate Advances of all Lenders then outstanding, together with interest accrued thereon, unless the Borrower, within five Business Days of notice from the Administrative Agent, Converts all Eurodollar Rate Advances of all Lenders then outstanding into Advances of another Type in accordance with Section 2.10. Section 2.14. Payments and Computations. (a) The Borrower shall make each payment hereunder, without condition or deduction for any counterclaim, defense, recoupment or setoff, not later than 11:00 A.M. (New York City time) on the day when due in U.S. dollars to the Administrative Agent at its address referred to in Section 8.02 in same day funds. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or fees (other than pursuant to Section 2.03(c), 2.04(d), 2.08 or 2.12) ratably to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to the Issuing Bank or to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) All computations of interest based on the base rate referred to in clause (i) of the definition of Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or Federal Funds Rate or of fees payable hereunder shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.08 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period of which such interest or fees are payable. Each determination by the Administrative Agent (or, in the case of Section 2.08, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes. 20 (c) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender, together with interest thereon for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent at the Federal Funds Rate. Section 2.15. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances made by it (other than pursuant to Section 2.03(c), 2.08 or 2.12) in excess of its ratable share of payments on account of the Extensions of Credit obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participation in the Extensions of Credit made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery, together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.15 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. Section 2.16. Letters of Credit. (a) From time to time and on any Business Day during the period from the date hereof to the tenth Business Day preceding the Termination Date, the Issuing Bank, in reliance upon the agreements of the other Lenders pursuant to subsection (d) of this Section 2.16, agrees to issue, at the request of the Borrower, Letters of Credit for the account of the Borrower on the terms and conditions hereinafter set forth; provided, that (i) each Letter of Credit shall expire on the earlier of (A) the date one year after the date of issuance of such Letter of Credit (or in the case of any renewal or extension thereof, one year after such renewal or extension) and (B) the date that is five Business 21 Days prior to the Termination Date; (ii) each Letter of Credit shall be in a stated amount of at least $25,000; and (iii) the Borrower may not request any Extension of Credit relating to a Letter of Credit if, after giving effect to such Extension of Credit, (X) the aggregate LC Exposure would exceed the LC Commitment or (Y) the aggregate Outstanding Credits would exceed the Commitments. Upon each Extension of Credit relating to a Letter of Credit, each Lender shall be deemed, and hereby irrevocably and unconditionally agrees, to purchase from the Issuing Bank without recourse a participation in such Letter of Credit equal to such Lender's Pro Rata Share of the aggregate amount available to be drawn under such Letter of Credit. Each Letter of Credit shall utilize the Commitment of each Lender by an amount equal to the amount of such participation. (b) To request an Extension of Credit relating to a Letter of Credit, the Borrower shall give the Issuing Bank and the Administrative Agent irrevocable written notice at least three Business Days prior to the requested date of such Extension of Credit specifying the date (which shall be a Business Day) on which such Extension of Credit is to occur, the expiration date of such Letter of Credit, the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. In addition to the satisfaction of the conditions in Section 3.02, such Extension of Credit will be subject to the further conditions that such Letter of Credit shall be in such form and contain such terms as the Issuing Bank shall approve and that the Borrower shall have executed and delivered any additional applications, agreements and instruments relating to such Extension of Credit as the Issuing Bank shall reasonably require; provided, that in the event of any conflict between such applications, agreements or instruments and this Agreement, the terms of this Agreement shall control. (c) At least two Business Days prior to each Extension of Credit relating to a Letter of Credit, the Issuing Bank will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has received such notice and, if it has not, the Issuing Bank will provide the Administrative Agent with a copy thereof. Unless the Issuing Bank has received notice from the Administrative Agent on or before the Business Day immediately preceding the date on which the Issuing Bank is to make the requested Extension of Credit relating to such Letter of Credit directing the Issuing Bank not to make such Extension of Credit because such Extension of Credit is not then permitted hereunder because of the limitations set forth in subsection (a) of this Section 2.16, or that one or more conditions specified in Section 3.02 are not then satisfied, then, subject to the terms and conditions hereof, the Issuing Bank shall, on the requested date, make such Extension of Credit in accordance with the Issuing Bank's usual and customary business practices. (d) The Issuing Bank shall examine all documents purporting to represent a demand for payment under a Letter of Credit promptly following its receipt thereof. The Issuing Bank shall notify the Borrower and the Administrative Agent (i) of such demand for payment and (ii) whether the Issuing Bank has made or will make a LC Disbursement thereunder; provided, that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Lenders with respect to such LC Disbursement. The Borrower shall be irrevocably and unconditionally obligated to reimburse the Issuing Bank for any LC Disbursements paid by the Issuing Bank in respect of such drawing, without presentment, demand or other formalities of any kind. Unless the Borrower shall have notified the Issuing Bank and the Administrative 22 Agent prior to 10:00 a.m. on the Business Day immediately prior to the date on which such drawing is honored that the Borrower intends to reimburse the Issuing Bank for the amount of such drawing in funds other than from the proceeds of Advances, the Borrower shall be deemed to have timely given a Notice of Borrowing to the Administrative Agent requesting a Borrowing compromising Base Rate Advances on the date on which such drawing is honored in the amount payable to the Issuing Bank in respect of such LC Disbursement; provided, that for purposes solely of such Borrowing, the conditions precedents set forth in Section 3.02 hereof shall not be applicable. The Administrative Agent shall notify the Lenders of such Borrowing in accordance with Section 2.03(a), and each Lender shall make the proceeds of its Base Rate Advance included in such Borrowing available to the Administrative Agent for the account of the Issuing Bank in accordance with Section 2.03(a). The proceeds of such Borrowing shall be applied directly by the Administrative Agent to reimburse the Issuing Bank for such LC Disbursement. (e) If for any reason a Borrowing may not be (as determined in the sole discretion of the Administrative Agent), or is not, made in accordance with the foregoing provisions, then each Lender shall be obligated to fund the participation that such Lender purchased pursuant to subsection (a) in an amount equal to its Pro Rata Share of such LC Disbursement on and as of the date on which such Borrowing should have occurred. Each Lender's obligation to fund its participation shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation (i) any setoff, counterclaim, recoupment, defense or other right that such Lender or any other Person may have against the Issuing Bank or any other Person for any reason whatsoever, (ii) the existence of an Event of Default or the termination of the Commitments, (iii) any adverse change in the condition (financial or otherwise) of the Borrower or any of its Subsidiaries, (iv) any breach of this Agreement by the Borrower or any other Lender, (v) any amendment, renewal or extension of any Letter of Credit or (vi) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. On the date that such participation is required to be funded, each Lender shall promptly transfer, in immediately available funds, the amount of its participation to the Administrative Agent for the account of the Issuing Bank. Whenever, at any time after the Issuing Bank has received from any such Lender the funds for its participation in a LC Disbursement, the Issuing Bank (or the Administrative Agent on its behalf) receives any payment on account thereof, the Administrative Agent or the Issuing Bank, as the case may be, will distribute to such Lender its Pro Rata Share of such payment; provided, that if such payment is required to be returned for any reason to the Borrower or to a trustee, receiver, liquidator, custodian or similar official in any bankruptcy proceeding, such Lender will return to the Administrative Agent or the Issuing Bank any portion thereof previously distributed by the Administrative Agent or the Issuing Bank to it. (f) To the extent that any Lender shall fail to pay when due any amount required to be paid pursuant to subsection (d) of this Section 2.16, such Lender shall pay interest to the Issuing Bank (through the Administrative Agent) on such amount from the date such amount became due and payable to the date such payment is made at a rate per annum equal to the Federal Funds Rate; provided, that if such Lender shall fail to make such payment to the Issuing Bank three Business Days after the date such amount became due and payable, then, retroactively to such date, such Lender shall pay interest on such amount at a rate per annum equal to the Base Rate in effect from time to time plus 2%. 23 (g) If any Event of Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Administrative Agent or the Majority Lenders demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Issuing Bank and the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid fees thereon; provided, that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or notice of any kind, upon the occurrence of any Event of Default described in subsection (e) of Section 6.01. Such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. The Borrower agrees to execute any documents and/or certificates to effectuate the intent of this subsection. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrower's risk and expense, such deposits shall not bear interest. Interest and profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it had not been reimbursed and, to the extent so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Advances has been accelerated, with the consent of the Majority Lenders, be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not so applied as aforesaid) shall be returned to the Borrower promptly after all Events of Default have been cured or waived. (h) Promptly following the end of each fiscal quarter of the Borrower, the Issuing Bank shall deliver (through the Administrative Agent) to each Lender and the Borrower a report describing the Letters of Credit outstanding and the LC Exposure at the end of such fiscal quarter. Upon the request of any Lender from time to time, the Issuing Bank shall deliver to such Lender any other information reasonably requested by such Lender with respect to each Letter of Credit then outstanding. (i) The Borrower's obligation to reimburse LC Disbursements hereunder shall be absolute, unconditional and irrevocable and shall be performed strictly in accordance with the terms of this Agreement under all circumstances whatsoever and irrespective of any of the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit or this Agreement; (ii) the existence of any claim, set-off, defense or other right that the Borrower or any Subsidiary or Affiliate of the Borrower may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Person or entity for which any such beneficiary or transferee may be acting), any Lender (including the Issuing Bank) or any other Person, whether in connection with this Agreement or any Letter of Credit or any document related hereto or thereto or any unrelated transaction; 24 (iii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document to the Issuing Bank that does not comply with the terms of such Letter of Credit; (v) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder; or (vi) the existence of an Event of Default. Neither the Administrative Agent, the Issuing Bank, any Lender nor any Affiliate of the foregoing Persons, nor any director, officer, employee, agent of any such Person or Affiliate shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to above), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; provided, that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank's failure to exercise care when determining whether drafts or other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree, that in the absence of gross negligence or willful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented that appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. (j) Each Letter of Credit shall be subject to the Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time, and, to the extent not inconsistent therewith, the governing law of this Agreement set forth in Section 8.08. 25 Article III CONDITIONS OF EXTENSIONS OF CREDIT Section 3.01. Conditions Precedent to Initial Extension of Credit. The obligation of each Lender to make its initial Advance and of the Issuing Bank to issue its initial Letter of Credit shall not become effective unless and until all fees due and payable by the Borrower in connection with this Agreement have been paid and the Administrative Agent shall have received the following: (a) Promissory notes, in a form acceptable to the Administrative Agent, payable to the order of each Lender that has requested such a note. (b) Copies of the resolutions of the Board of Directors of the Borrower approving this Agreement and all documents evidencing other necessary corporate action, certified by the Secretary or an Assistant Secretary of the Borrower to be true and correct, and in full force and effect on and as of the date hereof. (c) A certificate of the Secretary or an Assistant Secretary of the Borrower, dated as of the date hereof, certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the other documents to be delivered hereunder. (d) A certificate of a Responsible Officer of the Borrower, dated as of the date hereof, certifying (i) the accuracy of the representations and warranties contained herein and (ii) that no event has occurred and is continuing that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both. (e) Certified copies of all governmental approvals and authorizations required to be obtained in connection with the execution, delivery and performance by the Borrower of this Agreement. (f) Certified copies of the Restated Charter and By-Laws of the Borrower. (g) Favorable opinions of William D. Johnson, General Counsel of the Borrower, and of Hunton & Williams, counsel for the Borrower, substantially in the forms of Exhibit C-1 and C-2, respectively, hereto and as to such other matters as the Issuing Bank or any Lender through the Administrative Agent may reasonably request. (h) A favorable opinion of King & Spalding, counsel for the Administrative Agent, substantially in the form of Exhibit D hereto. Section 3.02. Conditions Precedent to Each Extension of Credit. The obligation of each Lender to make an Advance on the occasion of each Borrowing (including the initial Borrowing) and of the Issuing Bank to make any Extension of Credit relating to a Letter of Credit shall be subject to the further conditions precedent that (a) in the case of the making of an Advance, the Administrative Agent shall have received the written confirmatory Notice of Borrowing with respect thereto, (b) on the date of such Extension of Credit, the 26 following statements shall be true (and the giving of the Notice of Borrowing and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing such statements are true): (i) The representations and warranties contained in Section 4.01 are correct on and as of the date of such Extension of Credit before and after giving effect to such Extension of Credit and to the application of the proceeds therefrom, as though made on and as of such date; and (ii) No event has occurred and is continuing, or would result from such Extension of Credit from the application of the proceeds therefrom, that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both; and (c) the Administrative Agent shall have received such other approvals, opinions and documents as the Issuing Bank or any Lender through the Administrative Agent may reasonably request. Article IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) Each of the Borrower and each Significant Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and is duly qualified to do business in and is in good standing under the laws of each other jurisdiction where the nature of its business or the nature of property owned or used by it makes such qualification necessary (except where failure to so qualify would not have a material adverse affect on the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole). (b) The execution, delivery and performance by the Borrower of this Agreement are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Borrower's charter or by-laws or (ii) any law or contractual restriction binding on or affecting the Borrower or its properties. (c) No authorization or approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement, other than, the SEC Order, which has been duly issued and in full force and effect. (d) This Agreement has been duly executed and delivered by the Borrower and is, and any promissory note when delivered pursuant to Section 2.02(b) will be, the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 27 (e) The Consolidated balance sheets of the Borrower and its Subsidiaries as at December 31, 2001, and the related Consolidated statements of income and retained earnings of the Borrower and its Subsidiaries for the fiscal year then ended, and the Consolidated balance sheets of the Borrower and its Subsidiaries as at March 31, 2002, and the related Consolidated statements of income and retained earnings of the Borrower and its Subsidiaries, copies of each of which have been furnished to each Lender and the Issuing Bank, fairly present (subject, in the case of such financial statements dated March 31, 2002, to year end adjustments) the financial condition of the Borrower and its Subsidiaries as at such dates and the results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied. Since December 31, 2001, there has been no material adverse change in the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. (f) Except as described in the reports and registration statements that the Borrower, CP&L, FPC and Florida Power have filed with the Securities and Exchange Commission prior to the date of this Agreement, there is no pending or threatened action or proceeding affecting the Borrower or any Subsidiary before any court, governmental agency or arbitrator, that may materially adversely affect the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. (g) No proceeds of any Extension of Credit will be used to acquire any security in any transaction that is subject to Sections 13 and 14 of the Exchange Act. (h) The Borrower is not engaged in the business of extending credit for the purpose of buying or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to buy or carry any margin stock or to extend credit to others for the purpose of buying or carrying any margin stock. (i) Following application of the proceeds of each Extension of Credit, not more than 5% of the value of the assets (either of the Borrower only or of the Borrower and the Subsidiaries on a Consolidated basis) subject to the provisions of Section 5.02(a) or 5.02(e) will be margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). (j) No Termination Event has occurred or is reasonably expected to occur with respect to any Plan. (k) The Borrower is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (l) The Borrower is in substantial compliance with all applicable laws, rules, regulations and orders of any governmental authority, the noncompliance with which would materially and adversely affect the business or condition of the Borrower, such compliance to include, without limitation, substantial compliance with ERISA, Environmental Laws and paying before the same become delinquent all material taxes, assessments and governmental charges imposed upon it or upon its property, except to the extent compliance with any of the 28 foregoing is then being contested in good faith by appropriate legal proceedings. (m) All written information furnished by the Borrower to the Administrative Agent and the Lenders in connection with this Agreement (the "Disclosed Information") was (and all information furnished in the future by the Borrower to the Administrative Agent, the Issuing Bank and the Lenders will be) complete and correct in all respects material to the creditworthiness of the Borrower when delivered. As of the date hereof, the Disclosed Information does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances under which made. Article V COVENANTS OF THE COMPANY Section 5.01. Affirmative Covenants. So long as there shall be any Outstanding Credits, any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower shall, unless the Majority Lenders shall otherwise consent in writing: (a) Compliance with Laws, Etc. Except to the extent contested in good faith, comply, and cause each Subsidiary to comply, with all applicable laws, rules, regulations and orders (such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property), the non-compliance with which would materially adversely affect the Borrower's business or credit. (b) Preservation of Corporate Existence, Etc. Except as provided in Section 5.02(d), preserve and maintain, and cause each Significant Subsidiary to preserve and maintain, its corporate existence, rights (charter and statutory) and franchises. (c) Visitation Rights. At any reasonable time and from time to time, permit the Administrative Agent, the Issuing Bank or any of the Lenders or any agents or representatives thereof to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower and any Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and any Subsidiary with any of their respective officers or directors. (d) Keeping of Books. Keep, and cause each Subsidiary to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower and such Subsidiary in accordance with generally accepted accounting principles consistently applied. (e) Maintenance of Properties, Etc. Maintain and preserve, and cause each Subsidiary to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. 29 (f) Maintenance of Insurance. Maintain, and cause each Subsidiary to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates. (g) Taxes. File, and cause each Subsidiary to file, all tax returns (federal, state and local) required to be filed and paid and pay all taxes shown thereon to be due, including interest and penalties except, in the case of taxes, to the extent the Borrower or such Subsidiary is contesting the same in good faith and by appropriate proceedings and has set aside adequate reserves for the payment thereof in accordance with generally accepted accounting principles. (h) Material Obligations. Pay, and cause each Significant Subsidiary to pay, promptly as the same shall become due each material obligation of the Borrower or such Significant Subsidiary. (i) Reporting Requirements. Furnish to the Issuing Bank and the Lenders: (i) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a Consolidated balance sheet of the Borrower and the Subsidiaries as at the end of such quarter and Consolidated statements of income and retained earnings of the Borrower and the Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the treasurer or the chief financial officer of the Borrower, together with a certificate of the treasurer or chief financial officer of the Borrower, setting forth in reasonable detail the calculation of the Borrower's compliance with Section 5.01(j) and stating that no Event of Default and no event that, with the giving of notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing, or if an Event of Default or such event has occurred and is continuing, a statement setting forth details of such Event of Default or event and the action that the Borrower has taken and proposes to take with respect thereto; (ii) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the annual report for such year for the Borrower and the Subsidiaries, containing Consolidated financial statements for such year certified by Deloitte & Touche or other independent public accountants acceptable to the Majority Lenders, together with a certificate of the treasurer or chief financial officer of the Borrower, substantially in the form of Exhibit E hereto, setting forth in reasonable detail the calculation of the Borrower's compliance with Section 5.01(j) and stating that no Event of Default and no event that, with the giving of notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing, or if an Event of Default or such event has occurred and is continuing, a statement setting forth details of such Event of Default or event and the action that the Borrower has taken and proposes to take with respect thereto; (iii) promptly after the sending or filing thereof, copies of all reports that the Borrower sends to any of its security holders, and copies of all reports and registration statements that the Borrower or any 30 Subsidiary files with the Securities and Exchange Commission or any national securities exchange, to the extent not delivered by the Borrower pursuant to clause (i) or (ii) of this Section 5.01(i); (iv) immediately upon any Responsible Officer's obtaining knowledge of the occurrence of any Event of Default or any event that, with the giving of notice or lapse of time, or both, would constitute an Event of Default, a statement of the chief financial officer or treasurer of the Borrower setting forth details of such Event of Default or event and the action that the Borrower proposes to take with respect thereto; (v) immediately upon obtaining knowledge thereof, notice of any change in either the Moody's Rating or the S&P Rating; (vi) as soon as possible and in any event within five days after the commencement thereof or any adverse determination or development therein, notice of all actions, suits and proceedings that may adversely affect the Borrower's ability to perform its obligations under this Agreement; (vii) as soon as possible and in any event within five days after the occurrence of a Termination Event, notice of such Termination Event; and (viii) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any Subsidiary as any Lender or the Issuing Bank through the Administrative Agent may from time to time reasonably request. (j) Indebtedness to Total Capitalization. Maintain at all times a ratio of Consolidated Indebtedness of the Borrower and its Subsidiaries to Total Capitalization of not more than .70:1.0. (k) Use of Proceeds. Use the proceeds of each Advance solely for general corporate purposes (including, in each case, without limitation, as a commercial paper back-up). No proceeds of any Advance will be used to acquire any equity security of a class that is registered pursuant to Section 12 of the Exchange Act, or any security in any transaction that is subject to Sections 13 and 14 of the Exchange Act. (l) Ownership of Subsidiaries. Own at all times, directly or indirectly and free and clear of all liens and encumbrances, 100% of the common stock of CP&L, FPC and Florida Power. Section 5.02. Negative Covenants. So long as there shall be any Outstanding Credits, any other amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will not, without the written consent of the Majority Lenders: (a) Liens, Etc. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any Subsidiary to assign, any right to 31 receive income, in each case to secure any Indebtedness of any Person, other than (i) liens, mortgages and security interests created by the Mortgage and the Florida Power Mortgage, (ii) liens and security interests against the fuel used by the Borrower in its power generating operations in favor of the suppliers thereof, (iii) liens and security interests created in connection with the GenCo Financing, and (iv) liens, mortgages and security interests securing other Indebtedness of the Borrower and its Subsidiaries not exceeding $100,000,000 in the aggregate. (b) Indebtedness. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any Indebtedness other than (i) Indebtedness hereunder, (ii) Indebtedness secured by liens and security interests permitted pursuant to clauses (ii), (iii) and (iv) of subsection 5.02(a), (iii) Indebtedness evidenced by the First Mortgage Bonds and the Florida Power Mortgage Bonds, (iv) unsecured Indebtedness, including guarantees issued in connection with the financing of pollution control facilities operated by CP&L, FPC or Florida Power, guarantees of Indebtedness incurred by any wholly-owned Subsidiary and guarantees of debt securities issued by any financing Subsidiary established to secure debt financing in the offshore markets, and (v) other Indebtedness outstanding on the date of this Agreement, as described on Schedule II hereto. (c) Lease Obligations. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any obligations for the payment of rental for any property under leases or agreements to lease having a term of one year or more that would cause the direct or contingent Consolidated liabilities of the Borrower and its Subsidiaries in respect of all such obligations payable in any calendar year to exceed 10% of the Consolidated operating revenues of the Borrower and its Subsidiaries for the immediately preceding calendar year. (d) Mergers, Etc. Merge with or into or consolidate with or into, or acquire all or substantially all of the assets or securities of, any Person, unless, in each case, (i) immediately after giving effect thereto, no event shall occur and be continuing that constitutes an Event of Default or an event that with the giving of notice or lapse of time, or both, would constitute an Event of Default, and (ii) in the case of any such merger to which the Borrower is a party, such other Person is a utility company and the resulting or surviving corporation, if not the Borrower, (x) is organized and existing under the laws of the United States of America or any State thereof, (y) is a corporation satisfactory to the Majority Lenders, and (z) shall have expressly assumed, by an instrument satisfactory in form and substance to the Majority Lenders, the due and punctual payment of all amounts due under this Agreement and the performance of every covenant and undertaking of the Borrower contained in this Agreement. (e) Sales, Etc. of Assets. Sell, lease, transfer or otherwise dispose of, or permit any Subsidiary to sell, lease, transfer or otherwise dispose of, any of its assets, other than the following sales: (i) sales of generating capacity to the wholesale customers of the Borrower and the Subsidiaries, (ii) sales of nuclear fuel, (iii) sales of accounts receivable, (iv) sales in connection with a transaction authorized by subsection (d) of this Section, (v) the Portfolio Transaction, (vi) the Rail Transaction, (vii) sales of investments in securities with a maturity of less than one year, or (viii) other sales not exceeding $150,000,000 in the aggregate in any fiscal year of the Borrower. 32 (f) Margin Stock. Use any proceeds of any Advance to buy or carry margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). (g) Change in Nature of Business. Engage, or cause or permit CP&L or Florida Power to engage, in a material manner in businesses other than those in which they are engaged on the date hereof and businesses reasonably related thereto. Article VI EVENTS OF DEFAULT Section 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Advance or LC Disbursement when due, or shall fail to pay any interest on the principal amount of any Advance or LC Disbursement or any fees or other amount payable hereunder within five Business Days after such interest or fees or other amount shall become due; or (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in any document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made or deemed made; or (c) The Borrower shall fail to perform or observe any other term, covenant or agreement contained in Section 5.01(b), 5.01(i)(iv), 5.01(j), 5.01(l) or 5.02 on its part to be performed or observed; or the Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Administrative Agent or any Lender; or (d) The Borrower or any Significant Subsidiary shall fail to pay any amount in respect of any Indebtedness in excess of $10,000,000 (but excluding Indebtedness hereunder) of the Borrower or such Significant Subsidiary (as the case may be), or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or any other default under any agreement or instrument relating to any such Indebtedness, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) The Borrower or any Significant Subsidiary shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Significant Subsidiary seeking to adjudicate it a bankrupt or insolvent, or 33 seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property; or the Borrower or any Significant Subsidiary shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order for the payment of money in excess of $10,000,000 shall be rendered against the Borrower or any Significant Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) Any Termination Event with respect to a Plan shall have occurred, and, 30 days after the occurrence thereof, (i) such Termination Event (if correctable) shall not have been corrected and (ii) the then present value of such Plan's vested benefits exceeds the then current value of assets accumulated in such Plan by more than the amount of $20,000,000 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount); or (h) The Borrower or any of its Affiliates as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $20,000,000; or (i) A Change of Control shall occur; then, and in any such event, the Administrative Agent shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, (i) declare the Commitments and the obligation of each Lender and the Issuing Bank to make Extensions of Credit to be terminated, whereupon the same shall forthwith terminate, (ii) declare the Outstanding Credits all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon such principal amount, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower, and (iii) exercise the remedies specified in Section 2.16(g); provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any Subsidiary under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Extensions of Credit shall automatically be terminated and (B) the Outstanding Credits, all such interest and all such other amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. 34 Article VII THE administrative AGENT Section 7.01. Authorization and Action. (a) The Issuing Bank and each Lender hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably provided for by this Agreement (including, without limitation, enforcement or collection of the Advances), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon the Issuing Bank and all Lenders; provided, however, that the Administrative Agent shall not be required to take any action that exposes the Administrative Agent to personal liability or that is contrary to this Agreement or applicable law. (b) The Issuing Bank shall act on behalf of the Lenders with respect to any Letters of Credit issued by it and the documents associated therewith until such time and except for so long as the Administrative Agent may agree at the request of the Majority Lenders to act for the Issuing Bank with respect thereto; provided, that the Issuing Bank shall have all the benefits and immunities (i) provided to the Administrative Agent in this Article VII with respect to any acts taken or omissions suffered by the Issuing Bank in connection with Letters of Credit issued by it or proposed to be issued by it and the application and agreements for letters of credit pertaining to the Letters of Credit as fully as the term "Administrative Agent" as used in this Article VII included the Issuing Bank with respect to such acts or omissions and (ii) as additionally provided in this Agreement with respect to the Issuing Bank. Section 7.02. The Administrative Agent's Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by each or any of them under or in connection with this Agreement, except for their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Administrative Agent: (i) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to the Issuing Bank or any Lender and shall not be responsible to the Issuing Bank or any Lender for any statements, warranties or representations made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (iv) shall not be responsible to the Issuing Bank or any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (v) shall incur no liability under or in respect of this Agreement by acting upon any notice, 35 consent, certificate or other instrument or writing (which may be by telegram, telecopy or e-mail) believed by it to be genuine and signed or sent by the proper party or parties. Section 7.03. The Administrative Agent and its Affiliates. With respect to its Commitments and the Advances made by it, the Administrative Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not an Administrative Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include the Administrative Agent in its individual capacity, as applicable. The Administrative Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any Subsidiary and any Person who may do business with or own securities of the Borrower or any Subsidiary, all as if the Administrative Agent were not the Administrative Agent and without any duty to account therefor to the Lenders. Section 7.04. Lender Credit Decision. Each of the Issuing Bank and each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Issuing Bank or any other Lender (as applicable) and based on the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each of the Issuing Bank and each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Issuing Bank or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Section 7.05. Indemnification. The Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed by the Borrower) and the Issuing Bank, ratably according to the respective principal amounts of the Outstanding Credits then held by each of them (or if there are no Outstanding Credits at the time, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Administrative Agent and the Issuing Bank in any way relating to or arising out of this Agreement or any action taken or omitted by the Administrative Agent or the Issuing Bank (as the case may be) under this Agreement; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's or the Issuing Bank's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Administrative Agent or the Issuing Bank (as the case may be) promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by the Administrative Agent or the Issuing Bank (as the case may be) in connection with the preparation, execution, administration, or 36 enforcement of, or legal advice in respect of rights or responsibility under, this Agreement, to the extent that the Administrative Agent or the Issuing Bank (as the case may be) is not reimbursed for such expenses by the Borrower. Section 7.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders, the Issuing Bank and the Borrower and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, the Administrative Agent may appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Article VIII MISCELLANEOUS Section 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, in the case of any such amendment, waiver or consent of or in respect of this Agreement, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all of the Lenders, do any of the following: (i) waive any of the conditions specified in Section 3.01 or 3.02, (ii) increase the Commitment of any Lender or subject any Lender to any additional obligations, (iii) reduce, or waive the payment of, the principal of, or interest on, the Advances, reimbursement obligations in respect of LC Disbursements, or any fees or other amounts payable to the Lenders ratably hereunder, (iv) postpone any date fixed for any payment of principal of, or interest on, the Advances, reimbursement obligations in respect of LC Disbursements, or any fees or other amounts payable to the Lenders ratably hereunder, (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Advances, or the number of Lenders, which shall be required for the Lenders or any of them to take any action under this Agreement, or (vi) amend, waive, or in any way modify or suspend any provision requiring the pro rata application of payments or of this Section 8.01; provided 37 further, that no amendment, waiver or consent shall, unless in writing and signed by each Lender affected thereby, reduce, waive or postpone the date of payment of any amount payable to such Lender, other than any such amount payable to the Lenders ratably; and provided, further, that (A) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent and the Issuing Bank in addition to the Lenders required hereinabove to take such action, affect the rights or duties of such Administrative Agent or the Issuing Bank under this Agreement and (B) this Agreement may be amended and restated without the consent of any Lender or the Administrative Agent if, upon giving effect to such amendment and restatement, such Lender or Administrative Agent, as the case may be, shall no longer be a party to this Agreement (as so amended and restated) or have any Commitment or other obligation hereunder and shall have been paid in full all amounts payable hereunder to such Lender or the Administrative Agent, as the case may be. Section 8.02. Notices, Etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telegraphic communication) and mailed, telecopied, e-mailed or delivered, if to the Borrower, at its address at 410 S. Wilmington Street, PEB 19A3, Raleigh, North Carolina 27601, Attention: Director of Financial Operations, Treasury Department, Facsimile no.: (919) 546-7826, e-mail: charles.beuris@pgnmail.com; if to any Lender, at its Domestic Lending Office set forth opposite its name on Schedule I hereto; if to the Issuing Bank, at its address at 25 Park Place, 16th Floor, Atlanta, Georgia, 30303, Attention: Mike Sullivan, Facsimile no.: (404) 588-8129; and if to the Administrative Agent, at its address at Two Penns Way, Suite 200, New Castle, Delaware 19720, Attention: Bank Loan Syndications, Facsimile no.: (212) 816-8098, e-mail: j.nicholas.mckee@citi.com; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall be effective when received by the addressee thereof. Section 8.03. No Waiver; Remedies. No failure on the part of any Lender, the Issuing Bank or the Administrative Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 8.04. Costs, Expenses, Taxes and Indemnification. (a) The Borrower agrees to pay on demand all costs and expenses of the Administrative Agent (and as described in clause (iv) below, the Lenders and the Issuing Bank) in connection with (i) the preparation, execution, negotiation, syndication and delivery of this Agreement and the other documents to be delivered hereunder, (ii) the first Borrowing under this Agreement, (iii) any modification, amendment or supplement to this Agreement and the other documents to be delivered hereunder and (iv) the enforcement of the rights and remedies of the Lenders, the Issuing Bank and the Administrative Agent under this Agreement and the other documents to be delivered hereunder (whether through negotiations or legal proceedings), all the above costs and expenses to include, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent, the Issuing Bank and each of the Lenders with respect thereto. In addition, the Borrower shall pay any and all stamp and other taxes 38 payable or determined to be payable in connection with the execution and delivery of this Agreement and the other documents to be delivered hereunder, and agrees to save the Administrative Agent, the Issuing Bank and each Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. (b) If (i) due to payments made by the Borrower due to the acceleration of the maturity of the Advances pursuant to Section 6.01 or due to any other reason, any Lender receives payments of principal of any Eurodollar Rate Advance based upon the Eurodollar Rate other than on the last day of the Interest Period for such Advance, or (ii) due to any Conversion of Eurodollar Advance other than on the last day of an Interest Period pursuant to Section 2.13, the Borrower shall, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. In addition, if the Borrower fails to prepay any Advance on the date for which notice of prepayment has been given, the Borrower shall, upon demand by any Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any losses, costs or expenses (including loss of anticipated profits) that it may reasonably incur as a result of such prepayment not having been made on the date specified by the Borrower for such prepayment. (c) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.14, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender, the Issuing Bank and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender, Issuing Bank or Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender, Issuing Bank or Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Lender, Issuing Bank or Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (d) The Borrower will indemnify each Lender, the Issuing Bank and the Administrative Agent for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable under this Section 8.04) paid by such Lender, Issuing Bank or Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were 39 correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender, Issuing Bank or Administrative Agent (as the case may be) makes written demand therefor. (e) Prior to the date of the initial Borrowing or on the date of the Assignment and Acceptance pursuant to which it became a Lender, in the case of each Lender that becomes a Lender by virtue of entering into an Assignment and Acceptance, and from time to time thereafter if requested by the Borrower or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Administrative Agent and the Borrower with the forms prescribed by the Internal Revenue Service of the United States certifying that such Lender is exempt from United States withholding taxes with respect to all payments to be made to such Lender hereunder. If for any reason during the term of this Agreement, any Lender becomes unable to submit the forms referred to above or the information or representations contained therein are no longer accurate in any material respect, such Lender shall notify the Administrative Agent and the Borrower in writing to that effect. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments hereunder are not subject to United States withholding tax, the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States. (f) Any Lender claiming any additional amounts payable pursuant to Section 8.04(c) or (d) shall use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) (i) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender and (ii) to otherwise minimize the amounts due, or to become due, under Sections 8.04(c) and (d). (g) If the Borrower makes any additional payment to the Issuing Bank or any Lender pursuant to Sections 8.04(c) and (d) in respect of any Taxes, and the Issuing Bank or such Lender determines that it has received (i) a refund of such Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge solely as a result of any deduction or credit for any Taxes with respect to which it has received payments under Sections 8.04(c) and (d), the Issuing Bank or such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Borrower such amount as the Issuing Bank or such Lender shall have determined to be attributable to the deduction or withholding of such Taxes. If the Issuing Bank or such Lender later determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 8.04(g), the Borrower shall upon demand of the Issuing Bank or such Lender promptly repay the amount of such overpayment. Any determination made by the Issuing Bank or such Lender pursuant to this Section 8.04(g) shall in the absence of bad faith or manifest error be conclusive, and nothing in this Section 8.04(g) shall be construed as requiring the Issuing Bank or any Lender to conduct its business or to arrange or alter in any respect its tax or financial affairs so that it is entitled to receive such a refund, credit or reduction or as allowing any Person to inspect any records, including tax returns, of the Issuing Bank or any Lender. 40 (h) The Borrower hereby agrees to indemnify and hold harmless each Lender, the Issuing Bank, the Administrative Agent, counsel to the Administrative Agent and their respective officers, directors, partners, employees, Affiliates and advisors (each, an "Indemnified Person") from and against any and all claims, damages, losses, liabilities, costs, or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding), joint and several, that may actually be incurred by or asserted or awarded against any Indemnified Person (including, without limitation, in connection with any investigation, litigation or proceeding or the preparation of a defense in connection therewith) in each case by reason of or in connection with the execution, delivery, or performance of this Agreement, or the use by the Borrower of the proceeds of any Extension of Credit (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), except to the extent that such claims, damages, losses, liabilities, costs, or expenses are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of the party seeking indemnification. (i) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 8.04 shall survive the payment in full of principal and interest hereunder and the termination of the Commitments. Section 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Outstanding Credits due and payable pursuant to the provisions of Section 6.01, each Lender and the Issuing Bank are hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or Issuing Bank to or for the credit or the account of the Borrower now or hereafter existing under this Agreement, irrespective of whether or not such Lender or the Issuing Bank shall have made any demand under this Agreement and although such obligations may be unmatured. Each Lender and the Issuing Bank agree promptly to notify the Borrower after any such set-off and application made by such Lender or Issuing Bank; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender and the Issuing Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender or Issuing Bank may have. Section 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Administrative Agent and when the Administrative Agent shall have been notified by each Lender and the Issuing Bank that such Lender or Issuing Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent, the Issuing Bank and each Lender and their respective successors and assigns, except that the Borrower 41 shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Issuing Bank and each Lender. Section 8.07. Assignments and Participations. (a) Each Lender may, with the consent of the Administrative Agent, the Issuing Bank and the Borrower (such consent not to be unreasonably withheld and, in the case of the Borrower, such consent shall not be required if an Event of Default has occurred and is continuing), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the Advances owing to it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement, (ii) the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than the lesser of (A) $10,000,000 and (B) all of such Lender's rights and obligations and, if the preceding clause (A) is applicable, shall be an integral multiple of $1,000,000, (iii) each such assignment shall be to an Eligible Assignee, and (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance and such parties (other than when Citibank is an assigning party) shall also deliver to the Administrative Agent a processing and recordation fee of $3,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible 42 Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender. (c) The Administrative Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance (and copies of the related consents of the Borrower and the Administrative Agent to such assignment) delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit B hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. (e) Each Lender may assign to one or more banks or other entities any Advance made by it. (f) Each Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any promissory note held pursuant to Section 2.02(b) for all purposes of this Agreement, (iv) the Borrower, the Issuing Bank, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) the holder of any such participation, other than an Affiliate of such Lender, shall not be entitled to require such Lender to take or omit to take any action hereunder, except action (A) extending the time for payment of interest on, or the final maturity of any portion of the principal amount of, the Advances or (B) reducing the principal amount of or the rate of interest payable on the Advances. Without limiting the generality of the foregoing: (i) such participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.09, 2.13 and 8.04(b) only if, and to the same extent, the Lender from which such participating banks or other entities acquired its participation would, at the time, be entitled to claim thereunder; and (ii) such participating banks or other entities shall also, to the fullest extent permitted by law, be entitled 43 to exercise the rights of set-off contained in Section 8.05 as if such participating banks or other entities were Lenders hereunder. (g) If any Lender (or any bank, financial institution, or other entity to which such Lender has sold a participation) shall make any demand for payment under Section 2.12(b), then within 30 days after any such demand (if, but only if, such demanded payment has been made by the Borrower), the Borrower may, with the approval of the Administrative Agent (which approval shall not be unreasonably withheld) demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Borrower all (but not less than all) of such Lender's Commitment (if any) and the Advances owing to it within the period ending on the later to occur of such 30th day and the last day of the longest of the then current Interest Periods for such Advances, provided that (i) no Event of Default or event that, with the passage of time or the giving of notice, or both, would constitute an Event of Default shall then have occurred and be continuing, (ii) the Borrower shall have satisfied all its presently due obligations to such Lender under this Agreement, and (iii) if such Eligible Assignee designated by the Borrower is not an existing Lender on the date of such demand, the Borrower shall have delivered to the Administrative Agent an administrative fee of $3,500. If any such Eligible Assignee designated by the Borrower shall fail to consummate such assignment on terms acceptable to such Lender, or if the Borrower shall fail to designate any such Eligible Assignees for all or part of such Lender's Commitment or Advances, then such demand by the Borrower shall become ineffective; it being understood for purposes of this subsection (g) that such assignment shall be conclusively deemed to be on terms acceptable to such Lender, and such Lender shall be compelled to consummate such assignment to an Eligible Assignee designated by the Borrower, if such Eligible Assignee (i) shall agree to such assignment by entering into an Assignment and Acceptance in substantially the form of Exhibit B hereto with such Lender and (ii) shall offer compensation to such Lender in an amount equal to all amounts then owing by the Borrower to such Lender hereunder made by the Borrower to such Lender, whether for principal, interest, fees, costs or expenses (other than the demanded payment referred to above and payable by the Borrower as a condition to the Borrower's right to demand such assignment), or otherwise. (h) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Lender. (i) Anything in this Section 8.07 to the contrary notwithstanding, any Lender may (i) assign and pledge all or any portion of its Commitment and the Advances owing to it to any Federal Reserve Bank (and its transferees) as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank; provided, that no such assignment shall release the assigning Lender from its obligations hereunder; or (ii) assign its Commitments, Advances and other rights and obligations hereunder to any of its Affiliates upon notice to, but without the consent of, the Borrower and the Administrative Agent. 44 (j) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC") of such Granting Lender identified as such in writing from time to time by the Granting Lender to the Administrative Agent, the Issuing Bank and the Borrower, the option to provide to the Borrower all or any part of any Advance that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any such SPC to make any Advance, (ii) if such SPC elects not to exercise such option or otherwise fails to provide all or any part of such Advance, the Granting Lender shall be obligated to make such Advance pursuant to the terms hereof and (iii) no SPC or Granting Lender shall be entitled to receive any greater amount pursuant to Section 2.08 or 2.12 than the Granting Lender would have been entitled to receive had the Granting Lender not otherwise granted such SPC the option to provide any Advance to the Borrower. The making of an Advance by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Advance were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement for which a Lender would otherwise be liable so long as, and to the extent that, the related Granting Lender provides such indemnity or makes such payment. In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against or join any other person in instituting against such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. Notwithstanding the foregoing, the Granting Lender unconditionally agrees to indemnify the Borrower, the Administrative Agent, the Issuing Bank and each Lender against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be incurred by or asserted against the Borrower, the Administrative Agent, the Issuing Bank or such Lender, as the case may be, in any way relating to or arising as a consequence of any such forbearance or delay in the initiation of any such proceeding against its SPC. Each party hereto hereby acknowledges and agrees that no SPC shall have the rights of a Lender hereunder, such rights being retained by the applicable Granting Lender. Accordingly, and without limiting the foregoing, each party hereby further acknowledges and agrees that no SPC shall have any voting rights hereunder and that the voting rights attributable to any Advance made by an SPC shall be exercised only by the relevant Granting Lender and that each Granting Lender shall serve as the administrative agent and attorney-in-fact for its SPC and shall on behalf of its SPC receive any and all payments made for the benefit of such SPC and take all actions hereunder to the extent, if any, such SPC shall have any rights hereunder. In addition, notwithstanding anything to the contrary contained in this Agreement any SPC may with notice to, but without the prior written consent of any other party hereto, assign all or a portion of its interest in any Advances to the Granting Lender. This Section may not be amended without the prior written consent of each Granting Lender, all or any part of whose Advance is being funded by an SPC at the time of such amendment. Section 8.08. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. The Borrower (i) irrevocably submits to the non-exclusive jurisdiction of any New York State court or Federal court sitting in New York City in any action arising out of this Agreement, (ii) agrees that 45 all claims in such action may be decided in such court, (iii) waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum and (iv) consents to the service of process by mail. A final judgment in any such action shall be conclusive and may be enforced in other jurisdictions. Nothing herein shall affect the right of any party to serve legal process in any manner permitted by law or affect its right to bring any action in any other court. Section 8.09. Waiver of Jury Trial. THE BORROWER, THE ADMINISTRATIVE AGENT, THE ISSUING BANK AND EACH LENDER EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY AND LAWFULLY DO SO, ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING TO THIS AGREEMENT IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER INSTRUMENT OR DOCUMENT DELIVERED HEREUNDER OR THEREUNDER. Section 8.10. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 8.11. Severability. Any provision of this Agreement that is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section 8.12. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 8.13. Entire Agreement. This Agreement constitutes the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Except as is expressly provided for herein, nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. [Signature Pages to Follow] S-1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all as of the day and year first above written. CITIBANK, N.A. By ------------------------------------------ Name: Title: S-2 JPMORGAN CHASE BANK By ------------------------------------------ Name: Title: S-3 BANK ONE, N.A. By ------------------------------------------ Name: Title: S-4 BANK OF AMERICA, N.A. By ------------------------------------------ Name: Title: S-5 BANK OF TOKYO-MITSUBISHI TRUST COMPANY By ------------------------------------------ Name: Title: S-6 WACHOVIA BANK, N.A. By ------------------------------------------ Name: Title: S-7 SUNTRUST BANK By ------------------------------------------ Name: Title: S-8 MIZUHO CORPORATE BANK, LIMITED By ------------------------------------------ Name: Title: S-9 MELLON BANK, N.A. By ------------------------------------------ Name: Title: S-10 PROGRESS ENERGY, INC. By_______________________________ Name: Title: SCHEDULE I PROGRESS ENERGY, INC. List of Commitments and Applicable Lending Offices Eurodollar Domestic Name of Bank Lending Office Lending Office Commitment ------------ -------------- -------------- ---------- Citibank, N.A. Two Pennsway, Ste. 200 Same as Eurodollar Lending $80,526,315.78 New Castle, Delaware 19720 Office Attention: Bank Loan Syndications JPMorgan Chase Bank 270 Park Avenue Same as Eurodollar Lending $80,526,315.78 New York, NY 10017 Office Attention: Bank One, NA 1 Bank One Plaza, Suite 0363 Same as Eurodollar Lending $59,210,526.32 Chicago, Illinois 60670-0363 Office Attention: Robert G. Bussa Bank of America, N.A. Bank of America Plaza Same as Eurodollar Lending $68,684,210.53 901 Main Street Office 14th Floor, TX1-492-14-05 Dallas, Texas 75202-3714 Attention: Nora Taylor Bank of Tokyo-Mitsubishi Trust 1251 Avenue of the Americas Same as Eurodollar Lending $59,210,526.32 Company 12th Floor Office New York, New York 10020-1104 Attention: Nicholas R. Battista Wachovia Bank. N.A. 191 Peachtree St. Same as Eurodollar Lending $42,631,578.95 Atlanta, Georgia 30303 Office Attention: Loan Administration SunTrust Bank 200 South Orange Avenue Same as Eurodollar Lending $23,684,210.53 Orlando, Florida 32801 Office Attention: William Barr Mizuho Corporate Bank, Limited 1251 Avenue of the Americas Same as Eurodollar Lending $23,684,210.53 New York, New York 10020 Office Attention: Loan Administration Mellon Bank, N.A. Three Mellon Center, Rm. 1203 Same as Eurodollar Lending $11,842,105.26 Pittsburgh, Pennsylvania 15259 Office Attention: Brenda Leierzapf
SCHEDULE II Permitted Existing Indebtedness None. EXHIBIT A-1 Form of Notice of Borrowing NOTICE OF BORROWING [Date] Citibank, N.A., as Administrative Agent for the Lenders parties to the Agreement referred to below Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Bank Loan Syndications Ladies and Gentlemen: The undersigned, Progress Energy, Inc. refers to the Amended and Restated Credit Agreement, dated as of July 26, 2002 (the "Agreement", the terms defined therein being used herein as therein defined), among the undersigned, the Lenders thereunder, Citibank, N.A., as administrative agent for the Lenders, and SunTrust Bank, as issuing Bank for Letters of Credit issued thereunder, and hereby gives you notice pursuant to Section 2.03 of the Agreement that the undersigned hereby requests a Borrowing under the Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Agreement: (i) The Business Day of the Proposed Borrowing is ___________, 20____. (ii) The Type of Advances comprising the Proposed Borrowing is [Base Rate Advances][Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Borrowing is $________. (iv) The Interest Period for each Eurodollar Rate Advance that is an Advance made as part of the Proposed Borrowing is months. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (i) the representations and warranties contained in Section 4.01 of the Agreement are correct, before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (ii) no event has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. Very truly yours, PROGRESS ENERGY, INC. By --------------------------------------------- Name: Title: EXHIBIT A-2 Form of Notice of Conversion NOTICE OF CONVERSION [Date] Citibank, N.A., as Administrative Agent for the Lenders parties to the Agreement referred to below Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Bank Loan Syndications Ladies and Gentlemen: The undersigned, Progress Energy, Inc. refers to the Amended and Restated Credit Agreement, dated as of July 26, 2002 (the "Agreement", the terms defined therein being used herein as therein defined), among the undersigned, the Lenders thereunder, Citibank, N.A., as administrative agent for the Lenders, and SunTrust Bank, as issuing bank for the Letters of Credit issued thereunder, and hereby gives you notice pursuant to Section 2.10 of the Agreement that the undersigned hereby requests a Conversion under the Agreement, and in that connection sets forth the terms on which such Conversion (the "Proposed Conversion") is requested to be made: (i) The Business Day of the Proposed Conversion is ______________, 20____. (ii) The Type of, and Interest Period applicable to, the Advances (or portions thereof) proposed to be Converted:_________________. (iii) The Type of Advance to which such Advances (or portions thereof) are proposed to be Converted: ________________________. (iv) Except in the case of a Conversion to Base Rate Advances, the initial Interest Period to be applicable to the Advances resulting from such Conversion: ______________________________. (v) The aggregate amount of Advances (or portions thereof) proposed to be Converted is $_______________________. The undersigned hereby certifies that, on the date hereof, and on the date of the Proposed Conversion, no event has occurred and is continuing, or would result from such Proposed Conversion, that constitutes an Event of Default. Very truly yours, PROGRESS ENERGY, INC. By --------------------------------------------- Name: Title: EXHIBIT B Form of Assignment and Acceptance ASSIGNMENT AND ACCEPTANCE Dated , 20___ Reference is made to the Amended and Restated Credit Agreement, dated as of July 26, 2002 (as amended, modified and supplemented from time to time, the "Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., the Lenders (as defined in the Agreement) thereunder, Citibank, N.A., as administrative agent for the Lenders thereunder (the "Administrative Agent") and SunTrust Bank, as issuing bank for Letters of Credit issued thereunder. (the "Assignor") and (the "Assignee") agree as follows: ---------- ---------- 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Agreement as of the date hereof that represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Agreement, including, without limitation, such interest in the Assignor's Commitment (to the extent it has not been terminated), the Advances owing to the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment (if any) and the amount of the Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Agreement or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Agreement or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) confirms that it has received a copy of the Agreement, together with copies of the financial statements referred to in Section 4.01(e) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Agreement are required to be performed by it as a Lender; [and] (vi) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (vii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Agreement or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty].(1) 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Agreement in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Agreement for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] - ----------------------- (1) If the Assignee is organized under the laws of a jurisdiction outside the United States. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. [NAME OF ASSIGNOR] [NAME OF ASSIGNEE] By______________________ By______________________ Name: Name: Title: Title: Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Accepted this day of , 20 ---- ------------ --- CITIBANK, N.A., as Administrative Agent By_________________________ Name: Title: SUNTRUST BANK, as Issuing Bank By_________________________ Name: Title: PROGRESS ENERGY, INC.(2) By__________________________ Name: Title: - ----------------- (2) If required. SCHEDULE 1 TO ASSIGNMENT AND ACCEPTANCE Dated , 20____ Section 1 Percentage Interest Assigned: % ------ Section 2 Assignee's Commitment(3): $ Aggregate Outstanding Principal Amount of Advances owing to Assignee [specify Facility]: $ Section 3 Effective Date(4) - ------------------ (3) For use in connection with the Extension. (4) This date should be no earlier than the date of acceptance by the Administrative Agent. EXHIBIT C-1 Form of Opinion of General Counsel to The Company July 26, 2002 To each of the Lenders parties to the Agreement referred to below, Citibank, N.A., as Administrative Agent, and SunTrust Bank, as Issuing Bank Re: Progress Energy, Inc. Ladies and Gentlemen: This opinion is furnished to you by me as General Counsel to Progress Energy, Inc. (the "Borrower") pursuant to Section 3.01(g) of the Amended and Restated Credit Agreement, dated as of July 26, 2002 (the "Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain lenders thereunder (the "Lenders"), Citibank, N.A., as administrative agent for the Lenders, and SunTrust Bank, as issuing bank for Letters of Credit issued thereunder. In connection with the preparation, execution and delivery of the Agreement, I have examined: (1) The Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Agreement. (3) The Amended and Restated Articles of Incorporation of the Borrower (the "Charter"). (4) The By-Laws of the Borrower and all amendments thereto (the "By-Laws"). I have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as I have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, I have, when relevant facts were not independently established by me, relied upon certificates of the Borrower or its officers or of public officials. I have assumed the authenticity of all documents submitted to me as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of signatures (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. For purposes of my opinions expressed in paragraph 1 below as to existence and good standing, I have relied as of their respective dates on certificates of public officials, copies of which are attached hereto as Exhibit A. Whenever the phrase "to my knowledge" is used in this opinion it refers to my actual knowledge and the actual knowledge of the attorneys who work under my supervision and who were involved in the representation of the Borrower in connection with the transactions contemplated by the Agreement. I or attorneys working under my supervision are qualified to practice law in the States of North Carolina and Florida, and the opinions expressed herein are limited to the law of the States of North Carolina and Florida, the Federal law of the United States and, in reliance on a certificate issued by the Secretary of State of South Carolina and attached hereto as part of Exhibit A, the laws of the State of South Carolina for purposes of the first sentence of opinion paragraph 1 below. Based upon the foregoing and upon such investigation as I have deemed necessary, I am of the following opinion: 1. Each of the Borrower and CP&L is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina, and CP&L is duly qualified to do business and in good standing in the State of South Carolina. Each of Florida Power and FPC is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. Progress Capital is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. The Borrower has the corporate power and authority to enter into the transactions contemplated by the Agreement. 2. The execution, delivery and performance of the Agreement by the Borrower have been duly authorized by all necessary corporate action on the part of the Borrower and the Agreement has been duly executed and delivered by the Borrower. 3. The execution, delivery and performance of the Agreement by the Borrower will not (i) violate the Charter or the By-Laws or any law, rule or regulation applicable to the Borrower (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or (ii) result in a breach of, or constitute a default under, any judgment, decree or order binding on the Borrower, or any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound. 4. No authorization, approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of the Agreement, other than the SEC Order, which has been duly issued and is in full force and effect. 5. To my knowledge, except as described in the reports and registration statements that the Borrower, CP&L, FPC and Florida Power have filed with the Securities and Exchange Commission, there are no pending or overtly threatened actions or proceedings against the Borrower or any of such Subsidiaries before any court, governmental agency or arbitrator, that may materially adversely affect the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. The opinions set forth above are subject to the qualification that no opinion is expressed herein as to the enforceability of the Agreement or any other document. The foregoing opinions are solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Agreement after the date hereof and (ii) Hunton & Williams and King & Spalding, in connection with their respective opinions delivered on the date hereof under Section 3.01 of the Agreement. Very truly yours, EXHIBIT C-2 Form of Opinion of Special Counsel for the Company July 26, 2002 To each of the Lenders parties to the Agreement referred to below, Citibank, N.A., as Administrative Agent, and SunTrust Bank, as Issuing Bank Re: Progress Energy, Inc. Ladies and Gentlemen: This opinion is furnished to you by us as counsel for Progress Energy, Inc. (the "Borrower") pursuant to Section 3.01(g) of the Amended and Restated Credit Agreement, dated as of July 26, 2002 (the "Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain lenders thereunder (the "Lenders"), Citibank, N.A., as administrative agent for the Lenders, and SunTrust Bank, as issuing bank for Letters of Credit issued thereunder. In connection with the preparation, execution and delivery of the Agreement, we have examined: (1) The Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Agreement. (3) The opinion letter of even date herewith, addressed to you by William D. Johnson, General Counsel to the Company and delivered in connection with the transactions contemplated by the Agreement (the "Company Opinion Letter"). We have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as we have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, we have, when relevant facts were not independently established by us, relied upon certificates of the Borrower or its officers or of public officials. We have assumed the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the originals (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. Whenever the phrase "to our knowledge" is used in this opinion it refers to the actual knowledge of the attorneys of this firm involved in the representation of the Borrower without independent investigation. We are qualified to practice law in the States of North Carolina, Florida and New York, and the opinions expressed herein are limited to the law of the States of North Carolina, Florida and New York and the federal law of the United States. To the extent that our opinions expressed herein depend upon opinions expressed in paragraphs 1 through 4 of the Company Opinion Letter, we have relied without independent investigation on the accuracy of the opinions expressed in the Company Opinion Letter, subject to the assumptions, qualifications and limitations set forth in the Company Opinion Letter. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the opinion that the Agreement constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms except as enforcement may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting the rights of creditors generally and (b) principles of equity, whether considered at law or in equity. The opinion set forth above is subject to the following qualifications: (a) In addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (b) No opinion is expressed herein as to (i) Section 8.05 of the Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (c) No opinion is expressed herein as to provisions, if any, in the Agreement, which (A) purport to excuse, release or exculpate a party for liability for or indemnify a party against the consequences of its own acts, (B) purport to make void any act done in contravention thereof, (C) purport to authorize a party to make binding determinations in its sole discretion, (D) relate to the effects of laws which may be enacted in the future, (E) require waivers, consents or amendments to be made only in writing, (F) purport to waive rights of offset or to create rights of set off other than as provided by statute, or (G) purport to permit acceleration of indebtedness and the exercise of remedies by reason of the occurrence of an immaterial breach of the Agreement or any related document. Further, we express no opinion as to the necessity for any Lender, by reason of such Lender's particular circumstances, to qualify to transact business in the State of New York or as to any Lender's liability for taxes in any jurisdiction. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Agreement after the date hereof in accordance with the provisions thereof and (ii) King & Spalding, in connection with their opinion delivered on the date hereof under Section 3.01 of the Agreement. Very truly yours, EXHIBIT D Form of Opinion of Counsel to the Administrative Agent and the Lead Arranger July 26, 2002 To each of the Lenders parties to the Agreement referred to below, Citibank, N.A. ("Citibank"), as Administrative Agent, and SunTrust Bank, as Issuing Bank Re: Progress Energy, Inc. Ladies and Gentlemen: We have acted as counsel to the Administrative Agent and the Lead Arranger in connection with the preparation, execution and delivery of the Amended and Restated Credit Agreement, dated as of July 26, 2002 (the "Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., the Lenders thereunder, Citibank, N.A., as administrative agent for the Lenders, and SunTrust Bank, as issuing bank for Letters of Credit issued thereunder. In this connection, we have examined the following documents: 1. a counterpart of the Agreement, executed by the parties thereto; 2. the documents furnished by or on behalf of the Borrower pursuant to subsections (b) through (g) of Section 3.01 of the Agreement, including, without limitation, the opinion of Hunton & Williams (the "Borrower Opinion"). In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that you have independently evaluated, and are satisfied with, the creditworthiness of the Borrower and the business terms reflected in the Agreement. We have relied, as to factual matters, on the documents we have examined. To the extent that our opinions expressed below involve conclusions as to matters governed by law other than the law of the State of New York, we have relied upon the Borrower Opinion and have assumed without independent investigation the correctness of the matters set forth therein, our opinions expressed below being subject to the assumptions, qualifications and limitations set forth in the Borrower Opinion. Based upon and subject to the foregoing, and subject to the qualifications set forth below, we are of the opinion that the Agreement is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. Our opinion is subject to the following qualifications: (b) The enforceability of the Borrower's obligations under the Agreement is subject to the effect of any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar law affecting creditors' rights generally. (c) The enforceability of the Borrower's obligations under the Agreement is subject to the effect of general principles of equity, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law). Such principles of equity are of general application, and, in applying such principles, a court, among other things, might not allow a contracting party to exercise remedies in respect of a default deemed immaterial, or might decline to order an obligor to perform covenants. (d) We note further that, in addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (e) We express no opinion herein as to (i) the enforceability of Section 8.05 of the Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws, or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (f) Our opinions expressed above are limited to the law of the State of New York, and we do not express any opinion herein concerning any other law. The foregoing opinion is solely for your benefit and may not be relied upon by any other person or entity. Very truly yours, EXHIBIT E Form of Compliance Certificate [Letterhead of Progress Energy, Inc.] [Date] To each of the Lenders parties to the Agreement referred to below, Citibank, N.A., as Administrative Agent, and SunTrust Bank, as Issuing Bank Progress Energy, Inc. Ladies and Gentlemen: This compliance certificate is furnished to you pursuant to Section 5.01(i)(ii) of the Amended and Restated Credit Agreement, dated as of July 26, 2002 (the "Agreement"), among Progress Energy, Inc., a North Carolina corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks"), Citibank, N.A. ("Citibank"), as administrative agent (the "Administrative Agent") for the Lenders (as hereinafter defined), and SunTrust Bank, as issuing bank for Letters of Credit issued thereunder. Terms defined in the Agreement are used herein as therein defined. 1. As of [_______], 2001, the ratio of Consolidated Indebtedness of the Borrower and its Subsidiaries to Total Capitalization was _____ to 1.0, calculated, in accordance with Section 5.01(j) of the Agreement, as follows: A. Indebtedness as of such date was $________, calculated as follows: Current Indebtedness: Amount ------ [List all forms of current Debt] ---------------------------------- $ ---------------------------------- ---------------------------------- --------- Total current Indebtedness $________ Long-term Indebtedness : Amount ------ [list all forms of long-term Indebtedness ] ---------------------------------- $ ---------------------------------- ---------------------------------- -------- Total long-term Indebtedness $________ Total Indebtedness (current Indebtedness plus $________ ---- long-term Indebtedness ) B. Total Capitalization as of such date was $_____, calculated as follows: Consolidated Indebtedness $ Preferred Stock $ Common Stock $ Retained Earnings $________ 2. As of [_______], 2001, and as of the date hereof, no Event of Default and no event that, with the giving of notice or lapse of time or both, will constitute an Event of Default, has occurred and in continuing. I hereby certify that the calculations set forth in paragraph 1 hereof were prepared in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e) of the Agreement. Very truly yours, PROGRESS ENERGY, INC. By______________________________________ Name: Title: EX-10 4 pei_10qexhibit10ii.txt EXHIBIT 10(II) EXECUTION COPY ASSUMPTION AGREEMENT as of December 17, 2001 Reference is made to the 364-Day Credit Agreement, dated as of November 13, 2001 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among Progress Energy, Inc., a North Carolina corporation (the "Borrower"), the lenders party thereto and Citibank, N.A., as administrative agent for such lenders (the "Administrative Agent"). Unless otherwise defined herein, terms defined in the Credit Agreement are used herein with the same meanings. BARCLAYS BANK PLC (the "Additional Lender") and the Borrower hereby agree as follows: (a) The Additional Lender hereby agrees, that effective as of December 18, 2001 (the "Effective Date"), and subject to the satisfaction, on or prior to the Effective Date of the conditions set forth in clauses (A)(2), (A)(3) and (B) of Section 2.04(b)(ii) of the Credit Agreement, (i) the Additional Lender will become a Lender under the Credit Agreement, (ii) the Commitment of the Additional Lender will be $50,000,000, and (iii) the Additional Lender will be bound by all the terms and provisions of the Credit Agreement binding upon each Lender, including, without limitation, Section 2.04(b)(iii). (b) The Borrower consents to the foregoing and agrees to deliver to the Administrative Agent, on or prior to the Effective Date, the evidence of corporate authorization, opinions and certificates described in clauses (A)(2) and (A)(3) of Section 2.04(b)(ii) of the Credit Agreement. (c) THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. (d) This Assumption Agreement may be signed in any number of counterparts, each of which shall be deemed an original, with the same effect as if the signatures thereto and hereto were up on the same instrument. [Remainder of page intentionally left blank.] S-1 IN WITNESS WHEREOF, the parties hereto have caused this Assumption Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. BARCLAYS BANK PLC By ---------------------------------------- Name: Title: Eurodollar Lending Office: ----------------------------------- ----------------------------------- Attn.: ------------------------ (---) -------- Domestic Lending Office (and address for notices): ----------------------------------- ----------------------------------- Attn.: ------------------------ (---) -------- PROGRESS ENERGY, INC. By ---------------------------------------- Name: Title: Address for Notices: 410 S. Wilmington Street PEB 19A3 Raleigh, NC 27601 Telecopier No.: 919/546-7826 Telephone No.: 919/546-2924 E-mail: charles.beuris@pgnmail.com Attention: Director of Financial Operations, Treasury Department Accepted this day of December, 2001 ---- CITIBANK, N.A., as Administrative Agent By ----------------------------------------- Name: Title: EX-10 5 pei_10qexhibit10iii-.txt EXHIBIT 10(III) CONFORMED COPY - -------------------------------------------------------------------------------- (364-day) $272,500,000 CREDIT AGREEMENT Dated as of July 31, 2002 CAROLINA POWER & LIGHT COMPANY (Company) and THE BANKS LISTED ON THE SIGNATURE PAGES HEREOF (Banks) and THE OTHER LENDERS FROM TIME TO TIME PARTY HERETO (Lenders) and CITIBANK, N.A. (Administrative Agent) - -------------------------------------------------------------------------------- WACHOVIA BANK, NATIONAL ASSOCIATION Syndication Agent TABLE OF CONTENTS Section Page Article I DEFINITIONS AND ACCOUNTING TERMS........................1 Section 1.01. Certain Defined Terms..............................1 Section 1.02. Computation of Time Periods.......................10 Section 1.03. Accounting Terms..................................10 Article II AMOUNTS AND TERMS OF THE ADVANCES......................10 Section 2.01. The Advances......................................10 Section 2.02. Making the Advances...............................10 Section 2.03. Facility Fee......................................12 Section 2.04. Changes in the Commitments........................12 Section 2.05. Repayment of Advances.............................14 Section 2.06. Evidence of Indebtedness..........................14 Section 2.07. Interest on Advances..............................15 Section 2.08. Additional Interest on Eurodollar Rate Advances...15 Section 2.09. Interest Rate Determination.......................16 Section 2.10. Voluntary Conversion of Advances..................17 Section 2.11. Prepayments of Advances...........................17 Section 2.12. Increased Costs...................................18 Section 2.13. Illegality........................................19 Section 2.14. Payments and Computations.........................19 Section 2.15. Sharing of Payments, Etc..........................20 Section 2.16. Extension of the Revolving Period.................20 Section 2.17. Term Loan Conversion Option.......................22 Article III CONDITIONS OF LENDING..................................22 Section 3.01. Conditions Precedent to Closing...................22 Section 3.02. Conditions Precedent to Each Borrowing and to the Exercise of the Term Loan Conversion Option.......23 Article IV REPRESENTATIONS AND WARRANTIES.........................24 Section 4.01. Representations and Warranties of the Company.....24 Article V COVENANTS OF THE COMPANY...............................26 Section 5.01. Affirmative Covenants.............................26 Section 5.02. Negative Covenants................................28 Article VI EVENTS OF DEFAULT......................................29 Section 6.01. Events of Default.................................29 Article VII THE ADMINISTRATIVE AGENT...............................31 Section 7.01. Authorization and Action..........................31 Section 7.02. Administrative Agent's Reliance, Etc..............31 Section 7.03. The Administrative Agent and its Affiliates.......32 Section 7.04. Lender Credit Decision............................32 Section 7.05. Indemnification...................................32 Section 7.06. Successor Administrative Agent....................33 Article VIII MISCELLANEOUS..........................................33 Section 8.01. Amendments, Etc...................................33 Section 8.02. Notices, Etc......................................34 Section 8.03. No Waiver; Remedies...............................34 Section 8.04. Costs, Expenses and Taxes.........................34 Section 8.05. Right of Set-off..................................37 Section 8.06. Binding Effect....................................37 Section 8.07. Assignments and Participations....................37 Section 8.08. Governing Law.....................................41 Section 8.09. WAIVER OF JURY TRIAL..............................41 Section 8.10. Execution in Counterparts.........................41 Section 8.11. Severability......................................42 Section 8.12. Headings..........................................42 Section 8.13. Entire Agreement..................................42 SCHEDULES I Existing Facilities EXHIBITS A-1 Form of Notice of Borrowing A-2 Form of Notice of Conversion B Form of Assignment and Acceptance C-1 Form of Opinion of General Counsel for the Company C-2 Form of Opinion of Counsel for the Company C-3 Form of Opinion of General Counsel for the Company upon Extension of the Revolving Period and Exercise of the Term Loan Conversion Option C-4 Form of Opinion of Counsel for the Company upon Extension of the Revolving Period and Exercise of the Term Loan Conversion Option D Form of Opinion of Counsel for the Administrative Agent E Form of Request for Extension of the Revolving Period F Form of Term Loan Conversion Notice G Form of Assumption Agreement CREDIT AGREEMENT Dated as of July 31, 2002 CAROLINA POWER & LIGHT COMPANY, a North Carolina corporation (the "Company"), the banks listed on the signature pages hereof (the "Banks") and CITIBANK, N.A. ("Citibank"), as administrative agent (the "Administrative Agent") for the Lenders (as hereinafter defined) hereunder. Article I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Administrative Agent" has the meaning specified in the introductory paragraph hereof. "Advance" means an advance by a Lender to the Company as part of a Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of Advance. Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by, or is under common control with such Person or is a director or officer of such Person. "Applicable Lending Office" means, with respect to each Lender, (i) such Lender's Domestic Lending Office in the case of a Base Rate Advance, or (ii) such Lender's Eurodollar Lending Office, in the case of a Eurodollar Rate Advance. "Applicable Margin" means on any date, the rate per annum set forth below for the applicable Type of Advance, determined by reference to the ratings assigned to the Reference Securities: - -------------------------------------------------------------------------------------------------------------------------------- LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 LEVEL 5 LEVEL 6 Basis for If the If the If the Reference If the Reference If the Reference If the Reference Pricing Reference Reference Securities are Securities are rated Securities are rated Securities are rated Securities Securities rated lower than lower than Level 3 lower than Level 4 lower than Level 5 are rated are rated Level 2 but at but at least BBB by but at least BBB- by or unrated at least A lower than least BBB+ by Standard & Poor's or Standard & Poor's by Standard Level 1 but Standard & at least Baa2 by and at least Baa3 by & Poor's or at least A- Poor's or at Moody's Moody's at least A2 by Standard least Baa1 by by Moody's & Poor's or Moody's at least A3 by Moody's - -------------------------------------------------------------------------------------------------------------------------------- Eurodollar 0.295% 0.525% 0.750% 0.850% 1.050% 1.700% Rate - -------------------------------------------------------------------------------------------------------------------------------- Base Rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.700% - --------------------------------------------------------------------------------------------------------------------------------
The Applicable Margin will increase by (i) 0.125% for Levels 1, 2 and 3, (ii) 0.25% for Levels 4 and 5 and (iii) 0.50% for Level 6 at any time that more than 33% of the Commitments are utilized. The Applicable Margin will be redetermined on the date of any change in the rating assigned by Standard & Poor's or Moody's, as the case may be, to the Reference Securities. If and so long as an Event of Default shall have occurred and shall be continuing, the Applicable Margin will increase by 2.00%. If the ratings assigned to the Reference Securities by Standard & Poor's and Moody's are not comparable (i.e., a "split rating"), and (i) the ratings differential is one category, the higher of such two ratings shall control, unless either rating is below BBB- (in the case of Standard & Poor's) or Baa3 (in the case of Moody's), in which case the lower of such two ratings shall control, or (ii) the ratings differential is two or more categories, the rating that is one below the higher of the two ratings shall control, unless either rating is below BBB- (in the case of Standard & Poor's) or Baa3 (in the case of Moody's), in which case the lower of such two ratings shall control. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit B hereto. "Assuming Lender" means any Eligible Assignee not previously a Lender that becomes a Lender hereunder pursuant to Section 2.04(b). "Bank" has the meaning specified in the introductory paragraph hereof. "Base Rate" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the higher from time to time of: 2 (i) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; and (ii) 1/2 of one percent per annum above the Federal Funds Rate in effect from time to time. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.07(a). "Business Day" means a day of the year on which banks are not required or authorized to close at the principal office of any Lender and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Change of Control" means the occurrence, after the date of this Agreement, of (i) any Person or "group" (within the meaning of Rule 13(d) or 14(d) of the Securities and Exchange Commission under the Exchange Act), directly or indirectly, acquiring beneficial ownership of or control over securities of Progress Energy, Inc., representing in excess of 30% of the combined voting power of all securities of Progress Energy, Inc. entitled to vote in the election of directors of Progress Energy, Inc. or (ii) Progress Energy, Inc. shall fail to own, directly or indirectly, 95% of all securities of the Company entitled to vote in the election of directors of the Company. "Citibank" has the meaning specified in the introductory paragraph hereof. "Commitment" has the meaning specified in Section 2.01. "Commitment Increase" has the meaning assigned to that term in Section 2.04(b). "Commitment Increase Date" has the meaning set forth in Section 2.04(b). "Company" has the meaning specified in the introductory paragraph hereof. "Consolidated" refers to the consolidation of the accounts of the Company and the Subsidiaries in accordance with generally accepted accounting principles, including principles of consolidation, consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type, or the selection of a new, or the renewal of the same, Interest Period for Eurodollar Rate Advances, pursuant to Section 2.09 or 2.10. "Declining Lender" has the meaning assigned to that term in Section 2.16. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" below its 3 name on the signature pages hereof or such other office of such Lender as such Lender may from time to time specify to the Company and the Administrative Agent. "Eligible Assignee" means (i) any other Lender or any Affiliate of a Lender and (ii) (A) any other commercial bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator), (B) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator), (C) a commercial bank organized under the laws of any other country which is a member of the OECD or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow of the Cayman Islands, or a political subdivision of any such country, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator); provided that such bank is acting through a branch or agency located in the United States or in the country in which it is organized or another country which is described in this clause (C), (D) the central bank of any country which is a member of the OECD, and (E) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership or other entity) which is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business, whose outstanding unsecured indebtedness is rated AA- or better by S&P or Aa3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured indebtedness); provided, that, in the case of any such Person described in this clause (ii), the identity of such Person is notified by the proposed assignor to the Company and the Administrative Agent (or by the Company to the Administrative Agent pursuant to Section 8.07(f)) in writing at least ten Business Days prior to the date of the proposed assignment under Section 8.07 and is consented to in writing by the Company and the Administrative Agent (each of which shall not unreasonably withhold their respective consents) at least five Business Days prior to the date of such proposed assignment. "Environmental Laws" means any federal, state or local laws, ordinances or codes, rules, orders, or regulations relating to pollution or protection of the environment, including, without limitation, laws relating to hazardous substances, laws relating to reclamation of land and waterways and laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollution, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. 4 "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to each Lender, the office of such Lender specified as its "Eurodollar Lending Office" below its name on the signature pages hereof (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Company and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1/8 of 1% per annum, if such average is not such a multiple) of the rates per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London Interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period for a period equal to such Interest Period and in an amount substantially equal to the amount of such Eurodollar Rate Advance comprising part of such Borrowing to be outstanding during such Interest Period from such Reference Bank. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing shall be determined by the Administrative Agent on the basis of the applicable rates furnished to and received by the Administrative Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.08. "Eurodollar Rate Advance" means an Advance that bears interest as provided in Section 2.07(b). "Eurodollar Rate Reserve Percentage" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning assigned to that term in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934, and the regulations promulgated thereunder, in each case as amended and in effect from time to time. "Existing Facilities" refers to those credit agreements listed on Schedule 1 hereto. 5 "Extension Date" means at any time the last day of the Revolving Period then in effect. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "First Mortgage Bonds" means those bonds issued by the Company pursuant to the Mortgage. "Guaranty" of any Person means any obligation, contingent or otherwise, of such Person (i) to pay any Liability of any other Person or to otherwise protect, or having the practical effect of protecting, the holder of any such Liability against loss (whether such obligation arises by virtue of such Person being a partner of a partnership or participant in a joint venture or by agreement to pay, to keep well, to purchase assets, goods, securities or services or to take or pay, or otherwise) or (ii) incurred in connection with the issuance by a third Person of a Guaranty of any Liability of any other Person (whether such obligation arises by agreement to reimburse or indemnify such third Person or otherwise). The word "Guarantee" when used as a verb has the correlative meaning. "Increasing Commitment Lender" has the meaning assigned to that term in Section 2.16(b). "Increasing Lender" means any Lender that agrees to increase its Commitment pursuant to Section 2.04(b). "Indebtedness" of any Person means (i) any obligation of such Person for borrowed money, (ii) any obligation of such Person evidenced by a bond, debenture, note or other similar instrument, (iii) any obligation of such Person to pay the deferred purchase price of property or services, except a trade account payable that arises in the ordinary course of business but only if and so long as the same is payable on customary trade terms, (iv) any obligation of such Person as lessee under a capital lease, (v) any Mandatorily Redeemable Stock of such Person (the amount of such Mandatorily Redeemable Stock to be determined for this purpose as the higher of the liquidation preference and the amount payable upon redemption of such Mandatorily Redeemable Stock), (vi) any obligation of such Person to purchase securities or other property that arises out of or in connection with the sale of the same or substantially similar securities or property, (vii) any non-contingent obligation of such Person to reimburse any other Person in respect of amounts paid under a letter of credit or other Guaranty issued by such other Person to the extent that such reimbursement obligation remains outstanding after it becomes non-contingent, (viii) any Indebtedness of others secured by (or for which the holder of such 6 Indebtedness has an existing right, contingent or otherwise, to be secured by) a mortgage, lien, pledge, charge or other encumbrance on any asset of such Person, (ix) any Liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA, and (x) any Indebtedness of others Guaranteed by such Person. "Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Advance or the Conversion of any Advance to such Advance and ending on the last day of the period selected by the Company pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Company pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as the Company may, in the Notice of Borrowing given by the Company to the Administrative Agent pursuant to Section 2.02, select; provided, however, that: (i) the Company may not select any Interest Period that ends after the Commitment Termination Date; (ii) Interest Periods commencing on the same date for Advances comprising the same Borrowing shall be of the same duration; and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day; provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. The Administrative Agent shall promptly advise each Lender by telex, telecopy transmission or cable of each Interest Period so selected by the Company. "Lenders" means the Lenders listed on the signature pages hereof, each Assuming Lender and each Eligible Assignee that shall become a party hereto pursuant to Section 8.07. "Liability" of any Person means any indebtedness, liability or obligation of or binding upon, such Person or any of its assets, of any kind, nature or description, direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, whether arising under contract, applicable law, or otherwise, whether now existing or hereafter arising. "Majority Lenders" means at any time Lenders holding at least 66-2/3% of the then aggregate unpaid principal amount of the Advances, or, if no such principal amount is then outstanding, Lenders having at least 66-2/3% of the Commitments (provided that, for purposes hereof, neither the Company, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders holding such amount of the Advances or having such amount of the Commitments or (ii) determining the aggregate unpaid principal amount of the Advances or the total Commitments). 7 "Mandatorily Redeemable Stock" means, with respect to any Person, any share of such Person's capital stock to the extent that it is (i) redeemable, payable or required to be purchased or otherwise retired or extinguished, or convertible into any Indebtedness or other Liability of such Person, (ii) at a fixed or determinable date, whether by operation of a sinking fund or otherwise, (iii) at the option of any Person other than such Person or (iv) upon the occurrence of a condition not solely within the control of such Person, such as a redemption required to be made out of future earnings or (v) convertible into Mandatorily Redeemable Stock. "Moody's" means Moody's Investors Service, Inc., or any successor thereto. "Mortgage" means the Mortgage and Deed of Trust, dated as of May 1, 1940, from the Company to The Bank of New York (formerly Irving Trust Company) and to Frederick G. Herbst (W.T. Cunningham, successor), as modified, amended or supplemented from time to time. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "NCUC Order" means the order by the North Carolina Utilities Commission that authorizes the Company to execute, deliver and perform this Agreement. "Notice of Borrowing" has the meaning specified in Section 2.02(a). "Notice of Conversion" has the meaning specified in Section 2.10. "OECD" means the Organization for Economic Cooperation and Development. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Plan" means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Company or any of its Affiliates and covered by Title IV of ERISA. "Reference Banks" means Citibank and Wachovia Bank, National Association. "Reference Securities" means the long-term unsecured senior, non-credit enhanced debt of the Company. "Register" has the meaning specified in Section 8.07(c). "Responsible Officer" means the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller or any Assistant Treasurer of the Company the signatures of whom, in each case, have been certified to the Administrative Agent and each other Bank pursuant to 8 Section 3.01(d), or in a certificate delivered to the Administrative Agent replacing or amending such certificate. Each Lender may conclusively rely on each certificate so delivered until it shall have received a copy of a certificate from the Secretary or an Assistant Secretary of the Company amending, canceling or replacing such certificate. "Revolving Period" means the period beginning on the date hereof and ending on July 30, 2003, or, as to any Lender other than any Declining Lender, such later date as to which the Lenders may from time to time agree pursuant to Section 2.16. "S&P" means Standard & Poor's Ratings Group, or any successor thereto. "SCPSC Order" means the order by the South Carolina Public Service Commission that authorizes the Company to execute, deliver and perform this Agreement. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether at the time capital stock (or comparable interest) of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by said Person (whether directly or through one or more other Subsidiaries). "Term Loan Conversion Notice" has the meaning assigned to that term in Section 2.17. "Term Loan Conversion Option" means the option of the Company to convert the Advances into term loans in accordance with Section 2.17. "Termination Date" means the earlier to occur of (i) the last day of the Revolving Period, or, if the Company shall have exercised the Term Loan Conversion Option, the first anniversary of the last day of the Revolving Period, and (ii) the date of termination or reduction in whole of the Commitments pursuant to Section 2.04(a) or 6.01. "Termination Event" means (i) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation under such regulations), or (ii) the withdrawal of the Company or any of its Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the Pension Benefit Guaranty Corporation, or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Total Capitalization" means the sum of the value of the common stock, retained earnings, and preferred and preference stock of the Company (in each case, determined in accordance with generally accepted accounting 9 principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e)), plus Consolidated Indebtedness of the Company. Section 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Section 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). Article II AMOUNTS AND TERMS OF THE ADVANCES Section 2.01. The Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Advances to the Company from time to time on any Business Day during the period from the date hereof to but excluding the last day of the Revolving Period, in an aggregate amount outstanding not to exceed at any time the amount set opposite such Lender's name on the signature pages hereof or, if such Lender has entered into any Assignment and Acceptance or is an Assuming Lender, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c), as such amount may be reduced or increased pursuant to Section 2.04 (such Lender's "Commitment"). Each Borrowing shall be in an aggregate amount not less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Advances of the same Type made on the same day by the Lenders ratably according to their respective Commitments. Until the last day of the Revolving Period, within the limits of each Lender's Commitment, the Company may from time to time borrow, repay pursuant to Section 2.05 or prepay pursuant to Section 2.11(b) and reborrow under this Section 2.01. Section 2.02. Making the Advances. (a) Each Borrowing shall be made on notice, given not later than 11:00 A.M. (New York City time) on the day of such proposed Borrowing, in the case of a Borrowing comprised of Base Rate Advances, or on the third Business Day prior to the date of the proposed Borrowing, in the case of a Borrowing comprised of Eurodollar Rate Advances, by the Company to the Administrative Agent, which shall give to each Lender prompt notice thereof by telex, telecopier or cable. Each such notice of a Borrowing (a "Notice of Borrowing") shall be by telex, telecopier or cable, confirmed promptly in writing, in substantially the form of Exhibit A-1 hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing comprised of Eurodollar Rate 10 Advances, the Interest Period for each such Advance. In the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the Administrative Agent shall promptly notify each Lender of the applicable interest rate under Section 2.07(b). Each Lender shall, before 12:00 P.M. (New York City time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Company at the Administrative Agent's aforesaid address. (b) Each Notice of Borrowing shall be irrevocable and binding on the Company and, in respect of any Borrowing comprised of Eurodollar Rate Advances, the Company shall indemnify each Lender against any loss or expense incurred by such Lender as a result of any failure by the Company to fulfill on or before the date specified for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (c) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the Company severally agree to repay to the Administrative Agent (without duplication), forthwith on demand, such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Company until the date such amount is repaid to the Administrative Agent, (x) in the case of the Company, at the interest rate applicable at the time to Advances comprising such Borrowing and (y) in the case of such Lender, at the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement. (d) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. (e) If, for any reason, a Borrowing is not made on the date specified in any Notice of Borrowing, the Administrative Agent hereby agrees to repay to each Lender the amount, if any, which such Lender has made available to the Administrative Agent as such Lender's ratable portion of such Borrowing, together with interest thereon for each day from the date such amount is made available to the Administrative Agent until the date such amount is repaid to such Lender, at the Federal Funds Rate. 11 Section 2.03. Facility Fee. The Company agrees to pay to the Administrative Agent for the account of each Lender a facility fee on each Lender's Commitment, irrespective of usage, from the date hereof, in the case of each Bank, and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender, in the case of each other Lender, until the Termination Date, payable quarterly in arrears on the last day of each March, June, September and December during the term of such Lender's Commitment and on the Termination Date, at a rate per annum determined by reference to the ratings assigned to the Reference Securities as set forth below: - --------------------------------------------------------------------------------------------------------- Basis for LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 LEVEL 5 LEVEL 6 Pricing If the If the If the If the If the If the Reference Reference Reference Reference Reference Reference Securities Securities Securities Securities Securities Securities are rated at are rated are rated are rated are rated are rated least A by lower than lower than lower than lower than lower than Standard & Level 1 but Level 2 but Level 3 but Level 4 but Level 5 or Poor's or at at least A- at least at least BBB at least by are Unrated least A2 by by Standard BBB+ by by Standard BBB- and Moody's & Poor's or Standard & & Poor's or Baa3 by at least A3 Poor's or at least Moody's by Moody's at least Baa2 by Baa1 by Moody's Moody's - --------------------------------------------------------------------------------------------------------- Facility Fee 0.080% 0.100% 0.125% 0.150% 0.200% 0.300% - ---------------------------------------------------------------------------------------------------------
The Facility Fee rate will be redetermined on the date of any change in the rating assigned by Standard & Poor's or Moody's, as the case may be, to the Reference Securities. If the ratings assigned to the Reference Securities by Standard & Poor's and Moody's are not comparable (i.e., a "split rating"), and (i) the ratings differential is one category, the higher of such two ratings shall control, unless either rating is below BBB- (in the case of Standard & Poor's) or Baa3 (in the case of Moody's), in which case the lower of such two ratings shall control, or (ii) the ratings differential is two or more categories, the rating that is one below the higher of the two ratings shall control, unless either rating is below BBB- (in the case of Standard & Poor's) or Baa3 (in the case of Moody's), in which case the lower of such two ratings shall control. Section 2.04. Changes in the Commitments. (a) Reduction or Termination of the Commitments. The Company shall have the right, upon at least three Business Days' notice to the Administrative Agent, irrevocably and permanently to terminate in whole or reduce ratably in part the respective Commitments of the Lenders; provided that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount which is less than the aggregate principal amount of the Advances then outstanding; and provided further, that each partial reduction shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof. In addition, on each day on and after the effective date of the Term Loan Conversion Option on which the aggregate Commitments shall exceed the aggregate principal amount of the Advances then outstanding, the Commitments shall automatically and permanently reduce by an amount equal to such excess. 12 (b) Increase of the Commitments. (i) Requests for Increase by Company. The Company may, by notice to the Administrative Agent, propose that the aggregate amount of the Commitments be increased (each such proposed increase being a "Commitment Increase"), effective as of a date (the "Commitment Increase Date") that shall be specified in such notice; provided that: (A) the proposed Commitment Increase in respect of the Commitment of either (i) any Increasing Lender or (ii) any Assuming Lender for each Commitment Increase Date shall be in the aggregate amount of $10,000,000 or a multiple of $1,000,000 in excess thereof; (B) in no event shall the aggregate amount of the Commitments hereunder at any time exceed $287,500,000; (C) no Event of Default or event that, with the giving of notice on the passage of time, or both, would constitute an Event of Default shall have occurred and be continuing on such Commitment Increase Date or shall result from the proposed Commitment Increase; and (D) the representations and warranties contained in Article IV shall be correct on and as of the Commitment Increase Date as if made on and as of such date. (ii) Acceptance of Commitment Increase by the Company. The Company shall deliver the notice described in clause (i) above no later than three Business Days prior to the relevant Commitment Increase Date, which notice shall specify the identities of each Increasing Lender and Assuming Lender, the amount of the new Commitments to be accepted by each Increasing Lender and Assuming Lender and the relevant Commitment Increase Date (and the Administrative Agent shall give notice thereof to the Lenders, including any Assuming Lenders). The Assuming Lenders, if any, shall become Lenders hereunder as of such Commitment Increase Date, and the Commitments of any Increasing Lenders and such Assuming Lenders shall be increased as of such Commitment Increase Date; provided that: (A) the Administrative Agent shall have received on or prior to 11:00 a.m., New York City time, on such Commitment Increase Date a certificate of a duly authorized officer of the Company stating that each of the applicable conditions to such Commitment Increase set forth in this Section 2.04(b) has been satisfied; (B) with respect to each Assuming Lender, the Administrative Agent shall have received, on or prior to 11:00 a.m., New York City time, on such Commitment Increase Date, an appropriate Assumption Agreement in substantially the form of Exhibit G, duly executed by such Assuming Lender and the Company; and 13 (C) each Increasing Lender shall have delivered to the Administrative Agent, on or prior to 11:00 a.m., New York City time, on such Commitment Increase Date, confirmation in writing satisfactory to the Administrative Agent as to its increased Commitment, with a copy of such confirmation to the Company. (iii) Recordation. Upon receipt by the Administrative Agent of confirmation from a Lender that it is increasing its Commitment hereunder, together with the certificate referred to in clause (ii)(A) above, the Administrative Agent shall (A) record the information contained therein in the Register maintained by the Administrative Agent pursuant to Section 8.07(c) and (B) give prompt notice thereof to the Company. Upon receipt by the Administrative Agent of an Assumption Agreement executed by an Assuming Lender, together with the certificate referred to in clause (ii)(A) above, the Administrative Agent shall, if such Assumption Agreement has been completed and is in substantially the form of Exhibit G, (x) accept such Assumption Agreement, (y) record the information contained therein in the Register maintained by the Administrative Agent and (z) give prompt notice thereof to the Company. (iv) Adjustments of Borrowings upon Effectiveness of Increase. In the event that the Administrative Agent shall have received notice from the Company as to any agreement with respect to a Commitment Increase on or prior to the relevant Commitment Increase Date and the actions provided for in clauses (ii)(A) through (ii)(C) above shall have occurred by 11:00 a.m., New York City time, on such Commitment Increase Date, the Administrative Agent shall notify the Lenders (including any Assuming Lenders) of the occurrence of such Commitment Increase Date promptly on such date by facsimile transmission or electronic messaging system. On the date of such increase, the Company shall each prepay the outstanding Advances (if any) in full, and shall simultaneously borrow new Advances hereunder in an amount equal to such prepayment, so that, after giving effect thereto, the Advances of the Lenders are held ratably by the Lenders in accordance with their respective Commitments (after giving effect to such Commitment Increase). Prepayments made under this clause (iv) shall not be subject to the notice requirements of Section 2.11. Section 2.05. Repayment of Advances. The Company shall repay the principal amount of each Advance made by each Lender on the Termination Date. Section 2.06. Evidence of Indebtedness. Any Lender may request that any Advances made by it be evidenced by one or more promissory notes. In such event, the Company shall prepare, execute and deliver to such Lender one or more notes payable to the order of such Lender (or if requested by such Lender, to such Lender and its assignees) and in a form approved by the Administrative Agent. Thereafter, the Advances evidenced by such notes and interest thereon shall at all times (including after assignment pursuant to Section 8.07) be represented by one or more notes in such form payable to the order of the payee named therein. 14 Section 2.07. Interest on Advances. The Company shall pay interest on the unpaid principal amount of each Advance made by each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, plus the Applicable Margin for Base Rate Advances, payable quarterly in arrears on the last day of each September, December, March, and June and on the date such Base Rate Advance shall be paid in full. (b) Eurodollar Rate Advances. If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the Eurodollar Rate for such Interest Period, plus the Applicable Margin for Eurodollar Rate Advances, payable on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day which occurs during such Interest Period every three months from the first day of such Interest Period. Section 2.08. Additional Interest on Eurodollar Rate Advances. The Company shall pay to each Lender additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Advance. All claims for such additional interest shall be submitted by such Lender to the Company (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within ninety days after the first day of such Interest Period; provided, however, that if a claim is not submitted to the Company within such ninety day period, such Lender shall thereby waive its claim to such additional interest incurred during such ninety-day period but not to any such additional interest incurred thereafter. A certificate as to the amount of such additional interest, submitted to the Company (with a copy to the Administrative Agent) by such Lender, shall be conclusive and binding for all purposes, absent manifest error. Section 2.09. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining the Eurodollar Rate. If any one or more of the Reference Banks shall not furnish such timely information to the Administrative Agent for determination of any such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Administrative Agent shall give prompt notice to the Company and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.07(a) or (b), and the applicable rate, if any, furnished by each Reference Bank for determining the applicable interest rate under Section 2.07(b). 15 (c) If fewer than two Reference Banks furnish timely information to the Administrative Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Administrative Agent shall forthwith notify the Company and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Company and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Company and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Company and the Lenders that the circumstances causing such suspension no longer exist. (e) If the Company shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Administrative Agent will forthwith so notify the Company and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. If an Event of Default shall have occurred and be continuing, each Eurodollar Rate Advance shall automatically Convert into a Base Rate Advance at the end of the Interest Period then in effect for such Eurodollar Rate Advance. (f) On the date on which the aggregate unpaid principal amount of Advances comprising any Borrowing shall be reduced, by prepayment or otherwise, to less than $20,000,000, such Advances shall, if they are Eurodollar Rate Advances, automatically Convert into Base Rate Advances, and on and after such date the right of the Company to Convert such Advances into Eurodollar Advances shall terminate; provided, however, that if and so long as each such Advance shall be of the same Type and have the same Interest Period as Eurodollar Advances comprising another Borrowing or other Borrowings, and the aggregate unpaid principal amount of all Eurodollar Rate Advances shall equal or exceed $20,000,000, the Company shall have the right to continue all such Eurodollar Rate Advances as Advances having such Interest Period. 16 Section 2.10. Voluntary Conversion of Advances. The Company may, on any Business Day prior to the Termination Date (including any date occurring on and after the effectiveness of the Term Loan Conversion Option), upon notice given to the Administrative Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion, in the case of any proposed Conversion into Eurodollar Rate Advances, and on the date of the proposed Conversion, in the case of any proposed Conversion into Base Rate Advances, and subject to the provisions of Sections 2.09 and 2.13 and so long as no Event of Default has occurred and is continuing on the date of such proposed Conversion, Convert all Advances of one Type comprising the same Borrowing into Advances of another Type; provided, however, that any Conversion of any Eurodollar Rate Advances into Base Rate Advances shall be made on, and only on, the last day of an Interest Period for such Eurodollar Rate Advances. Each such notice of a Conversion (a "Notice of Conversion") shall be by telex, telecopier or cable, confirmed promptly in writing, in substantially the form of Exhibit A-2 hereto and shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the aggregate amount of, Type of, and Interest Periods (if any) applicable to the Advances to be Converted, (iii) the Type of Advance to which such Advances (or portions thereof) are proposed to be Converted, and (iv) if such Conversion is into Eurodollar Rate Advances, the duration of the Interest Period for each such Advance. Section 2.11. Prepayments of Advances. (a) The Company shall have no right to prepay any principal amount of any Advances other than as provided in subsection (b) below. (b) The Company may, upon notice given to the Administrative Agent at least two Business Days prior to the proposed prepayment, in the case of any Eurodollar Rate Advance, and on the date of the proposed prepayment, in the case of any Base Rate Advance, and if such notice is given the Company shall, prepay the outstanding principal amounts of the Advances comprising the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the amount prepaid and, in the case of any Eurodollar Rate Advance, any amount payable pursuant to Section 8.04(b); provided, however, that each partial prepayment shall be in an aggregate principal amount not less than $5,000,000 and in integral multiples of $1,000,000 in excess thereof. Section 2.12. Increased Costs. (a) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage), in or in the interpretation of any law or regulation, or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances, then the Company shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for account of such Lender additional amounts sufficient to reimburse such Lender for such increased cost. All claims for increased cost shall be submitted by such Lender to the Company (with a copy to 17 the Administrative Agent) as soon as is reasonably possible and in all events within ninety days after such introduction, such change, or the beginning of such compliance, the occurrence of which resulted in such increased cost, and the Company shall make such payment within five Business Days after notice of such claim is received; provided, however, that if a claim is not submitted to the Company within such ninety-day period, such Lender shall thereby waive its claim to such increased cost incurred during such ninety-day period but not to any such increased cost incurred thereafter. A certificate as to the amount of such increased cost, submitted to the Company (with a copy to the Administrative Agent) by such Lender, shall be conclusive and binding for all purposes, absent manifest error. (b) If any Lender determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type, then, upon demand by such Lender (with a copy of such demand to the Administrative Agent), the Company shall immediately pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder. All claims for such additional amounts shall be submitted by such Lender (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within ninety days after such determination by such Lender, and the Company shall make such payment within five Business Days after notice of such claim is received; provided, however, that if a claim is not submitted to the Company within such ninety-day period, such Lender shall thereby waive its claim to such additional amounts incurred during such ninety-day period but not to any such additional amounts incurred thereafter. A certificate as to such amounts submitted to the Company and the Administrative Agent by such Lender shall be conclusive and binding for all purposes, absent manifest error. Section 2.13. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances (i) the obligation of the Lenders to make Eurodollar Rate Advances, or to Convert Advances into Eurodollar Rate Advances, shall be suspended until the Administrative Agent shall notify the Company and the Lenders that the circumstances causing such suspension no longer exist and (ii) the Company shall forthwith prepay in full all Eurodollar Rate Advances of all Lenders then outstanding, together with interest accrued thereon, unless the Company, within five Business Days of notice from the Administrative Agent, Converts all Eurodollar Rate Advances of all Lenders then outstanding into Base Rate Advances in accordance with Section 2.10. 18 Section 2.14. Payments and Computations. (a) The Company shall make each payment hereunder not later than 11:00 A.M. (New York City time) on the day when due in U.S. dollars to the Administrative Agent at its address referred to in Section 8.02 in same day funds. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or fees (other than pursuant to Section 2.08 or 2.12) ratably to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) All computations of interest based on clause (i) of the definition of "Base Rate" shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or on clause (ii) of the definition of "Base Rate" or of fees payable hereunder shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.08 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period of which such interest or fees are payable. Each determination by the Administrative Agent (or, in the case of Section 2.08, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes. (c) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Unless the Administrative Agent shall have received notice from the Company prior to the date on which any payment is due to the Lenders hereunder that the Company will not make such payment in full, the Administrative Agent may assume that the Company has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Company shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender, together with interest thereon for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent at the Federal Funds Rate. 19 Section 2.15. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances made by it (other than pursuant to Section 2.08 or 2.12) in excess of its ratable share of payments on account of the Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participation in the Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery, together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Company agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.15 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Company in the amount of such participation. Section 2.16. Extension of the Revolving Period. (a) Unless (i) the Termination Date shall have occurred or (ii) the Company shall have exercised the Term Loan Conversion Option in accordance with Section 2.17, at least 30 days but not more than 45 days prior to each Extension Date, the Company may request that the Lenders, by written notice to the Administrative Agent (in substantially the form attached hereto as Exhibit E), consent to a 364-day extension of the Revolving Period. Each Lender shall, in its sole discretion, determine whether to consent to such request and shall notify the Administrative Agent of its determination at least 20 days but not more than 30 days prior to such Extension Date. The failure to respond by any Lender within such time period shall be deemed a denial of such request. The Administrative Agent shall deliver a notice to the Company and the Lenders no later than 15 days prior to such Extension Date of the identity of the Lenders that have consented to such extension (the "Extending Lenders") and the Lenders that have declined such consent (the "Declining Lenders"). If Lenders holding in the aggregate 50% or less of the Commitments have consented to the requested extension, the Revolving Period shall not be extended, and the Commitments of all Lenders shall terminate on the last day of the Revolving Period. (b) If (x) Lenders holding 85% or more of the Commitments have consented to the requested extension or (y) Lenders holding in the aggregate more than 50% but less than 85% of the Commitments have consented to the requested extension and the Company shall have, within 5 Business Days following receipt of the notice from the Administrative Agent described in subsection (a) above, notified the Administrative Agent (which notice shall be irrevocable) that the Company still seeks an extension of the Revolving Period, then subject to the conditions set forth in Section 2.16(c), then the Revolving Period shall be extended as to such Extending Lenders only (and not as to any Declining Lender) for a period of 364 days, and the Commitments of any Declining Lenders shall terminate on the Extension Date (as theretofore in effect), and all Advances of such Declining 20 Lenders shall be repaid to them on such date. If the Company so requests, each Extending Lender shall be given the opportunity at least seven days but not more than 15 days prior to such Extension Date, in each Extending Lender's sole discretion, to commit to increase its Commitment by submission of a written notice setting forth the desired increase in such Extending Lender's Commitment to the Administrative Agent in amounts such that the aggregate Commitments hereunder after giving effect to any such extension and increase in the Commitments shall not exceed the aggregate Commitments immediately prior to such Extension Date. If the Administrative Agent receives commitments to increase the Commitments from the Extending Lenders, which, when aggregated with the existing Commitments, (i) are less than or equal to the Commitments immediately prior to such Extension Date, the Administrative Agent shall accept all such Commitments, (ii) are greater than the Commitments immediately prior to such Extension Date, the Administrative Agent may determine, in its reasonable discretion, which Commitments to accept and the amounts by which each submitting Lender's Commitments shall be increased so that the aggregate Commitments after such Extension Date shall equal the aggregate Commitments immediately prior to such Extension Date (any Lender whose commitment to increase its Commitment hereunder is accepted by the Administrative Agent, an "Increasing Commitment Lender"). If Lenders do not consent to increase the aggregate Commitments to an amount equal to the Commitments immediately prior to such Extension Date, the Company may, at least two days but not more than seven days prior to such Extension Date, request that the Administrative Agent, in its sole discretion, accept the Commitment or Commitments of an Eligible Assignee or Eligible Assignees such that the aggregate Commitments hereunder after such Extension Date shall not be greater than Commitments hereunder immediately prior to such Extension Date. (c) Each such accepted Eligible Assignee and each Increasing Commitment Lender shall deliver a signature page hereto indicating that it is bound by the terms hereof and setting forth its aggregate Commitment hereunder. Such new signature page shall constitute a part hereof upon acceptance by the Administrative Agent and, in the case of any signature page submitted by any Increasing Commitment Lender, shall replace such Increasing Commitment Lender's signature page. Any such extension shall become effective upon the Extension Date then in effect, if the Company shall have delivered to the Administrative Agent and each Lender, on or prior to such Extension Date, opinions of counsel to the Company substantially in the forms of Exhibit C- 3 and Exhibit C-4 attached hereto upon which each Lender and the Administrative Agent may rely, together with any governmental order referred to therein attached thereto. Upon satisfaction of such condition and the effectiveness of such extension, each new Lender and Increasing Commitment Lender shall make Advances to the Company (A) in the case of each new Lender, equal to such Lender's ratable portion of the Advances outstanding immediately prior to such Extension Date and (B) in the case of each Increasing Commitment Lender, equal to of such Lender's ratable portion of the Advances (assuming that such Lender's Commitment consists of only the increased portion thereof) outstanding immediately prior to such Extension Date, in each case, without giving effect to any repayment of Advances to Declining Lenders made on such Extension Date. Section 2.17. Term Loan Conversion Option. At least one Business Day but not more than 45 Business Days prior to the last day of the Revolving Period, and subject to the conditions set forth in Section 3.02 and delivery on or prior to such date of opinions of counsel to the Company substantially in the forms of Exhibit C-3 and Exhibit C-4 attached 21 hereto, together with any necessary NCUC Order and the SCPSC Order referred to therein and attached thereto, to the Administrative Agent and each of the Lenders, by submission of a written notice (substantially in the form of Exhibit F) to the Administrative Agent, the Company may request that the Lenders convert all Advances made hereunder into term loans. Upon satisfaction of such conditions and delivery of such notice (the "Term Loan Conversion Notice"), the Advances shall convert into term loans on the last day of the Revolving Period and all such Advances shall become due and payable on the first anniversary of the last day of the Revolving Period. Notwithstanding the foregoing, any Term Loan Conversion Notice may be delivered by the Company in conjunction with (and simultaneously with) any request for extension of the Revolving Period pursuant to Section 2.16, above. If such extension of the Revolving Period shall occur as provided in Section 2.16, such Term Loan Conversion Notice shall be deemed withdrawn and shall be of no further effect. Article III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Closing. The Commitments of the Lenders shall not become effective unless and until (i) the conditions precedent set forth in Section 3.01 of the three-year $272,500,000 Credit Agreement, dated as of the date hereof, among the Company, the lenders named therein and Citibank, as administrative agent, shall have been satisfied, (ii) the Existing Facilities shall have been terminated and all amounts outstanding thereunder shall have been paid in full and (iii) the Administrative Agent shall have received the following: (a) Promissory notes, if requested by any Lender pursuant to Section 2.06. (b) Certified copies of the resolutions of the Board of Directors of the Company approving this Agreement, and of all documents evidencing other necessary corporate action and governmental approvals, including the NCUC Order and the SCPSC Order, with respect to this Agreement. (c) A certificate of the Secretary or an Assistant Secretary of the Company, dated as of the date hereof, certifying the names and true signatures of the officers of the Company authorized to sign this Agreement and the other documents to be delivered hereunder. (d) A certificate of a Responsible Officer of the Company, dated as of the date hereof, certifying (i) the accuracy of the representations and warranties contained herein and (ii) that no event has occurred and is continuing which constitutes an Event of Default or which would constitute an Event of Default but for the requirement that notice be given or time elapse, or both. (e) Certified copies of all required governmental approvals and authorizations. (f) Certified copy of the restated charter and bylaws of the Company. 22 (g) Favorable opinions of counsel for the Company, substantially in the forms of Exhibit C-1 and Exhibit C-2 hereto and as to such other matters as any Lender through the Administrative Agent may reasonably request. (h) A favorable opinion of King & Spalding, counsel for the Administrative Agent, substantially in the form of Exhibit D hereto. Section 3.02. Conditions Precedent to Each Borrowing and to the Exercise of the Term Loan Conversion Option. The obligation of each Lender to make an Advance on the occasion of each Borrowing (including the initial Borrowing) and the obligation to convert the Advances into term loans in accordance with Section 2.17 shall be subject to the further conditions precedent that (i) in the case of the making of an Advance, the Administrative Agent shall have received the written confirmatory Notice of Borrowing with respect thereto, and (ii) on the date of such Borrowing or exercise of the Term Loan Conversion Option, as the case may be, the following statements shall be true (and each of the giving of the applicable Notice of Borrowing or Term Loan Conversion Notice, as the case may be, and the acceptance by the Company of the proceeds of such Borrowing, in the case of a Borrowing, or the conversion of the Advances into term loans, in the case of such exercise, shall constitute a representation and warranty by the Company that, on the date of such Borrowing or exercise, as the case may be, such statements are true): (a) The representations and warranties contained in Section 4.01 (excluding, in the case of any Borrowing that will not result in an increase in the aggregate principal amount of Advances outstanding, the representation and warranty contained in the last sentence of Section 4.01(e)) are correct on and as of the date of such Borrowing or the date of effectiveness of the Term Loan Conversion Option, as the case may be, before and after giving effect to (x) such Borrowing and to the application of the proceeds therefrom or (y) such effectiveness, as the case may be, as though made on and as of such date; and (b) No event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom or the exercise of such Term Loan Conversion Option, as the case may be, that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both. Article IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of the Company. The Company represents and warrants as follows: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of North Carolina and is duly qualified to do business and in good standing under the laws of the State of South Carolina. 23 (b) The execution, delivery and performance by the Company of this Agreement are within the Company's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Company's charter or bylaws or (ii) any law or contractual restriction binding on or affecting the Company. (c) No authorization or approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of this Agreement, other than the NCUC Order and the SCPSC Order, each of which has been duly issued, is final and in full force and effect. (d) This Agreement is the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. (e) The Consolidated balance sheet of the Company and the Subsidiaries as at December 31, 2001, and the related Consolidated statements of income and retained earnings of the Company and the Subsidiaries for the fiscal year then ended, and the Consolidated balance sheet of the Company and the Subsidiaries as at March 31, 2002, and the related Consolidated statements of income and retained earnings of the Company and the Subsidiaries for the three-month period then ended, copies of which have been furnished to each Lender, fairly present (subject, in the case of such financial statements dated March 31, 2002, to year-end adjustments) the financial condition of the Company and the Subsidiaries as at such dates and the results of the operations of the Company and the Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied. Since December 31, 2001, there has been no material adverse change in the financial condition, operations or properties of the Company. (f) Except as described in the reports and registration statements which the Company has filed with the Securities and Exchange Commission prior to the date of this Agreement, there is no pending or threatened action or proceeding affecting the Company or any Subsidiary before any court, governmental agency or arbitrator, which may materially adversely affect the financial condition, operations or properties of the Company. (g) No proceeds of any Advance will be used to acquire any security in any transaction which is subject to Sections 12, 13 and 14 of the Securities Exchange Act of 1934. (h) The Company is not engaged in the business of extending credit for the purpose of buying or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to buy or carry any margin stock or to extend credit to others for the purpose of buying or carrying any margin stock. (i) Following application of the proceeds of each Advance, not more than 5 percent of the value of the assets (either of the Company only or of the Company and the Subsidiaries on a Consolidated basis) subject to the provisions of Section 5.02(a) or 5.02(e) will be margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). 24 (j) No Termination Event has occurred or is reasonably expected to occur with respect to any Plan. (k) The Company is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (l) The Company is in substantial compliance with all applicable laws, rules, regulations and orders of any governmental authority, the noncompliance with which would materially and adversely affect the business or condition of the Company, such compliance to include, without limitation, substantial compliance with ERISA and Environmental Laws and paying before the same become delinquent all material taxes, assessments and governmental charges imposed upon it or upon its property, except to the extent compliance with any of the foregoing is then being contested in good faith by appropriate legal proceedings. (m) All written information furnished by the Company to the Administrative Agent and the Lenders in connection with this Agreement (the "Disclosed Information") was (and all information furnished in the future by the Company to the Administrative Agent and the Lenders will be) complete and correct in all respects material to the creditworthiness of the Company when delivered. As of the date hereof, the Disclosed Information does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances under which made. Article V COVENANTS OF THE COMPANY Section 5.01. Affirmative Covenants. So long as any Advances shall remain unpaid or any Lender shall have any Commitment hereunder, the Company shall, unless the Majority Lenders shall otherwise consent in writing: (a) Compliance with Laws, Etc. Except to the extent contested in good faith, comply, and cause each Subsidiary to comply, with all applicable laws, rules, regulations and orders (such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property), the non-compliance with which would materially adversely affect the Company's business or credit. (b) Preservation of Corporate Existence, Etc. Preserve and maintain its corporate existence, rights (charter and statutory) and franchises. (c) Visitation Rights. At any reasonable time and from time to time, permit the Administrative Agent or any of the Lenders or any agents or representatives thereof to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Company and any of the Subsidiaries, and to discuss the affairs, finances and accounts of the Company and any of the Subsidiaries with any of their respective officers or directors. 25 (d) Keeping of Books. Keep, and cause each Subsidiary to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and such Subsidiary in accordance with generally accepted accounting principles consistently applied. (e) Maintenance of Properties, Etc. Maintain and preserve, and cause each Subsidiary to maintain and preserve, all of its properties which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. (f) Maintenance of Insurance. Maintain, and cause each Subsidiary to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company or such Subsidiary operates. (g) Taxes. File, and cause each Subsidiary to file, all tax returns (federal, state and local) required to be filed and paid and pay all taxes shown thereon to be due, including interest and penalties, or provide adequate reserves for payment thereof other than such taxes that the Company or such Subsidiary is contesting in good faith by appropriate legal proceedings. (h) Material Obligations. Pay, and cause each Subsidiary to pay, promptly as the same shall become due each material obligation of the Company or such Subsidiary. (i) Reporting Requirements. Furnish to the Lenders: (i) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Company, a Consolidated balance sheet of the Company and the Subsidiaries as at the end of such quarter and Consolidated statements of income and retained earnings of the Company and the Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the treasurer or the chief financial officer of the Company, together with a certificate of the treasurer or chief financial officer of the Company, setting forth in reasonable detail the calculation of the Company's compliance with Section 5.01(j) and stating that no Event of Default and no event that, with the giving of notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing, or if an Event of Default or such event has occurred and is continuing, a statement setting forth details of such Event of Default or event and the action that the Company has taken and proposes to take with respect thereto; (ii) as soon as available and in any event within 100 days after the end of each fiscal year of the Company, a copy of the annual report for such year for the Company and the Subsidiaries, containing Consolidated financial statements for such year certified by Deloitte & Touche or other independent public accountants acceptable to the Majority Lenders, together with a certificate of the treasurer or chief financial officer of the Company, setting forth in reasonable detail the calculation of the Company's compliance with Section 5.01(j) and stating that no Event of Default and no event that, with the giving of notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing, 26 or if an Event of Default or such event has occurred and is continuing, a statement setting forth details of such Event of Default or event and the action that the Company has taken and proposes to take with respect thereto; (iii) promptly after the sending or filing thereof, copies of all reports which the Company sends to any of its security holders, and copies of all reports and registration statements which the Company or any Subsidiary files with the Securities and Exchange Commission or any national securities exchange to the extent not delivered by the Company pursuant to clause (i) or (ii) of this Section 5.01(i); (iv) immediately upon any Responsible Officer's obtaining knowledge of the occurrence of any Event of Default or any event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, a statement of the chief financial officer or treasurer of the Company setting forth details of such Event of Default or event and the action which the Company proposes to take with respect thereto; (v) immediately upon any Responsible Officer's obtaining knowledge thereof, notice of any change in any rating assigned by Standard & Poor's or Moody's to the Reference Securities; (vi) as soon as possible and in any event within five days after the commencement thereof or any adverse determination or development therein, notice of all actions, suits and proceedings that may adversely affect the Company's ability to perform its obligations under this Agreement; (vii) as soon as possible and in any event within five days after the occurrence of a Termination Event, notice of such Termination Event; and (viii) such other information respecting the condition or operations, financial or otherwise, of the Company or any Subsidiary as any Lender through the Administrative Agent may from time to time reasonably request. (j) Indebtedness to Total Capitalization. Maintain at all times a ratio of Consolidated Indebtedness of the Company and its Subsidiaries to Total Capitalization of not more than .65:1.0. (k) Use of Proceeds. Use the proceeds of each Advance solely for general corporate purposes (including, without limitation, as a commercial paper back-up). No proceeds of any Advance will be used to acquire any equity security of a class that is registered pursuant to Section 12 of the Exchange Act or any security in any transaction that is subject to Sections 13 or 14 of the Exchange Act. Section 5.02. Negative Covenants. So long as any Advances shall remain unpaid or any Lender shall have any Commitment hereunder, the Company will not, without the written consent of the Majority Lenders: 27 (a) Liens, Etc. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any Subsidiary to assign, any right to receive income, in each case to secure any Indebtedness of any Person, other than (i) liens, mortgages and security interests created by the Mortgage, (ii) liens and security interests affecting the fuel used by the Company in its power generating operations, and (iii) liens, mortgages and security interests securing other Indebtedness not exceeding $100,000,000; provided, however, that, in the event that and for so long as the First Mortgage Bonds are rated lower than BBB- or Baa3 by S&P or Moody's, respectively, or, in the event that neither of such credit rating agencies is in the business of rating the First Mortgage Bonds, lower than an equivalent rating of the First Mortgage Bonds by another nationally-recognized credit rating agency of similar standing, the Company's right to continue to create, incur and suffer to exist liens, mortgages and security interests securing other Indebtedness pursuant to the foregoing clause (iii) shall be suspended. (b) Indebtedness. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any Indebtedness other than (i)Indebtedness hereunder, (ii) Indebtedness secured by liens and security interests permitted pursuant to clauses (ii) and (iii) of subsection 5.02(a), (iii) Indebtedness evidenced by the First Mortgage Bonds and (iv) unsecured Indebtedness, including guarantees issued in connection with the financing of pollution control facilities operated by the Company, guarantees of Indebtedness incurred by any wholly-owned Subsidiary and guarantees of debt securities issued by any financing Subsidiary established to secure debt financing in the offshore markets. (c) Lease Obligations. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any obligations for the payment of rental for any property under leases or agreements to lease having a term of one year or more which would cause the direct or contingent Consolidated liabilities of the Company and the Subsidiaries in respect of all such obligations payable in any calendar year to exceed 10% of the Consolidated operating revenues of the Company and the Subsidiaries for the immediately preceding calendar year. (d) Mergers, Etc. Merge with or into or consolidate with or into, or acquire all or substantially all of the assets or securities of, any Person, unless, in each case, (i) immediately after giving effect thereto, no event shall occur and be continuing which constitutes an Event of Default or an event which with the giving of notice or lapse of time, or both, would constitute an Event of Default, and (ii) in the case of any such merger to which the Company is a party, such other Person is a utility company and the resulting or surviving corporation, if not the Company, (x) is organized and existing under the laws of the United States of America or any State thereof, (y) is a corporation satisfactory to the Majority Lenders, and (z) shall have expressly assumed, by an instrument satisfactory in form and substance to the Majority Lenders, the due and punctual payment of all amounts due under this Agreement and the performance of every covenant and undertaking of the Company contained in this Agreement. (e) Sales, Etc. of Assets. Sell, lease, transfer or otherwise dispose of, or permit any Subsidiary to sell, lease, transfer or otherwise dispose of, any of its assets, other than the following sales: (i) sales of generating capacity to the Company's wholesale customers, (ii) sales of nuclear fuel, (iii) sales of 28 accounts receivable, (iv) sales in connection with a transaction authorized by subsection (d) of this Section, (v) sales of investments in securities with a maturity of less than one year, or (vi) other sales not exceeding $150,000,000 in the aggregate in any fiscal year of the Company. (f) Margin Stock. Use any proceeds of any Advance to buy or carry margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). Article VI EVENTS OF DEFAULT Section 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Company shall fail to pay any principal of any Advance when due, or shall fail to pay any interest on any Advance or any fees or other amounts payable hereunder within five Business Days after such interest or fees shall become due; or (b) Any representation or warranty made by the Company herein or by the Company (or any of its officers) in connection with this Agreement shall prove to have been incorrect in any material respect when made; or (c) The Company shall fail to perform or observe any other term, covenant or agreement contained in Sections 5.01(b), 5.01(i)(iv), 5.01(j) or 5.02 on its part to be performed or observed; or the Company shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Company by the Administrative Agent or any Lender; or (d) The Company or any of the Subsidiaries shall fail to pay any amount in respect of any Indebtedness in excess of $10,000,000 (but excluding Indebtedness hereunder) of the Company or such Subsidiary (as the case may be), or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or any other default under any agreement or instrument relating to any such Indebtedness, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) The Company or any of the Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Company or any of the Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to 29 bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property; or the Company or any of the Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order for the payment of money in excess of $10,000,000 shall be rendered against the Company or any of the Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) Any Termination Event with respect to a Plan shall have occurred, and, 30 days after notice thereof shall have been given to the Company by the Administrative Agent, (i) such Termination Event (if correctable) shall not have been corrected and (ii) the then present value of such Plan's vested benefits exceeds the then current value of assets accumulated in such Plan by more than the amount of $20,000,000 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount); or (h) The Company or any of its Affiliates as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $20,000,000; or (i) A Change of Control shall occur; then, and in any such event, the Administrative Agent shall at the request, or may with the consent, of the Majority Lenders, by notice to the Company, (i) declare the Commitments and the obligation of each Lender to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) declare the Advances, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Advances, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Company or any of the Subsidiaries under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the Advances, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Company. 30 Article VII THE ADMINISTRATIVE AGENT Section 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably provided for by this Agreement (including, without limitation, enforcement or collection of the Advances), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders; provided, however, that the Administrative Agent shall not be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement or applicable law. Section 7.02. Administrative Agent's Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Administrative Agent: (i) may consult with legal counsel (including counsel for the Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Company or to inspect the property (including the books and records) of the Company; (iv) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (v) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopy, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. Section 7.03. The Administrative Agent and its Affiliates. With respect to its Commitment and the Advances made by it, the Administrative Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Administrative Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Citibank in its individual capacity. Citibank, and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Company, 31 any of the Subsidiaries and any Person who may do business with or own securities of the Company or any Subsidiary, all as if Citibank were not the Administrative Agent and without any duty to account therefor to the Lenders. Section 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Section 7.05. Indemnification. The Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed by the Company), ratably according to the respective amounts of the Commitments then held by each of them, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Administrative Agent under this Agreement; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by the Administrative Agent in connection with the preparation, execution, administration, or enforcement of, or legal advice in respect of rights or responsibility under, this Agreement, to the extent that the Administrative Agent is not reimbursed for such expenses by the Company. Section 7.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Company and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring 32 Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Article VIII MISCELLANEOUS Section 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Company therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all of the Lenders, do any of the following: (a) waive any of the conditions specified in Section 3.01 or 3.02 (b) change the Commitment of any Lender or subject any Lender to any additional obligations (other than pursuant to Section 2.04 or Section 2.16), (c) reduce the principal of, or interest on, the Advances or any fees hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Advances or any fees hereunder (other than pursuant to Sections 2.16 or 2.17), (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Advances, or the number of Lenders, which shall be required for the Lenders or any of them to take any action under this Agreement, and (f) amend, waive, or in any way modify or suspend any provision of Section 2.16, Section 2.17 or of this Section 8.01; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required hereinabove to take such action, affect the rights or duties of the Administrative Agent under this Agreement. Section 8.02. Notices, Etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telegraphic communication) and mailed, telecopied, telegraphed or delivered, if to the Company, at its address at 411 Fayetteville Street, Raleigh, North Carolina 27602, Attention: Manager of Financial Operations; if to any Lender, at its Domestic Lending Office set forth under its name on the signature pages hereof; and if to the Administrative Agent, at its address at Two Penns Way, Suite 200, New Castle, Delaware 19720, Attention: Bank Loan Syndications; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall be effective when received by the addressee thereof. Section 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof of the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 33 Section 8.04. Costs, Expenses and Taxes. (a) The Company agrees to pay on demand all costs and expenses of the Administrative Agent in connection with (i) the preparation, execution and delivery of this Agreement and the other documents to be delivered hereunder, (ii) the first Borrowing under this Agreement, (iii) any modification, amendment or supplement to this Agreement and the other documents to be delivered hereunder and (iv) the enforcement of the rights and remedies of the Lenders and the Administrative Agent under this Agreement and the other documents to be delivered hereunder (whether through negotiations or legal proceedings), all the above costs and expenses to include, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent and each of the Lenders with respect thereto. In addition, the Company shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Agreement and the other documents to be delivered hereunder, and agrees to save the Administrative Agent and each Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. (b) If, due to payments made by the Company due to acceleration of the maturity of the Advances pursuant to Section 6.01, adjustments of the Borrowings pursuant to Section 2.04(b)(iv), or due to any other reason, any Lender receives payments of principal of any Eurodollar Rate Advance based upon the Eurodollar Rate other than on the last day of the Interest Period for such Advance, the Company shall, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. (c) Any and all payments by the Company hereunder shall be made, in accordance with Section 2.14, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Company shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions and (iii) the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. 34 (d) The Company will indemnify each Lender and the Administrative Agent for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable under this Section 8.04) paid by such Lender or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender or the Administrative Agent (as the case may be) makes written demand therefor. (e) Prior to the date of the initial Borrowing or on the date of the Assignment and Acceptance pursuant to which it became a Lender, in the case of each Lender that becomes a Lender by virtue of entering into an Assignment and Acceptance, and from time to time thereafter if requested by the Company or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Administrative Agent and the Company with the forms prescribed by the Internal Revenue Service of the United States certifying that such Lender is exempt from United States withholding taxes with respect to all payments to be made to such Lender hereunder. If for any reason during the term of this Agreement, any Lender becomes unable to submit the forms referred to above or the information or representations contained therein are no longer accurate in any material respect, such Lender shall notify the Administrative Agent and the Company in writing to that effect. Unless the Company and the Administrative Agent have received forms or other documents satisfactory to them indicating that payment hereunder are not subject to United States withholding tax, the Company or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States. (f) Any Lender claiming any additional amounts payable pursuant to Section 8.04(c) or (d) shall use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) (i) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender and (ii) to otherwise minimize the amounts due, or to become due, under Sections 8.04(c) and (d). (g) If the Company makes any additional payment to any Lender pursuant to Section 8.04(c) or (d) in respect of any Taxes, and such Lender determines that it has received (i) a refund of such Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge solely as a result of any deduction or credit for any Taxes with respect to which it has received payments under Sections 8.04(c) and (d), such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Company such amount as such Lender shall have determined to be attributable to the deduction or withholding of such Taxes. If such Lender later determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 8.04(g), the Company shall upon demand of such Lender promptly repay the amount of such overpayment. Any determination made by such Lender pursuant to this Section 8.04(g) shall in the absence of bad faith or manifest error be conclusive, and nothing in this Section 8.04(g) shall be construed as requiring any Lender to conduct its business or to arrange or alter in any respect its tax 35 or financial affairs so that it is entitled to receive such a refund, credit or reduction or as allowing any Person to inspect any records, including tax returns, of any Lender. (h) The Company hereby agrees to indemnify and hold harmless each Lender, the Administrative Agent, counsel to the Administrative Agent and their respective officers, directors, partners, employees, Affiliates and advisors (each, an "Indemnified Person") from and against any and all claims, damages, losses, liabilities, costs or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding), joint and several, that may actually be incurred by or asserted or awarded against any Indemnified Person (including, without limitation, in connection with any investigation, litigation or proceeding or the preparation of a defense in connection therewith) in each case by reason of or in connection with the execution, delivery, or performance of this Agreement, except to the extent that such claims, damages, losses, liabilities, costs, or expenses are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of the party seeking indemnification. (i) Without prejudice to the survival of any other agreement of the Company hereunder, the agreements and obligations of the Company contained in this Section 8.04 shall survive the payment in full of principal and interest hereunder and the termination of Commitments. Section 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Advances due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Company now or hereafter existing under this Agreement, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. Each Lender agrees promptly to notify the Company after any such set-off and application made by such Lender; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have. Section 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Company and the Administrative Agent and when the Administrative Agent shall have been notified by each Lender that such Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Company, the Administrative Agent and each Lender and their respective successors and assigns, except that the Company shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of each Lender. 36 Section 8.07. Assignments and Participations. (a) Each Lender may (i) with notice to the Company and to the Administrative Agent, assign to any of its Affiliates all or a portion of its rights and obligations under this Agreement, and (ii) with the consent of the Agent and the Company (such consent not to be unreasonably withheld and, in the case of the Company, such consent shall not be required if an Event of Default has occurred and is continuing), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the Advances owing to it; provided, however, that (A) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement, (B) prior to the effectiveness of the Term Loan Conversion Option, the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than 50% of all such rights and obligations or less than the lesser of (1) $10,000,000 and (2) all of such Lender's rights and obligations and, if the preceding clause (1) is applicable, shall be an integral multiple of $1,000,000, (C) each such assignment shall be to an Eligible Assignee, (D) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance and (E) such parties shall also deliver to the Administrative Agent a processing and recordation fee of $3,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) 37 such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (c) The Administrative Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance (and copies of the related consents of the Company and the Administrative Agent to such assignment) delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders (including, without limitation, the Assuming Lenders) and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Company, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit B hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company. (e) Each Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Company hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Advances for all purposes of this Agreement, (iv) the Company, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) the holder of any such participation, other than an Affiliate of such Lender, shall not be entitled to require such Lender to take or omit to take any action hereunder, except action (A) extending the time for payment of interest on, or the final maturity of any portion of the principal amount of, the Advances or (B) reducing the principal amount of or the rate of interest payable on the Advances. Without limiting the generality of the foregoing: (i) such participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.08, 2.12 and 8.04(b) only if, and to the same extent, the Lender from which such participating banks or other entities acquired its participation would, at the time, be entitled to claim thereunder; and (ii) such participating banks or other entities shall also, to the fullest extent permitted by law, be entitled to exercise the rights of set-off contained in Section 8.05 as if such participating banks or other entities were Lenders hereunder. 38 (f) If any Lender (or any bank, financial institution, or other entity to which such Lender has sold a participation) shall make any demand for payment under Section 2.12(b), then within 30 days after any such demand (if, but only if, such demanded payment has been made by the Company), the Company may, with the approval of the Administrative Agent (which approval shall not be unreasonably withheld) and provided that no Event of Default or event which, with the passage of time or the giving of notice, or both, would constitute an Event of Default shall then have occurred and be continuing, demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Company all (but not less than all) of such Lender's Commitment (if any) and the Advances owing to it within the period ending on the later to occur of such 30th day and the last day of the longest of the then current Interest Periods for such Advances. If any such Eligible Assignee designated by the Company is not a Lender on the date of such demand by the Company, the Company shall pay the $3,500 processing and recordation fee described in Section 8.07(a). If any such Eligible Assignee designated by the Company shall fail to consummate such assignment on terms acceptable to such Lender, or if the Company shall fail to designate any such Eligible Assignees for all or part of such Lender's Commitment or Advances, then such demand by the Company shall become ineffective; it being understood for purposes of this subsection (g) that such assignment shall be conclusively deemed to be on terms acceptable to such Lender, and such Lender shall be compelled to consummate such assignment to an Eligible Assignee designated by the Company, if such Eligible Assignee (i) shall agree to such assignment by entering into an Assignment and Acceptance in substantially the form of Exhibit B hereto with such Lender and (ii) shall offer compensation to such Lender in an amount equal to all amounts then owing by the Company to such Lender hereunder, whether for principal, interest, fees, costs or expenses (other than the demanded payment referred to above and payable by the Company as a condition to the Company's right to demand such assignment), or otherwise. (g) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company furnished to such Lender by or on behalf of the Company; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Company received by it from such Lender. (h) Anything in this Section 8.07 to the contrary notwithstanding, any Lender may assign and pledge all or any portion of its Commitment and the Advances owing to it to any Federal Reserve Bank (and its transferees) as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations hereunder. (i) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC") of such Granting Lender identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Company, the option to provide to the Company all or any part of any Advance that such Granting Lender would otherwise be obligated to make to the Company pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any such SPC to make any Advance, (ii) if such SPC elects not to exercise such option or 39 otherwise fails to provide all or any part of such Advance, the Granting Lender shall be obligated to make such Advance pursuant to the terms hereof and (iii) no SPC or Granting Lender shall be entitled to receive any greater amount pursuant to Section 2.08 or 2.12 than the Granting Lender would have been entitled to receive had the Granting Lender not otherwise granted such SPC the option to provide any Advance to the Company. The making of an Advance by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Advance were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement for which a Lender would otherwise be liable so long as, and to the extent that, the related Granting Lender provides such indemnity or makes such payment. In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against or join any other person in instituting against such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. Notwithstanding the foregoing, the Granting Lender unconditionally agrees to indemnify the Company, the Administrative Agent and each Lender against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be incurred by or asserted against the Company, the Administrative Agent or such Lender, as the case may be, in any way relating to or arising as a consequence of any such forbearance or delay in the initiation of any such proceeding against its SPC. Each party hereto hereby acknowledges and agrees that no SPC shall have the rights of a Lender hereunder, such rights being retained by the applicable Granting Lender. Accordingly, and without limiting the foregoing, each party hereby further acknowledges and agrees that no SPC shall have any voting rights hereunder and that the voting rights attributable to any Advance made by an SPC shall be exercised only by the relevant Granting Lender and that each Granting Lender shall serve as the administrative agent and attorney-in-fact for its SPC and shall on behalf of its SPC receive any and all payments made for the benefit of such SPC and take all actions hereunder to the extent, if any, such SPC shall have any rights hereunder. In addition, notwithstanding anything to the contrary contained in this Agreement any SPC may with notice to, but without the prior written consent of any other party hereto, assign all or a portion of its interest in any Advances to the Granting Lender. This Section may not be amended without the prior written consent of each Granting Lender, all or any part of whose Advance is being funded by an SPC at the time of such amendment. 40 Section 8.08. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. The Company (i) irrevocably submits to the non-exclusive jurisdiction of any New York State court or Federal court sitting in New York City in any action arising out of this Agreement, (ii) agrees that all claims in such action may be decided in such court, (iii) waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum and (iv) consents to the service of process by mail. A final judgment in any such action shall be conclusive and may be enforced in other jurisdictions. Nothing herein shall affect the right of any party to serve legal process in any manner permitted by law or affect its right to bring any action in any other court. Section 8.09. WAIVER OF JURY TRIAL. THE COMPANY, THE ADMINISTRATIVE AGENT AND EACH LENDER EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY AND LAWFULLY DO SO, ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING TO THIS AGREEMENT IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER INSTRUMENT OR DOCUMENT DELIVERED HEREUNDER OR THEREUNDER. Section 8.10. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 8.11. Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section 8.12. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 8.13. Entire Agreement. This Agreement constitutes the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Except as is expressly provided for herein, nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. 41 S-1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. CAROLINA POWER & LIGHT COMPANY By /s/ Thomas R. Sullivan -------------------------------------- Thomas R. Sullivan Treasurer CITIBANK, N.A., as Administrative Agent and as a Lender By /s/ Anita J. Brickell -------------------------------------- Anita J. Brickell Vice President S-2 WACHOVIA BANK, NATIONAL ASSOCIATION By /s/ Mitch Wilson -------------------------------------- Mitch Wilson Vice President S-3 CITIBANK, N.A. By /s/ Anita J. Brickell -------------------------------------- Anita J. Brickell Vice President S-4 JPMORGAN CHASE BANK By /s/ Robert M. Bowen, II -------------------------------------- Robert M. Bowen, II Managing Director S-5 BANK ONE, NA By /s/ Jane A. Bek -------------------------------------- Jane A. Bek Director S-6 MELLON BANK, N.A. By /s/ Scott Hennessee -------------------------------------- Scott Hennessee Vice President S-7 NORDDEUTSCHE LANDESBANK GIROZENTRALE, New York/Cayman Islands Branch By /s/ Jens A. Westrick -------------------------------------- Jens A. Westrick EVP By /s/ Stephanie Finnen -------------------------------------- Stephanie Finnen VP S-8 SUNTRUST BANK, ATLANTA By /s/ Karen C. Copeland -------------------------------------- Karen C. Copeland Vice President S-9 BARCLAYS BANK PLC By /s/ Sydney G. Dennis -------------------------------------- Sydney G. Dennis Director S-10 BANK OF AMERICA, N.A. By /s/ Gretchen Burud -------------------------------------- Gretchen Burud Managing Director SCHEDULE I Existing Facilities $200,000,000 364-Day Revolving Credit Agreement, dated as of June 30, 1998, as amended and restated as of June 29, 1999, and as amended June 7, 2002, among the Company, certain lenders and Citibank, as agent. Five Year Revolving Credit Agreement, dated as of June 30, 1998, among the Company, certain lenders and Citibank, as agent. EXHIBIT A-1 NOTICE OF BORROWING [Date] Citibank, N.A., as Administrative Agent for the Lenders parties to the Credit Agreement referred to below Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Bank Loan Syndications Ladies and Gentlemen: The undersigned, CAROLINA POWER & LIGHT COMPANY, refers to the 364-day Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders from time to time parties thereto and CITIBANK, N.A., as Administrative Agent for said Lenders, and hereby gives you notice pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is ____________, 20__. (ii) The Type of Advances comprising the Proposed Borrowing is [Base Rate Advances][Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Borrowing is $______________. (iv) The Interest Period for each Eurodollar Rate Advance that is an Advance made as part of the Proposed Borrowing is _____ months. Very truly yours, CAROLINA POWER & LIGHT COMPANY By -------------------------------------- Name: Title: EXHIBIT A-2 NOTICE OF CONVERSION [Date] Citibank, N.A., as Administrative Agent for the Lenders parties to the Credit Agreement referred to below Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Bank Loan Syndications Ladies and Gentlemen: The undersigned, CAROLINA POWER & LIGHT COMPANY, refers to the 364-day Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders from time to time parties thereto and CITIBANK, N.A., as Administrative Agent for said Lenders, and hereby gives you notice pursuant to Section 2.10 of the Credit Agreement that the undersigned hereby requests a Conversion under the Credit Agreement, and in that connection sets forth the terms on which such Conversion (the "Proposed Conversion") is requested to be made: (i) The Business Day of the Proposed Conversion is ______________, 20__. (ii) The Type of, and Interest Period (if any) applicable to, the Advances (or portions thereof) proposed to be Converted: ----------------. (iii) The Type of Advance to which such Advances (or portions thereof) are proposed to be Converted: ________________________. (iv) Except in the case of a Conversion to Base Rate Advances, the initial Interest Period to be applicable to the Advances resulting from such Conversion: ______________________________. (v) The aggregate amount of Advances (or portions thereof) proposed to be Converted is $________. The undersigned hereby certifies that, on the date hereof, and on the date of the Proposed Conversion, no event has occurred and is continuing, or would result from such Proposed Conversion, which constitutes an Event of Default. Very truly yours, CAROLINA POWER & LIGHT COMPANY By -------------------------------------- Name: Title: EXHIBIT B ASSIGNMENT AND ACCEPTANCE Dated ___________, 20__ Reference is made to the 364-day Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement"), among CAROLINA POWER & LIGHT COMPANY, a North Carolina corporation (the "Company"), the Lenders (as defined in the Credit Agreement) from time to time parties thereto and CITIBANK, N.A., as Administrative Agent for the Lenders (the "Administrative Agent"). Terms defined in the Credit Agreement are used herein with the same meaning. ______________ (the "Assignor") and ____________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof which represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement, including, without limitation, such interest in the Assignor's Commitment (to the extent it has not been terminated) and the Advances owing to the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment (if any) and the amount of the Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01(e) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; [and] (vi) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (vii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty].(1) 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. - --------------------- (1) If the Assignee is organized under the laws of a jurisdiction outside the United States. Schedule 1 to Assignment and Acceptance Dated __________, 20 Section 1 Percentage Interest Assigned: % ------ Section 2 Assignee's Commitment: $ Aggregate Outstanding Principal Amount of Advances owing to Assignee: $ Section 3 Effective Date(1) [NAME OF ASSIGNOR] By -------------------------------------- Name: Title: [NAME OF ASSIGNEE] By -------------------------------------- Name: Title: Domestic Lending Office (and address for notices): - --------------------- (1) This date should be no earlier than the date of acceptance by the Administrative Agent. [Address] Eurodollar Lending Office: [Address] Accepted this _____ day of ______________, 20__ CITIBANK, N.A., as Administrative Agent By_______________________ Name: Title: CAROLINA POWER & LIGHT COMPANY By_______________________ Name: Title: EXHIBIT C-1 FORM OF OPINION OF COUNSEL FOR THE COMPANY [Date] To each of the Lenders parties to the Agreement referred to below and Citibank, N.A., as Administrative Agent Re: Carolina Power & Light Company Ladies and Gentlemen: This opinion is furnished to you by us as counsel for Carolina Power & Light Company (the "Borrower") pursuant to Section 3.01(g) of the 364-day Credit Agreement, dated as of July 31, 2002 (the "Agreement", the terms defined therein being used herein as therein defined), among the Borrower, certain lenders thereunder (the "Lenders") and Citibank, N.A., as administrative agent for the Lenders. In connection with the preparation, execution and delivery of the Agreement, we have examined: (1) The Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Agreement. (3) The opinion letter of even date herewith, addressed to you by ____________, General Counsel to the Company and delivered in connection with the transactions contemplated by the Agreement (the "Company Opinion Letter"). We have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as we have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, we have, when relevant facts were not independently established by us, relied upon certificates of the Borrower or its officers or of public officials. We have assumed the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the originals (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. Whenever the phrase "to our knowledge" is used in this opinion it refers to the actual knowledge of the attorneys of this firm involved in the representation of the Borrower without independent investigation. We are qualified to practice law in the States of North Carolina and New York, and the opinions expressed herein are limited to the law of the States of North Carolina and New York and the federal law of the United States. To the extent that our opinions expressed herein depend upon opinions expressed in paragraphs 1 through 4 of the Company Opinion Letter, we have relied without independent investigation on the accuracy of the opinions expressed in the Company Opinion Letter, subject to the assumptions, qualifications and limitations set forth in the Company Opinion Letter. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the opinion that the Agreement constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms except as enforcement may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting the rights of creditors generally and (b) principles of equity, whether considered at law or in equity. The opinion set forth above is subject to the following qualifications: (a) In addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (b) No opinion is expressed herein as to (i) Section 8.05 of the Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (c) No opinion is expressed herein as to provisions, if any, in the Agreement, which (A) purport to excuse, release or exculpate a party for liability for or indemnify a party against the consequences of its own acts, (B) purport to make void any act done in contravention thereof, (C) purport to authorize a party to make binding determinations in its sole discretion, (D) relate to the effects of laws which may be enacted in the future, (E) require waivers, consents or amendments to be made only in writing, (F) purport to waive rights of offset or to create rights of set off other than as provided by statute, or (G) purport to permit acceleration of indebtedness and the exercise of remedies by reason of the occurrence of an immaterial breach of the Agreement or any related document. Further, we express no opinion as to the necessity for any Lender, by reason of such Lender's particular circumstances, to qualify to transact business in the State of New York or as to any Lender's liability for taxes in any jurisdiction. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Agreement after the date hereof in accordance with the provisions thereof and (ii) King & Spalding, in connection with its opinion delivered on the date hereof under Section 3.01 of the Agreement. Very truly yours, EXHIBIT C-2 FORM OF OPINION OF GENERAL COUNSEL TO THE COMPANY [Date] To each of the Lenders parties to the Agreement referred to below and Citibank, N.A., as Administrative Agent Re: Carolina Power & Light Company Ladies and Gentlemen: This opinion is furnished to you by me as Vice President of Progress Energy Service Company, LLC and counsel to Carolina Power & Light Company (the "Borrower") pursuant to Section 3.01(g) of the 364-day Credit Agreement, dated as of July 31, 2002 (the "Agreement", the terms defined therein being used herein as therein defined), among the Borrower, certain lenders thereunder (the "Lenders") and Citibank, N.A., as administrative agent for the Lenders. In connection with the preparation, execution and delivery of the Agreement, I have examined: (1) The Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Agreement. (3) The Restated Charter of the Borrower (the "Charter"). (4) The Bylaws of the Borrower and all amendments thereto (the "Bylaws"). (5) The NCUC Order and the SCPSC Order. I have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as I have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, I have, when relevant facts were not independently established by me, relied upon certificates of the Borrower or its officers or of public officials. I have assumed the authenticity of all documents submitted to me as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of signatures (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. For purposes of my opinions expressed in paragraph 1 below as to existence and good standing, I have relied as of their respective dates on certificates of public officials, copies of which are attached hereto as Exhibit A. Whenever the phrase "to my knowledge" is used in this opinion it refers to my actual knowledge and the actual knowledge of the attorneys who work under my supervision and who were involved in the representation of the Borrower in connection with the transactions contemplated by the Agreement. I or attorneys working under my supervision are qualified to practice law in the State of North Carolina, and the opinions expressed herein are limited to the law of the State of North Carolina and the federal law of the United States and, in reliance on a certificate issued by the Secretary of State of South Carolina and attached hereto as part of Exhibit A, the laws of the State of South Carolina for purposes of the first sentence of opinion paragraph 1 below, and for purposes of the opinion expressed in paragraph 4, the public utility laws of the State of South Carolina. Based upon the foregoing and upon such investigation as I have deemed necessary, I am of the following opinion: 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina, and is duly qualified to do business and in good standing in the State of South Carolina. The Borrower has the corporate power and authority to enter into the transactions contemplated by the Agreement. 2. The execution, delivery and performance of the Agreement by the Borrower have been duly authorized by all necessary corporate action on the part of the Borrower and the Agreement has been duly executed and delivered by the Borrower. 3. The execution, delivery and performance of the Agreement by the Borrower will not (i) violate the Charter or the Bylaws or any law, rule or regulation applicable to the Borrower (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or (ii) result in a breach of, or constitute a default under, any judgment, decree or order binding on the Borrower, or any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound. 4. No authorization, approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of the Agreement, other than the NCUC Order and SCPSC Order, each of which has been duly issued and is in full force and effect. All periods for review and approval of the SCPSC Order have expired, and no such request for review or appeal has been filed and is pending. The period for appeal or review of the NCUC Order has not expired, but as of the date of this opinion, no such request for review or appeal has been filed; moreover, the validity of the obligations incurred under the Agreement would not be affected by any supplemental order modifying the NCUC Order on appeal or otherwise. 5. To my knowledge, except as described in the reports and registration statements that the Borrower has filed with the Securities and Exchange Commission, there are no pending or overtly threatened actions or proceedings against the Borrower or any of the Subsidiaries before any court, governmental agency or arbitrator, that purport to affect the legality, validity, binding effect or enforceability of the Agreement or that are likely to have a material adverse effect upon the financial condition or operations of the Borrower or any of the Subsidiaries. The opinions set forth above are subject to the qualification that, except as provided in paragraph 4 above, no opinion is expressed herein as to the enforceability of the Agreement or any other document. The foregoing opinions are solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Agreement after the date hereof and (ii) Hunton & Williams and King & Spalding, in connection with their respective opinions delivered on the date hereof under Section 3.01 of the Agreement. Very truly yours, EXHIBIT C-3 FORM OF OPINION OF COUNSEL FOR THE COMPANY UPON EXTENSION OF THE REVOLVING PERIOD AND EXERCISE OF THE TERM LOAN CONVERSION OPTION [Date] To each of the Lenders parties to the Credit Agreement referred to below and Citibank, N.A., as Administrative Agent Re: Carolina Power & Light Company Ladies and Gentlemen: This opinion is furnished to you by me as counsel for Carolina Power & Light Company (the "Company") in connection with [the extension of the Revolving Period until ________ __, _____ under Section 2.16 (the "Extension")](1) [the exercise of the Term Loan Conversion Option under Section 2.17 (the "Exercise")](2) of the 364-day Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement"), among the Company, the lenders from time to time parties thereto (the "Lenders") and Citibank, N.A., as Administrative Agent for the Lenders (the "Administrative Agent"). Terms defined in the Credit Agreement are used herein as therein defined. In connection with the preparation, execution and delivery of the Credit Agreement, we have examined or have had examined under my supervision: (1) The Credit Agreement. - --------------------- (1) For use in connection with the Extension. (2) For use in connection with the Exercise. [(2) The Request for Extension of the Revolving Period, dated _____, submitted by the Company in connection with the Extension.](1) [(3) The Notice of Term Loan Conversion Option, dated _____, submitted by the Company in connection with the Exercise.](2) (4) The opinion letter of even date herewith, addressed to you by ____________, General Counsel to the Company and delivered in connection with [the Extension]1 [the Exercise](2). We have also examined the originals, or copies of such other corporate records of the Company, certificates of public officials and of officers of the Company and agreements, instruments and other documents as we have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, we have, when relevant facts were not independently established by us, relied upon certificates of the Company or its officers or of public officials. We have assumed the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the originals (other than those of the Company), and the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. We are qualified to practice law in the States of North Carolina and New York, and the opinions expressed herein are limited to the laws of the States of North Carolina and New York, the laws of the State of South Carolina applicable to public utilities and the federal laws of the United States. To the extent that our opinions expressed herein depend upon opinions expressed in paragraphs 1 through 4 of the Company Opinion Letter, we have relied without independent investigation on the accuracy of the opinions expressed in the Company Opinion Letter, subject to the assumptions, qualifications and limitations set forth in the Company Opinion Letter. Based upon the foregoing and upon such investigation as we have deemed necessary, we of the opinion that the Credit Agreement, [after giving effect to the Extension,]1 [after giving effect to the Exercise,]2 constitutes the legal, valid and binding obligation of the Company in accordance with its terms except as enforcement may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting the rights of creditors generally and (b) principles of equity, whether considered at law or in equity. The opinions set forth above are subject to the following qualifications: (a) In addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may - --------------------- (1) For use in connection with the Extension. (2) For use in connection with the Exercise. also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (b) No opinion is expressed herein as to (i) Section 8.05 of the Credit Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (c) No opinion is expressed herein as to provisions, if any, in the Credit Agreement, which (A) purport to excuse, release or exculpate a party for liability for or indemnify a party against the consequences of its own acts, (B) purport to make void any act done in contravention thereof, (C) purport to authorize a party to make binding determinations in its sole discretion, (D) relate to the effects of laws which may be enacted in the future, (E) require waivers, consents or amendments to be made only in writing, (F) purport to waive rights of offset or to create rights of set off other than as provided by statute, or (G) purport to permit acceleration of indebtedness and the exercise of remedies by reason of the occurrence of an immaterial breach of the Credit Agreement or any related document. Further, we express no opinion as to the necessity for any Lender, by reason of such Lender's particular circumstances, to qualify to transact business in the State of New York or as to any Lender's liability for taxes in any jurisdiction. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than any other Person that may become a Lender under the Credit Agreement after the date hereof. Very truly yours, EXHIBIT C-4 FORM OF OPINION OF GENERAL COUNSEL FOR THE COMPANY UPON EXTENSION OF THE REVOLVING PERIOD AND EXERCISE OF THE TERM LOAN CONVERSION OPTION [Date] To each of the Lenders parties to the Agreement referred to below and Citibank, N.A., as Administrative Agent Re: Carolina Power & Light Company Ladies and Gentlemen: This opinion is furnished to you by me as Vice President of Progress Energy Service Company, LLC and counsel to Carolina Power & Light Company (the "Borrower") in connection with [the extension of the Revolving Period until _______ under Section 2.16 (the "Extension")](1) [the exercise of the Term Loan Conversion Option under Section 2.17 (the "Exercise")](2) of the 364-day Credit Agreement, dated as of July 31, 2002 (the "Agreement", the terms defined therein being used herein as therein defined), among the Borrower, certain lenders named therein (the "Lenders") and Citibank, N.A., as Administrative Agent for the Lenders (the "Administrative Agent"). In connection with the preparation, execution and delivery of the Agreement, I have examined: (1) The Agreement. [(2) The Request for Extension of the Revolving Period, dated as of ______, submitted by the Borrower in connection with the Extension.] [(3) The Notice of Term Loan Conversion, dated as of ______, submitted by the borrower in connection with the Exercise.] (4) The Restated Charter of the Borrower (the "Charter"). (5) The Bylaws of the Borrower and all amendments thereto (the "Bylaws"). - --------------------- (1) For use in connection with the Extension. (2) For use in connection with the Exercise. (6) The NCUC Order and the SCPSC Order. I have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as I have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, I have, when relevant facts were not independently established by me, relied upon certificates of the Borrower or its officers or of public officials. I have assumed the authenticity of all documents submitted to me as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the originals (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. I am qualified to practice law in the State of North Carolina, and the opinions expressed herein are limited to the law of the State of North Carolina and the federal law of the United States. Based upon the foregoing and upon such investigation as I have deemed necessary, I am of the following opinion: 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina, and is duly qualified to do business and in good standing in the State of South Carolina. 2. The execution, delivery and performance by the Borrower of the Agreement, [after giving effect to the Extension,](1) [after giving effect to the Exercise,](2) are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Charter or the Bylaws or (ii) any law, rule or regulation applicable to the Borrower (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or (iii) any contractual or legal restriction binding or affecting the Borrower. 3. No authorization, approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for performance by the Borrower of the Agreement, [after giving effect to the Extension,]1 [after giving effect to the Exercise,]2 other than the NCUC Order and the SCPSC Order, each of which has been duly issued, is final and in full force and effect, and all periods for review or appeal there 4. To my knowledge, except as described in the reports and registration statements which the Borrower has filed with the Securities and Exchange Commission, there are no pending or overtly threatened actions or proceedings against the Borrower or any of the Subsidiaries before any court, governmental agency or arbitrator that purport to affect the legality, validity, binding effect or enforceability of the Agreement or that are likely to have a materially adverse effect upon the financial condition or operations of the Borrower or any of the Subsidiaries. - --------------------- (1) For use in connection with the Extension. (2) For use in connection with the Exercise. The opinions set forth above are subject to the qualification that no opinion is expressed herein as to the enforceability of the Agreement or any other document. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than any other Person that may become a Lender under the Agreement after the date hereof. Very truly yours, EXHIBIT D FORM OF OPINION OF COUNSEL TO THE ADMINISTRATIVE AGENT [DATE] To Citibank, N.A. ("Citibank"), as Administrative Agent for the Lenders referred to below, and to each of the Lenders parties to the 364-day Credit Agreement, dated as of July 31, 2002, among Carolina Power & Light Company, said Lenders and Citibank, as Administrative Agent Re: Carolina Power & Light Company Ladies and Gentlemen: We have acted as your counsel in connection with the preparation, execution and delivery of, and the closing on July 31, 2002 under, the 364-Day Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement"), among Carolina Power & Light Company (the "Company"), the Lenders from time to time parties thereto and Citibank, N.A. ("Citibank"), as Administrative Agent for the Lenders. Terms defined in the Credit Agreement are used herein as therein defined. In this connection, we have examined the following documents: 1. a counterpart of the Credit Agreement, executed by the parties thereto; 2. the documents furnished by or on behalf of the Company pursuant to subsections (a) through (g) of Section 3.01 of the Credit Agreement, including, without limitation, the opinion of the General Counsel to the Company (the "Company Opinion"). In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that you have independently evaluated, and are satisfied with, the creditworthiness of the Company and the business terms reflected in the Credit Agreement. We have relied, as to factual matters, on the documents we have examined. To the extent that our opinions expressed below involve conclusions as to matters governed by law other than the law of the State of New York, we have relied upon the Company Opinion and have assumed without independent investigation the correctness of the matters set forth therein, our opinions expressed below being subject to the assumptions, qualifications and limitations set forth in the Company Opinion. Based upon and subject to the foregoing, and subject to the qualifications set forth below, we are of the opinion that the Credit Agreement is the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. Our opinion is subject to the following qualifications: (a) The enforceability of the Company's obligations under the Credit Agreement is subject to the effect of any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar law affecting creditors' rights generally. (b) The enforceability of the Company's obligations under the Credit Agreement is subject to the effect of general principles of equity, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law). Such principles of equity are of general application, and, in applying such principles, a court, among other things, might not allow a contracting party to exercise remedies in respect of a default deemed immaterial, or might decline to order an obligor to perform covenants. (c) We note further that, in addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (d) We express no opinion herein as to (i) the enforceability of Section 8.05 of the Credit Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (e) Our opinions expressed above are limited to the law of the State of New York, and we do not express any opinion herein concerning any other law. The foregoing opinion is solely for your benefit and may not be relied upon by any other person or entity. Very truly yours, MEO:PKS:um EXHIBIT E FORM OF REQUEST FOR EXTENSION OF THE REVOLVING PERIOD 364-DAY CREDIT AGREEMENT dated as of July 31, 2002 ----------------------------------- CAROLINA POWER & LIGHT COMPANY (Company) AND CITIBANK, N.A. (Administrative Agent) Request for Extension of Revolving Period and Certificate of Representations and Warranties and No Default I, [______________], Vice President and Treasurer of Carolina Power & Light Company, do hereby request that the Revolving Period of the 364-day Credit Agreement, dated as of July 31, 2002 (hereinafter the "Credit Agreement"), be extended for an additional 364-day period (hereinafter the "Proposed Extension") pursuant to Section 2.16 of the Credit Agreement and, in connection therewith, hereby certify as follows: (i) as of the date hereof, the representations and warranties set forth in Section 4.01 (including without limitation those regarding any required approvals of or notices to governmental bodies) of the Credit Agreement are and will be as of the effective date of the Proposed Extension accurate both before and after giving effect to the Proposed Extension; and (ii) as of the date hereof, no Event of Default, as defined in Section 6.01 of the Credit Agreement, has occurred, nor has any event occurred, that with the giving of notice or the passage of time or both, would constitute an Event of Default, in either case both before and after giving effect to the Proposed Extension. Witness my hand this ______ day of _________, ____. ------------------------ [----------------] Vice President and Treasurer EXHIBIT F FORM OF REQUEST FOR TERM LOAN CONVERSION OPTION 364-DAY CREDIT AGREEMENT dated as of July 31, 2002 ----------------------------------- CAROLINA POWER & LIGHT COMPANY (Company) AND CITIBANK, N.A. (Administrative Agent) Request for Term Loan Conversion Option and Certificate of Representations and Warranties and No Default I, [______________], Vice President and Treasurer of Carolina Power & Light Company, do hereby exercise the Term Loan Conversion Option of the 364-day Credit Agreement, dated as of July 31, 2002 (hereinafter the "Credit Agreement"), pursuant to Section 2.17 of the Credit Agreement and, in connection therewith, hereby certify as follows: (i) as of the date hereof, the representations and warranties set forth in Section 4.01 (including without limitation those regarding any required approvals of or notices to governmental bodies) of the Credit Agreement are and will be as of the effective date of the Term Loan Conversion Option accurate both before and after giving effect thereto; and (ii) as of the date hereof, no Event of Default, as defined in Section 6.01 of the Credit Agreement, has occurred, nor has any event occurred, that with the giving of notice or the passage of time or both, would constitute an Event of Default, in either case both before and after giving effect to the effectiveness of the Term Loan Conversion Option. Witness my hand this ______ day of _________, ____. ------------------------ [----------------] Vice President and Treasurer EXHIBIT G FORM OF ASSUMPTION AGREEMENT ----------, ---- To Citibank, N.A., as Administrative Agent under the Credit Agreement referred to below Ladies and Gentlemen: We make reference to the 364-day Credit Agreement (the "Credit Agreement"), dated as of July 31, 2002, among Carolina Power & Light Company (the "Borrower"), the lenders named therein and Citibank, N.A., as Administrative Agent. Terms defined in the Credit Agreement are used herein as defined therein. The Borrower and _______________ (the "Assuming Lender") each hereby agree as follows: 1. The Assuming Lender proposes to become an Assuming Lender pursuant to Section 2.04(b) of the Credit Agreement and, in that connection, hereby agrees with the Administrative Agent and the Borrower that it shall become a Lender for all purposes of the Credit Agreement on the applicable Commitment Increase Date. 2. The Assuming Lender (a) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01(e) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assumption Agreement; (b) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (c) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; and (d) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender. 3. Following the execution hereof, this Assumption Agreement will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date for this Assumption Agreement (the "Effective Date") shall be the applicable Commitment Increase Date. 4. Upon satisfaction of the applicable conditions set forth in Section 2.04(b) of the Credit Agreement and upon such acceptance and recording by the Administrative Agent, as of the Effective Date, the Assuming Lender shall be a party to the Credit Agreement and have all of the rights and obligations of a Lender thereunder. 5. This Assumption Agreement shall be governed by, and construed in accordance with, the law of the State of New York. 6. This Assumption Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Assumption Agreement by facsimile shall be effective as delivery of a manually executed counterpart of this Assumption Agreement. IN WITNESS WHEREOF, the Borrower and the Assuming Lender have caused this letter to be duly executed and delivered as of the date first above written. Very truly yours, CAROLINA POWER & LIGHT COMPANY By _____________________ Name: Title: [NAME OF ASSUMING LENDER] By ________________________ Name: Title: Accepted this __ day of ----------, ----: CITIBANK, N.A., As Administrative Agent By___________________________ Name: Title: EX-10 6 pei_10qexhibit10iv-.txt EXHIBIT 10(IV) CONFORMED COPY - -------------------------------------------------------------------------------- (three-year) $272,500,000 CREDIT AGREEMENT Dated as of July 31, 2002 CAROLINA POWER & LIGHT COMPANY (Company) and THE BANKS LISTED ON THE SIGNATURE PAGES HEREOF (Banks) and THE OTHER LENDERS FROM TIME TO TIME PARTY HERETO (Lenders) and CITIBANK, N.A. (Administrative Agent) - -------------------------------------------------------------------------------- WACHOVIA BANK, NATIONAL ASSOCIATION Syndication Agent TABLE OF CONTENTS Section Page Article I DEFINITIONS AND ACCOUNTING TERMS........................1 Section 1.01. Certain Defined Terms..............................1 Section 1.02. Computation of Time Periods........................9 Section 1.03. Accounting Terms...................................9 Article II AMOUNTS AND TERMS OF THE ADVANCES......................10 Section 2.01. The Advances......................................10 Section 2.02. Making the Advances...............................10 Section 2.03. Facility Fee......................................11 Section 2.04. Changes in the Commitments........................12 Section 2.05. Repayment of Advances.............................14 Section 2.06. Evidence of Indebtedness..........................14 Section 2.07. Interest on Advances..............................14 Section 2.08. Additional Interest on Eurodollar Rate Advances...15 Section 2.09. Interest Rate Determination.......................15 Section 2.10. Voluntary Conversion of Advances..................16 Section 2.11. Prepayments of Advances...........................17 Section 2.12. Increased Costs...................................17 Section 2.13. Illegality........................................18 Section 2.14. Payments and Computations.........................18 Section 2.15. Sharing of Payments, Etc..........................19 Article III CONDITIONS OF LENDING..................................20 Section 3.01. Conditions Precedent to Closing...................20 Section 3.02. Conditions Precedent to Each Borrowing............21 Article IV REPRESENTATIONS AND WARRANTIES.........................21 Section 4.01. Representations and Warranties of the Company.....21 Article V COVENANTS OF THE COMPANY...............................23 Section 5.01. Affirmative Covenants.............................23 Section 5.02. Negative Covenants................................25 Article VI EVENTS OF DEFAULT......................................27 Section 6.01. Events of Default.................................27 Article VII THE ADMINISTRATIVE AGENT...............................28 Section 7.01. Authorization and Action..........................28 Section 7.02. Administrative Agent's Reliance, Etc..............29 Section 7.03. The Administrative Agent and its Affiliates.......29 Section 7.04. Lender Credit Decision............................29 Section 7.05. Indemnification...................................30 Section 7.06. Successor Administrative Agent....................30 Article VIII MISCELLANEOUS..........................................30 Section 8.01. Amendments, Etc...................................30 Section 8.02. Notices, Etc......................................31 Section 8.03. No Waiver; Remedies...............................31 Section 8.04. Costs, Expenses and Taxes.........................31 Section 8.05. Right of Set-off..................................34 Section 8.06. Binding Effect....................................34 Section 8.07. Assignments and Participations....................34 Section 8.08. Governing Law.....................................38 Section 8.09. WAIVER OF JURY TRIAL..............................38 Section 8.10. Execution in Counterparts.........................38 Section 8.11. Severability......................................38 Section 8.12. Headings..........................................39 Section 8.13. Entire Agreement..................................39 SCHEDULES I Existing Facilities EXHIBITS A-1 Form of Notice of Borrowing A-2 Form of Notice of Conversion B Form of Assignment and Acceptance C-1 Form of Opinion of General Counsel for the Company C-2 Form of Opinion of Counsel for the Company D Form of Opinion of Counsel for the Administrative Agent E Form of Assumption Agreement CREDIT AGREEMENT Dated as of July 31, 2002 CAROLINA POWER & LIGHT COMPANY, a North Carolina corporation (the "Company"), the banks listed on the signature pages hereof (the "Banks") and CITIBANK, N.A. ("Citibank"), as administrative agent (the "Administrative Agent") for the Lenders (as hereinafter defined) hereunder. Article I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Administrative Agent" has the meaning specified in the introductory paragraph hereof. "Advance" means an advance by a Lender to the Company as part of a Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of Advance. Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by, or is under common control with such Person or is a director or officer of such Person. "Applicable Lending Office" means, with respect to each Lender, (i) such Lender's Domestic Lending Office in the case of a Base Rate Advance, or (ii) such Lender's Eurodollar Lending Office, in the case of a Eurodollar Rate Advance. "Applicable Margin" means on any date, the rate per annum set forth below for the applicable Type of Advance, determined by reference to the ratings assigned to the Reference Securities: - ---------------------------------------------------------------------------------------------------------------------------------- Basis for LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 LEVEL 5 LEVEL 6 Pricing If the If the If the Reference If the Reference If the Reference If the Reference Reference Reference Securities are Securities are rated Securities are rated Securities are rated Securities Securities rated lower than lower than Level 3 lower than Level 4 lower than Level 5 are rated are rated Level 2 but at but at least BBB by but at least BBB- by or unrated at least A lower than least BBB+ by Standard & Poor's or Standard & Poor's by Standard Level 1 but Standard & at least Baa2 by and at least Baa3 by & Poor's or at least A- Poor's or at Moody's Moody's at least A2 by Standard least Baa1 by by Moody's & Poor's or Moody's at least A3 by Moody's - ---------------------------------------------------------------------------------------------------------------------------------- Eurodollar 0.275% 0.500% 0.725% 0.800% 1.000% 1.650% Rate - ---------------------------------------------------------------------------------------------------------------------------------- Base Rate 0.0% 0.0% 0.0% 0.0% 0.000% 0.650% - ----------------------------------------------------------------------------------------------------------------------------------
The Applicable Margin will increase by (i) 0.125% for Levels 1, 2 and 3, (ii) 0.25% for Levels 4 and 5 and (iii) 0.50% for Level 6 at any time that more than 33% of the Commitments are utilized. The Applicable Margin will be redetermined on the date of any change in the rating assigned by Standard & Poor's or Moody's, as the case may be, to the Reference Securities. If and so long as an Event of Default shall have occurred and shall be continuing, the Applicable Margin will increase by 2.00%. If the ratings assigned to the Reference Securities by Standard & Poor's and Moody's are not comparable (i.e., a "split rating"), and (i) the ratings differential is one category, the higher of such two ratings shall control, unless either rating is below BBB- (in the case of Standard & Poor's) or Baa3 (in the case of Moody's), in which case the lower of such two ratings shall control, or (ii) the ratings differential is two or more categories, the rating that is one below the higher of the two ratings shall control, unless either rating is below BBB- (in the case of Standard & Poor's) or Baa3 (in the case of Moody's), in which case the lower of such two ratings shall control. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit B hereto. "Assuming Lender" means any Eligible Assignee not previously a Lender that becomes a Lender hereunder pursuant to Section 2.04(b). "Bank" has the meaning specified in the introductory paragraph hereof. "Base Rate" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the higher from time to time of: (i) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; and 2 (ii) 1/2 of one percent per annum above the Federal Funds Rate in effect from time to time. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.07(a). "Business Day" means a day of the year on which banks are not required or authorized to close at the principal office of any Lender and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Change of Control" means the occurrence, after the date of this Agreement, of (i) any Person or "group" (within the meaning of Rule 13(d) or 14(d) of the Securities and Exchange Commission under the Exchange Act), directly or indirectly, acquiring beneficial ownership of or control over securities of Progress Energy, Inc., representing in excess of 30% of the combined voting power of all securities of Progress Energy, Inc. entitled to vote in the election of directors of Progress Energy, Inc. or (ii) Progress Energy, Inc. shall fail to own, directly or indirectly, 95% of all securities of the Company entitled to vote in the election of directors of the Company. "Citibank" has the meaning specified in the introductory paragraph hereof. "Commitment" has the meaning specified in Section 2.01. "Commitment Increase" has the meaning assigned to that term in Section 2.04(b). "Commitment Increase Date" has the meaning set forth in Section 2.04(b). "Company" has the meaning specified in the introductory paragraph hereof. "Consolidated" refers to the consolidation of the accounts of the Company and the Subsidiaries in accordance with generally accepted accounting principles, including principles of consolidation, consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type, or the selection of a new, or the renewal of the same, Interest Period for Eurodollar Rate Advances, pursuant to Section 2.09 or 2.10. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" below its name on the signature pages hereof or such other office of such Lender as such Lender may from time to time specify to the Company and the Administrative Agent. "Eligible Assignee" means (i) any other Lender or any Affiliate of a Lender and (ii) (A) any other commercial bank organized under the laws of 3 the United States, or any State thereof, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator), (B) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator), (C) a commercial bank organized under the laws of any other country which is a member of the OECD or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow of the Cayman Islands, or a political subdivision of any such country, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator); provided that such bank is acting through a branch or agency located in the United States or in the country in which it is organized or another country which is described in this clause (C), (D) the central bank of any country which is a member of the OECD, and (E) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership or other entity) which is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business, whose outstanding unsecured indebtedness is rated AA- or better by S&P or Aa3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured indebtedness); provided, that, in the case of any such Person described in this clause (ii), the identity of such Person is notified by the proposed assignor to the Company and the Administrative Agent (or by the Company to the Administrative Agent pursuant to Section 8.07(f)) in writing at least ten Business Days prior to the date of the proposed assignment under Section 8.07 and is consented to in writing by the Company and the Administrative Agent (each of which shall not unreasonably withhold their respective consents) at least five Business Days prior to the date of such proposed assignment. "Environmental Laws" means any federal, state or local laws, ordinances or codes, rules, orders, or regulations relating to pollution or protection of the environment, including, without limitation, laws relating to hazardous substances, laws relating to reclamation of land and waterways and laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollution, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. 4 "Eurodollar Lending Office" means, with respect to each Lender, the office of such Lender specified as its "Eurodollar Lending Office" below its name on the signature pages hereof (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Company and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1/8 of 1% per annum, if such average is not such a multiple) of the rates per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London Interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period for a period equal to such Interest Period and in an amount substantially equal to the amount of such Eurodollar Rate Advance comprising part of such Borrowing to be outstanding during such Interest Period from such Reference Bank. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing shall be determined by the Administrative Agent on the basis of the applicable rates furnished to and received by the Administrative Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.08. "Eurodollar Rate Advance" means an Advance that bears interest as provided in Section 2.07(b). "Eurodollar Rate Reserve Percentage" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning assigned to that term in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934, and the regulations promulgated thereunder, in each case as amended and in effect from time to time. "Existing Facilities" refers to those credit agreements listed on Schedule 1 hereto. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next 5 preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "First Mortgage Bonds" means those bonds issued by the Company pursuant to the Mortgage. "Guaranty" of any Person means any obligation, contingent or otherwise, of such Person (i) to pay any Liability of any other Person or to otherwise protect, or having the practical effect of protecting, the holder of any such Liability against loss (whether such obligation arises by virtue of such Person being a partner of a partnership or participant in a joint venture or by agreement to pay, to keep well, to purchase assets, goods, securities or services or to take or pay, or otherwise) or (ii) incurred in connection with the issuance by a third Person of a Guaranty of any Liability of any other Person (whether such obligation arises by agreement to reimburse or indemnify such third Person or otherwise). The word "Guarantee" when used as a verb has the correlative meaning. "Increasing Lender" means any Lender that agrees to increase its Commitment pursuant to Section 2.04(b). "Indebtedness" of any Person means (i) any obligation of such Person for borrowed money, (ii) any obligation of such Person evidenced by a bond, debenture, note or other similar instrument, (iii) any obligation of such Person to pay the deferred purchase price of property or services, except a trade account payable that arises in the ordinary course of business but only if and so long as the same is payable on customary trade terms, (iv) any obligation of such Person as lessee under a capital lease, (v) any Mandatorily Redeemable Stock of such Person (the amount of such Mandatorily Redeemable Stock to be determined for this purpose as the higher of the liquidation preference and the amount payable upon redemption of such Mandatorily Redeemable Stock), (vi) any obligation of such Person to purchase securities or other property that arises out of or in connection with the sale of the same or substantially similar securities or property, (vii) any non-contingent obligation of such Person to reimburse any other Person in respect of amounts paid under a letter of credit or other Guaranty issued by such other Person to the extent that such reimbursement obligation remains outstanding after it becomes non-contingent, (viii) any Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) a mortgage, lien, pledge, charge or other encumbrance on any asset of such Person, (ix) any Liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA, and (x) any Indebtedness of others Guaranteed by such Person. "Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Advance or the Conversion of any Advance to such Advance and ending on the last day of the period selected by the Company pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the 6 period selected by the Company pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as the Company may, in the Notice of Borrowing given by the Company to the Administrative Agent pursuant to Section 2.02, select; provided, however, that: (i) the Company may not select any Interest Period that ends after the Commitment Termination Date; (ii) Interest Periods commencing on the same date for Advances comprising the same Borrowing shall be of the same duration; and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day; provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. The Administrative Agent shall promptly advise each Lender by telex, telecopy transmission or cable of each Interest Period so selected by the Company. "Lenders" means the Lenders listed on the signature pages hereof, each Assuming Lender and each Eligible Assignee that shall become a party hereto pursuant to Section 8.07. "Liability" of any Person means any indebtedness, liability or obligation of or binding upon, such Person or any of its assets, of any kind, nature or description, direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, whether arising under contract, applicable law, or otherwise, whether now existing or hereafter arising. "Majority Lenders" means at any time Lenders holding at least 66-2/3% of the then aggregate unpaid principal amount of the Advances, or, if no such principal amount is then outstanding, Lenders having at least 66-2/3% of the Commitments (provided that, for purposes hereof, neither the Company, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders holding such amount of the Advances or having such amount of the Commitments or (ii) determining the aggregate unpaid principal amount of the Advances or the total Commitments). "Mandatorily Redeemable Stock" means, with respect to any Person, any share of such Person's capital stock to the extent that it is (i) redeemable, payable or required to be purchased or otherwise retired or extinguished, or convertible into any Indebtedness or other Liability of such Person, (ii) at a fixed or determinable date, whether by operation of a sinking fund or otherwise, (iii) at the option of any Person other than such Person or (iv) upon the occurrence of a condition not solely within the control of such Person, such as a redemption required to be made out of future earnings or (v) convertible into Mandatorily Redeemable Stock. 7 "Moody's" means Moody's Investors Service, Inc., or any successor thereto. "Mortgage" means the Mortgage and Deed of Trust, dated as of May 1, 1940, from the Company to The Bank of New York (formerly Irving Trust Company) and to Frederick G. Herbst (W.T. Cunningham, successor), as modified, amended or supplemented from time to time. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "NCUC Order" means the order by the North Carolina Utilities Commission that authorizes the Company to execute, deliver and perform this Agreement. "Notice of Borrowing" has the meaning specified in Section 2.02(a). "Notice of Conversion" has the meaning specified in Section 2.10. "OECD" means the Organization for Economic Cooperation and Development. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Plan" means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Company or any of its Affiliates and covered by Title IV of ERISA. "Reference Banks" means Citibank and Wachovia Bank, National Association. "Reference Securities" means the long-term unsecured senior, non-credit enhanced debt of the Company. "Register" has the meaning specified in Section 8.07(c). "Responsible Officer" means the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller or any Assistant Treasurer of the Company the signatures of whom, in each case, have been certified to the Administrative Agent and each other Bank pursuant to Section 3.01(d), or in a certificate delivered to the Administrative Agent replacing or amending such certificate. Each Lender may conclusively rely on each certificate so delivered until it shall have received a copy of a certificate from the Secretary or an Assistant Secretary of the Company amending, canceling or replacing such certificate. "S&P" means Standard & Poor's Ratings Group, or any successor thereto. 8 "SCPSC Order" means the order by the South Carolina Public Service Commission that authorizes the Company to execute, deliver and perform this Agreement. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether at the time capital stock (or comparable interest) of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by said Person (whether directly or through one or more other Subsidiaries). "Termination Date" means the earlier to occur of (i) July 31, 2005 and (ii) the date of termination or reduction in whole of the Commitments pursuant to Section 2.04(a) or 6.01. "Termination Event" means (i) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation under such regulations), or (ii) the withdrawal of the Company or any of its Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the Pension Benefit Guaranty Corporation, or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Total Capitalization" means the sum of the value of the common stock, retained earnings, and preferred and preference stock of the Company (in each case, determined in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e)), plus Consolidated Indebtedness of the Company. Section 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Section 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). 9 Article II AMOUNTS AND TERMS OF THE ADVANCES Section 2.01. The Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Advances to the Company from time to time on any Business Day during the period from the date hereof to but excluding the Termination Date, in an aggregate amount outstanding not to exceed at any time the amount set opposite such Lender's name on the signature pages hereof or, if such Lender has entered into any Assignment and Acceptance or is an Assuming Lender, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c), as such amount may be reduced or increased pursuant to Section 2.04 (such Lender's "Commitment"). Each Borrowing shall be in an aggregate amount not less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Advances of the same Type made on the same day by the Lenders ratably according to their respective Commitments. Until the Termination Date, within the limits of each Lender's Commitment, the Company may from time to time borrow, repay pursuant to Section 2.05 or prepay pursuant to Section 2.11(b) and reborrow under this Section 2.01. Section 2.02. Making the Advances. (a) Each Borrowing shall be made on notice, given not later than 11:00 A.M. (New York City time) on the day of such proposed Borrowing, in the case of a Borrowing comprised of Base Rate Advances, or on the third Business Day prior to the date of the proposed Borrowing, in the case of a Borrowing comprised of Eurodollar Rate Advances, by the Company to the Administrative Agent, which shall give to each Lender prompt notice thereof by telex, telecopier or cable. Each such notice of a Borrowing (a "Notice of Borrowing") shall be by telex, telecopier or cable, confirmed promptly in writing, in substantially the form of Exhibit A-1 hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing comprised of Eurodollar Rate Advances, the Interest Period for each such Advance. In the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the Administrative Agent shall promptly notify each Lender of the applicable interest rate under Section 2.07(b). Each Lender shall, before 12:00 P.M. (New York City time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Company at the Administrative Agent's aforesaid address. (b) Each Notice of Borrowing shall be irrevocable and binding on the Company and, in respect of any Borrowing comprised of Eurodollar Rate Advances, the Company shall indemnify each Lender against any loss or expense incurred by such Lender as a result of any failure by the Company to fulfill on or before the date specified for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the 10 Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (c) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the Company severally agree to repay to the Administrative Agent (without duplication), forthwith on demand, such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Company until the date such amount is repaid to the Administrative Agent, (x) in the case of the Company, at the interest rate applicable at the time to Advances comprising such Borrowing and (y) in the case of such Lender, at the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement. (d) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. (e) If, for any reason, a Borrowing is not made on the date specified in any Notice of Borrowing, the Administrative Agent hereby agrees to repay to each Lender the amount, if any, which such Lender has made available to the Administrative Agent as such Lender's ratable portion of such Borrowing, together with interest thereon for each day from the date such amount is made available to the Administrative Agent until the date such amount is repaid to such Lender, at the Federal Funds Rate. Section 2.03. Facility Fee. The Company agrees to pay to the Administrative Agent for the account of each Lender a facility fee on each Lender's Commitment, irrespective of usage, from the date hereof, in the case of each Bank, and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender, in the case of each other Lender, until the Termination Date, payable quarterly in arrears on the last day of each March, June, September and December during the term of such Lender's Commitment and on the Termination Date, at a rate per annum determined by reference to the ratings assigned to the Reference Securities as set forth below: 11 - --------------------------------------------------------------------------------------------------------- Basis for LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 LEVEL 5 LEVEL 6 Pricing If the If the If the If the If the If the Reference Reference Reference Reference Reference Reference Securities Securities Securities Securities Securities Securities are rated at are rated are rated are rated are rated are rated least A by lower than lower than lower than lower than lower than Standard & Level 1 but Level 2 but Level 3 but Level 4 but Level 5 or Poor's or at at least A- at least at least BBB at least by are Unrated least A2 by by Standard BBB+ by by Standard BBB- and Moody's & Poor's or Standard & & Poor's or Baa3 by at least A3 Poor's or at least Moody's by Moody's at least Baa2 by Baa1 by Moody's Moody's - --------------------------------------------------------------------------------------------------------- Facility Fee 0.100% 0.125% 0.150% 0.200% 0.250% 0.350% - ---------------------------------------------------------------------------------------------------------
The Facility Fee rate will be redetermined on the date of any change in the rating assigned by Standard & Poor's or Moody's, as the case may be, to the Reference Securities. If the ratings assigned to the Reference Securities by Standard & Poor's and Moody's are not comparable (i.e., a "split rating"), and (i) the ratings differential is one category, the higher of such two ratings shall control, unless either rating is below BBB- (in the case of Standard & Poor's) or Baa3 (in the case of Moody's), in which case the lower of such two ratings shall control, or (ii) the ratings differential is two or more categories, the rating that is one below the higher of the two ratings shall control, unless either rating is below BBB- (in the case of Standard & Poor's) or Baa3 (in the case of Moody's), in which case the lower of such two ratings shall control. Section 2.04. Changes in the Commitments. (a) Reduction or Termination of the Commitments. The Company shall have the right, upon at least three Business Days' notice to the Administrative Agent, irrevocably and permanently to terminate in whole or reduce ratably in part the respective Commitments of the Lenders; provided that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount which is less than the aggregate principal amount of the Advances then outstanding; and provided further, that each partial reduction shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof. (b) Increase of the Commitments. (i) Requests for Increase by Company. The Company may, by notice to the Administrative Agent, propose that the aggregate amount of the Commitments be increased (each such proposed increase being a "Commitment Increase"), effective as of a date (the "Commitment Increase Date") that shall be specified in such notice; provided that: (A) the proposed Commitment Increase in respect of the Commitment of either (i) any Increasing Lender or (ii) any Assuming Lender for each Commitment Increase Date shall be in the aggregate amount of $10,000,000 or a multiple of $1,000,000 in excess thereof; 12 (B) in no event shall the aggregate amount of the Commitments hereunder at any time exceed $287,500,000; (C) no Event of Default or event that, with the giving of notice on the passage of time, or both, would constitute an Event of Default shall have occurred and be continuing on such Commitment Increase Date or shall result from the proposed Commitment Increase; and (D) the representations and warranties contained in Article IV shall be correct on and as of the Commitment Increase Date as if made on and as of such date. (ii) Acceptance of Commitment Increase by the Company. The Company shall deliver the notice described in clause (i) above no later than three Business Days prior to the relevant Commitment Increase Date, which notice shall specify the identities of each Increasing Lender and Assuming Lender, the amount of the new Commitments to be accepted by each Increasing Lender and Assuming Lender and the relevant Commitment Increase Date (and the Administrative Agent shall give notice thereof to the Lenders, including any Assuming Lenders). The Assuming Lenders, if any, shall become Lenders hereunder as of such Commitment Increase Date, and the Commitments of any Increasing Lenders and such Assuming Lenders shall be increased as of such Commitment Increase Date; provided that: (A) the Administrative Agent shall have received on or prior to 11:00 a.m., New York City time, on such Commitment Increase Date a certificate of a duly authorized officer of the Company stating that each of the applicable conditions to such Commitment Increase set forth in this Section 2.04(b) has been satisfied; (B) with respect to each Assuming Lender, the Administrative Agent shall have received, on or prior to 11:00 a.m., New York City time, on such Commitment Increase Date, an appropriate Assumption Agreement in substantially the form of Exhibit G, duly executed by such Assuming Lender and the Company; and (C) each Increasing Lender shall have delivered to the Administrative Agent, on or prior to 11:00 a.m., New York City time, on such Commitment Increase Date, confirmation in writing satisfactory to the Administrative Agent as to its increased Commitment, with a copy of such confirmation to the Company. (iii) Recordation. Upon receipt by the Administrative Agent of confirmation from a Lender that it is increasing its Commitment hereunder, together with the certificate referred to in clause (ii)(A) above, the Administrative Agent shall (A) record the information contained therein in the Register maintained by the Administrative Agent pursuant to Section 8.07(c) and (B) give prompt notice thereof to the Company. Upon receipt by the Administrative Agent of an Assumption Agreement executed by an Assuming Lender, together with the certificate referred to in clause (ii)(A) above, 13 the Administrative Agent shall, if such Assumption Agreement has been completed and is in substantially the form of Exhibit E, (x) accept such Assumption Agreement, (y) record the information contained therein in the Register maintained by the Administrative Agent and (z) give prompt notice thereof to the Company. (iv) Adjustments of Borrowings upon Effectiveness of Increase. In the event that the Administrative Agent shall have received notice from the Company as to any agreement with respect to a Commitment Increase on or prior to the relevant Commitment Increase Date and the actions provided for in clauses (ii)(A) through (ii)(C) above shall have occurred by 11:00 a.m., New York City time, on such Commitment Increase Date, the Administrative Agent shall notify the Lenders (including any Assuming Lenders) of the occurrence of such Commitment Increase Date promptly on such date by facsimile transmission or electronic messaging system. On the date of such increase, the Company shall each prepay the outstanding Advances (if any) in full, and shall simultaneously borrow new Advances hereunder in an amount equal to such prepayment, so that, after giving effect thereto, the Advances of the Lenders are held ratably by the Lenders in accordance with their respective Commitments (after giving effect to such Commitment Increase). Prepayments made under this clause (iv) shall not be subject to the notice requirements of Section 2.11. Section 2.05. Repayment of Advances. The Company shall repay the principal amount of each Advance made by each Lender on the Termination Date. Section 2.06. Evidence of Indebtedness. Any Lender may request that any Advances made by it be evidenced by one or more promissory notes. In such event, the Company shall prepare, execute and deliver to such Lender one or more notes payable to the order of such Lender (or if requested by such Lender, to such Lender and its assignees) and in a form approved by the Administrative Agent. Thereafter, the Advances evidenced by such notes and interest thereon shall at all times (including after assignment pursuant to Section 8.07) be represented by one or more notes in such form payable to the order of the payee named therein. Section 2.07. Interest on Advances. The Company shall pay interest on the unpaid principal amount of each Advance made by each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, plus the Applicable Margin for Base Rate Advances, payable quarterly in arrears on the last day of each September, December, March, and June and on the date such Base Rate Advance shall be paid in full. (b) Eurodollar Rate Advances. If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance 14 to the Eurodollar Rate for such Interest Period, plus the Applicable Margin for Eurodollar Rate Advances, payable on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day which occurs during such Interest Period every three months from the first day of such Interest Period. Section 2.08. Additional Interest on Eurodollar Rate Advances. The Company shall pay to each Lender additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Advance. All claims for such additional interest shall be submitted by such Lender to the Company (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within ninety days after the first day of such Interest Period; provided, however, that if a claim is not submitted to the Company within such ninety day period, such Lender shall thereby waive its claim to such additional interest incurred during such ninety-day period but not to any such additional interest incurred thereafter. A certificate as to the amount of such additional interest, submitted to the Company (with a copy to the Administrative Agent) by such Lender, shall be conclusive and binding for all purposes, absent manifest error. Section 2.09. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining the Eurodollar Rate. If any one or more of the Reference Banks shall not furnish such timely information to the Administrative Agent for determination of any such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Administrative Agent shall give prompt notice to the Company and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.07(a) or (b), and the applicable rate, if any, furnished by each Reference Bank for determining the applicable interest rate under Section 2.07(b). (c) If fewer than two Reference Banks furnish timely information to the Administrative Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Administrative Agent shall forthwith notify the Company and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative 15 Agent shall notify the Company and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Company and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Company and the Lenders that the circumstances causing such suspension no longer exist. (e) If the Company shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Administrative Agent will forthwith so notify the Company and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. If an Event of Default shall have occurred and be continuing, each Eurodollar Rate Advance shall automatically Convert into a Base Rate Advance at the end of the Interest Period that is in effect for such Eurodollar Rate Advance. (f) On the date on which the aggregate unpaid principal amount of Advances comprising any Borrowing shall be reduced, by prepayment or otherwise, to less than $20,000,000, such Advances shall, if they are Eurodollar Rate Advances, automatically Convert into Base Rate Advances, and on and after such date the right of the Company to Convert such Advances into Eurodollar Advances shall terminate; provided, however, that if and so long as each such Advance shall be of the same Type and have the same Interest Period as Eurodollar Advances comprising another Borrowing or other Borrowings, and the aggregate unpaid principal amount of all Eurodollar Rate Advances shall equal or exceed $20,000,000, the Company shall have the right to continue all such Eurodollar Rate Advances as Advances having such Interest Period. Section 2.10. Voluntary Conversion of Advances. The Company may, on any Business Day prior to the Termination Date, upon notice given to the Administrative Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion, in the case of any proposed Conversion into Eurodollar Rate Advances, and on the date of the proposed Conversion, in the case of any proposed Conversion into Base Rate Advances, and subject to the provisions of Sections 2.09 and 2.13 and so long as no Event of Default has occurred and is continuing on the date of such proposed Conversion, Convert all Advances of one Type comprising the same Borrowing into Advances of another Type; provided, 16 however, that any Conversion of any Eurodollar Rate Advances into Base Rate Advances shall be made on, and only on, the last day of an Interest Period for such Eurodollar Rate Advances. Each such notice of a Conversion (a "Notice of Conversion") shall be by telex, telecopier or cable, confirmed promptly in writing, in substantially the form of Exhibit A-2 hereto and shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the aggregate amount of, Type of, and Interest Periods (if any) applicable to the Advances to be Converted, (iii) the Type of Advance to which such Advances (or portions thereof) are proposed to be Converted, and (iv) if such Conversion is into Eurodollar Rate Advances, the duration of the Interest Period for each such Advance. Section 2.11. Prepayments of Advances. (a) The Company shall have no right to prepay any principal amount of any Advances other than as provided in subsection (b) below. (b) The Company may, upon notice given to the Administrative Agent at least two Business Days prior to the proposed prepayment, in the case of any Eurodollar Rate Advance, and on the date of the proposed prepayment, in the case of any Base Rate Advance, and if such notice is given the Company shall, prepay the outstanding principal amounts of the Advances comprising the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the amount prepaid and, in the case of any Eurodollar Rate Advance, any amount payable pursuant to Section 8.04(b); provided, however, that each partial prepayment shall be in an aggregate principal amount not less than $5,000,000 and in integral multiples of $1,000,000 in excess thereof. Section 2.12. Increased Costs. (a) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage), in or in the interpretation of any law or regulation, or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances, then the Company shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for account of such Lender additional amounts sufficient to reimburse such Lender for such increased cost. All claims for increased cost shall be submitted by such Lender to the Company (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within ninety days after such introduction, such change, or the beginning of such compliance, the occurrence of which resulted in such increased cost, and the Company shall make such payment within five Business Days after notice of such claim is received; provided, however, that if a claim is not submitted to the Company within such ninety-day period, such Lender shall thereby waive its claim to such increased cost incurred during such ninety-day period but not to any such increased cost incurred thereafter. A certificate as to the amount of such increased cost, submitted to the Company (with a copy to the Administrative Agent) by such Lender, shall be conclusive and binding for all purposes, absent manifest error. 17 (b) If any Lender determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type, then, upon demand by such Lender (with a copy of such demand to the Administrative Agent), the Company shall immediately pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder. All claims for such additional amounts shall be submitted by such Lender (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within ninety days after such determination by such Lender, and the Company shall make such payment within five Business Days after notice of such claim is received; provided, however, that if a claim is not submitted to the Company within such ninety-day period, such Lender shall thereby waive its claim to such additional amounts incurred during such ninety-day period but not to any such additional amounts incurred thereafter. A certificate as to such amounts submitted to the Company and the Administrative Agent by such Lender shall be conclusive and binding for all purposes, absent manifest error. Section 2.13. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances (i) the obligation of the Lenders to make Eurodollar Rate Advances, or to Convert Advances into Eurodollar Rate Advances, shall be suspended until the Administrative Agent shall notify the Company and the Lenders that the circumstances causing such suspension no longer exist and (ii) the Company shall forthwith prepay in full all Eurodollar Rate Advances of all Lenders then outstanding, together with interest accrued thereon, unless the Company, within five Business Days of notice from the Administrative Agent, Converts all Eurodollar Rate Advances of all Lenders then outstanding into Base Rate Advances in accordance with Section 2.10. Section 2.14. Payments and Computations. (a) The Company shall make each payment hereunder not later than 11:00 A.M. (New York City time) on the day when due in U.S. dollars to the Administrative Agent at its address referred to in Section 8.02 in same day funds. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or fees (other than pursuant to Section 2.08 or 2.12) ratably to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of 18 the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) All computations of interest based on clause (i) of the definition of "Base Rate" shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or on clause (ii) of the definition of "Base Rate" or of fees payable hereunder shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.08 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period of which such interest or fees are payable. Each determination by the Administrative Agent (or, in the case of Section 2.08, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes. (c) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Unless the Administrative Agent shall have received notice from the Company prior to the date on which any payment is due to the Lenders hereunder that the Company will not make such payment in full, the Administrative Agent may assume that the Company has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Company shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender, together with interest thereon for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent at the Federal Funds Rate. Section 2.15. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances made by it (other than pursuant to Section 2.08 or 2.12) in excess of its ratable share of payments on account of the Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participation in the Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery, together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of 19 such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Company agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.15 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Company in the amount of such participation. Article III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Closing. The Commitments of the Lenders shall not become effective unless and until (i) the conditions precedent set forth in Section 3.01 of the 364-day $272,500,000 Credit Agreement, dated as of the date hereof, among the Company, the lenders named therein and Citibank, as administrative agent, shall have been satisfied, (ii) the Existing Facilities shall have been terminated and all amounts outstanding thereunder shall have been paid in full and (iii) the Administrative Agent shall have received the following: (a) Promissory notes, if requested by any Lender pursuant to Section 2.06. (b) Certified copies of the resolutions of the Board of Directors of the Company approving this Agreement, and of all documents evidencing other necessary corporate action and governmental approvals, including the NCUC Order and the SCPSC Order, with respect to this Agreement. (c) A certificate of the Secretary or an Assistant Secretary of the Company, dated as of the date hereof, certifying the names and true signatures of the officers of the Company authorized to sign this Agreement and the other documents to be delivered hereunder. (d) A certificate of a Responsible Officer of the Company, dated as of the date hereof, certifying (i) the accuracy of the representations and warranties contained herein and (ii) that no event has occurred and is continuing which constitutes an Event of Default or which would constitute an Event of Default but for the requirement that notice be given or time elapse, or both. (e) Certified copies of all required governmental approvals and authorizations. (f) Certified copy of the restated charter and bylaws of the Company. (g) Favorable opinions of counsel for the Company, substantially in the forms of Exhibit C-1 and Exhibit C-2 hereto and as to such other matters as any Lender through the Administrative Agent may reasonably request. (h) A favorable opinion of King & Spalding, counsel for the Administrative Agent, substantially in the form of Exhibit D hereto. 20 Section 3.02. Conditions Precedent to Each Borrowing. The obligation of each Lender to make an Advance on the occasion of each Borrowing (including the initial Borrowing) shall be subject to the further conditions precedent that (i) in the case of the making of an Advance, the Administrative Agent shall have received the written confirmatory Notice of Borrowing with respect thereto, and (ii) on the date of such Borrowing, the following statements shall be true (and each of the giving of the applicable Notice of Borrowing and the acceptance by the Company of the proceeds of such Borrowing shall constitute a representation and warranty by the Company that, on the date of such Borrowing, such statements are true): (a) The representations and warranties contained in Section 4.01 (excluding, in the case of any Borrowing that will not result in an increase in the aggregate principal amount of Advances outstanding, the representation and warranty contained in the last sentence of Section 4.01(e)) are correct on and as of the date of such Borrowing before and after giving effect to such Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (b) No event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both. Article IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of the Company. The Company represents and warrants as follows: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of North Carolina and is duly qualified to do business and in good standing under the laws of the State of South Carolina. (b) The execution, delivery and performance by the Company of this Agreement are within the Company's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Company's charter or bylaws or (ii) any law or contractual restriction binding on or affecting the Company. (c) No authorization or approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of this Agreement, other than the NCUC Order and the SCPSC Order, each of which has been duly issued, is final and in full force and effect. (d) This Agreement is the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. 21 (e) The Consolidated balance sheet of the Company and the Subsidiaries as at December 31, 2001, and the related Consolidated statements of income and retained earnings of the Company and the Subsidiaries for the fiscal year then ended, and the Consolidated balance sheet of the Company and the Subsidiaries as at March 31, 2002, and the related Consolidated statements of income and retained earnings of the Company and the Subsidiaries for the three-month period then ended, copies of which have been furnished to each Lender, fairly present (subject, in the case of such financial statements dated March 31, 2002, to year-end adjustments) the financial condition of the Company and the Subsidiaries as at such dates and the results of the operations of the Company and the Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied. Since December 31, 2001, there has been no material adverse change in the financial condition, operations or properties of the Company. (f) Except as described in the reports and registration statements which the Company has filed with the Securities and Exchange Commission prior to the date of this Agreement, there is no pending or threatened action or proceeding affecting the Company or any Subsidiary before any court, governmental agency or arbitrator, which may materially adversely affect the financial condition, operations or properties of the Company. (g) No proceeds of any Advance will be used to acquire any security in any transaction which is subject to Sections 12, 13 and 14 of the Securities Exchange Act of 1934. (h) The Company is not engaged in the business of extending credit for the purpose of buying or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to buy or carry any margin stock or to extend credit to others for the purpose of buying or carrying any margin stock. (i) Following application of the proceeds of each Advance, not more than 5 percent of the value of the assets (either of the Company only or of the Company and the Subsidiaries on a Consolidated basis) subject to the provisions of Section 5.02(a) or 5.02(e) will be margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). (j) No Termination Event has occurred or is reasonably expected to occur with respect to any Plan. (k) The Company is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (l) The Company is in substantial compliance with all applicable laws, rules, regulations and orders of any governmental authority, the noncompliance with which would materially and adversely affect the business or condition of the Company, such compliance to include, without limitation, substantial compliance with ERISA and Environmental Laws and paying before the same become delinquent all material taxes, assessments and governmental charges imposed upon 22 it or upon its property, except to the extent compliance with any of the foregoing is then being contested in good faith by appropriate legal proceedings. (m) All written information furnished by the Company to the Administrative Agent and the Lenders in connection with this Agreement (the "Disclosed Information") was (and all information furnished in the future by the Company to the Administrative Agent and the Lenders will be) complete and correct in all respects material to the creditworthiness of the Company when delivered. As of the date hereof, the Disclosed Information does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances under which made. Article V COVENANTS OF THE COMPANY Section 5.01. Affirmative Covenants. So long as any Advances shall remain unpaid or any Lender shall have any Commitment hereunder, the Company shall, unless the Majority Lenders shall otherwise consent in writing: (a) Compliance with Laws, Etc. Except to the extent contested in good faith, comply, and cause each Subsidiary to comply, with all applicable laws, rules, regulations and orders (such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property), the non-compliance with which would materially adversely affect the Company's business or credit. (b) Preservation of Corporate Existence, Etc. Preserve and maintain its corporate existence, rights (charter and statutory) and franchises. (c) Visitation Rights. At any reasonable time and from time to time, permit the Administrative Agent or any of the Lenders or any agents or representatives thereof to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Company and any of the Subsidiaries, and to discuss the affairs, finances and accounts of the Company and any of the Subsidiaries with any of their respective officers or directors. (d) Keeping of Books. Keep, and cause each Subsidiary to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and such Subsidiary in accordance with generally accepted accounting principles consistently applied. (e) Maintenance of Properties, Etc. Maintain and preserve, and cause each Subsidiary to maintain and preserve, all of its properties which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. (f) Maintenance of Insurance. Maintain, and cause each Subsidiary to maintain, insurance with responsible and reputable insurance companies or 23 associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company or such Subsidiary operates. (g) Taxes. File, and cause each Subsidiary to file, all tax returns (federal, state and local) required to be filed and paid and pay all taxes shown thereon to be due, including interest and penalties, or provide adequate reserves for payment thereof other than such taxes that the Company or such Subsidiary is contesting in good faith by appropriate legal proceedings. (h) Material Obligations. Pay, and cause each Subsidiary to pay, promptly as the same shall become due each material obligation of the Company or such Subsidiary. (i) Reporting Requirements. Furnish to the Lenders: (i) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Company, a Consolidated balance sheet of the Company and the Subsidiaries as at the end of such quarter and Consolidated statements of income and retained earnings of the Company and the Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the treasurer or the chief financial officer of the Company, together with a certificate of the treasurer or chief financial officer of the Company, setting forth in reasonable detail the calculation of the Company's compliance with Section 5.01(j) and stating that no Event of Default and no event that, with the giving of notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing, or if an Event of Default or such event has occurred and is continuing, a statement setting forth details of such Event of Default or event and the action that the Company has taken and proposes to take with respect thereto; (ii) as soon as available and in any event within 100 days after the end of each fiscal year of the Company, a copy of the annual report for such year for the Company and the Subsidiaries, containing Consolidated financial statements for such year certified by Deloitte & Touche or other independent public accountants acceptable to the Majority Lenders, together with a certificate of the treasurer or chief financial officer of the Company, setting forth in reasonable detail the calculation of the Company's compliance with Section 5.01(j) and stating that no Event of Default and no event that, with the giving of notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing, or if an Event of Default or such event has occurred and is continuing, a statement setting forth details of such Event of Default or event and the action that the Company has taken and proposes to take with respect thereto; (iii) promptly after the sending or filing thereof, copies of all reports which the Company sends to any of its security holders, and copies of all reports and registration statements which the Company or any Subsidiary files with the Securities and Exchange Commission or any national securities exchange to the extent not delivered by the Company pursuant to clause (i) or (ii) of this Section 5.01(i); 24 (iv) immediately upon any Responsible Officer's obtaining knowledge of the occurrence of any Event of Default or any event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, a statement of the chief financial officer or treasurer of the Company setting forth details of such Event of Default or event and the action which the Company proposes to take with respect thereto; (v) immediately upon any Responsible Officer's obtaining knowledge thereof, notice of any change in any rating assigned by Standard & Poor's or Moody's to the Reference Securities; (vi) as soon as possible and in any event within five days after the commencement thereof or any adverse determination or development therein, notice of all actions, suits and proceedings that may adversely affect the Company's ability to perform its obligations under this Agreement; (vii) as soon as possible and in any event within five days after the occurrence of a Termination Event, notice of such Termination Event; and (viii) such other information respecting the condition or operations, financial or otherwise, of the Company or any Subsidiary as any Lender through the Administrative Agent may from time to time reasonably request. (j) Indebtedness to Total Capitalization. Maintain at all times a ratio of Consolidated Indebtedness of the Company and its Subsidiaries to Total Capitalization of not more than .65:1.0. (k) Use of Proceeds. Use the proceeds of each Advance solely for general corporate purposes (including, without limitation, as a commercial paper back-up). No proceeds of any Advance will be used to acquire any equity security of a class that is registered pursuant to Section 12 of the Exchange Act or any security in any transaction that is subject to Sections 13 or 14 of the Exchange Act. Section 5.02. Negative Covenants. So long as any Advances shall remain unpaid or any Lender shall have any Commitment hereunder, the Company will not, without the written consent of the Majority Lenders: (a) Liens, Etc. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any Subsidiary to assign, any right to receive income, in each case to secure any Indebtedness of any Person, other than (i) liens, mortgages and security interests created by the Mortgage, (ii) liens and security interests affecting the fuel used by the Company in its power generating operations, and (iii) liens, mortgages and security interests securing other Indebtedness not exceeding $100,000,000; provided, however, that, in the event that and for so long as the First Mortgage Bonds are rated lower than BBB- or Baa3 by S&P or Moody's, respectively, or, in the event that neither of such credit rating agencies is in the business of rating the First Mortgage 25 Bonds, lower than an equivalent rating of the First Mortgage Bonds by another nationally-recognized credit rating agency of similar standing, the Company's right to continue to create, incur and suffer to exist liens, mortgages and security interests securing other Indebtedness pursuant to the foregoing clause (iii) shall be suspended. (b) Indebtedness. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any Indebtedness other than (i) Indebtedness hereunder, (ii) Indebtedness secured by liens and security interests permitted pursuant to clauses (ii) and (iii) of subsection 5.02(a), (iii) Indebtedness evidenced by the First Mortgage Bonds and (iv) unsecured Indebtedness, including guarantees issued in connection with the financing of pollution control facilities operated by the Company, guarantees of Indebtedness incurred by any wholly-owned Subsidiary and guarantees of debt securities issued by any financing Subsidiary established to secure debt financing in the offshore markets. (c) Lease Obligations. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any obligations for the payment of rental for any property under leases or agreements to lease having a term of one year or more which would cause the direct or contingent Consolidated liabilities of the Company and the Subsidiaries in respect of all such obligations payable in any calendar year to exceed 10% of the Consolidated operating revenues of the Company and the Subsidiaries for the immediately preceding calendar year. (d) Mergers, Etc. Merge with or into or consolidate with or into, or acquire all or substantially all of the assets or securities of, any Person, unless, in each case, (i) immediately after giving effect thereto, no event shall occur and be continuing which constitutes an Event of Default or an event which with the giving of notice or lapse of time, or both, would constitute an Event of Default, and (ii) in the case of any such merger to which the Company is a party, such other Person is a utility company and the resulting or surviving corporation, if not the Company, (x) is organized and existing under the laws of the United States of America or any State thereof, (y) is a corporation satisfactory to the Majority Lenders, and (z) shall have expressly assumed, by an instrument satisfactory in form and substance to the Majority Lenders, the due and punctual payment of all amounts due under this Agreement and the performance of every covenant and undertaking of the Company contained in this Agreement. (e) Sales, Etc. of Assets. Sell, lease, transfer or otherwise dispose of, or permit any Subsidiary to sell, lease, transfer or otherwise dispose of, any of its assets, other than the following sales: (i) sales of generating capacity to the Company's wholesale customers, (ii) sales of nuclear fuel, (iii) sales of accounts receivable, (iv) sales in connection with a transaction authorized by subsection (d) of this Section, (v) sales of investments in securities with a maturity of less than one year, or (vi) other sales not exceeding $150,000,000 in the aggregate in any fiscal year of the Company. (f) Margin Stock. Use any proceeds of any Advance to buy or carry margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). 26 Article VI EVENTS OF DEFAULT Section 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Company shall fail to pay any principal of any Advance when due, or shall fail to pay any interest on any Advance or any fees or other amounts payable hereunder within five Business Days after such interest or fees shall become due; or (b) Any representation or warranty made by the Company herein or by the Company (or any of its officers) in connection with this Agreement shall prove to have been incorrect in any material respect when made; or (c) The Company shall fail to perform or observe any other term, covenant or agreement contained in Sections 5.01(b), 5.01(i)(iv), 5.01(j) or 5.02 on its part to be performed or observed; or the Company shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Company by the Administrative Agent or any Lender; or (d) The Company or any of the Subsidiaries shall fail to pay any amount in respect of any Indebtedness in excess of $10,000,000 (but excluding Indebtedness hereunder) of the Company or such Subsidiary (as the case may be), or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or any other default under any agreement or instrument relating to any such Indebtedness, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) The Company or any of the Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Company or any of the Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property; or the Company or any of the Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order for the payment of money in excess of $10,000,000 shall be rendered against the Company or any of the Subsidiaries and either (i) 27 enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) Any Termination Event with respect to a Plan shall have occurred, and, 30 days after notice thereof shall have been given to the Company by the Administrative Agent, (i) such Termination Event (if correctable) shall not have been corrected and (ii) the then present value of such Plan's vested benefits exceeds the then current value of assets accumulated in such Plan by more than the amount of $20,000,000 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount); or (h) The Company or any of its Affiliates as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $20,000,000; or (i) A Change of Control shall occur; then, and in any such event, the Administrative Agent shall at the request, or may with the consent, of the Majority Lenders, by notice to the Company, (i) declare the Commitments and the obligation of each Lender to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) declare the Advances, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Advances, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Company or any of the Subsidiaries under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the Advances, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Company. Article VII THE ADMINISTRATIVE AGENT Section 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably provided for by this Agreement (including, without limitation, enforcement or collection of the Advances), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders; provided, however, that the Administrative Agent shall not be required to take 28 any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement or applicable law. Section 7.02. Administrative Agent's Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Administrative Agent: (i) may consult with legal counsel (including counsel for the Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Company or to inspect the property (including the books and records) of the Company; (iv) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (v) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopy, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. Section 7.03. The Administrative Agent and its Affiliates. With respect to its Commitment and the Advances made by it, the Administrative Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Administrative Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Citibank in its individual capacity. Citibank, and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Company, any of the Subsidiaries and any Person who may do business with or own securities of the Company or any Subsidiary, all as if Citibank were not the Administrative Agent and without any duty to account therefor to the Lenders. Section 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. 29 Section 7.05. Indemnification. The Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed by the Company), ratably according to the respective amounts of the Commitments then held by each of them, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Administrative Agent under this Agreement; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by the Administrative Agent in connection with the preparation, execution, administration, or enforcement of, or legal advice in respect of rights or responsibility under, this Agreement, to the extent that the Administrative Agent is not reimbursed for such expenses by the Company. Section 7.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Company and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Article VIII MISCELLANEOUS Section 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Company therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver 30 or consent shall, unless in writing and signed by all of the Lenders, do any of the following: (a) waive any of the conditions specified in Section 3.01 or 3.02 (b) change the Commitment of any Lender or subject any Lender to any additional obligations (other than pursuant to Section 2.04), (c) reduce the principal of, or interest on, the Advances or any fees hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Advances or any fees hereunder, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Advances, or the number of Lenders, which shall be required for the Lenders or any of them to take any action under this Agreement, and (f) amend, waive, or in any way modify or suspend any provision of this Section 8.01; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required hereinabove to take such action, affect the rights or duties of the Administrative Agent under this Agreement. Section 8.02. Notices, Etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telegraphic communication) and mailed, telecopied, telegraphed or delivered, if to the Company, at its address at 411 Fayetteville Street, Raleigh, North Carolina 27602, Attention: Manager of Financial Operations; if to any Lender, at its Domestic Lending Office set forth under its name on the signature pages hereof; and if to the Administrative Agent, at its address at Two Penns Way, Suite 200, New Castle, Delaware 19720, Attention: Bank Loan Syndications; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall be effective when received by the addressee thereof. Section 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof of the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 8.04. Costs, Expenses and Taxes. (a) The Company agrees to pay on demand all costs and expenses of the Administrative Agent in connection with (i) the preparation, execution and delivery of this Agreement and the other documents to be delivered hereunder, (ii) the first Borrowing under this Agreement, (iii) any modification, amendment or supplement to this Agreement and the other documents to be delivered hereunder and (iv) the enforcement of the rights and remedies of the Lenders and the Administrative Agent under this Agreement and the other documents to be delivered hereunder (whether through negotiations or legal proceedings), all the above costs and expenses to include, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent and each of the Lenders with respect thereto. In addition, the Company shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Agreement and the other documents to be delivered hereunder, and agrees to save the Administrative Agent and each Lender harmless 31 from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. (b) If, due to payments made by the Company due to acceleration of the maturity of the Advances pursuant to Section 6.01, or adjustments of the Borrowings pursuant to Section 2.04(b)(iv), or due to any other reason, any Lender receives payments of principal of any Eurodollar Rate Advance based upon the Eurodollar Rate other than on the last day of the Interest Period for such Advance, the Company shall, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. (c) Any and all payments by the Company hereunder shall be made, in accordance with Section 2.14, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Company shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions and (iii) the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (d) The Company will indemnify each Lender and the Administrative Agent for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable under this Section 8.04) paid by such Lender or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender or the Administrative Agent (as the case may be) makes written demand therefor. (e) Prior to the date of the initial Borrowing or on the date of the Assignment and Acceptance pursuant to which it became a Lender, in the case of each Lender that becomes a Lender by virtue of entering into an Assignment and Acceptance, and from time to time thereafter if requested by the Company or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Administrative Agent and the Company 32 with the forms prescribed by the Internal Revenue Service of the United States certifying that such Lender is exempt from United States withholding taxes with respect to all payments to be made to such Lender hereunder. If for any reason during the term of this Agreement, any Lender becomes unable to submit the forms referred to above or the information or representations contained therein are no longer accurate in any material respect, such Lender shall notify the Administrative Agent and the Company in writing to that effect. Unless the Company and the Administrative Agent have received forms or other documents satisfactory to them indicating that payment hereunder are not subject to United States withholding tax, the Company or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States. (f) Any Lender claiming any additional amounts payable pursuant to Section 8.04(c) or (d) shall use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) (i) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender and (ii) to otherwise minimize the amounts due, or to become due, under Sections 8.04(c) and (d). (g) If the Company makes any additional payment to any Lender pursuant to Section 8.04(c) or (d) in respect of any Taxes, and such Lender determines that it has received (i) a refund of such Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge solely as a result of any deduction or credit for any Taxes with respect to which it has received payments under Sections 8.04(c) and (d), such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Company such amount as such Lender shall have determined to be attributable to the deduction or withholding of such Taxes. If such Lender later determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 8.04(g), the Company shall upon demand of such Lender promptly repay the amount of such overpayment. Any determination made by such Lender pursuant to this Section 8.04(g) shall in the absence of bad faith or manifest error be conclusive, and nothing in this Section 8.04(g) shall be construed as requiring any Lender to conduct its business or to arrange or alter in any respect its tax or financial affairs so that it is entitled to receive such a refund, credit or reduction or as allowing any Person to inspect any records, including tax returns, of any Lender. (h) The Company hereby agrees to indemnify and hold harmless each Lender, the Administrative Agent, counsel to the Administrative Agent and their respective officers, directors, partners, employees, Affiliates and advisors (each, an "Indemnified Person") from and against any and all claims, damages, losses, liabilities, costs or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding), joint and several, that may actually be incurred by or asserted or awarded against any Indemnified Person (including, without limitation, in connection with any investigation, litigation or proceeding or the preparation of a defense in connection therewith) in each case by reason of or in connection with the execution, delivery, or performance of this Agreement, except to the extent that such claims, damages, losses, liabilities, costs, or expenses are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of the party seeking indemnification. (i) Without prejudice 33 to the survival of any other agreement of the Company hereunder, the agreements and obligations of the Company contained in this Section 8.04 shall survive the payment in full of principal and interest hereunder and the termination of Commitments. Section 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Advances due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Company now or hereafter existing under this Agreement, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. Each Lender agrees promptly to notify the Company after any such set-off and application made by such Lender; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have. Section 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Company and the Administrative Agent and when the Administrative Agent shall have been notified by each Lender that such Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Company, the Administrative Agent and each Lender and their respective successors and assigns, except that the Company shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of each Lender. Section 8.07. Assignments and Participations. (a) Each Lender may (i) with notice to the Company and to the Administrative Agent, assign to any of its Affiliates all or a portion of its rights and obligations under this Agreement, and (ii) with the consent of the Agent and the Company (such consent not to be unreasonably withheld and, in the case of the Company, such consent shall not be required if an Event of Default has occurred and is continuing), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the Advances owing to it; provided, however, that (A) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement, (B) each such assignment shall be to an Eligible Assignee, (C) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance and 34 (D) such parties shall also deliver to the Administrative Agent a processing and recordation fee of $3,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (c) The Administrative Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance (and copies of the related consents of the Company and the Administrative Agent to such assignment) delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders (including, without limitation, the Assuming Lenders) and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Company, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. 35 (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit B hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company. (e) Each Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Company hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Advances for all purposes of this Agreement, (iv) the Company, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) the holder of any such participation, other than an Affiliate of such Lender, shall not be entitled to require such Lender to take or omit to take any action hereunder, except action (A) extending the time for payment of interest on, or the final maturity of any portion of the principal amount of, the Advances or (B) reducing the principal amount of or the rate of interest payable on the Advances. Without limiting the generality of the foregoing: (i) such participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.08, 2.12 and 8.04(b) only if, and to the same extent, the Lender from which such participating banks or other entities acquired its participation would, at the time, be entitled to claim thereunder; and (ii) such participating banks or other entities shall also, to the fullest extent permitted by law, be entitled to exercise the rights of set-off contained in Section 8.05 as if such participating banks or other entities were Lenders hereunder. (f) If any Lender (or any bank, financial institution, or other entity to which such Lender has sold a participation) shall make any demand for payment under Section 2.12(b), then within 30 days after any such demand (if, but only if, such demanded payment has been made by the Company), the Company may, with the approval of the Administrative Agent (which approval shall not be unreasonably withheld) and provided that no Event of Default or event which, with the passage of time or the giving of notice, or both, would constitute an Event of Default shall then have occurred and be continuing, demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Company all (but not less than all) of such Lender's Commitment (if any) and the Advances owing to it within the period ending on the later to occur of such 30th day and the last day of the longest of the then current Interest Periods for such Advances. If such Eligible Assignee designated by the Company is not a Lender on the date of such demand by the Company, the Company shall pay the $3,500 processing and recordation fee described in Section 8.07(a). If any such Eligible Assignee designated by the Company shall fail to consummate such assignment on terms acceptable to such Lender, or if the Company shall fail to designate any such Eligible Assignees for all or part of such Lender's Commitment or Advances, then such demand by the Company shall become ineffective; it being understood for purposes of this subsection (g) that such assignment shall be conclusively deemed to be on terms acceptable to such Lender, and such Lender shall be compelled to consummate such assignment to an Eligible Assignee designated by the Company, if such Eligible Assignee (i) shall 36 agree to such assignment by entering into an Assignment and Acceptance in substantially the form of Exhibit B hereto with such Lender and (ii) shall offer compensation to such Lender in an amount equal to all amounts then owing by the Company to such Lender hereunder, whether for principal, interest, fees, costs or expenses (other than the demanded payment referred to above and payable by the Company as a condition to the Company's right to demand such assignment), or otherwise. (g) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company furnished to such Lender by or on behalf of the Company; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Company received by it from such Lender. (h) Anything in this Section 8.07 to the contrary notwithstanding, any Lender may assign and pledge all or any portion of its Commitment and the Advances owing to it to any Federal Reserve Bank (and its transferees) as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations hereunder. (i) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC") of such Granting Lender identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Company, the option to provide to the Company all or any part of any Advance that such Granting Lender would otherwise be obligated to make to the Company pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any such SPC to make any Advance, (ii) if such SPC elects not to exercise such option or otherwise fails to provide all or any part of such Advance, the Granting Lender shall be obligated to make such Advance pursuant to the terms hereof and (iii) no SPC or Granting Lender shall be entitled to receive any greater amount pursuant to Section 2.08 or 2.12 than the Granting Lender would have been entitled to receive had the Granting Lender not otherwise granted such SPC the option to provide any Advance to the Company. The making of an Advance by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Advance were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement for which a Lender would otherwise be liable so long as, and to the extent that, the related Granting Lender provides such indemnity or makes such payment. In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against or join any other person in instituting against such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. Notwithstanding the foregoing, the Granting Lender unconditionally agrees to indemnify the Company, the Administrative Agent and each Lender against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be incurred by or asserted against the Company, the Administrative Agent or such Lender, as the case may be, in any way relating to 37 or arising as a consequence of any such forbearance or delay in the initiation of any such proceeding against its SPC. Each party hereto hereby acknowledges and agrees that no SPC shall have the rights of a Lender hereunder, such rights being retained by the applicable Granting Lender. Accordingly, and without limiting the foregoing, each party hereby further acknowledges and agrees that no SPC shall have any voting rights hereunder and that the voting rights attributable to any Advance made by an SPC shall be exercised only by the relevant Granting Lender and that each Granting Lender shall serve as the administrative agent and attorney-in-fact for its SPC and shall on behalf of its SPC receive any and all payments made for the benefit of such SPC and take all actions hereunder to the extent, if any, such SPC shall have any rights hereunder. In addition, notwithstanding anything to the contrary contained in this Agreement any SPC may with notice to, but without the prior written consent of any other party hereto, assign all or a portion of its interest in any Advances to the Granting Lender. This Section may not be amended without the prior written consent of each Granting Lender, all or any part of whose Advance is being funded by an SPC at the time of such amendment. Section 8.08. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. The Company (i) irrevocably submits to the non-exclusive jurisdiction of any New York State court or Federal court sitting in New York City in any action arising out of this Agreement, (ii) agrees that all claims in such action may be decided in such court, (iii) waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum and (iv) consents to the service of process by mail. A final judgment in any such action shall be conclusive and may be enforced in other jurisdictions. Nothing herein shall affect the right of any party to serve legal process in any manner permitted by law or affect its right to bring any action in any other court. Section 8.09. WAIVER OF JURY TRIAL. THE COMPANY, THE ADMINISTRATIVE AGENT AND EACH LENDER EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY AND LAWFULLY DO SO, ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING TO THIS AGREEMENT IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER INSTRUMENT OR DOCUMENT DELIVERED HEREUNDER OR THEREUNDER. Section 8.10. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 8.11. Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. 38 Section 8.12. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 8.13. Entire Agreement. This Agreement constitutes the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Except as is expressly provided for herein, nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. 39 S-1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. CAROLINA POWER & LIGHT COMPANY By /s/ Thomas R. Sullivan ---------------------------------- Thomas R. Sullivan Treasurer CITIBANK, N.A., as Administrative Agent and as a Lender By /s/ Anita J. Brickell ------------------------------------- Anita J. Brickell Vice President S-2 WACHOVIA BANK, NATIONAL ASSOCIATION By /s/ Mitch Wilson ------------------------------------- Mitch Wilson Vice President S-3 CITIBANK, N.A. By /s/ Anita J. Brickell ------------------------------------- Anita J. Brickell Vice President S-4 JPMORGAN CHASE BANK By /s/ Robert M. Bowen, II ------------------------------------- Robert M. Bowen, II Managing Director S-5 BANK ONE, NA By /s/ Jane A. Bek ------------------------------------- Jane A. Bek Director S-6 MELLON BANK, N.A. By /s/ Scott Hennessee ------------------------------------- Scott Hennessee Vice President S-7 NORDDEUTSCHE LANDESBANK GIROZENTRALE, New York/Cayman Islands Branch By /s/ Jens A. Westrick ------------------------------------- Jens A. Westrick EVP By /s/ Stephanie Finnen ------------------------------------- Stephanie Finnen VP S-8 SUNTRUST BANK, ATLANTA By /s/ Karen C. Copeland ------------------------------------- Karen C. Copeland Vice President S-9 BARCLAYS BANK PLC By /s/ Sydney G. Dennis ------------------------------------- Sydney G. Dennis Director S-10 BANK OF AMERICA, N.A. By /s/ Gretchen Burud ------------------------------------- Gretchen Burud Managing Director SCHEDULE I Existing Facilities $200,000,000 364-Day Revolving Credit Agreement, dated as of June 30, 1998, as amended and restated as of June 29, 1999, and as amended June 7, 2002, among the Company, certain lenders and Citibank, as agent. Five Year Revolving Credit Agreement, dated as of June 30, 1998, among the Company, certain lenders and Citibank, as agent. EXHIBIT A-1 NOTICE OF BORROWING [Date] Citibank, N.A., as Administrative Agent for the Lenders parties to the Credit Agreement referred to below Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Bank Loan Syndications Ladies and Gentlemen: The undersigned, CAROLINA POWER & LIGHT COMPANY, refers to the three-year Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders from time to time parties thereto and CITIBANK, N.A., as Administrative Agent for said Lenders, and hereby gives you notice pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is ____________, 20__. (ii) The Type of Advances comprising the Proposed Borrowing is [Base Rate Advances][Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Borrowing is $______________. (iv) The Interest Period for each Eurodollar Rate Advance that is an Advance made as part of the Proposed Borrowing is _____ months. Very truly yours, CAROLINA POWER & LIGHT COMPANY By -------------------------------------- Name: Title: EXHIBIT A-2 NOTICE OF CONVERSION [Date] Citibank, N.A., as Administrative Agent for the Lenders parties to the Credit Agreement referred to below Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Bank Loan Syndications Ladies and Gentlemen: The undersigned, CAROLINA POWER & LIGHT COMPANY, refers to the three-year Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders from time to time parties thereto and CITIBANK, N.A., as Administrative Agent for said Lenders, and hereby gives you notice pursuant to Section 2.10 of the Credit Agreement that the undersigned hereby requests a Conversion under the Credit Agreement, and in that connection sets forth the terms on which such Conversion (the "Proposed Conversion") is requested to be made: (i) The Business Day of the Proposed Conversion is ______________, 20__. (ii) The Type of, and Interest Period (if any) applicable to, the Advances (or portions thereof) proposed to be Converted: _________________. (iii) The Type of Advance to which such Advances (or portions thereof) are proposed to be Converted: ________________________. (iv) Except in the case of a Conversion to Base Rate Advances, the initial Interest Period to be applicable to the Advances resulting from such Conversion: ______________________________. (v) The aggregate amount of Advances (or portions thereof) proposed to be Converted is $________. The undersigned hereby certifies that, on the date hereof, and on the date of the Proposed Conversion, no event has occurred and is continuing, or would result from such Proposed Conversion, which constitutes an Event of Default. Very truly yours, CAROLINA POWER & LIGHT COMPANY By -------------------------------------- Name: Title: EXHIBIT B ASSIGNMENT AND ACCEPTANCE Dated ___________, 20__ Reference is made to the three-year Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement"), among CAROLINA POWER & LIGHT COMPANY, a North Carolina corporation (the "Company"), the Lenders (as defined in the Credit Agreement) from time to time parties thereto and CITIBANK, N.A., as Administrative Agent for the Lenders (the "Administrative Agent"). Terms defined in the Credit Agreement are used herein with the same meaning. ______________ (the "Assignor") and ____________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof which represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement, including, without limitation, such interest in the Assignor's Commitment (to the extent it has not been terminated) and the Advances owing to the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment (if any) and the amount of the Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01(e) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; [and] (vi) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (vii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty].(1) 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. - --------------------------- (1) If the Assignee is organized under the laws of a jurisdiction outside the United States. Schedule 1 to Assignment and Acceptance Dated __________, 20 Section 1 Percentage Interest Assigned: % ------ Section 2 Assignee's Commitment: $ Aggregate Outstanding Principal Amount of Advances owing to Assignee: $ Section 3 Effective Date(1) [NAME OF ASSIGNOR] By -------------------------------------- Name: Title: [NAME OF ASSIGNEE] By -------------------------------------- Name: Title: Domestic Lending Office (and address for notices): - --------------------- (1) This date should be no earlier than the date of acceptance by the Administrative Agent. [Address] Eurodollar Lending Office: [Address] Accepted this _____ day of ______________, 20__ CITIBANK, N.A., as Administrative Agent By_______________________ Name: Title: CAROLINA POWER & LIGHT COMPANY By_______________________ Name: Title: EXHIBIT C-1 FORM OF OPINION OF COUNSEL FOR THE COMPANY [Date] To each of the Lenders parties to the Agreement referred to below and Citibank, N.A., as Administrative Agent Re: Carolina Power & Light Company Ladies and Gentlemen: This opinion is furnished to you by us as counsel for Carolina Power & Light Company (the "Borrower") pursuant to Section 3.01(g) of the three-year Credit Agreement, dated as of July 31, 2002 (the "Agreement", the terms defined therein being used herein as therein defined), among the Borrower, certain lenders thereunder (the "Lenders") and Citibank, N.A., as administrative agent for the Lenders. In connection with the preparation, execution and delivery of the Agreement, we have examined: (1) The Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Agreement. (3) The opinion letter of even date herewith, addressed to you by ____________, General Counsel to the Company and delivered in connection with the transactions contemplated by the Agreement (the "Company Opinion Letter"). We have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as we have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, we have, when relevant facts were not independently established by us, relied upon certificates of the Borrower or its officers or of public officials. We have assumed the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the originals (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. Whenever the phrase "to our knowledge" is used in this opinion it refers to the actual knowledge of the attorneys of this firm involved in the representation of the Borrower without independent investigation. We are qualified to practice law in the States of North Carolina and New York, and the opinions expressed herein are limited to the law of the States of North Carolina and New York and the federal law of the United States. To the extent that our opinions expressed herein depend upon opinions expressed in paragraphs 1 through 4 of the Company Opinion Letter, we have relied without independent investigation on the accuracy of the opinions expressed in the Company Opinion Letter, subject to the assumptions, qualifications and limitations set forth in the Company Opinion Letter. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the opinion that the Agreement constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms except as enforcement may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting the rights of creditors generally and (b) principles of equity, whether considered at law or in equity. The opinion set forth above is subject to the following qualifications: (a) In addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (b) No opinion is expressed herein as to (i) Section 8.05 of the Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (c) No opinion is expressed herein as to provisions, if any, in the Agreement, which (A) purport to excuse, release or exculpate a party for liability for or indemnify a party against the consequences of its own acts, (B) purport to make void any act done in contravention thereof, (C) purport to authorize a party to make binding determinations in its sole discretion, (D) relate to the effects of laws which may be enacted in the future, (E) require waivers, consents or amendments to be made only in writing, (F) purport to waive rights of offset or to create rights of set off other than as provided by statute, or (G) purport to permit acceleration of indebtedness and the exercise of remedies by reason of the occurrence of an immaterial breach of the Agreement or any related document. Further, we express no opinion as to the necessity for any Lender, by reason of such Lender's particular circumstances, to qualify to transact business in the State of New York or as to any Lender's liability for taxes in any jurisdiction. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Agreement after the date hereof in accordance with the provisions thereof and (ii) King & Spalding, in connection with its opinion delivered on the date hereof under Section 3.01 of the Agreement. Very truly yours, EXHIBIT C-2 FORM OF OPINION OF GENERAL COUNSEL TO THE COMPANY [Date] To each of the Lenders parties to the Agreement referred to below and Citibank, N.A., as Administrative Agent Re: Carolina Power & Light Company Ladies and Gentlemen: This opinion is furnished to you by me as Vice President of Progress Energy Supply Company, LLC and counsel to Carolina Power & Light Company (the "Borrower") pursuant to Section 3.01(g) of the three-year Credit Agreement, dated as of July 31, 2002 (the "Agreement", the terms defined therein being used herein as therein defined), among the Borrower, certain lenders thereunder (the "Lenders") and Citibank, N.A., as administrative agent for the Lenders. In connection with the preparation, execution and delivery of the Agreement, I have examined: (1) The Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Agreement. (3) The Restated Charter of the Borrower (the "Charter"). (4) The Bylaws of the Borrower and all amendments thereto (the "ByLaws"). (5) The NCUC Order and the SCPSC Order. I have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as I have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, I have, when relevant facts were not independently established by me, relied upon certificates of the Borrower or its officers or of public officials. I have assumed the authenticity of all documents submitted to me as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of signatures (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. For purposes of my opinions expressed in paragraph 1 below as to existence and good standing, I have relied as of their respective dates on certificates of public officials, copies of which are attached hereto as Exhibit A. Whenever the phrase "to my knowledge" is used in this opinion it refers to my actual knowledge and the actual knowledge of the attorneys who work under my supervision and who were involved in the representation of the Borrower in connection with the transactions contemplated by the Agreement. I or attorneys working under my supervision are qualified to practice law in the State of North Carolina, and the opinions expressed herein are limited to the law of the State of North Carolina and the federal law of the United States and, in reliance on a certificate issued by the Secretary of State of South Carolina and attached hereto as part of Exhibit A, the laws of the State of South Carolina for purposes of the first sentence of opinion paragraph 1 below, and for purposes of the opinion expressed in paragraph 4 of this opinion, the public utility laws of the State of South Carolina. Based upon the foregoing and upon such investigation as I have deemed necessary, I am of the following opinion: 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina, and is duly qualified to do business and in good standing in the State of South Carolina. The Borrower has the corporate power and authority to enter into the transactions contemplated by the Agreement. 2. The execution, delivery and performance of the Agreement by the Borrower have been duly authorized by all necessary corporate action on the part of the Borrower and the Agreement has been duly executed and delivered by the Borrower. 3. The execution, delivery and performance of the Agreement by the Borrower will not (i) violate the Charter or the Bylaws or any law, rule or regulation applicable to the Borrower (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or (ii) result in a breach of, or constitute a default under, any judgment, decree or order binding on the Borrower, or any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound. 4. No authorization, approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of the Agreement, other than the NCUC Order and SCPSC Order, each of which has been duly issued and is in full force and effect. All periods for review and approval of the SCPSC Order have expired, and no such request for review or appeal has been filed and is pending. The period for appeal or review of the NCUC Order has not expired, but as of the date of this opinion, no such request for review or appeal has been filed; moreover, the validity of the obligations incurred under the Agreement would not be affected by any supplemental order modifying the NCUC Order on appeal or otherwise. 5. To my knowledge, except as described in the reports and registration statements that the Borrower has filed with the Securities and Exchange Commission, there are no pending or overtly threatened actions or proceedings against the Borrower or any of the Subsidiaries before any court, governmental agency or arbitrator, that purport to affect the legality, validity, binding effect, or enforceability of the Agreement or that are likely to have a material adverse effect upon the financial condition or operations of the Borrower or any of the Subsidiaries. The opinions set forth above are subject to the qualification that, except as provided in paragraph 4 above, no opinion is expressed herein as to the enforceability of the Agreement or any other document. The foregoing opinions are solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Agreement after the date hereof and (ii) Hunton & Williams and King & Spalding, in connection with their respective opinions delivered on the date hereof under Section 3.01 of the Agreement. Very truly yours, EXHIBIT D FORM OF OPINION OF COUNSEL TO THE ADMINISTRATIVE AGENT [DATE] To Citibank, N.A. ("Citibank"), as Administrative Agent for the Lenders referred to below, and to each of the Lenders parties to the three-year Credit Agreement, dated as of July 31, 2002, among Carolina Power & Light Company, said Lenders and Citibank, as Administrative Agent Re: Carolina Power & Light Company Ladies and Gentlemen: We have acted as your counsel in connection with the preparation, execution and delivery of, and the closing on July 31, 2002 under, the three-year Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement"), among Carolina Power & Light Company (the "Company"), the Lenders from time to time parties thereto and Citibank, N.A. ("Citibank"), as Administrative Agent for the Lenders. Terms defined in the Credit Agreement are used herein as therein defined. In this connection, we have examined the following documents: 1. a counterpart of the Credit Agreement, executed by the parties thereto; 2. the documents furnished by or on behalf of the Company pursuant to subsections (a) through (g) of Section 3.01 of the Credit Agreement, including, without limitation, the opinion of the General Counsel to the Company (the "Company Opinion"). In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that you have independently evaluated, and are satisfied with, the creditworthiness of the Company and the business terms reflected in the Credit Agreement. We have relied, as to factual matters, on the documents we have examined. To the extent that our opinions expressed below involve conclusions as to matters governed by law other than the law of the State of New York, we have relied upon the Company Opinion and have assumed without independent investigation the correctness of the matters set forth therein, our opinions expressed below being subject to the assumptions, qualifications and limitations set forth in the Company Opinion. Based upon and subject to the foregoing, and subject to the qualifications set forth below, we are of the opinion that the Credit Agreement is the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. Our opinion is subject to the following qualifications: (a) The enforceability of the Company's obligations under the Credit Agreement is subject to the effect of any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar law affecting creditors' rights generally. (b) The enforceability of the Company's obligations under the Credit Agreement is subject to the effect of general principles of equity, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law). Such principles of equity are of general application, and, in applying such principles, a court, among other things, might not allow a contracting party to exercise remedies in respect of a default deemed immaterial, or might decline to order an obligor to perform covenants. (c) We note further that, in addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (d) We express no opinion herein as to (i) the enforceability of Section 8.05 of the Credit Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (e) Our opinions expressed above are limited to the law of the State of New York, and we do not express any opinion herein concerning any other law. The foregoing opinion is solely for your benefit and may not be relied upon by any other person or entity. Very truly yours, MEO:PKS:um EXHIBIT E FORM OF ASSUMPTION AGREEMENT ----------, ---- To Citibank, N.A., as Administrative Agent under the Credit Agreement referred to below Ladies and Gentlemen: We make reference to the three-year Credit Agreement (the "Credit Agreement"), dated as of July 31, 2002, among Carolina Power & Light Company (the "Borrower"), the lenders named therein and Citibank, N.A., as Administrative Agent. Terms defined in the Credit Agreement are used herein as defined therein. The Borrower and _______________ (the "Assuming Lender") each hereby agree as follows: 1. The Assuming Lender proposes to become an Assuming Lender pursuant to Section 2.04(b) of the Credit Agreement and, in that connection, hereby agrees with the Administrative Agent and the Borrower that it shall become a Lender for all purposes of the Credit Agreement on the applicable Commitment Increase Date. 2. The Assuming Lender (a) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01(e) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assumption Agreement; (b) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (c) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; and (d) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender. 3. Following the execution hereof, this Assumption Agreement will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date for this Assumption Agreement (the "Effective Date") shall be the applicable Commitment Increase Date. 4. Upon satisfaction of the applicable conditions set forth in Section 2.04(b) of the Credit Agreement and upon such acceptance and recording by the Administrative Agent, as of the Effective Date, the Assuming Lender shall be a party to the Credit Agreement and have all of the rights and obligations of a Lender thereunder. 5. This Assumption Agreement shall be governed by, and construed in accordance with, the law of the State of New York. 6. This Assumption Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Assumption Agreement by facsimile shall be effective as delivery of a manually executed counterpart of this Assumption Agreement. IN WITNESS WHEREOF, the Borrower and the Assuming Lender have caused this letter to be duly executed and delivered as of the date first above written. Very truly yours, CAROLINA POWER & LIGHT COMPANY By_____________________ Name: Title: [NAME OF ASSUMING LENDER] By________________________ Name: Title: Accepted this __ day of - -------------, ----: CITIBANK, N.A., As Administrative Agent By___________________________ Name: Title: EX-10 7 pei_10qexhibit10v-.txt EXHIBIT 10(V) EXECUTION COPY ASSUMPTION AGREEMENT August 5, 2002 To Citibank, N.A., as Administrative Agent under the Credit Agreement referred to below Ladies and Gentlemen: We make reference to the (three-year) Credit Agreement and the (364-day) Credit Agreement, each dated as of July 31, 2002 (collectively, the "Credit Agreements"), among Carolina Power & Light Company (the "Borrower"), the lenders named therein and Citibank, N.A., as Administrative Agent. Terms defined in the Credit Agreement are used herein as defined therein. The Borrower and The Bank of New York (the "Assuming Lender") each hereby agree as follows: 1. The Assuming Lender proposes to become an Assuming Lender pursuant to Section 2.04(b) of Each Credit Agreement and, in that connection, hereby agrees with the Administrative Agent and the Borrower that it shall become a Lender with a Commitment of $12,500,000 for all purposes under each Credit Agreement on the applicable Commitment Increase Date. 2. The Assuming Lender (a) confirms that it has received copies of the Credit Agreements, together with copies of the financial statements referred to in Section 4.01(e) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assumption Agreement; (b) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreements; (c) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreements as are delegated to the Administrative Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; and (d) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreements are required to be performed by it as a Lender. 3. Following the execution hereof, this Assumption Agreement will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date for this Assumption Agreement (the "Effective Date") shall be the applicable Commitment Increase Date. 4. Upon satisfaction of the applicable conditions set forth in Section 2.04(b) of each Credit Agreement and upon such acceptance and recording by the Administrative Agent, as of the Effective Date, the Assuming Lender shall be a party to the Credit Agreements and have all of the rights and obligations of a Lender thereunder. 5. This Assumption Agreement shall be governed by, and construed in accordance with, the law of the State of New York. 6. This Assumption Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of the Assumption Agreement by Facsimile shall be effective as delivery of a manually executed counterpart of this Assumption Agreement. IN WITNESS WHEREOF, the Borrower and the Assuming Lender have caused this letter to be duly executed and delivered as of the date first above written. Very truly yours, CAROLINA POWER & LIGHT COMPANY By /s/ Thomas R. Sullivan -------------------------------------- Name: Thomas R. Sullivan Title: Treasurer THE BANK OF NEW YORK By /s/ Jesus Williams -------------------------------------- Name: Jesus Williams Title: Assistant Vice President Accepted this 5th day of August 2002: CITIBANK, N.A., As Administrative Agent By________________________________ Name: Title: EXECUTION COPY NOTICE OF COMMITMENT INCREASE August 5, 2002 Ladies and Gentlemen: We refer to the (364-day) Credit Agreement and the (three-year) Credit Agreement, each dated as of July 31, 2002 (collectively, the "Credit Agreements"), among Carolina Power & Light Company (the "Borrower"), the lenders named therein and Citibank, N.A., as Administrative Agent (the "Agent"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Credit Agreements. Pursuant to Section 2.04(b) of each Credit Agreement, we hereby provide notice to you of a proposed Commitment Increase under each Credit Agreement. The Bank of New York has indicated to the Borrower that it wishes to participate in the facilities under each Credit Agreement and thereby become an Assuming Lender. The Bank of New York has indicated to the Borrower that it wishes to participate in the facilities under each Credit Agreement and thereby become an Assuming Lender. The Bank of New York proposes to participate in each Credit Agreement in the amount of $12,500,000 thus increasing the aggregate amount of the Commitments to $285,000,000 under each Credit Agreement as of August 8, 2002, which will be the Commitment Increase Date. Very truly yours, CITIBANK, N.A. By /s/ Anita J. Brickell -------------------------------------- Name: Anita J. Brickell Title: Vice President EX-10 8 pei_10qexhibit10vi-.txt EXHIBIT 10(VI) Progress Energy, Inc. 2002 Equity Incentive Plan (Amended and Restated Effective July 10, 2002) Section 1. Purpose Progress Energy, Inc. (hereinafter referred to as the "Sponsor"), a North Carolina corporation, hereby establishes the 2002 Equity Incentive Plan (the "Plan") to promote the interests of the Sponsor and its shareholders through the (i) attraction and retention of executive officers, directors and other key employees essential to the success of Sponsor and its Affiliates; (ii) motivation of executive officers, directors and other key employees using performance-related and stock-based incentives linked to the interests of the Sponsor's shareholders; and (iii) enabling of such executive officers, directors and other key employees to share in the long-term growth and success of the Sponsor and its Affiliates. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended), Stock Appreciation Rights, Restricted Stock, Performance Shares, Performance Units, and any other Stock Unit Awards or stock-based forms of Awards as the Committee may determine under its sole and complete discretion at the time of grant, subject to the provisions of this Plan document and applicable law. The 1997 Equity Incentive Plan of Progress Energy, Inc. (the "1997 Plan") shall remain effective with regard to all Awards made thereunder, but shall be superseded by this Plan with regard to all Awards after the Effective Date. Section 2. Effective Date and Duration The Plan was approved by the Board of Directors on March 20, 2002, subject to approval by the shareholders of the Sponsor. The Plan will become effective on the date of approval of the Plan by the Sponsor's shareholders (the "Effective Date"). The Plan was further amended and restated effective July 10, 2002. The Plan shall expire on the tenth anniversary of the Effective Date; however, all Awards made prior to, and outstanding on such date, shall remain valid in accordance with their terms and conditions. Section 3. Definitions Except as otherwise defined in the Plan, the following terms shall have the meanings set forth below: 3.1 "Affiliate" means, with respect to Sponsor, any entity that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with Sponsor. 3.2 "Award" means individually or collectively, a grant under the Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Units, Performance Shares, or other Stock Unit Awards. 3.3 "Award Date" or "Grant Date" means the date on which an Award is made by the Committee under this Plan. 3.4 "Award Agreement" or "Agreement" means a written agreement implementing the grant of each Award signed by an authorized officer of the Sponsor and by the Participant. 3.5 "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act. 3.6 "Board" or "Board of Directors" means the Board of Directors of the Sponsor. 3.7 "Cashless Exercise" means the exercise of an Option by the Participant in compliance with the Federal Reserve Board's Regulation T (or any successor provision) or as otherwise permitted by the Committee through the use of a brokerage firm to make payment to the Sponsor of the exercise price either from the proceeds of a loan to the Participant from the brokerage firm or from the proceeds of the sale of Stock issued pursuant to the exercise of the Option, and upon receipt of such payment, the Sponsor delivers the exercised Stock to the brokerage firm. The date of exercise of a Cashless Exercise shall be the date the broker executes the sale of exercised Stock, or if no sale is made, the date the broker receives the exercise loan notice from the Participant to pay the Sponsor for the exercised Stock. 3.8 "Cause" means: (a) embezzlement or theft from the Company, or other acts of dishonesty, disloyalty or otherwise injurious to the Company; (b) disclosing without authorization proprietary or confidential information of the Company; (c) committing any act of negligence or malfeasance causing injury to the Company; (d) conviction of a crime amounting to a felony under the laws of the United States or any of the several states; (e) any violation of the Company's Code of Ethics; or (f) unacceptable job performance which has been substantiated in accordance with the normal practices and procedures of the Company. 3.9 "Change in Control" means, with respect to any Award granted on or after the Effective Date and prior to July 10, 2002, a change in control of the Sponsor of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act; provided, that without limitation, such a Change in Control shall be deemed to have occurred at such time as a "person" (as used in Section 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 25% or more of the combined voting power of the Sponsor's outstanding securities ordinarily having the right to vote in elections of directors; or individuals who constitute the Board of Directors of the Sponsor on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, or of any board of directors of a successor to the Sponsor, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Sponsor's shareholders, was approved by a vote of at least three quarters of the directors comprising the Incumbent Board shall be, for purposes of this subsection (b), considered as though such person were a member of the Incumbent Board, in each case, as determined by the Committee in accordance with Section 4.1. Notwithstanding the foregoing, with respect to any Award granted on or after July 10, 2002, a Change in Control shall mean the earliest of the following dates: (a) the date any person or group of persons (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934), excluding employee benefit plans of the Sponsor, becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Securities Act of 1934) of securities of the Sponsor representing twenty-five percent (25%) or more of the combined voting power of the Sponsor's then outstanding securities (excluding the acquisition of securities of the Sponsor by an entity at least eighty percent (80%) of the outstanding voting securities of which are, directly or indirectly, beneficially owned by the Sponsor); or (b) the date of consummation of a tender offer for the ownership of more than fifty percent (50%) of the Sponsor's then outstanding voting securities; or (c) the date of consummation of a merger, share exchange or consolidation of the Sponsor with any other corporation or entity regardless of which entity is the survivor, other than a merger, share exchange or consolidation which would result in the voting securities of the Sponsor outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving or acquiring entity) more than sixty percent (60%) of the combined voting power of the voting securities of the Sponsor or such surviving or acquiring entity outstanding immediately after such merger or consolidation; or (d) the date, when as a result of a tender offer or exchange offer for the purchase of securities of the Sponsor (other than such an offer by the Sponsor for its own securities), or as a result of a proxy contest, merger, share exchange, consolidation or sale of assets, or as a result of any combination of the foregoing, individuals who are Continuing Directors cease for any reason to constitute at least two-thirds (2/3) of the members of the Board; or (e) the date the shareholders of the Sponsor approve a plan of complete liquidation or winding-up of the Sponsor or an agreement for the sale or disposition by the Sponsor of all or substantially all of the Sponsor's assets; or (f) the date of any event which the Board determines should constitute a Change in Control. A Change in Control shall not be deemed to have occurred after July 10, 2002, on account of an event described in paragraphs (a), (b), (c), (d) or (e) of this Section 3.9 until a majority of the members of the Board receive written certification from the Committee that such event has occurred. Any determination that an event described in this Section 3.9 has occurred shall, if made in good faith on the basis of information available at that time, be conclusive and binding on the Committee, the Sponsor, the Participants and their beneficiaries for all purposes of the Plan. 3.10 "CEO" means the chief executive officer of the Sponsor. 3.11 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 3.12 "Committee" means the Organization and Compensation Committee of the Board, comprised solely of Outside Directors, which will administer the Plan pursuant to Section 4 herein. 3.13 "Company" means Progress Energy, Inc., including all Affiliates, or any successor thereto. 3.14 "Continuing Director" means the members of the Board as of the Effective Date; provided, however, that any person becoming a director subsequent to such date whose election or nomination for election was supported by seventy-five percent (75%) or more of the directors who then comprised Continuing Directors shall be considered to be a Continuing Director. 3.15 "Covered Participant" means a Participant who is a "covered employee" as defined in Section 162(m)(3) of the Code, and the regulations promulgated thereunder. 3.16 "Department" means the Human Resources Department of Progress Energy Service Company, LLC. 3.17 "Designated Beneficiary" means the beneficiary designated by the Participant, pursuant to procedures established by the Department, to receive amounts due to the Participant or to exercise any rights of the Participant to the extent permitted hereunder in the event of the Participant's death. If the Participant does not make an effective designation, then the Designated Beneficiary will be deemed to be the Participant's estate. 3.18 "Disability" means (i) the mental or physical disability, either occupational or non-occupational in origin, of the Participant defined as "total disability" in the Long-term Disability Plan of the Sponsor currently in effect and as amended from time to time; or (ii) a determination by the Committee of "Total Disability" based on medical evidence that precludes the Participant from engaging in any occupation or employment for wage or profit for at least twelve months and appears to be permanent. In the case of Awards of Incentive Stock Options, "Disability" shall have the meaning set forth in Section 22(e)(3) of the Code. 3.19 "Divestiture" means the sale (including the spin-off) of, or closing by, the Company of the business operations in which the Participant is employed. 3.20 "Early Retirement" means retirement of a Participant from employment with the Company after age 55, but prior to age 65 under the provisions of the Sponsor's Pension Plan or the Sponsor's Supplemental Senior Executive Retirement Plan. In the event of a change in the Sponsor's Pension Plan such that there is no longer a definition of "Early Retirement" or the Participant is not a participant in the Sponsor's Pension Plan for purposes of this plan, "Early Retirement" shall mean retirement before age 65 after reaching the 55th birthday together with completion of 15 years of Vesting Service, or after completion of 35 years of Vesting Service with no age limitation. 3.21 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 3.22 "Executive Officer" means an individual designated as an "officer" for purposes of Section 16 of the Securities Exchange Act of 1934 and as an "executive officer" for Item 401(b) of Regulation S-K by the Board pursuant to resolutions adopted by the Board from time to time. 3.23 "Fair Market Value" means, on any given date, the closing price of Stock as reported on the New York Stock Exchange composite tape on such day or, if no shares of Stock were traded on the New York Stock Exchange on such day, then on the next preceding day that Stock was traded on such exchange, all as reported by such source as the Committee may select. In the case of a Cashless Exercise, Fair Market Value means the price of the Stock at the date and time the broker executes the sale of exercised Stock. 3.24 "Full-time Employee" means an employee of the Company designated by the Department as being a "regular, full-time employee" who is eligible for all plans and programs of the Company set forth for such employees. This designation excludes all part-time, temporary, leased or contract employees and consultants to the Company. 3.25 "Incentive Stock Option" means an option to purchase Stock, granted under Section 7 herein, which is designated as an incentive stock option by the Committee and is intended to meet the requirements of Section 422 of the Code. 3.26 "Key Employee" means an officer or other employee of the Company, who is selected for participation in the Plan in accordance with Section 4.2. 3.27 "Nonqualified Stock Option" means an Option to purchase Stock, granted under Section 7 herein, which is not intended to be an Incentive Stock Option. 3.28 "Normal Retirement" means the retirement of any Participant under the Sponsor's Pension Plan at age 65. In the event of a change in the Sponsor's Pension Plan such that there is no longer a definition of "Normal Retirement" or the Participant is not a participant in the Sponsor's Pension Plan, for purposes of the Plan "Normal Retirement" shall mean retirement upon attaining the age of 65 years and completing five years of Vesting Service. 3.29 "Option" means an Incentive Stock Option or a Nonqualified Stock Option. 3.30 "Other Stock Unit Award" means Awards of Stock or other Awards that are valued in whole or in part by reference to, or are otherwise based on, shares of Stock or other securities of the Sponsor. 3.31 "Outside Director" means a member of the Board of Directors of the Sponsor who is not an employee of the Company. 3.32 "Participant" means a Key Employee or Outside Director who has been granted an Award under the Plan. 3.33 "Performance-Based Exception" means the performance-based exception from the tax deductibility limitations of Code Section 162(m). 3.34 "Performance Measures" mean, unless and until the Committee proposes for shareholder approval and the Sponsor's shareholders approve a change in the general performance measures set forth in this article, the attainment of which may determine the degree of payout and/or vesting with respect to Awards which are designed to qualify for the Performance-Based Exception, measure(s) chosen from among the following alternatives: (a) Total shareholder return (absolute or peer-group comparative) (b) Stock price increase (absolute or peer-group comparative) (c) Dividend payout as a percentage of net income (absolute or peer-group comparative) (d) Return on equity (absolute or peer-group comparative) (e) Return on capital employed (absolute or peer-group comparative) (f) Cash flow, including operating cash flow, free cash flow, discounted cash flow return on investment, and cash flow in excess of cost of capital (g) Economic value added (income in excess of capital costs) (h) Cost per KWH (absolute or peer-group comparative) (i) Revenue per KWH (absolute or peer-group comparative) (j) Market share (k) Customer satisfaction as measured by survey instruments (absolute or peer-group comparative) (l) Earnings before interest, and taxes (absolute or peer-group comparative) (m) Earnings before interest, taxes, depreciation, and amortization (absolute or peer-group comparative) The Committee shall have the discretion to adjust the determinations of the degree of attainment of the pre-established Performance Measures; provided, however, that Awards which are designed to qualify for the Performance-Based Exception may not be adjusted upward (the Committee shall retain the discretion to adjust such Awards downward), except to the extent permitted under Code Section 162(m) and the regulations thereunder to reflect corporate reorganizations or other events. 3.35 "Performance Award" means a performance-based Award, which may be in the form of either Performance Shares or Performance Units. 3.36 "Performance Period" means the time period designated by the Committee during which performance goals must be met. 3.37 "Performance Share" means an Award, designated as a Performance Share, granted to a Participant pursuant to Section 10 herein, the value of which is determined, in whole or in part, by the value of Stock in a manner deemed appropriate by the Committee and described in the Agreement or Sub-Plan. 3.38 "Performance Unit" means an Award, designated as a Performance Unit, granted to a Participant pursuant to Section 10 herein, the value of which is determined, in whole or in part, by the attainment of pre-established goals relating to Sponsor's or Company's financial or operating performance as deemed appropriate by the Committee and described in the Agreement or Sub-Plan. 3.39 "Period of Restriction" means the period during which the transfer of shares of Restricted Stock is restricted, pursuant to Section 9 of the Plan. 3.40 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). 3.41 "Plan" means the Progress Energy, Inc. 2002 Equity Incentive Plan as herein described and as hereafter from time to time amended. 3.42 "Restricted Stock" means an Award of Stock granted to a Participant pursuant to Section 9 of the Plan. 3.43 "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the Exchange Act as adopted in Exchange Act Release No. 34-37260 (May 31, 1996, effective August 15, 1996), or any successor rule as amended from time to time. 3.44 "Section 162(m)" means Section 162(m) of the Code, or any successor section under the Code, as amended from time to time and as interpreted by final or proposed regulations promulgated thereunder from time to time. 3.45 "Securities Act" means the Securities Act of 1933 and the rules and regulations promulgated thereunder, or any successor law, as amended from time to time. 3.46 "Secretary" means the corporate secretary of the Sponsor. 3.47 "Sponsor" means Progress Energy, Inc., or any successor thereto. 3.48 "Sponsor's Pension Plan" means the Progress Energy Pension Plan, as amended from time to time, and any successor thereto. 3.49 "Stock" means the common stock of the Sponsor. 3.50 "Stock Appreciation Right" means the right to receive an amount equal to the excess of the Fair Market Value of a share of Stock (as determined on the date of exercise) over the Fair Market Value of the Stock on the Award Date of the Stock Appreciation Right. 3.51 "Stock Unit Award" means an Award of Stock or units granted under Section 11 of the Plan. 3.52 "Sub-Plan" means a written document that permits the grant of Awards consistent with the provisions of this Plan. 3.53 "Vesting Service" means each year of employment with the Company in which a Participant works 1,000 hours. Section 4. Administration 4.1 The Committee. The Plan shall be administered and interpreted by the Committee which shall have full authority and all powers necessary or desirable for such administration. The express grant in this Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. In its sole and complete discretion the Committee may adopt, alter, suspend and repeal any such administrative rules, regulations, guidelines, and practices governing the operation of the Plan as it shall from time to time deem advisable. In addition to any other powers and, subject to the provisions of the Plan, the Committee shall have the following specific powers: (i) to determine the terms and conditions upon which the Awards may be made and exercised; (ii) to determine all terms and provisions of each Agreement and/or Sub-Plan, which need not be identical for types of Awards nor for the same type of Award to different Participants; (iii) to construe and interpret the Agreements, Sub-Plans and the Plan; (iv) to establish, amend, or waive rules or regulations for the Plan's administration; (v) to accelerate the exercisability of any Award, the length of a Performance Period or the termination of any Period of Restriction except for Awards to Covered Participants that are intended to qualify for the Performance-Based Exception, other than as may be otherwise provided under the terns of such an Award in the event of a Change in Control or as hereinafter specified; and (vi) to make all other determinations and take all other actions necessary or advisable for the administration of the Plan, including a determination of a Change in Control under Section 3.9. The Committee may take action by a meeting in person, by unanimous written consent, or by meeting with the assistance of communications equipment which allows all Committee members participating in the meeting to communicate in either oral or written form. The Committee may seek the assistance or advice of any persons it deems necessary to the proper administration of the Plan. 4.2 Selection of Participants Other Than Outside Directors. Subject to Section 5 of the Plan, the Committee shall have sole and complete discretion in determining Key Employees who shall participate in the Plan; provided, however, the Committee may delegate to the CEO the authority to designate Key Employees and/or Awards to be made to Key Employees who are not Executive Officers, subject to any limitations imposed by the Committee on the designation of Key Employees including a fixed maximum Award amount for any group of Key Employees and/or a maximum Award amount for any one Key Employee, as determined by the Committee. Awards made to the Executive Officers shall be determined by the Committee. 4.3 Awards to Outside Directors. Awards to Outside Directors shall be made in the sole discretion of the full Board of Directors; provided, however, that Awards of Options to Outside Directors shall be limited to Nonqualified Stock Options. 4.4 Award Agreements and Sub-Plans. Each Award granted under the Plan shall be granted either under the terms of an Award Agreement and/or a Sub-Plan. Award Agreements and Sub-Plans shall specify the terms, conditions and any rules applicable to the Award, including but not limited to the effect of transferability, a Change in Control, or death, Disability, Divestiture, Early Retirement, Normal Retirement or other termination of employment of the Participant on the Award. If the Award is granted under the terms of an Award Agreement, the Award Agreement shall be signed by an authorized representative of the Sponsor and the Participant, and a copy of the signed Award Agreement shall be provided to the Participant. If the Award is granted under the terms and conditions of a Sub-Plan, the Sub-Plan shall be approved by the Committee as an Exhibit to the Plan, and a copy of the Sub-Plan or a summary description thereof shall be provided to each Participant. 4.5 Committee Decisions. All determinations and decisions made by the Committee pursuant to the provisions of the Plan shall be final, conclusive, and binding upon all persons, including the Company, its employees, Participants, and Designated Beneficiaries, and the Sponsor's shareholders, except when the terms of any sale or award of shares of Stock or any grant of rights or Options under the Plan are required by law or by the Articles of Incorporation or Bylaws of the Sponsor to be approved by the Sponsor's Board of Directors or shareholders prior to any such sale, award or grant. 4.6 Rule 16b-3 and Section 162(m) Requirements. Notwithstanding any other provision of the Plan, the Committee may impose such conditions on any Award, and the Board may amend the Plan in any such respects, as may be required to satisfy the requirements of Rule 16b-3 or Section 162(m). 4.7 Indemnification of Committee. In addition to such other rights of indemnification as they may have as Outside Directors or as members of the Committee, the members of the Committee shall be indemnified by the Sponsor against reasonable expenses incurred from their administration of the Plan. Such reasonable expenses include, but are not limited to, attorneys' fees, actually and reasonably incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted or made hereunder, and against all amounts reasonably paid by them in settlement thereof or paid by them in satisfaction of a judgment in any such action, suit or proceeding, if such members acted in good faith and in a manner which they believed to be in, and not opposed to, the best interests of the Company. Section 5. Eligibility Selection of Participants by the Committee or the CEO under Section 4.2 shall be subject to the following limitations: (i) no person owning, directly or indirectly, more than 5% of the total combined voting power of all classes of Stock shall be eligible to participate under the Plan; and (ii) only Full-time Employees shall be eligible to participate under the Plan, except that Outside Directors may be granted Nonqualified Stock Options or Restricted Stock Awards in accordance with Section 4.3. Section 6. Shares of Stock Subject to the Plan 6.1 Number of Shares. Subject to adjustment as provided below and except as otherwise provided in Section 6.4 and Section 6.5 herein, the maximum aggregate number of shares of Stock that may be issued pursuant to Awards made under the Plan shall not exceed 15,000,000 shares of Stock, which may be in any combination of Options, Restricted Stock, Performance Shares or any other right or Option which is payable in the form of Stock. Additionally, shares of Stock available for issuance on the Effective Date under the 1997 Plan shall be transferred to the Plan and added to the shares available for the grant of Awards under this Plan. The maximum aggregate number of shares that may be granted in the form of Incentive Stock Options shall be 10,000,000. The maximum aggregate number of shares of Stock that may be granted in the form of Restricted Stock shall be 3,000,000 and the maximum aggregate number of shares of Stock (or derivatives of shares of Stock) that may be granted in the form of Performance Shares, Performance Units or other Stock Unit Awards shall be 4,000,000. Shares of Stock may be available from the authorized but unissued shares of Stock. Except as provided in Sections 6.2 and 6.3 herein, the issuance of shares of Stock in connection with the exercise of, or as other payment for, Awards under the Plan shall reduce the number of shares of Stock available for future Awards under the Plan. 6.2 Lapsed Awards of Forfeited Shares of Stock. In the event that (i) any Option or other Award granted under the Plan or the 1997 Plan terminates, expires, or lapses for any reason other than exercise of the Award, or (ii) if shares of Stock issued pursuant to the Awards are canceled or forfeited for any reason, the number of shares of Stock available for Awards under the Plan shall be increased by the number of shares of Stock that were subject to such Award; provided, however, that this provision shall not be construed to allow for the issuance of treasury stock. 6.3 Delivery of Shares of Stock as Payment. In the event a Participant pays for any Option or other Award granted under the Plan through the delivery of previously acquired shares of Stock, the number of shares of Stock available for Awards under the Plan shall be increased by the number of shares of Stock surrendered by the Participant, subject to Rule 16b-3 as interpreted by the Securities and Exchange Commission or its staff; provided, however, that this provision shall not be construed to allow for the issuance of treasury stock. 6.4 Capital Adjustments. The number and class of shares of Stock subject to each outstanding Award, the maximum number of shares of Stock that may be subject to an Award under Sections 7.7, 8.5, 9.6, 10.6 and 11.1, the Option Price (as hereinafter defined) and the aggregate number, type and class of shares of Stock for which Awards thereafter may be made shall be subject to adjustment, if any, as the Committee deems appropriate, based on the occurrence of a number of specified and non-specified events; provided, however, that with respect to Incentive Stock Options such adjustment shall be made in a manner consistent with Section 424(a) of the Code and, with respect to any Awards to Executive Officers, shall be consistent with the requirements of Section 162(m) of the Code and the regulations promulgated thereunder. Such events include but are not limited to the following: (a) If the outstanding shares of Stock of the Sponsor are increased, decreased or exchanged through merger, consolidation, sale of all or substantially all of the property of the Sponsor, reorganization, recapitalization, reclassification, stock dividend, stock split or other distribution in respect to such shares of Stock, for a different number or type of shares of Stock, or if additional shares of Stock or new or different shares of Stock are distributed with respect to such shares of Stock, an appropriate and proportionate adjustment shall be made in: (i) the maximum number of shares of Stock available for the Plan as provided in Section 6.1 herein, (ii) the type of shares of Stock or other securities available for the Plan, (iii) the number of shares of Stock subject to any then outstanding Awards under the Plan, and (iv) the price (including exercise price) for each share of Stock (or other kind of shares or securities) subject to then outstanding Awards, but without change in the aggregate purchase price as to which such Options remain exercisable or Restricted Stock releasable. (b) If other events not specified above in this Section 6.4, such as any extraordinary cash dividend, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Stock, or other similar corporate event affect the Stock such that an adjustment is necessary to maintain the benefits or potential benefits intended to be provided under this Plan, then the Committee in its discretion may make adjustments to any or all of (i) the number and type of shares of Stock which thereafter may be optioned and sold or awarded or made subject to Stock Appreciation Rights under the Plan, (ii) the grant, exercise or conversion price of any Award made under the Plan thereafter, and (iii) the number and price (including Exercise Price) of each share of Stock (or other kind of shares or securities) subject to then outstanding Awards, but without change in the aggregate purchase price as to which such Options remain exercisable or Restricted Stock releasable. Any adjustment as provided above for Awards that are intended to qualify for the Performance-Based Exception shall be subject to any applicable restrictions set forth in Section 12 or in Section 162(m). (c) Any adjustment made by the Committee pursuant to the provisions of this Section 6.4 shall be final, binding and conclusive. A notice of such adjustment, including identification of the event causing such an adjustment, the calculation method of such adjustment, and the change in price and the number of shares of Stock, or securities, cash or property purchasable subject to each Award shall be sent to each affected Participant. No fractional interests shall be issued under the Plan based on such adjustments, and shall be forfeited. 6.5 Acquisitions. In connection with the acquisition of any business by the Company or any of its Affiliates, any outstanding grants, awards or sales of options or other similar rights pertaining to such business may be assumed or replaced by grants or awards under the Plan upon such terms and conditions as the Committee determines. The date of any such grant or award shall relate back to the date of the initial grant or award being assumed or replaced, and service with the acquired business shall constitute service with the Company for purposes of such grant or award. Any shares of Stock underlying any grant or award or sale pursuant to any such acquisition shall be disregarded for purposes of applying the limitations, and shall not reduce the number of shares of Stock available, under Section 6.1 above. Notwithstanding any provision in this Plan to the contrary, the exercise price of any such Award may be below Fair Market Value in order to replace the value of another award in the sole discretion of the Committee. Section 7. Stock Options 7.1 Grant of Stock Options. Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may grant Options to Key Employees, and with respect to Outside Directors pursuant to approval by the Board, as it shall determine. Except with respect to Outside Directors, the Committee shall have sole and complete discretion in determining the type of Option granted, the Option Price (as hereinafter defined), the duration of the Option, the number of shares of Stock to which an Option pertains, any conditions imposed upon the exercisability of the Options, the conditions under which the Option may be terminated and any such other provisions as may be warranted to comply with the law or rules of any securities trading system or stock exchange. Notwithstanding the preceding, the Committee may delegate to the CEO authority to grant options in accordance with Section 4.2. Each Option grant shall have such specified terms and conditions detailed in an Award Agreement. The Agreement shall specify whether the Option is intended to be an Incentive Stock Option within the meaning of Section 422 of the Code, or a Nonqualified Stock Option. 7.2 Option Price. The exercise price per share of Stock covered by an Option ("Option Price") shall be determined at the time of grant by the Committee, subject to Section 6.5 hereof and the limitation that the Option Price shall not be less than 100% of the Fair Market Value of the Stock on the Grant Date. 7.3 Exercisability. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee or the CEO, as the case may be, shall determine, which will be specified in the Award Agreement and need not be the same for each Participant. However, no Option may be exercisable within the first year following the Grant Date, except in the event of a Change in Control, or after the expiration of ten (10) years from the Grant Date. 7.4 Limitations on Incentive Stock Options. Incentive Stock Options may be granted only to Participants who are employees of the Sponsor or of a "Parent Corporation" or "Subsidiary Corporation" (as defined in Sections 424(e) and (f) of the Code, respectively) at the Grant Date. The aggregate Fair Market Value (determined as of the time the Stock Option is granted) of the Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under all option plans of the Company and of any Parent Corporation or Subsidiary Corporation) shall not exceed one hundred thousand dollars ($100,000). For purposes of the preceding sentence, Incentive Stock Options will be taken into account in the order in which they are granted. The per-share exercise price of an Incentive Stock Option shall not be less than one hundred percent (100%) of the Fair Market Value of the Stock on the Grant Date, and no Incentive Stock Option may be exercised later than ten (10) years after the date it is granted. In addition, no Incentive Stock Option may be issued to a Participant in tandem with a Nonqualified Stock Option. Further, Incentive Stock Options may not be granted to any Participant who, at the time of grant, owns stock possessing (after the application of the attribution rules of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary Corporation, unless the exercise price of the option is fixed at not less than one hundred ten percent (110%) of the Fair Market Value of the Stock on the Grant Date and the exercise of such Option is prohibited by its terns after the expiration of five (5) years from the Grant Date of such Option. 7.5 Method of Exercise. Options shall be exercised by the delivery of a notice from the Participant to the Secretary (or his or her designee) in the form prescribed by the Committee setting forth the number of shares of Stock with respect to which the Option is to be exercised, accompanied by full payment for the shares of Stock. The Option Price shall be payable to the Sponsor in full in cash, or its equivalent, or by delivery of shares of Stock (not subject to any security interest or pledge) valued at Fair Market Value at the time of exercise or by a combination of the foregoing. In addition, the Committee may permit the Cashless Exercise of the Option. As soon as practicable, after receipt of notice and payment, the Sponsor shall deliver to the Participant, Stock certificates in an appropriate amount based upon the number of shares of Stock with respect to which the option is exercised, issued in the Participant's name. 7.6 Notice. Each Participant shall give prompt notice to the Sponsor of any disposition of shares of Stock acquired upon exercise of an Incentive Stock Option if such disposition occurs within either two (2) years after the Grant Date or one (1) year after the date of transfer of such shares of Stock to the Participant upon the exercise of such Incentive Stock Option. 7.7 Maximum Award. The maximum number of shares of Stock that may be granted in the form of Options pursuant to any Award granted in a single calendar year to any one Participant shall be 2,000,000. 7.8 Limitation on Transferability. Solely to the extent permitted by the Committee in an Award Agreement and subject to the terms and conditions as the Committee shall specify, a Nonqualified Stock Option (but not an Incentive Stock Option) may be transferred to members of the Participant's immediate family (as determined by the Committee) or to trusts, partnerships or corporations whose beneficiaries, members or owners are members of the Participant's immediate family, and/or to such other persons or entities as may be approved by the Committee in advance and set forth in an Award Agreement, in each case subject to the condition that the Committee be satisfied that such transfer is being made for estate or tax planning purposes or for gratuitous or donative purposes, without consideration (other than nominal consideration) being received therefor. Except to the extent permitted by the Committee in accordance with the foregoing, an Option shall be nontransferable otherwise than by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the Participant only by such Participant. Section 8. Stock Appreciation Rights 8.1 Grant of Stock Appreciation Rights. Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may grant freestanding Stock Appreciation Rights, Stock Appreciation Rights in tandem with an Option, or Stock Appreciation Rights in addition to an Option. Stock Appreciation Rights granted in tandem with an Option or in addition to an Option may be granted at the time of the Option or at a later time. 8.2 Price. The exercise price of each Stock Appreciation Right shall be determined at the time of grant by the Committee, subject to the limitation that the grant price shall not be less than 100% of Fair Market Value of the Stock on the Grant Date. 8.3 Exercise. The Participant shall be entitled to receive payment upon exercise of a Stock Appreciation Right in accordance with Section 8.4. 8.4 Payment. Upon exercise of the Stock Appreciation Right, the Participant shall be entitled to receive payment from the Company in an amount determined by multiplying (a) the difference between the Fair Market Value of a share of Stock on the date of Exercise of the Stock Appreciation Right over the grant price specified in the Award Agreement by (b) the number of shares of Stock with respect to which the Stock Appreciation Right is exercised. 8.5 Maximum Award. The maximum number of shares of Stock that may be subject to Stock Appreciation Rights granted to any Participant during a single calendar year shall be 2,000,000. Section 9. Restricted Stock 9.1 Grant of Restricted Stock. Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may grant shares of Restricted Stock under the Plan to such Participants, and in such amounts and for such duration and/or consideration as it shall determine. Participants receiving Restricted Stock Awards are not required to pay the Sponsor or the Company therefor (except for applicable tax withholding) other than the rendering of services and/or other consideration as determined by the Committee at its sole discretion. 9.2 Restricted Stock Agreement. Each Restricted Stock grant shall be evidenced by an Agreement that shall specify the Period of Restriction; the conditions which must be satisfied prior to removal of the restriction; the number of shares of Restricted Stock granted; and such other provisions as the Committee shall determine. The Committee may specify, but is not limited to, the following types of restrictions in the Award Agreement: (i) restrictions on acceleration or achievement of terms or vesting based an any business or financial goals of the Company, including, but not limited to the Performance Measures set out in Section 3.33, and (ii) any other further restrictions that may be advisable under the law, including requirements set forth by the Securities Act, any securities trading system or stock exchange upon which such shares under the Plan are listed. 9.3 Removal of Restrictions. Except as otherwise noted in this Section 9, Restricted Stock covered by each Award made under the Plan shall be provided to and become freely transferable by the Participant after the last day of the Period of Restriction and/or upon the satisfaction of other conditions as determined by the Committee. Except as specifically provided in this Section 9, the Committee shall have no authority to reduce or remove the restrictions or to reduce or remove the Period of Restriction without the express consent of the shareholders of the Sponsor. If the grant of Restricted Stock is performance based, the total Restricted Period for any or all shares or units of Restricted Stock so granted shall be no less than one (1) year. Any other shares of Restricted Stock issued pursuant to this Section 9 shall provide that the minimum Period of Restrictions shall be three (3) years, which Period of Restriction may permit the removal of restrictions on no more than one-third (1/3) of the shares of Restricted Stock at the end of the first year following the Grant Date, and the removal of the restrictions on an additional one-third (1/3) of the shares at the end of each subsequent year. Notwithstanding the previous sentence, if a Participant terminates employment from the Company at or following Early Retirement or Normal Retirement, any time-based Period of Restriction may be removed at the discretion of the Committee. In no event shall any restrictions be removed from shares of Restricted Stock during the first year following the Grant Date, except due to retirement as described in the preceding sentence or in the event of a Change in Control. 9.4 Voting Rights. During the Period of Restriction, Participants in whose name Restricted Stock is granted under the Plan may exercise full voting rights with respect to those shares. 9.5 Dividends and Other Distributions. During the Period of Restriction, Participants in whose name Restricted Stock is granted under the Plan shall be entitled to receive all dividends and other distributions paid with respect to those shares. If any such dividends or distributions are paid in shares, the shares shall be subject to the same restrictions on transferability as the Restricted Stock with respect to which they were distributed. 9.6 Maximum Award. The maximum number of shares of Stock that may be granted in the form of Restricted Stock pursuant to an Award granted to a Participant during a single calendar year shall be 250,000. Section 10. Performance Based Awards 10.1 Grant of Performance Awards. Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may issue Performance Awards in the form of either Performance Units or Performance Shares to Participants subject to the Performance Measures and Performance Period as it shall determine. The Committee shall have complete discretion in determining the number and value of Performance Units or Performance Shares granted to each Participant. Participants receiving Performance Awards are not required to pay the Sponsor or a Subsidiary or Affiliate therefor (except for applicable tax withholding) other than the rendering of services. 10.2 Value of Performance Awards. The Committee shall determine the number and value of Performance Units or Performance Shares granted to each Participant as a Performance Award. The Committee shall set Performance Measures in its discretion for each Participant who is granted a Performance Award. The extent to which such Performance Measures are met will determine the value of the Performance Unit to the Participant or the number of Performance Shares earned by the Participant. Such Performance Measures may be particular to a Participant, may relate to the performance of the Affiliate which employs him or her, may be based on the division which employs him or her, may be based on the performance of the Company generally, or a combination of the foregoing. The terms and conditions of each Performance Award will be set forth in an Agreement and/or a Sub-Plan. 10.3 Settlement of Performance Awards. After a Performance Period has ended, the holder of a Performance Unit or Performance Share shall be entitled to receive the value thereof based on the degree to which the Performance Measures established by the Committee and set forth in the Agreement and/or Sub-Plan have been satisfied. 10.4 Form of Payment. Payment of the amount to which a Participant shall be entitled upon the settlement of a Performance Award shall be made in cash, Stock, or a combination thereof as determined by the Committee. Payment may be made in a lump sum or installments as prescribed by the Committee. 10.5 Deferral of Performance Awards. Prior to the year with respect to which a Performance Award may vest, the Committee may permit a Participant to elect, in accordance with rules prescribed by the Committee, not to receive a distribution upon the vesting of such Performance Award and instead have the Company continue to maintain the Performance Award on its books of account. 10.6 Maximum Award. The maximum number of shares of Stock that may be the subject of a Performance Share Award granted to a Participant in a single calendar year shall be 250,000. The maximum amount of compensation payable, without regard to any deferred amounts, to a Participant pursuant to the grant of Performance Unit Awards in any calendar year shall be $10,000,000. Section 11. Other Stock Based Awards 11.1 Grant of Other Stock Based Awards. Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may issue to Participants, either alone or in addition to other Awards made under the Plan, Stock Unit Awards which may be in the form of or based on Stock or other securities. The maximum number of shares of Stock that may be granted in any calendar year to a Participant as part of a Stock Unit Award shall be 250,000. If the value of any Stock Unit Award is not based entirely on the value of the underlying Stock, the maximum amount of compensation payable, without regard to any deferred amounts, to a Participant pursuant to the grant of all such Stock Unit Awards in any calendar year shall be $ 2,500,000. The Committee, in its sole and complete discretion, may determine that an Award, either in the fore of a Stock Unit Award under this Section 11 or as an Award granted pursuant to Sections 7 through 10, may provide to the Participant (i) dividends or dividend equivalents (payable on a current or deferred basis) and (ii) cash payments in lieu of or in addition to an Award. Subject to the provisions of the Plan, the Committee in its sole and complete discretion, shall determine the terms, restrictions, conditions, vesting requirements, and payment rules (all of which are sometimes hereinafter collectively referred to as "rules") of the Award. The Award Agreement and/or Sub-Plan shall specify the rules of each Award as determined by the Committee. However, each Stock Unit Award need not be subject to identical rules. 11.2 Rules. The Committee, in its sole and complete discretion, may grant a Stock Unit Award subject to the following rules: (a) Stock or other securities issued pursuant to Stock Unit Awards may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated by a Participant until the expiration of at least six months from the Award Date, except that such limitation shall not apply in the case of death or Disability of the Participant. All rights with respect to such other Stock Unit Awards granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant or his or her guardian or legal representative. (b) Stock Unit Awards may require the payment of cash consideration by the Participant in receipt of the Award or provide that the Award, and any Stock or other securities issued in conjunction with the Award be delivered without the payment of cash consideration. (c) The Committee, in its sole and complete discretion, may establish certain Performance Measures that may relate in whole or in part to receipt of the Stock Unit Awards. (d) Stock Unit Awards may be subject to a deferred payment schedule and/or vesting over a specified employment period. (e) The Committee, in its sole and complete discretion, as a result of certain circumstances, may waive or otherwise remove, in whole or in part, any restriction or condition imposed on a Stock Unit Award at the time of grant. 11.3 Deferral of Stock Units. Prior to the year with respect to which a Stock Unit may vest, the Committee may permit a Participant to elect, in accordance with rules prescribed by the Committee, not to receive a distribution upon the vesting of such Stock Unit and instead have the Company continue to maintain the Stock Unit on its books of account. Section 12. Special Provisions Applicable to Covered Participants. Unless the Committee in its sole discretion determines that any Award made to a Covered Employee is not intended to qualify for the Performance Based Exception under Section 162(m), Awards subject to Performance Measures that are granted to Covered Participants under this Plan shall be governed by the conditions of this Section 12, in addition to the requirements of Sections 9, 10, and 11 above. Should conditions set forth under this Section 12 (when applicable) conflict with the requirements of Sections 9, 10, and 11, the conditions of this Section 12 shall prevail. (a) Performance Measures for Covered Participants shall be established by the Committee in writing prior to the beginning of the Performance Period, or by such other later date during the Performance Period as may be permitted under Section 162(m). Performance Measures for Covered Participants may include alternative and multiple Performance Measures and may be based on one or more business criteria. (b) All Performance Measures must be objective and must satisfy third party "objectivity" standards under Section 162(m). (c) The Performance Measures shall not allow for any discretion by the Committee as to an increase in any Award, but discretion to lower an Award is permissible. (d) The Award and payment of any Award under this Plan to a Covered Participant with respect to relevant Performance Period shall be contingent upon the attainment of the Performance Measures that are applicable to such Covered Participant. The Committee shall certify in writing prior to payment of any such Award that such applicable Performance Measures relating to the Award are satisfied. Approved minutes of the Committee may be used for this purpose. (e) All Awards to Covered Participants under this Plan shall be further subject to such other conditions, restrictions, and requirements as the Committee may determine to be necessary to carry out the purpose of this Section 12. Section 13. General Provisions 13.1 Withholding. The Company shall have the right to deduct or withhold, or require a Participant to remit to the Company, any taxes, including employment taxes, required by law to be withheld with respect to the Awards made under this Plan. In the event an Award is paid in the form of Stock, the Committee may require the Participant to remit to the Company the amount of any taxes required to be withheld from such payment in Stock, or, in lieu thereof the Company may withhold (or the Participant may be provided the opportunity to elect to tender) the number of shares of Stock equal in Fair Market Value to the amount required to be withheld. 13.2 No Right to Employment. No granting of an Award shall be construed as a right to employment with the Company. 13.3 Rights as Shareholder. Subject to the Award provisions, no Participant or Designated Beneficiary shall be deemed a shareholder of the Sponsor nor have any rights as such with respect to any shares of Stock to be provided under the Plan until he or she has become the holder of such shares. Notwithstanding the aforementioned, with respect to Stock granted under a Restricted Stock Agreement under this Plan, the Participant or Designated Beneficiary of such Award shall be deemed the owner of such shares. As such, unless contrary to the provisions herein or in any such related Award Agreement, such shareholder shall be entitled to full voting, dividend and distribution rights as provided any other Sponsor shareholder. 13.4 Construction of the Plan. The Plan, and its rules, rights, Agreements, Sub-Plans and regulations, shall be governed, construed, interpreted and administered in accordance with applicable Federal laws, or to the extent that Federal laws do not apply, the laws of the State of North Carolina. In the event any provision of the Plan shall be held invalid, illegal or unenforceable, in whole or in part, for any reason, such determination shall not affect the validity, legality or enforceability of any remaining provision, or portion of provision, of the Plan overall, which shall remain in full force and effect. 13.5 Amendment of Plan. The Committee or the Board of Directors may amend, suspend, or terminate the Plan or any portion thereof at any time, provided (a) such amendment is made with shareholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement for the Performance-Based Exception under Section 162(m), and (b) such amendment may not adjust or amend the exercise price of Options previously granted to a Participant without further shareholder approval except as provided in Sections 6.4 and 6.5 hereof. The Committee in its discretion may amend the Plan so as to conform with any applicable regulatory requirements subject to any provisions to the contrary specified herein. 13.6 Amendment of Award. At any time and in its sole and complete discretion, the Committee may amend any Award for the following reasons: (i) additions and/or changes are made to the Code, any federal or state securities law, or other law or regulations subsequent to the Grant Date, and have an impact on the Award; or (ii) for any other reason not described in clause (i), provided (a) such amendment does not adversely affect a Participant or, if it does, provided the Participant gives his or her consent to such amendment, and (b) such amendment may not adjust or amend the exercise price of Options previously granted to a Participant without further shareholder approval except as provided in Sections 6.4 and 6.5 hereof. 13.7 Exemption from Computation of Compensation for Other Purposes. By accepting an Award under this Plan, each Participant agrees that such Award shall be considered special incentive compensation and will be exempt from inclusion as "wages" or "salary" for purposes of calculating benefits under pension, profit sharing, disability, severance, life insurance, and other employee benefit plans of the Company, except as otherwise provided in those benefit plans. 13.8 Legend. In its sole and complete discretion, the Committee may elect to legend certificates representing shares of Stock sold or awarded under the Plan, to make appropriate references to the restrictions imposed on such shares. 13.9 Executive Officers and Covered Participants. All Award Agreements and/or Sub-Plans for Participants subject to Section 16(b) shall be deemed to include any such additional terms, conditions, limitations and provisions as Rule 16b-3 requires, unless the Committee in its discretion determines that any such Award should not be governed by Rule 16b3. All Awards subject to the Performance Based Exception shall be deemed to include any such additional terms, conditions, limitations and provisions as are necessary to comply with the Performance-Based Compensation exemption of Section 162(m), unless the Committee, in its sole discretion, determines that an Award to a Covered Participant is not intended to qualify for the Performance-Based Exception. 13.10 Change in Control. In the event of a Change in Control, the Committee may provide, in its sole and complete discretion, either within the terms of the Award Agreement or subsequently, for the acceleration of the payment and/or vesting of any Award, the extension of the time during which an Award is exercisable to its full term regardless of a Participant's termination of employment with the Company and/or the release of any restrictions on any Award. 13.11 Divestiture. In the event of a Divestiture, the Committee may provide, in its sole and complete discretion, either within the terms of the Award Agreement or subsequently, for the acceleration of the payment and/or vesting of any Award, the extension of the time during which an Award is exercisable to its full term regardless of a Participant's termination of employment with the Company and/or the release of any restrictions on any Award or the assumption of an Award as contemplated in Section 13.14. 13.12 Unfunded Obligation. Nothing in this Plan shall be interpreted or construed to require the Company in any manner to fund any obligation to the Participants or any Designated Beneficiary. Nothing contained in this Plan nor any action taken hereunder shall create, or be construed to create a trust of any kind, or a fiduciary relationship between the Company and/or the Committee, and the Participants and/or any Designated Beneficiary. To the extent that any Participant or Designated Beneficiary acquires a right to receive payments under this Plan, such rights shall be no greater than the rights of any unsecured general creditor of the Sponsor. 13.13 Plan Expenses. All reasonable expenses of the Plan shall be paid by the Company. 13.14 Transfer. The sponsorship of this Plan may be assumed by any Affiliate of the Sponsor in the case of a reorganization of the Sponsor and its Affiliates, or by any successor in interest of the Sponsor. Further, in the event any Award under the Plan is assumed by an Affiliate or another entity in connection with the disposition or sale of any business of the Sponsor and its Affiliates, the Award so assumed shall be cancelled under the Plan. EX-10 9 pei_10qexhibit10vii-.txt EXHIBIT 10(VII) EXHIBIT A TO 2002 EQUITY INCENTIVE PLAN PERFORMANCE SHARE SUB-PLAN (Effective July 9, 2002) This Performance Share Sub-Plan ("Sub-Plan") sets forth the rules and regulations adopted by the Committee for issuance of Performance Share Awards under Section 10 of the 2002 Equity Incentive Plan ("Plan"). Capitalized terms used in this Sub-Plan that are not defined herein shall have the meaning given in the Plan. In the event of any conflict between this Sub-Plan and the Plan, the terms and conditions of the Plan shall control. No Award Agreement shall be required for participation in this Sub-Plan. Section 1. Definitions When used in this Sub-Plan, the following terms shall have the meanings as set forth below, and are in addition to the definitions set forth in the Plan. 1.1 "Account" means the account used to record and track the number of ------- Performance Shares granted to each Participant as provided in Section 2.4. 1.2 "Award" as used in this Sub-Plan means each aggregate award of Performance ----- Shares as provided in Section 2.2. 1.3 "EBITDA" means earnings before interest, taxes, depreciation, and ------ amortization as determined from time to time by the Committee. 1.4 "EBITDA Growth" means the percentage increase (if any) in EBITDA for any -------------- Year, as compared to the previous Year as determined from time to time by the Committee. 1.5 "Peer Group" means the utilities included in the Standard & Poor's Utility ---------- (Electric Power Companies) Index. 1.6 "Performance Period" for purposes of this Sub-Plan means three consecutive ------------------- Years beginning with the Year in which an Award is granted. 1.7 "Performance Schedule" means Attachment 1 to this Sub-Plan, which sets --------------------- forth the Performance Measures applicable to this Sub-Plan. 1.8 "Performance Share" for purposes of this Sub-Plan means each unit of an ------------------ Award granted to a Participant, the value of which is equal to the value of Company Stock as hereinafter provided. 1.9 "Retire" or "Retirement" means termination of employment on or after: ------ ---------- (a) becoming 65 years old with at least 5 years of service; (b) becoming 55 years old with at least 15 years of service; or (c) achieving at least 35 years of service, regardless of age. 1.10 "Salary" means the regular base rate of compensation payable by the Company ------ to a Participant on an annual basis as of the date an Award is granted. Salary does not include bonuses, if any, or incentive compensation, if any. Such compensation shall not be reduced by any deferrals made under any other plans or programs maintained by the Company. 1.11 "Total Shareholder Return" means the total percentage return realized by -------------------------- the owner of a share of stock during a relevant Year or any part thereof. Total Shareholder Return is equal to the appreciation or depreciation in value of the stock (which is equal to the closing value of the stock on the last trading day of the relevant period minus the closing value of the stock on the last trading day of the preceding Year) plus the dividends declared during the relevant period, divided by the closing value of the stock on the last trading day of the preceding Year. Closing values for the stock on the dates given above shall be those published in the Wall Street Journal. 1.12 "Year" means a calendar year. ---- Section 2. Sub-Plan Participation and Awards 2.1 Participant Selection. Participants under this Sub-Plan shall be selected ---------------------- by the Committee in its sole discretion as provided in Section 4.2 of the Plan. 2.2 Awards. Subject to any adjustments to be made under Section 2.5, the ------ Compensation Committee may, in its sole discretion, grant Awards to some or all of the Participants in the form of a specific number of Performance Shares. The total value of any Award shall not exceed the following limitations, based on the Participant's Salary on the date that the Award is granted: -------------------------------------------- ------------------------------ Participant Award Limitation -------------------------------------------- ------------------------------ CEO*/COO* 150% of Salary -------------------------------------------- ------------------------------ Presidents*/Executive VPs* 100% of Salary -------------------------------------------- ------------------------------ Senior VPs* 85% of Salary -------------------------------------------- ------------------------------ Department Heads and Key Managers** Level I 75% of Salary Level II 50% of Salary Level III 40% of Salary -------------------------------------------- ------------------------------ * Senior Management Committee level position **Levels shall be determined in the sole discretion of the Committee 2.3 Award Valuation at Grant. In calculating the limitations set forth in ------------------------- Section 2.2, the value of each Performance Share shall be equal to the closing price of a share of Stock on the last trading day before the Award is granted, as published in the Wall Street Journal. Each Award is deemed to be granted on the day that it is approved by the Committee. 2.4 Accounting and Adjustment of Awards. The number of Performance Shares -------------------------------------- awarded to a Participant shall be recorded in a separate Account for each Participant. The number of Performance Shares recorded in a Participant's Account shall be adjusted to reflect any splits or other adjustments in the Stock. If any cash dividends are paid on the Stock, the number of Performance Shares in each Participant's Account shall be increased by a number equal to (i) the dividend multiplied by the number of Performance Shares in each Participant's Account, divided by (ii) the closing price of a share of Stock on the payment date of the dividend, as published in the Wall Street Journal. 2.5 Performance Schedule and Calculation of Awards. Each Award shall become ------------------------------------------------- vested on January 1 immediately following the end of the applicable Performance Period, subject to adjustment in accordance with the following procedure. (a) One-half of the Award shall be adjusted as follows: (i) The Total Shareholder Return for the Company shall be determined for each Year during the Performance Period, and shall then be averaged (the "Company TSR"). (ii) The average Total Shareholder Return for all Peer Group utilities shall be determined for each Year during the Performance Period, and shall then be averaged ( the "Peer Group TSR"). (iii)The Peer Group TSR for the Performance Period shall be subtracted from the Company TSR for the Performance Period. The remainder shall then be used to determine the number of vested Performance Shares using the Performance Schedule, based on one-half of the number of Performance Shares in the Participant's Account. (b) The other one-half of the Award shall be adjusted as follows: (i) The EBITDA Growth for the Company shall be determined for each Year during the Performance Period, and shall then be averaged (the "Company EBITDA Growth"). (ii) The average EBITDA Growth for all Peer Group utilities shall be determined for each Year during the Performance period, and shall be averaged (the "Peer Group EBITDA Growth"). (iii) The Peer Group EBITDA Growth for the Performance Period shall be subtracted from the Company EBITDA Growth for the Performance Period. The remainder shall then be used to determine the number of vested Performance Shares using the Performance Schedule, based on one-half of the number of Performance Shares in the Participant's Account. (c) The total number of vested Performance Shares payable to the Participant shall be the sum of the amounts determined in accordance with subsections (a) and (b) above. (d) The Performance Measures and the Performance Schedule will not change during any Performance Period with regard to any Awards that have already been granted. The Committee reserves the right to modify or adjust the Performance Measures and/or the Performance Schedule in the Committee's sole discretion with regard to future grants. 2.6 Payment Options. Except as provided in Section 3, Awards shall be paid after expiration of the Performance Period. The Company will pay in cash to each Participant the aggregate value of vested Performance Shares, which shall be determined in accordance with Section 2.7. Payment shall be made as follows: (a) 100% during the month of April of the Year immediately following expiration of the Performance Period, or as soon as practical thereafter; or (b) in accordance with an alternative payment election made by Participant substantially in the form attached hereto as Attachment 2, provided that such election is executed by the Participant and returned to the Vice President, Human Resources Department no later than the end of the first Year of the Performance Period. Once made, this election is irrevocable. 2.7 Valuation of Performance Shares. For the purposes of payment under Section 2.6, the aggregate value of vested Performance Shares shall be equal to the total number of vested Performance Shares in the Participant's Account (after any applicable adjustments under Section 2.5) multiplied by the closing price of the Stock on the March 31 (or if March 31 is not a trading day, the closing price of the Stock on the next preceding trading day) before payment of the Award, as published in the Wall Street Journal. 2.8 Grantor Trust. In the case of a Change in Control, the Company shall, subject to the restrictions in this Section 2.8 and Section 13.12 of the Plan, irrevocably set aside funds in one or more such grantor trusts in an amount that is sufficient to pay each Participant employed by such Company (or Designated Beneficiary), the net present value as of the date on which the Change in Control occurs, of the earned benefits to which Participants (or their Designated Beneficiaries) would be entitled pursuant to the terms of the Plan if the value of their deferral account (if any) established pursuant to section 2.6(b) would be paid in a lump sum upon the Change in Control. Any such trust shall be subject to the claims of the general creditors of the Sponsor or Company in the event of bankruptcy or insolvency of the Sponsor or Company. Section 3. Early Vesting and Forfeiture 3.1 Retirement, Death or Divestiture. If prior to expiration of the Performance Period the Participant Retires or dies, or in the event of a Divestiture during a Performance Period, the Participant's outstanding Award(s) for any unexpired Performance Period shall immediately become vested, and the aggregate value of the Award shall be paid in cash after being adjusted in accordance with Section 3.3. 3.2 Change in Control. In the event of a Change in Control prior to the expiration of the Performance Period, any outstanding Award of the Participant for any unexpired Performance Period shall be treated as follows: (a) If the Award is assumed by the successor to the Sponsor as of the date of the Change in Control, each outstanding Award not previously forfeited shall continue to vest and shall be paid pursuant to the terms of this Sub-Plan; provided, however, that in the event the employment of the Participant is terminated by the Company without Cause following the Change in Control, any outstanding Award shall become vested as of the termination date, and the aggregate value of the Award shall be paid in cash after being adjusted in accordance with Section 3.3. (b) If the Award is not assumed by the successor to the Sponsor as of the date of the Change in Control, any outstanding Award shall become vested as of the date of the Change in Control, and the aggregate value of the Award shall be paid in cash after being adjusted in accordance with Section 3.3. 3.3 Adjustment of Awards. Any Award which is vested pursuant to this Section 3 prior to the end of the Performance Period shall be adjusted pursuant to the following procedure. (a) One-half of the Award shall be adjusted as follows: (i) The Total Shareholder Return for the Company shall be determined for each Year or partial Year, and a weighted average Total Shareholder Return for the Company shall be calculated for the period between the first day of the Performance Period and the date the Participant Retires or dies, or the date of the Divestiture or the date that the Award is vested pursuant to Section 3.2 (the "Prorated Company TSR"). (ii) The average Total Shareholder Return for all Peer Group utilities shall be determined for each Year or partial Year, and a weighted average Total Shareholder Return shall be calculated for the period between the first day of the Performance Period and the date the Participant Retires or dies, or the date of the Divestiture or the date that the Award is vested pursuant to Section 3.2 (the "Prorated Peer Group TSR"). (iii) The Prorated Peer Group TSR for the Performance Period shall be subtracted from the Prorated Company TSR for the Performance Period. The remainder shall then be used to determine the vested Performance Shares using the Performance Schedule, based on one-half of the number of Performance Shares in the Participant's Account. (b) The other one-half of the Award shall be adjusted as follows: (i) The EBITDA Growth for the Company shall be determined for each Year or partial Year, and a weighted average EBITDA Growth for the Company shall be calculated for the period between the first day of the Performance Period and the end of the calendar quarter immediately preceding the date that the Participant Retires or dies, or end of the calendar quarter immediately preceding the date of the Divestiture or the date that the Award is vested pursuant to Section 3.2 (the "Prorated Company EBITDA Growth"). (ii) The average EBITDA Growth for all Peer Group utilities shall be determined for each Year or partial Year, and a weighted average EBITDA Growth shall be calculated for the period between the first day of the Performance Period and the end of the calendar quarter immediately preceding the date the Participant Retires or dies, or the end of the calendar quarter immediately preceding the date of the Divestiture or the date that the Award is vested pursuant to Section 3.2 (the "Prorated Peer Group EBITDA Growth"). (iii) The Prorated Peer Group EBITDA Growth for the Performance Period shall be subtracted from the Prorated Company EBITDA Growth for the Performance Period. The remainder shall then be used to determine the vested Performance Shares using the Performance Schedule, based on one-half of the number of Performance Shares in the Participant's Account. (c) The total number of vested Performance Shares payable to the Participant shall be the sum of the amounts determined in accordance with subsections (a) and (b) above. (d) If the Participant Retires, the Award shall be paid in accordance with the Participant's election as provided in Section 2.6. If the Participant dies, or in the event of a Divestiture, payment shall be made in cash within a reasonable time after the Participant dies, or within a reasonable time after the Divestiture becomes effective, notwithstanding any election under Section 2.6. Payment upon death shall be made to the Participant's Designated Beneficiary. If the Award is vested pursuant to Section 3.2, the Award shall be paid within a reasonable time after the date of vesting, notwithstanding any election under Section 2.6. The aggregate value of the vested Performance Shares shall be determined in accordance with section 3.4. 3.4 Valuation of Performance Shares. For the purposes of payment under Section 3.3(d), the aggregate value of vested Performance Shares shall be equal to the number of vested Performance Shares in the Participant's Account (after any applicable adjustments under Section 3.3) multiplied by the closing price of the Stock on the date that the Participant Retires or dies, or on the date of the Divestiture, or the on date the Award vests pursuant to Section 3.2 (as applicable), as published in the Wall Street Journal. 3.5 Termination of Employment. In the event that a Participant's employment with the Company terminates for any reason other than as provided in this Section 3, any Award made to the Participant which has not vested as provided in Section 2 or Section 3 shall be forfeited. Any vested Awards shall be paid within a reasonable time after termination (for reasons other than Retirement), notwithstanding any election to defer the payment of any Award under Section 2.6. Section 4. Non-Assignability of Awards The Awards and any right to receive payment under the Plan and this Sub-Plan may not be anticipated, alienated, pledged, encumbered, or subject to any charge or legal process, and if any attempt is made to do so, or a Participant becomes bankrupt, then in the sole discretion of the Committee, any Award made to the Participant which has not vested as provided in Sections 2 and 3 shall be forfeited. Section 5. Amendment and Termination This Sub-Plan shall be subject to amendment, suspension, or termination as provided in the Plan. ATTACHMENT 1 PERFORMANCE SCHEDULE PERFORMANCE SHARE CALCULATION(1) -------------------------------- The following table shall be used to adjust one half of the Participant's Award in accordance with Section 2.5(a) or Section 3.3(a) of the Plan: If the Company TSR(2) minus Then the 50% of the vested the Peer Group TSR(2) is: Performance Share Award shall be multiplied by: 5% or better 2.00 4.0 - 4.99 1.75 3.0 - 3.99 1.50 2.0 - 2.99 1.25 1.0 - 1.99 1.00 (0.99) - 0.99 .50 (1.0) - (1.99) .25 (2.0) or less 0.00 The following table shall be used to adjust one half of the Participant's Award in accordance with Section 2.5(b) or Section 3.3(b) of the Plan: If the Company EBITDA Growth(2) minus Then the 50% of the vested the Peer Group EBITDA Growth(2) is: Performance Share Award shall be multiplied by: 5% or better 2.00 4.0 - 4.99 1.75 3.0 - 3.99 1.50 2.0 - 2.99 1.25 1.0 - 1.99 1.00 0.00 - 0.99 .50 Less than 0 0 (1) The number of Performance Shares as calculated above shall be paid in accordance with the provisions of Section 2.5 and 2.6 of the Sub-Plan. (2) For purposes of Section 3, the Prorated Company TSR and EBITDA Growth and Prorated Peer Group TSR and EBITDA Growth shall be used, and the number of Performance Shares as calculated above shall be paid in accordance with the provisions of Section 3.3 of the Sub-Plan. ATTACHMENT 2 Performance Share Sub-Plan 200_ Deferral Election Form As a Participant in the Performance Share Sub-Plan of the 2002 Equity Incentive Plan ("Sub-Plan"), I hereby elect to defer payment of my Award otherwise payable to me by the Company and attributable to services to be performed by me during the Performance Period beginning on January __, 200__. This election shall apply to [CHECK ONE]: [ ] 100% of the Award [ ] 50% of the Award [ ] 75% of the Award [ ] 25% of the Award Upon vesting, I understand that my Award shall continue to be recorded in my Account as Performance Shares as described in the Sub-Plan and adjusted to reflect the payment and reinvesting of the Company's common stock dividends over the deferral period, until paid in full. I hereby elect to defer receipt (or commencement of receipt) of my Award until the date specified below, or as soon as practical thereafter [CHECK ONE]: [ ] a specific date certain at least 5 years from expiration of the Performance Period: 4 / 1 / * ------------------------- (month/day/year) [ ] the April 1 following the date of retirement [ ] the April 1 following the first anniversary of my date of retirement * Notwithstanding my election above, if I elect a date certain distribution and I retire before that date certain, I understand that the Company will commence distribution of my account no later than the April 1 following the first anniversary of the date of retirement, or as soon as practical thereafter, even though said date is earlier than 5 years from expiration of the Performance Period. I hereby elect to be paid as described in the Sub-Plan in the form of [CHECK ONE]: [ ] a single payment [ ] annual payments commencing on the date set forth above and payable on the anniversary date thereof over: [ ] a two year period [ ] a three year period [ ] a four year period [ ] a five year period I understand that I will receive "earnings" on those deferred amounts when they are paid to me. I understand that the election made as indicated herein is irrevocable and that all deferral elections are subject to the provisions of the Sub-Plan, including provisions that may affect timing of distributions. I understand and acknowledge that my interests herein and my rights to receive distribution of the deferred amounts may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, or subjected to any charge or legal process, and if any attempt is made to do so, or I become bankrupt, my interest may be terminated by the Committee, which, in his sole discretion. I further understand that nothing in the Sub-Plan shall be interpreted or construed to require the Company in any manner to fund any obligation to me, or to my beneficiary(ies) in the event of my death. - ------------------------------------------ --------------------------------- (Signature) (Date) - ------------------------------------------ --------------------------------- (Print Name) (Company Location) Received: Agent of Chief Executive Officer - ------------------------------------------ --------------------------------- (Signature) (Date) -----END PRIVACY-ENHANCED MESSAGE-----