-----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, RzJriJjF7j61CdvpIZHKWMFrbciB7N/D9fcaRUTQZL4pia+ZhEhDJFXkT4NaAaI5 lkZAVLaAOFqvyrgfWXrmGA== 0001094093-03-000117.txt : 20030811 0001094093-03-000117.hdr.sgml : 20030811 20030811152426 ACCESSION NUMBER: 0001094093-03-000117 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030811 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: 03834408 BUSINESS ADDRESS: STREET 1: 411 FAYETTEVILLE ST CITY: RALEIGH STATE: NC ZIP: 27601 BUSINESS PHONE: 9195466111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROGRESS ENERGY INC CENTRAL INDEX KEY: 0001094093 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 562155481 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15929 FILM NUMBER: 03834407 BUSINESS ADDRESS: STREET 1: 410 S WILMINGTON ST CITY: RALEIGH STATE: NC ZIP: 27601 BUSINESS PHONE: 9195466463 MAIL ADDRESS: STREET 1: 410 S WILMINGTON ST CITY: RALEIGH STATE: NC ZIP: 27601 FORMER COMPANY: FORMER CONFORMED NAME: CP&L ENERGY INC DATE OF NAME CHANGE: 20000314 FORMER COMPANY: FORMER CONFORMED NAME: CP&L HOLDINGS INC DATE OF NAME CHANGE: 19990830 10-Q 1 pei_form10q-.txt PGN FORM 10-Q 2003 2ND QTR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 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 d/b/a Progress Energy Carolinas, Inc. 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 Indicate by check mark whether Progress Energy, Inc. is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No __ Indicate by check mark whether Carolina Power & Light Company is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X This combined Form 10-Q is filed separately by two registrants: Progress Energy, Inc. (Progress Energy) and Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. (PEC). 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. Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date. As of July 31, 2003, each registrant had the following shares of common stock outstanding: Registrant Description Shares ---------- ----------- ------ Progress Energy, Inc. Common Stock (Without Par Value) 243,437,696 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 PROGRESS ENERGY CAROLINAS, INC. FORM 10-Q - For the Quarter Ended June 30, 2003 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 Notes to Consolidated Interim Financial Statements Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. --------------------------------------------------------------- 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 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures 2 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined Form 10-Q are defined below: TERM DEFINITION AFUDC Allowance for funds used during construction the Agreement Stipulation and Settlement Agreement ARO Asset retirement obligations Bcf Billion cubic feet CCO Competitive Commercial Operations the Code Internal Revenue Service Code Colona Colona Synfuel Limited Partnership, L.L.L.P. the Company Progress Energy, Inc. and subsidiaries CP&L Energy CP&L Energy, Inc., now known as Progress Energy, Inc. CPI Consumer Price Index CR3 Progress Energy Florida's nuclear generating plant, Crystal River Unit No. 3 CVO Contingent value obligation DIG Derivatives Implementation Group DOE United States Department of Energy Dt Dekatherm DWM North Carolina Department of Environment and Natural Resources, Division of Waste Management EITF Emerging Issues Task Force ENCNG Eastern North Carolina Natural Gas Company, formerly referred to as Eastern NC EPA United States Environmental Protection Agency FASB Financial Accounting Standards Board FDEP Florida Department of Environment and Protection Federal Circuit U.S. Circuit Court of Appeals FERC Federal Energy Regulatory Commission FIN No. 46 FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51" FPC Florida Progress Corporation FPSC Florida Public Service Commission Funding Corp. Florida Progress Funding Corporation GAAP Accounting principles generally accepted in the United States of America Genco Progress Genco Ventures, LLC IRS Internal Revenue Service Jackson Jackson Electric Membership Corp. KWh Kilowatt-hour MACT Maximum Available Control Technology MGP Manufactured gas plant MW Megawatt NCNG North Carolina Natural Gas Corporation NCUC North Carolina Utilities Commission NOx SIP Call EPA rule which requires 23 jurisdictions including North and South Carolina and Georgia to further reduce nitrogen oxide emissions NRC United States Nuclear Regulatory Commission NSP Northern States Power PCH Progress Capital Holdings, Inc. PEC Progress Energy Carolinas, Inc., formerly referred to as Carolina Power & Light Company PEF Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation PFA IRS Prefiling Agreement the Plan Revenue Sharing Incentive Plan PLRs Private Letter Rulings Preferred Securities FPC-obligated mandatorily redeemable preferred securities 3 Progress Energy Progress Energy, Inc. Progress Rail Progress Rail Services Corporation Progress Telecom Progress Telecommunications Corporation Progress Ventures Business segment of Progress Energy primarily made up of nonregulated energy generation, gas, coal and synthetic fuel operations and energy marketing and trading PUHCA Public Utility Holding Company Act of 1935, as amended PVI Legal entity of Progress Ventures, Inc., formerly referred to as CPL Energy Ventures, Inc. PWR Pressurized water reactor RAFT Railcar Asset Financing Trust Rail Rail Services RTO Regional Transmission Organization SCPSC Public Service Commission of South Carolina SEC United States Securities and Exchange Commission Section 29 Section 29 of the Internal Revenue Service Code Section 42 Section 42 of the Internal Revenue Service Code Service Company Progress Energy Service Company, LLC SFAS No. 5 Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" SFAS No. 71 Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" SFAS No. 131 Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" SFAS No. 133 Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities" SFAS No. 142 Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" SFAS No. 143 Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" SFAS No. 148 Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123" SFAS No. 149 Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" SFAS No. 150 Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination through Open Access Transmission and Standard Market Design SRS Strategic Resource Solutions Corp. the Trust FPC Capital I
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" about the effects of new environmental regulations, nuclear decommissioning costs and the effect of electric utility industry restructuring. Any forward-looking statement speaks only as of the date on which such statement is made, and neither Progress Energy, Inc. (Progress Energy) nor Progress Energy Carolinas, Inc. (PEC) 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 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 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; the ability of the Company to maintain its current credit ratings; the impact of derivative contracts used in the normal course of business by the Company; the outcome of the IRS's audit and inquiry into the availability and use of Section 29 tax credits by synthetic fuel producers and 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 Telecommunications Corporation and Caronet, Inc.; the Company's ability to successfully integrate newly acquired assets, properties or businesses 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 nonregulated 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 Company's ability to obtain an extension of the Securities and Exchange Commission's order requiring us to divest of Progress Rail Services Corporation by November 30, 2003; and unanticipated changes in operating expenses and capital expenditures. Most of these risks similarly impact the Company's subsidiaries including PEC. These and other risk factors are detailed from time to time in the Progress Energy and PEC SEC reports. Many, but not all of the factors that may impact actual results are discussed in the Risk Factors sections of Progress Energy's and PEC's annual report on Form 10-K for the year ended December 31, 2002, which were filed with the SEC on March 21, 2003. 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 PEC. 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 PEC. 5 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Progress Energy, Inc. CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2003 CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended (Unaudited) June 30, June 30, - ----------------------------------------------------------------------------------------------------------------------- (In thousands except per share data) 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------------------------------- Operating Revenues Utility $ 1,582,787 $ 1,600,581 $ 3,236,674 $ 3,098,503 Diversified business 429,897 358,274 792,015 647,653 - ----------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 2,012,684 1,958,855 4,028,689 3,746,156 - ----------------------------------------------------------------------------------------------------------------------- Operating Expenses Utility Fuel used in electric generation 393,331 366,757 804,954 736,809 Purchased power 209,825 224,685 412,567 405,958 Operation and maintenance 364,766 346,358 699,079 675,332 Depreciation and amortization 223,595 210,485 443,683 422,373 Taxes other than on income 94,446 93,306 197,278 189,227 Diversified business Cost of sales 379,710 347,438 686,651 647,963 Depreciation and amortization 33,680 29,329 61,948 56,664 Other 38,996 35,209 89,254 64,562 - ----------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 1,738,349 1,653,567 3,395,414 3,198,888 - ----------------------------------------------------------------------------------------------------------------------- Operating Income 274,335 305,288 633,275 547,268 - ----------------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 3,531 6,153 6,297 8,106 Other, net (9,432) (2,340) (11,883) 3,718 - ----------------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (5,901) 3,813 (5,586) 11,824 - ----------------------------------------------------------------------------------------------------------------------- Income before Interest Charges and Income Taxes 268,434 309,101 627,689 559,092 - ----------------------------------------------------------------------------------------------------------------------- Interest Charges Net interest charges 159,520 170,161 315,768 340,330 Allowance for borrowed funds used during construction (2,222) (3,353) (5,109) (6,906) - ----------------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 157,298 166,808 310,659 333,424 - ----------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations before Income Tax 111,136 142,293 317,030 225,668 Income Tax Expense (Benefit) (39,174) 20,360 (30,146) (20,326) - ----------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 150,310 121,933 347,176 245,994 Discontinued Operations, Net of Tax 2,513 (1,313) 13,803 7,153 - ----------------------------------------------------------------------------------------------------------------------- Net Income $ 152,823 $ 120,620 $ 360,979 $ 253,147 - ----------------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 236,057 215,007 234,755 213,999 - ----------------------------------------------------------------------------------------------------------------------- Basic Earnings per Common Share Income from Continuing Operations $ 0.64 $ 0.57 $ 1.48 $ 1.15 Discontinued Operations, Net of Tax $ 0.01 $ (0.01) $ 0.06 $ 0.03 Net Income $ 0.65 $ 0.56 $ 1.54 $ 1.18 - ----------------------------------------------------------------------------------------------------------------------- Diluted Earnings per Common Share Income from Continuing Operations $ 0.63 $ 0.56 $ 1.47 $ 1.15 Discontinued Operations, Net of Tax $ 0.01 $ 0.00 $ 0.06 $ 0.03 Net Income $ 0.64 $ 0.56 $ 1.53 $ 1.18 - ----------------------------------------------------------------------------------------------------------------------- Dividends Declared per Common Share $ 0.560 $ 0.545 $ 1.120 $ 1.090 - -----------------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 6 Progress Energy, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands except share data) June 30, December 31, Assets 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 20,991,295 $ 20,152,787 Accumulated depreciation (9,990,819) (10,480,880) - ----------------------------------------------------------------------------------------------------------------------------- Utility plant in service, net 11,000,476 9,671,907 Held for future use 12,864 15,109 Construction work in progress 842,520 752,336 Nuclear fuel, net of amortization 234,515 216,882 - ----------------------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 12,090,375 10,656,234 - ----------------------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 45,654 61,358 Accounts receivable 824,233 737,369 Unbilled accounts receivable 217,586 225,011 Inventory 846,928 875,485 Deferred fuel cost 277,480 183,518 Assets of discontinued operations 491,784 490,429 Prepayments and other current assets 213,209 260,804 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 2,916,874 2,833,974 - ----------------------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 640,891 393,215 Nuclear decommissioning trust funds 861,752 796,844 Diversified business property, net 2,213,623 1,884,271 Miscellaneous other property and investments 443,428 463,776 Goodwill 3,719,327 3,719,327 Prepaid pension costs 57,919 60,169 Other assets and deferred debits 684,764 517,182 - ----------------------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 8,621,704 7,834,784 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 23,628,953 $ 21,324,992 - ----------------------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ----------------------------------------------------------------------------------------------------------------------------- Common Stock Equity Common stock without par value, 500,000,000 shares authorized, 242,187,774 and 237,992,513 shares issued and outstanding, respectively $ 5,109,564 $ 4,929,104 Unearned ESOP common stock (88,734) (101,560) Accumulated other comprehensive loss (240,508) (237,762) Retained earnings 2,182,440 2,087,227 - ----------------------------------------------------------------------------------------------------------------------------- Total Common Stock Equity 6,962,762 6,677,009 - ----------------------------------------------------------------------------------------------------------------------------- Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption 92,831 92,831 Long-Term Debt 9,223,632 9,747,293 - ----------------------------------------------------------------------------------------------------------------------------- Total Capitalization 16,279,225 16,517,133 - ----------------------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 1,130,308 275,397 Accounts payable 606,658 756,287 Interest accrued 222,896 220,400 Dividends declared 135,280 132,232 Short-term obligations 858,991 694,850 Customer deposits 161,539 158,214 Liabilities of discontinued operations 119,058 124,767 Other current liabilities 478,419 350,132 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 3,713,149 2,712,279 - ----------------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 824,961 932,813 Accumulated deferred investment tax credits 198,098 206,221 Regulatory liabilities 542,210 119,766 Asset retirement obligations 1,225,605 - Other liabilities and deferred credits 845,705 836,780 - ----------------------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 3,636,579 2,095,580 - ----------------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 15) - ----------------------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 23,628,953 $ 21,324,992 - -----------------------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 7 Progress Energy, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended (Unaudited) June 30, (In thousands) 2003 2002 - ------------------------------------------------------------------------------------------------------------------------ Operating Activities Net income $ 360,979 $ 253,147 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations (13,803) (7,153) Depreciation and amortization 568,328 567,106 Deferred income taxes (118,442) (44,234) Investment tax credit (8,123) (10,126) Deferred fuel cost (credit) (93,962) 22,718 Net increase in accounts receivable (85,314) (35,229) Net (increase) decrease in inventories 26,591 (38,637) Net (increase) decrease in prepayments and other current assets 23,120 (14,993) Net decrease in accounts payable (15,332) (62,655) Net increase in income taxes, net 104,997 78,837 Net increase in other current liabilities 52,538 30,661 Other 92,666 39,896 - ------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 894,243 779,338 - ------------------------------------------------------------------------------------------------------------------------ Investing Activities Gross utility property additions (541,205) (520,872) Diversified business property additions and acquisitions (366,494) (627,042) Nuclear fuel additions (84,050) (49,346) Net contributions to nuclear decommissioning trust (17,959) (19,917) Investments in non-utility activities (5,792) (10,301) Acquisition of intangibles (190,168) - Net decrease (increase) in restricted cash 16,784 (105,721) Other (1,136) 5,257 - ------------------------------------------------------------------------------------------------------------------------ Net Cash Used in Investing Activities (1,190,020) (1,327,942) - ------------------------------------------------------------------------------------------------------------------------ Financing Activities Issuance of common stock, net of issuance costs 171,771 - Purchase of restricted shares (6,560) (5,393) Issuance of long-term debt, net of issuance costs 654,824 1,013,633 Net increase in short-term indebtedness 163,092 14,499 Net decrease in cash provided by checks drawn in excess of bank balances (43,707) (33,605) Retirement of long-term debt (392,054) (108,381) Dividends paid on common stock (267,608) (238,404) Other 815 47,407 - ------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Financing Activities 280,573 689,756 - ------------------------------------------------------------------------------------------------------------------------ Cash Used in Discontinued Operations (500) (584) - ------------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents (15,704) 140,568 Cash and Cash Equivalents at Beginning of the Period 61,358 53,708 - ------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of the Period $ 45,654 $ 194,276 - ------------------------------------------------------------------------------------------------------------------------ Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 305,206 $ 324,234 income taxes (net of refunds) $ 22,241 $ 15,977
Noncash Activities o On April 26, 2002, Progress Fuels Corporation, a subsidiary of the Company, acquired 100% of Westchester Gas Company. In conjunction with the purchase, the Company issued approximately $129.0 million in common stock. See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 8 Progress Energy, Inc. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION A. Organization Progress Energy, Inc. (Progress Energy or the Company) is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), as amended. Both the Company and its subsidiaries are subject to the regulatory provisions of PUHCA. Effective January 1, 2003, Carolina Power & Light Company, Florida Power Corporation and Progress Ventures, Inc. (PVI) began doing business under the names Progress Energy Carolinas, Inc. (PEC), Progress Energy Florida, Inc. (PEF) and Progress Energy Ventures, Inc., respectively. The legal names of these entities have not changed, and there was no restructuring of any kind related to the name change. The current corporate and business unit structure remains unchanged. Through its wholly owned subsidiaries, Progress Energy Carolinas, Inc. and Progress Energy Florida, Inc., the Company is engaged in the generation, purchase, transmission, distribution and sale of electricity primarily in portions of North Carolina, South Carolina and Florida. The Progress Ventures business unit consists of the Fuels and Competitive Commercial Operations (CCO) operating segments. The Fuels operating segment includes natural gas drilling and production, coal mining and synthetic fuels production. The CCO operating segment includes nonregulated generation and energy marketing and limited trading activities. Through other business units, the Company engages in other nonregulated 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 unit. Whether, and when, the legal and functional structures will converge depends upon legislative and regulatory action, which cannot currently be anticipated. B. Basis of Presentation These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) 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 GAAP for complete financial statements. Because the accompanying consolidated interim financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the audited financial statements for the period ended December 31, 2002 and notes thereto included in Progress Energy's Form 10-K for the year ended December 31, 2002. In accordance with the provisions of APB 28, GAAP requires 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 increased by $4.8 million and $58.4 million for the second quarter of 2003 and 2002, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was decreased by $5.4 million and increased $79.6 million for the first half of 2003 and 2002, respectively. The amounts included in the consolidated interim financial statements are unaudited but, in the opinion of management, reflect all normal recurring 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 or future periods. In preparing financial statements that conform with GAAP, 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. Certain amounts for 2002 have been reclassified to conform to the 2003 presentation. 2. ACQUISITIONS During the first quarter of 2003, Progress Fuels Corporation, a wholly owned subsidiary of Progress Energy, entered into three independent transactions to acquire approximately 162 natural gas-producing wells with proven reserves of approximately 195 billion cubic feet (Bcf) from Republic Energy, Inc. and two other privately-owned companies, all headquartered in Texas. The primary assets in the acquisition have been contributed to 9 Progress Fuels North Texas Gas, L.P., a wholly owned subsidiary of Progress Fuels Corporation. The cash purchase price for the transactions totaled $148 million. On May 31, 2003, PVI acquired from Williams Energy Marketing and Trading, a subsidiary of the Williams Companies, Inc., a long-term full-requirements power supply agreement at fixed prices with Jackson Electric Membership Corp. (Jackson), for $188.2 million. See Note 7 for additional information. 3. DIVESTITURES A. NCNG Divestiture On October 16, 2002, the Company announced the Board of Directors' approval to sell North Carolina Natural Gas Corporation (NCNG) and the Company's equity investment in Eastern North Carolina Natural Gas Company (ENCNG) to Piedmont Natural Gas Company, Inc., for approximately $400 million in net proceeds. By order issued June 26, 2003, the North Carolina Utilities Commission (NCUC) approved the Company's application to sell NCNG to Piedmont Natural Gas Company, Inc. The closing of the acquisition is subject to the approval of the Securities and Exchange Commission (SEC). The sale is expected to close during the summer of 2003. Net proceeds from the sale will be used to pay down debt obligations. The accompanying consolidated interim financial statements have been restated for all periods presented for the discontinued operations of NCNG. The net income of these operations is reported as discontinued operations in the Consolidated Statements of Income. Interest expense has been allocated to discontinued operations based on the net assets of NCNG, assuming a uniform debt-to-equity ratio across the Company's operations. Interest expense allocated for the three months ended June 30, 2003 and 2002 was $3.3 million and $4.0 million, respectively. Amounts allocated for the six months ended June 30, 2003 and 2002 were $6.9 million and $8.0 million, respectively. The Company ceased recording depreciation upon classification of the assets as discontinued operations. After-tax depreciation expense recorded by NCNG during the second quarter of 2002 was $2.9 million and during the first half of 2002 was $5.8 million. The asset group, including goodwill, has been recorded at fair value less cost to sell, resulting in an estimated loss on disposal of approximately $29.4 million, which was recorded in the fourth quarter of 2002. The estimated loss is reviewed quarterly and will be finalized once the disposition is complete and the actual loss can be determined. Results of discontinued operations were as follows: Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2003 2002 2003 2002 -------------- ------------- --------------- -------------- Revenues $ 70,815 $ 64,510 $ 225,041 $ 150,625 ============== ============= =============== ============== Earnings (loss) before income taxes $ 4,119 $(5,514) $ 22,602 $ 8,522 Income tax expense (benefit) 1,606 (4,201) 8,799 1,369 -------------- ------------- --------------- -------------- Net earnings (loss) from discontinued operations $ 2,513 $(1,313) $ 13,803 $ 7,153 ============== ============= =============== ==============
The major balance sheet classes included in assets and liabilities of discontinued operations in the Consolidated Balance Sheets are as follows: June 30, December 31, (in thousands) 2003 2002 --------------- ---------------- Utility plant, net $ 403,515 $398,931 Current assets 69,743 72,821 Deferred debits and other assets 18,526 18,677 --------------- ---------------- Assets of discontinued operations $ 491,784 $490,429 =============== ================ Current liabilities $ 68,884 $ 76,372 Deferred credits and other liabilities 50,174 48,395 --------------- ---------------- Liabilities of discontinued operations $119,058 $124,767 =============== ================
The Company's equity investment in ENCNG of $7.7 million as of June 30, 2003 and December 31, 2002 is included in miscellaneous other property and investments in the Consolidated Balance Sheets. 10 B. Railcar Ltd. Divestiture In December 2002, the Progress Energy Board of Directors adopted a resolution to sell the assets of Railcar Ltd., a leasing subsidiary included in the Rail Services segment. A series of sales transactions is expected to take place throughout 2003. An estimated impairment on assets held for sale was recognized in December 2002 to write-down the assets to fair value less costs to sell. The assets of Railcar Ltd. have been grouped as assets held for sale and are included in other current assets in the accompanying Consolidated Balance Sheets as of June 30, 2003. The assets are recorded at $24.0 million and $23.6 million as of June 30, 2003 and December 31, 2002, respectively. On March 12, 2003, the Company signed a letter of intent to sell the majority of Railcar Ltd. assets to The Andersons, Inc. The majority of the proceeds from the sale will be used by the Company to pay off certain Railcar Ltd. off balance sheet lease obligations for railcars that will be transferred to The Andersons, Inc. as part of the sales transaction. The transaction is subject to various closing conditions including financing, due diligence and the completion of a definitive purchase agreement. 4. FINANCIAL INFORMATION BY BUSINESS SEGMENT The Company currently has the following business segments: Progress Energy Carolinas Electric (PEC Electric), Progress Energy Florida (PEF), Fuels, Competitive Commercial Operations (CCO), Rail Services (Rail) and Other Businesses (Other). Prior to 2003, Fuels and CCO were reported together as the Progress Ventures business segment and corporate costs were included in the Other segment. These reportable segment changes reflect the current management structure. Additionally, earnings from wholesale customers of the regulated plants have previously been reported in both the regulated utilities' results and the results of Progress Ventures. With the realignment of the reportable business segments, these results are now included in each of the respective regulated utilities' results only. The PEC Electric and PEF segments are engaged in the generation, transmission, distribution and sale of electric energy primarily in portions of North Carolina, South Carolina and Florida. These electric operations are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC), the NCUC, the Public Service Commission of South Carolina (SCPSC), the Florida Public Service Commission (FPSC) and the U.S. Nuclear Regulatory Commission (NRC). Fuels' operations, which are located in the United States, include natural gas drilling and production, coal mining and terminals, and the production of synthetic fuels. CCO operations, which are located in the United States, include nonregulated electric generation operations and limited trading activities. The increase in revenue and income from continuing operations for the six months ended June 30, 2003 is primarily due to a tolling agreement termination payment from Dynegy. Rail operations include railcar repair, rail parts reconditioning and sales, railcar leasing (primarily through Railcar Ltd.) and sales, and scrap metal recycling. These activities include maintenance and reconditioning of salvageable scrap components of railcars, locomotive repair and right-of-way maintenance. Rail's primary operations are located in the United States, with limited operation in Mexico and Canada. Other primarily includes operations in the United States of Progress Telecommunications Corporation and Caronet, Inc. (collectively referred to as Progress Telecom) and other nonregulated subsidiaries that do not meet the disclosure requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company's corporate operations include the operations of the holding company, Progress Energy Service Company, LLC and intercompany elimination transactions. The operating business segments combined with the corporate operations represent the total continuing operations of the Company. In prior periods, Corporate was reported as a component of the Other segment. The discontinued operations related to NCNG are not included as an operating segment. The following summarizes the revenues, income from continuing operations and assets (excluding assets of discontinued operations) for the business segments, corporate and total Progress Energy. The 2002 information has been restated to align with the 2003 segment structure. 11 Income Revenues from --------------------------------------------------- Continuing (in thousands) Unaffiliated Intersegment Total Operations ------------ --------------- ---------------- ------------ Three Months Ended June 30, 2003 PEC Electric $ 816,240 $ - $ 816,240 $ 88,394 PEF 766,547 - 766,547 61,359 Fuels 166,918 89,861 256,779 53,807 CCO 33,283 - 33,283 2,383 Rail 213,740 - 213,740 2,192 Other 15,903 1,460 17,363 1,200 Corporate 53 (91,321) (91,268) (59,025) ------------ --------------- ---------------- ------------ Consolidated totals $ 2,012,684 $ - $ 2,012,684 $ 150,310 ------------ --------------- ---------------- ------------ Three Months Ended June 30, 2002 PEC Electric $ 834,658 $ - $ 834,658 $ 131,690 PEF 765,923 - 765,923 76,753 Fuels 112,558 74,896 187,454 46,729 CCO 23,902 - 23,902 6,738 Rail 196,489 - 196,489 2,947 Other 25,325 1,454 26,779 (8,353) Corporate - (76,350) (76,350) (134,571) ------------ --------------- ---------------- ------------ Consolidated totals $ 1,958,855 $ - $ 1,958,855 $ 121,933 ------------ --------------- ---------------- ------------ Income Revenues from --------------------------------------------------- Continuing (in thousands) Unaffiliated Intersegment Total Operations Assets ------------ --------------- ---------------- ------------ ------------- Six Months Ended June 30, 2003 PEC Electric $ 1,741,710 $ - $ 1,741,710 $ 223,264 $ 9,568,769 PEF 1,494,964 - 1,494,964 132,116 5,912,152 Fuels 297,769 174,068 471,837 80,385 1,215,374 CCO 70,833 - 70,833 10,909 1,712,985 Rail 391,549 - 391,549 (1,204) 503,897 Other 31,758 2,957 34,715 1,869 305,535 Corporate 106 (177,025) (176,919) (100,163) 3,918,457 ------------ --------------- ---------------- ------------ ------------- Consolidated totals $ 4,028,689 $ - $ 4,028,689 $ 347,176 $ 23,137,169 ------------ --------------- ---------------- ------------ ------------- Six Months Ended June 30, 2002 PEC Electric $ 1,646,139 $ - $ 1,646,139 $ 217,222 $ 8,669,993 PEF 1,452,364 - 1,452,364 134,496 4,967,998 Fuels 215,824 150,003 365,827 88,324 963,109 CCO 32,949 - 32,949 4,627 1,277,824 Rail 351,456 - 351,456 2,246 607,617 Other 47,424 2,908 50,332 (13,202) 803,837 Corporate - (152,911) (152,911) (187,719) 4,008,041 ------------ --------------- ---------------- ------------ ------------- Consolidated totals $ 3,746,156 $ - $ 3,746,156 $ 245,994 $ 21,298,419 ------------ --------------- ---------------- ------------ -------------
5. IMPACT OF NEW ACCOUNTING STANDARDS SFAS No. 148, "Accounting for Stock-Based Compensation" The Company measures compensation expense for stock options as the difference between the market price of its common stock and the exercise price of the option at the grant date. Accordingly, no compensation expense has been recognized for stock option grants. For purposes of the pro forma disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123," the estimated fair value of the Company's stock options is amortized to expense over the options' vesting period. The Company's information related to the pro forma impact on earnings and earnings per share assuming stock options were expensed for the three and six months ended June 30 is as follows: 12 (in thousands except per share data) Three Months Ended June 30, Six Months Ended June 30, ------------------------------ ---------------------------- 2003 2002 2003 2002 --------------- ------------- ------------ -------------- Net income, as reported $ 152,823 $ 120,620 $ 360,979 $ 253,147 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 1,697 1,320 4,276 3,112 --------------- ------------- ------------ -------------- Pro forma net income $ 151,126 $ 119,300 $ 356,703 $ 250,035 =============== ============= ============ ============== Basic earnings per share As reported $ 0.65 $ 0.56 $ 1.54 $ 1.18 Pro forma $ 0.64 $ 0.55 $ 1.52 $ 1.17 Fully diluted earnings per share As reported $ 0.64 $ 0.56 $ 1.53 $ 1.18 Pro forma $ 0.64 $ 0.55 $ 1.51 $ 1.16
In April 2003, the Financial Accounting Standards Board (FASB) approved certain decisions on its stock-based compensation project. Some of the key decisions reached by the FASB were that stock-based compensation should be recognized in the income statement as an expense and that the expense should be measured as of the grant date at fair value. A significant issue yet to be resolved by the FASB is the determination of the appropriate fair value measure. The FASB continues to deliberate additional issues in this project; however, the FASB plans to issue an exposure draft in 2003 that could become effective in 2004. Derivative Instruments and Hedging Activities In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The statement amends and clarifies SFAS No. 133 on accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The new guidance incorporates decisions made as part of the Derivatives Implementation Group (DIG) process, as well as decisions regarding implementation issues raised in relation to the application of the definition of a derivative. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The Company is currently evaluating what effects, if any, this statement will have on its results of operations and financial position. In connection with the January 2003 FASB Emerging Issues Task Force (EITF) meeting, the FASB was requested to reconsider an interpretation of SFAS No. 133. The interpretation, which is contained in the Derivative Implementation Group's C11 guidance, relates to the pricing of contracts that include broad market indices (e.g., CPI). In particular, that guidance discusses whether the pricing in a contract that contains broad market indices could qualify as a normal purchase or sale (the normal purchase or sale term is a defined accounting term, and may not, in all cases, indicate whether the contract would be "normal" from an operating entity viewpoint). In late June 2003, the FASB issued final superseding guidance (DIG Issue C20) on this issue, which is significantly different from the tentative superseding guidance that was issued in April 2003. The new guidance is effective October 1, 2003 for the Company. DIG Issue C20 specifies new pricing-related criteria for qualifying as a normal purchase or sale, and it requires a special transition adjustment as of October 1, 2003. PEC has determined that it has one existing "normal" contract that is affected by this revised guidance. PEC is in the process of evaluating the revised guidance and related contract to determine the transition adjustment that will be necessary and to determine if the contract will be required to be recorded at fair value subsequent to October 1, 2003. SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The financial instruments within the scope of SFAS No. 150 include mandatorily redeemable stock, obligations to repurchase the issuer's equity shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective immediately for such financial instruments entered into or modified after May 31, 2003, and is effective for previously issued financial instruments within its scope on July 1, 2003. 13 Upon the Company's adoption of the FIN No. 46, "Consolidation of Variable Interest Entities" (see below), the FPC Capital I Preferred Securities, as discussed in Note 12, are anticipated to be deconsolidated from the Company's financial statements effective July 1, 2003. Therefore, the Company does not expect the adoption of SFAS No. 150 to have a material impact on its financial position or results of operations. FIN No. 46, "Consolidation of Variable Interest Entities" In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46). This interpretation provides guidance related to identifying variable interest entities (previously known as special purpose entities or SPEs) and determining whether such entities should be consolidated. Certain disclosures are required if it is reasonably possible that a company will consolidate or disclose information about a variable interest entity when it initially applies FIN No. 46. This interpretation must be applied immediately to variable interest entities created or obtained after January 31, 2003. During the first six months of 2003, the Company did not participate in the creation of, or obtain a new variable interest in, any variable interest entity. For those variable interest entities created or obtained on or before January 31, 2003, the Company must apply the provisions of FIN No. 46 in the third quarter of 2003. The Company is currently evaluating what effects, if any, this interpretation will have on its results of operations and financial position. During this evaluation process, several arrangements through its Railcar Ltd. subsidiary have been identified to which this interpretation may apply. These arrangements include an agreement with Railcar Asset Financing Trust (RAFT), a receivables securitization trust, and seven synthetic leases. Because the Company expects to sell the majority of Railcar Ltd. during 2003 (See Note 3B) and divest of its interests in these arrangements, the application of FIN No. 46 is not expected to have a material impact with respect to these arrangements. If these interests are not divested as currently expected, the maximum cash obligations under these arrangements total approximately $54 million. However, management believes the maximum loss exposure would be significantly reduced based on the current fair values of the underlying assets related to these arrangements. In addition, the Company is also evaluating certain other investments to determine if they require consolidation or disclosure upon adoption of FIN No. 46. These include investments in approximately 50 Affordable Housing properties eligible for Section 42 tax credits of the Internal Revenue Service Code (Section 42). The Company divested approximately 30 of these Affordable Housing investments in July 2003, and therefore the application of FIN No. 46 is not expected to have a material impact with respect to these 30 investments. It is reasonably possible that the Company will be required to consolidate some of the remaining 20 Affordable Housing entities that are currently accounted for under the equity method. The maximum exposure to loss as a result of the Company's total funding commitments for the remaining 20 Affordable Housing investments is approximately $23.9 million. However, management believes the total loss of its investments is unlikely given the nature of the investments and the utilization of certain Section 42 tax credits to date. The implementation of FIN No. 46 may require deconsolidation of certain previously consolidated entities. Upon adoption, the company anticipates deconsolidating the FPC Capital I Trust, which holds FPC-obligated mandatorily redeemable preferred securities. The Company will reflect it subordinate note obligation to the Trust as detailed in Note 12. Therefore, the deconsolidation is not expected to have a material effect. The Company is in the final stages of completing the adoption of FIN No. 46, but having considered the facts described herein, does not expect the results to have a material impact on its consolidated financial position, results of operations or liquidity. EITF Issue No. 03-04, "Accounting for 'Cash Balance' Pension Plans" In May 2003, the EITF reached consensus in EITF Issue No. 03-04 to specifically address the accounting for certain cash balance pension plans. The consensus reached in EITF Issue No. 03-04 requires certain cash balance pension plans to be accounted for as defined benefit plans. For cash balance plans described in the consensus, the consensus also requires the use of the traditional unit credit method for purposes of measuring the benefit obligation and annual cost of benefits earned as opposed to the projected unit credit method. The Company has historically accounted for its cash balance plans as defined benefit plans; however, the Company is required to adopt the measurement provisions of EITF 03-04 at its cash balance plans' next measurement date of December 31, 2003. Any differences in the measurement of the obligations as a result of applying the consensus will be reported as a component of actuarial gain or loss. The Company is currently evaluating what effects EITF 03-04 will have on its results of operations and financial position. 14 6. ASSET RETIREMENT OBLIGATIONS SFAS No. 143, "Accounting for Asset Retirement Obligations," provides accounting and disclosure requirements for retirement obligations associated with long-lived assets and was adopted by the Company 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 liability. Cumulative accretion and accumulated depreciation were recognized for the time period from the date the liability would have been recognized had the provisions of this statement been in effect, to the date of adoption of this statement. For assets acquired through acquisition, the cumulative effect was based on the acquisition date. Upon adoption of SFAS No. 143, the Company recorded asset retirement obligations (AROs) totaling $1,182.5 million for nuclear decommissioning of radiated plant at PEC and PEF. The Company used an expected cash flow approach to measure these obligations. This amount includes accruals recorded prior to adoption totaling $775.2 million, which were previously recorded in accumulated depreciation. The related asset retirement costs, net of accumulated depreciation, recorded upon adoption totaled $367.5 million for regulated operations. The adoption of this statement had no impact on the income of the regulated entities, as the effects were offset by the establishment of a regulatory asset and a regulatory liability pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." A regulatory asset was recorded related to PEC in the amount of $271.1 million, representing the cumulative accretion and accumulated depreciation for the time period from the date the liability would have been recognized had the provisions of this statement been in effect to the date of adoption, less amounts previously recorded. A regulatory liability was recorded related to PEF in the amount of $231.3 million, representing the amount by which previously recorded accruals exceeded the cumulative accretion and accumulated depreciation for the time period from the date the liability would have been recognized had the provisions of this statement been in effect at the date of the acquisition of the assets by Progress Energy to the date of adoption. Funds set aside in the Company's nuclear decommissioning trust fund for the nuclear decommissioning liability totaled $861.8 million at June 30, 2003 and $796.8 million at December 31, 2002. The Company also recorded AROs totaling $10.3 million for synthetic fuel operations of PVI and coal mine operations, synthetic fuel operations and gas production of Progress Fuels Corporation. The Company used an expected cash flow approach to measure these obligations. This amount includes accruals recorded prior to adoption totaling $4.6 million, which was previously recorded in other liabilities and deferred credits. The related asset retirement costs, net of accumulated depreciation, recorded upon adoption totaled $7.0 million for nonregulated operations. The cumulative effect of initial adoption of this statement related to nonregulated operations was $1.3 million of pre-tax income. The ongoing impact on earnings related to accretion and depreciation was not significant for the three or six months ended June 30, 2003. Pro forma net income has not been presented for prior years because the pro forma application of SFAS No. 143 to prior years would result in pro forma net income not materially different from the actual amounts reported. The Company has identified but not recognized AROs related to electric transmission and distribution, gas distribution and telecommunications assets as the result of easements over property not owned by the Company. These easements are generally perpetual and only require retirement action upon abandonment or cessation of use of the property for the specified purpose. The ARO liability is not estimable for such easements as the Company intends to utilize these properties indefinitely. In the event the Company decides to abandon or cease the use of a particular easement, an ARO liability would be recorded at that time. The utilities have previously recognized removal costs as a component of depreciation in accordance with regulatory treatment. As of June 30, 2003, the portions of such costs not representing AROs under SFAS No. 143 were $882.6 million for PEC, $940.1 million for PEF and $39.2 million for NCNG. The amounts for PEC and PEF are included in accumulated depreciation on the accompanying Consolidated Balance Sheets. The amount for NCNG is included as an offset to assets of discontinued operations on the accompanying Consolidated Balance Sheets. PEC and PEF have collected amounts for non-radiated areas at nuclear facilities, which do not represent asset retirement obligations. The amounts at June 30, 2003 were $63.5 million for PEC and $61.5 million for PEF, which are included in accumulated depreciation on the accompanying Consolidated Balance Sheets. PEF previously collected amounts for dismantlement of its fossil generation plants. As of June 30, 2003, this amounted to $142.2 million, which is included in accumulated depreciation on the accompanying Consolidated Balance Sheets. This collection was suspended pursuant to the rate case settlement discussed in Note 13A. 15 PEC filed a request with the NCUC requesting deferral of the difference between expense pursuant to SFAS No. 143 and expense as previously determined by the NCUC. The NCUC granted the deferral of the January 1, 2003 cumulative adjustment. Because the clean air legislation discussed in Note 15 under "Air Quality" contained a prohibition against cost deferrals unless certain criteria are met, the NCUC denied the deferral of the ongoing effects. The Company has provided additional information to the NCUC that it believes will demonstrate that deferral of the ongoing effects should also be allowed. Since the NCUC order denied deferral of the ongoing effects, PEC ceased deferral of the ongoing effects during the second quarter for the six months ended June 30, 2003 related to its North Carolina retail jurisdiction. Pre-tax income for the three and six months ended June 30, 2003 increased by approximately $13.6 million, which represents a decrease in non-ARO cost of removal expense, partially offset by an increase in decommissioning expense. On April 8, 2003, the SCPSC approved a joint request by PEC, Duke Energy and South Carolina Electric and Gas Company for an accounting order to authorize the deferral of all cumulative and prospective effects related to the adoption of SFAS No. 143. On January 23, 2003, the Staff of the FPSC issued a notice of proposed rule development to adopt provisions relating to accounting for asset retirement obligations under SFAS No. 143. Accompanying the notice was a draft rule presented by the Staff which adopts the provisions of SFAS No. 143 along with the requirement to record the difference between amounts prescribed by the FPSC and those used in the application of SFAS No. 143 as regulatory assets or regulatory liabilities, which was accepted by all parties. The Commission approved the draft rule in June 2003, and a final order is expected in the third quarter of 2003. 7. GOODWILL AND OTHER INTANGIBLE ASSETS SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill be tested for impairment at least annually and more frequently when indicators of impairment exist. SFAS No. 142 requires a two-step fair value-based test. The first step, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. The second step, used to measure the amount of the impairment loss if step one indicates a potential impairment, compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill. This assessment could result in periodic impairment charges. The Company performed the annual goodwill impairment test for the CCO segment in the first quarter of 2003, and the annual goodwill impairment test for the PEC Electric and PEF segments in the second quarter of 2003, both of which indicated no impairment. During 2002, the Company acquired Westchester Gas Company (Westchester). The purchase price was finalized during the first quarter 2003 with the purchase price being primarily allocated to fixed assets including oil and gas properties. No goodwill was recorded. The carrying amounts of goodwill at June 30, 2003, by reportable segment, are $1.9 billion, $1.7 billion and $64.1 million for PEC Electric, PEF and CCO, respectively. The gross carrying amount and accumulated amortization of the Company's intangible assets as of June 30, 2003 and December 31, 2002 are as follows: June 30, 2003 December 31, 2002 ------------------------------ ----------------------------- (in thousands) Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization -------------- --------------- -------------- -------------- Synthetic fuel intangibles $ 140,469 $(54,717) $ 140,469 $(45,189) Power agreements 221,192 (10,073) 33,000 (5,593) Other 53,182 (9,453) 40,968 (7,792) -------------- --------------- -------------- -------------- Total $ 414,843 $(74,243) $ 214,437 $(58,574) -------------- --------------- -------------- --------------
All of the Company's intangibles are subject to amortization. Synthetic fuel intangibles represent intangibles for synthetic fuel technology. These intangibles are being amortized on a straight-line basis until the expiration of tax credits under Section 29 of the Internal Revenue Service Code (the Code) in December 2007. On May 31, 2003, PVI acquired from Williams Energy Marketing and Trading, a subsidiary of The Williams Companies, Inc., a long-term full-requirements power supply agreement at fixed prices with Jackson, located in Jefferson, Georgia for $188.2 million. Assignment of Williams' responsibilities under the contract began in June 2003 and terminates in 2015, with a first refusal option to extend for five years. The agreement includes the use of 640 megawatts (MW) of contracted Georgia System generation comprised of nuclear, coal, gas and pumped-storage hydro resources. The intangible 16 related to this power agreement is being amortized based on the economic benefits of the contract. As part of the acquisition of generating assets from LG&E Energy Corp. on February 15, 2002, power agreements of $33 million were recorded and are amortized based on the economic benefits of the contracts through December 31, 2004, which approximates straight-line. Other intangibles are primarily customer contracts and permits that are amortized over their respective lives. Of the increase in other intangible assets, $9.2 million relates to customer contracts acquired as part of the Westchester acquisition, which was identified as an intangible in the final purchase price allocation. Net intangible assets are included in other assets and deferred debits in the accompanying Consolidated Balance Sheets. Amortization expense recorded on intangible assets for the three months ended June 30, 2003 and 2002, respectively, was $8.5 million and $8.1 million. Amortization expense recorded on intangible assets for the six months ended June 30, 2003 and 2002, respectively, was $15.7 million and $16.2 million. The estimated amortization expense for intangible assets for 2003 through 2007, in millions, is approximately $36.7, $41.3, $34.8, $35.9 and $36.1, respectively. 8. COMPREHENSIVE INCOME Comprehensive income for the three and six months ended June 30, 2003 was $150.6 million and $358.2 million, respectively. Comprehensive income for the three and six months ended June 30, 2002 was $119.6 million and $256.4 million, respectively. Items of other comprehensive income for the three month periods consisted primarily of changes in the fair value of derivatives used to hedge cash flows related to interest on long-term debt and gas sales. 9. FINANCING ACTIVITIES On February 21, 2003, PEF issued $425 million of First Mortgage Bonds, 4.80% Series, Due March 1, 2013 and $225 million of First Mortgage Bonds, 5.90% Series, Due March 1, 2033. Proceeds from this issuance were used to repay the balance of its outstanding commercial paper, to refinance its secured and unsecured indebtedness, including PEF's First Mortgage Bonds 6.125% Series Due March 1, 2003, and to redeem the aggregate outstanding balance of its 8% First Mortgage Bonds Due 2022. On March 1, 2003, $70 million of PEF First Mortgage Bonds, 6.125% Series, matured and were retired. On March 24, 2003, PEF redeemed $150 million of First Mortgage Bonds, 8% Series, Due December 1, 2022 at 103.75% of the principal amount of such bonds. In March 2003, Progress Genco Ventures, LLC (Genco), a wholly owned subsidiary of PVI, terminated its $50 million working capital credit facility. A related construction facility initially provided for Genco to draw up to $260 million. The amount outstanding under this facility is $241 million as of June 30, 2003. During the second quarter of 2003 Genco determined it did not need to make any additional draws under this facility. As a result of this decision, the drawn amount of $241 million will not increase. On April 1, 2003, PEF entered into a new $200 million 364-day credit agreement and a new $200 million three-year credit agreement, replacing its prior credit facilities (which had been a $90 million 364-day facility and a $200 million five-year facility). The new PEF credit facilities contain a defined maximum total debt to total capital ratio of 65%; as of June 30, 2003 the calculated ratio was 52.6%. The new credit facilities also contain a requirement that the ratio of EBITDA, as defined in the facilities, to interest expense to be at least 3 to 1; as of June 30, 2003 the calculated ratio was 8.7 to 1. Also on April 1, 2003, PEC reduced the size of its existing 364-day credit facility from $285 million to $165 million. The other terms of this facility were not changed. On July 30, 2003, PEC renewed its $165 million 364-day credit agreement. PEC's $285 million three-year credit agreement entered into in July 2002 remains in place, for total facilities of $450 million. On May 27, 2003, PEC redeemed $150 million of First Mortgage Bonds, 7.5% Series, Due March 1, 2023 at 103.22% of the principal amount of such bonds; PEC funded the redemption with commercial paper. 17 On July 14, 2003, PEC announced the redemption of $100 million of First Mortgage Bonds, 6.875% Series Due August 15, 2023 at 102.84%. The date of the redemption will be August 15, 2003. PEC will fund the redemption with commercial paper. For the three months ended June 30, 2003, the Company issued approximately 2.4 million shares representing approximately $98 million in proceeds from its Investor Plus Stock Purchase Plan and its employee benefit plans during the second quarter. For the six months ended June 30, 2003, the Company has issued 4.2 million shares through these plans, resulting in approximately $172 million of cash proceeds. 10. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS Progress Energy and its subsidiaries are exposed to various risks related to changes in market conditions. The Company has a risk management committee that is chaired by the Chief Financial Officer and includes senior executives from various business groups. The risk management committee is responsible for administering risk management policies and monitoring compliance with those policies by all subsidiaries. The Company manages its market risk in accordance with its established risk management policies, which may include entering into various derivative transactions. Progress Energy uses interest rate derivative instruments to adjust the fixed and variable rate debt components of its debt portfolio and to hedge interest rates with regard to future fixed rate debt issuances. Treasury rate lock agreements were terminated in conjunction with the pricing of the PEF First Mortgage Bonds in February 2003. The loss on the agreements was deferred and is being amortized over the life of the bonds as these agreements had been designated as cash flow hedges for accounting purposes. Progress Energy currently has $850 million of fixed rate debt swapped to floating rate debt by executing interest rate derivative agreements. Under terms of these swap rate agreements, Progress Energy will receive a fixed rate and pay a floating rate based on 3-month LIBOR. These agreements expire in March of 2006, April 2007 and October 2008. In March, April and June of 2003, PEC entered into treasury rate locks to hedge its exposure to interest rates with regard to a future issuance of debt. These agreements have a computational period of ten years and are designated as cash flow hedges for accounting purposes. The agreements have a total notional amount of $60 million. Progress Fuels Corporation periodically enters into derivative instruments to hedge its exposure to price fluctuations on natural gas sales. As of June 30, 2003, Progress Fuels Corporation had approximately 16.6 Bcf of cash flow hedges in place for its natural gas production. These positions span the remainder of 2003 and extend through December 2004. These instruments did not have a material impact on the Company's consolidated financial position or results of operations. Genco has a series of interest rate collars to hedge floating rate exposure associated with the construction credit facility. These collars hedge 75% of the drawn facility balance through March of 2007. The notional amounts of the above contracts are not exchanged and do not represent exposure to credit loss. In the event of default by a counterparty, the risk in the transaction is the cost of replacing the agreements at current market rates. Progress Energy only enters into interest rate derivative agreements with banks with credit ratings of single A or better. 11. EARNINGS PER COMMON SHARE 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 June 30, Six Months Ended June 30, ----------------------------- ------------------------------- 2003 2002 2003 2002 ------------- ------------ ------------ --------------- ------------- Weighted-average common shares - basic 236,057 215,007 234,755 213,999 Restricted stock awards 1,004 734 967 690 Stock options 140 333 23 224 ------------- ------------ ------------ --------------- ------------- ------------ Weighted-average shares - fully dilutive 237,201 216,074 235,745 214,913 ------------- ------------ ------------ ---------------
18 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 (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. Upon adoption of FIN No. 46, the Company anticipates deconsolidating the FPC Capital I Trust which is not expected to have a material effect on the consolidated financial position, results of operations or liquidity (See Note 5). 13. REGULATORY MATTERS A. Retail Rate Matters In conjunction with the acquisition of NCNG, PEC agreed to cap base retail electric rates in North Carolina and South Carolina through December 2004. The cap on base retail electric rates in South Carolina was extended to December 2005 in conjunction with regulatory approval to form a holding company. NCNG also agreed to cap its North Carolina margin rates for gas sales and transportation services, with limited exceptions, through November 1, 2003. On May 16, 2002, NCNG filed a request to increase its margin rates and rebalance its rates with the NCUC, requesting an annual rate increase of $4.1 million to recover costs associated with specific system improvements. In September 2002, the NCUC issued its order approving the $4.1 million rate increase. The rate increase was effective October 1, 2002. NCNG filed a general rate case with the NCUC on March 31, 2003. NCNG anticipates that new rates, if approved, will go into effect in November 2003, after the terms of the joint stipulation agreement expire (See Note 3A). On March 27, 2002, the parties in PEF'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 provides that PEF will operate under a Revenue Sharing Incentive Plan (the Plan) through 2005 and thereafter until terminated by the FPSC. The Plan establishes annual revenue caps and sharing thresholds. The Plan provides that all retail base revenues between an established threshold and cap will be shared - a 2/3 share to be refunded to PEF's retail customers, and a 1/3 share to be received by PEF's shareholders. All retail base rate revenues above the retail base rate revenue caps established for each year will be refunded 100% to retail customers on an annual basis. For 2002, the refund to customers was limited to 67.1% of the retail base rate revenues that exceeded the 2002 cap. The retail base rate revenue sharing threshold amounts for 2003 are $1.333 billion and will increase $37 million each year thereafter. The retail base revenue cap for 2003 is $1.393 billion and will increase $37 million each year thereafter. As of December 31, 2002, $4.7 million was accrued and was refunded to customers in March 2003. On February 24, 2003, the parties to the Agreement filed a motion seeking an order from the FPSC to enforce the Agreement. In this motion, the parties 19 disputed PEF's calculation of retail revenue subject to refund and contended that the refund should be approximately $23 million. On July 9, 2003, the FPSC ruled that PEF must provide an additional $18.4 million to its retail customers related to the 2002 revenue sharing calculation. PEF recorded this refund in the second quarter of 2003 as a charge against electric operating revenue and will refund this amount by no later than October 31, 2003. In the second quarter of 2003, PEF also recorded an additional accrual of $9.5 million related to estimated 2003 revenue sharing. On March 4, 2003, the FPSC approved PEF's petition to increase its fuel factors due to continuing increases in oil and natural gas commodity prices. The crisis in the Middle East along with the recent Venezuelan oil workers' strike have put upward pressure on commodity prices that was not anticipated by PEF when fuel factors for 2003 were approved by the FPSC in November 2002. New rates became effective on March 28, 2003. B. Regional Transmission Organizations In early 2000, the FERC issued Order 2000 regarding regional transmission organizations (RTOs). This Order set minimum characteristics and functions that RTOs must meet, including independent transmission service. As a result of Order 2000, PEF, along with Florida Power & Light Company and Tampa Electric Company, filed with the FERC, in October 2000, an application for approval of a GridFlorida RTO. In March 2001, the FERC issued an order provisionally approving GridFlorida. PEC, along with Duke Energy Corporation and South Carolina Electric & Gas Company, filed with the FERC, for approval of a GridSouth RTO. In July 2001, the FERC issued an order provisionally approving GridSouth. However, in July 2001, FERC issued orders recommending that companies in the Southeast engage in a mediation to develop a plan for a single RTO for the Southeast. PEF and PEC participated in the mediation. The FERC has not issued an order specifically on this mediation. In July 2002, the 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). 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. PEF and PEC, as subsidiaries of Progress Energy, filed comments on November 15, 2002 and supplemental comments on January 10, 2003. On April 28, 2003, the FERC released a White Paper on the Wholesale Market Platform. The White Paper provides an overview of what the FERC currently intends to include in a final rule in the SMD NOPR docket. The White Paper retains the fundamental and most protested aspects of SMD NOPR, including mandatory RTOs and the FERC's assertion of jurisdiction over certain aspects of retail service. PEF and PEC, as subsidiaries of Progress Energy, plan to file comments on the White Paper. The FERC has also indicated that it expects to issue a final rule after Congress votes this fall on the proposed House and Senate Energy Bills. The Company cannot predict the outcome of these matters or the effect that they may have on the GridFlorida and GridSouth proceedings currently ongoing before the FERC. The Company has $31.2 million and an immaterial amount invested in GridSouth and GridFlorida, respectively, at June 30, 2003. It is unknown what impact the future proceedings will have on the Company's earnings, revenues or prices. In October 2002, the FPSC abated its proceedings regarding its review of the proposed GridFlorida RTO. The FPSC action to abate the proceedings came in response to the Florida Office at Public Counsel's appeal before the State Supreme Court requesting review of the FPSC's order approving the transfer of operational control of electric transmission assets to an RTO under the jurisdiction of the FERC. On June 2, 2003 the Florida Supreme Court dismissed the appeal without prejudice on the ground that certain portions of the Commission's order constituted non-final action. The dismissal is without prejudice to any party to challenge the Commission's order after all portions are final. A technical conference for the state of Florida to be conducted by the FERC is scheduled for September 15, 2003. It is unknown when the FERC or the FPSC will take final action with regard to the status of GridFlorida or what the impact of further proceedings will have on the Company's earnings, revenues or prices. 14. OTHER INCOME AND OTHER EXPENSE Other income and expense includes interest income, gain on the sale of investments, impairment of investments and other income and expense items as discussed below. The components of other, net as shown on the Consolidated Statements of Income are as follows: 20 Three Months Ended June 30, Six Months Ended June 30, ------------------------------ ------------------------------- (in thousands) 2003 2002 2003 2002 -------------- ----------- ------------ --------------- Other income Net financial trading gain (loss) $ 67 $ 792 $ (2,632) $ (1,429) Net energy brokered for resale (1,369) 124 157 (141) Nonregulated energy and delivery services income 5,652 5,862 11,242 12,459 Contingent value obligation mark-to-market (1,677) 1,479 - 12,821 Investment gains - 2,960 - 2,960 AFUDC equity 4,035 1,833 5,914 4,077 Other 5,299 7,905 10,937 13,049 -------------- ----------- ------------ --------------- Total other income $ 12,007 $ 20,955 $ 25,618 $ 43,796 -------------- ----------- ------------ --------------- Other expense Nonregulated energy and delivery services expenses 5,479 6,248 9,696 9,383 Donations 3,377 2,736 6,721 7,007 Investment losses 8,644 - 8,644 - Other 3,939 14,311 12,440 23,688 -------------- ----------- ------------ --------------- Total other expense $ 21,439 $ 23,295 $ 37,501 $ 40,078 -------------- ----------- ------------ --------------- Other, net $ (9,432) $ (2,340) $ (11,883) $ 3,718 ============== =========== ============ ===============
Net financial trading gains and losses represent non-asset-backed trades of electricity and gas. Net energy brokered for resale represents electricity purchased for sale to a third party. Nonregulated energy and delivery services include power protection services and mass market programs (surge protection, appliance services and area light sales) and delivery, transmission and substation work for other utilities. Investment losses represent losses on limited partnership investment funds. 15. COMMITMENTS AND CONTINGENCIES Contingencies and significant changes to the commitments discussed in Note 24 of the financial statements included in the Company's 2002 Annual Report on Form 10-K are described below. A. Guarantees As a part of normal business, Progress Energy and certain subsidiaries enter into various agreements providing financial or performance assessments to third parties. Such agreements include guarantees, standby letters of credit and surety bonds. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended commercial purposes. Guarantees as of June 30, 2003, are summarized in the table below and discussed more fully in the subsequent paragraphs. (in millions) Guarantees of performance issued by or on behalf of affiliates Guarantees supporting nonregulated portfolio expansion and energy marketing and trading activities issued by Progress Energy $ 290.5 Guarantees supporting energy marketing and trading activities issued by subsidiaries of Progress Energy 12.0 Guarantees supporting nuclear decommissioning 276.0 Guarantee supporting power supply agreements 285.0 Standby letters of credit 49.5 Surety bonds 104.3 Other guarantees 44.1 Guarantees issued on behalf of third parties Other guarantees 16.4 ------------------- Total $ 1,077.8 ===================
21 Guarantees Supporting Nonregulated Portfolio Expansion and Energy Marketing and Trading Activities Progress Energy has issued approximately $290.5 million of guarantees on behalf of PVI and its subsidiaries for obligations under tolling agreements, transmission agreements, gas agreements, construction agreements and trading operations. Approximately $26.9 million of these guarantees were issued during the year to support energy and trading activities. The majority of the marketing and trading 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 June 30, 2003, if the Company's ratings were to decline below investment grade, the Company would have to deposit cash or provide letters of credit or other cash collateral of approximately $40.0 million for the benefit of the Company's counterparties. Guarantees Supporting Nuclear Decommissioning In 2003, PEC determined that its external funding levels did not fully meet the nuclear decommissioning financial assurance levels required by the NRC. Therefore, PEC met the financial assurance requirements by obtaining parent company guarantees. Guarantee Supporting Power Supply Agreements On March 20, 2003, PVI entered into a definitive agreement with Williams Energy Marketing and Trading, a subsidiary of The Williams Companies, Inc., to acquire a long-term full-requirements power supply agreement at fixed prices with Jackson. The power supply agreement included a performance guarantee by Progress Energy. The transaction closed during the second quarter of 2003. The Company issued a payment and performance guarantee to Jackson related to the power supply agreement of $285.0 million. In the event that Progress Energy's credit ratings fall below investment grade, Progress Energy will be required to provide additional security for this guarantee in form and amount (not to exceed $285 million) acceptable to Jackson. Standby Letters of Credit The Company has issued standby letters of credit to financial institutions for the benefit of third parties that have extended credit to the Company and certain subsidiaries. These letters of credit have been issued primarily for the purpose of supporting payments of trade payables, securing performance under contracts and lease obligations and self-insurance for workers' compensation. If a subsidiary does not pay amounts when due under a covered contract, the counterparty may present its claim for payment to the financial institution, which will in turn request payment from the Company. Any amounts owed by the Company's subsidiaries are reflected in the accompanying Consolidated Balance Sheets. Surety Bonds At June 30, 2003, the Company had $104.3 million in surety bonds purchased primarily for purposes such as providing workers' compensation coverage, obtaining licenses, permits and rights-of-way and project performance. To the extent liabilities are incurred as a result of the activities covered by the surety bonds, such liabilities are included in the accompanying Consolidated Balance Sheets. Other Guarantees The Company has other guarantees outstanding related primarily to prompt performance payments, lease obligations and other payments subject to contingencies. As of June 30, 2003, management does not believe conditions are likely for performance under the agreements discussed in this Note 15. B. Insurance Both PEC and PEF are insured against public liability for a nuclear incident. Under the current provisions of the Price Anderson Act, which limits liability for accidents at nuclear power plants, each company, as an owner of nuclear units, can be assessed a portion of any third-party liability claims arising from an accident at any commercial nuclear power plant in the United States. In the event that public liability claims from an insured nuclear incident exceed $300 million (currently available through commercial insurers), each company would be subject to pro rata assessments for each reactor owned per occurrence. Effective August 20, 2003, the retroactive premium assessments will increase to $100.6 million per reactor from the current amount of $88.1 million. The total limit available to cover nuclear liability losses will increase as well from $9.6 billion to $10.6 billion. The annual retroactive premium limit of $10 million per reactor owned will not change. 22 C. Claims and uncertainties a) The Company is subject to federal, state and local regulations addressing hazardous and solid waste management, air and water quality and other environmental matters. Hazardous and Solid Waste Management Various organic materials associated with the production of manufactured gas, generally referred to as coal tar, are regulated under federal and state laws. The principal regulatory agency that is responsible for a specific former manufactured gas plant (MGP) site depends largely upon the state in which the site is located. There are several MGP sites to which both electric utilities and the gas utility have some connection. In this regard, both electric utilities and the gas utility and other potentially responsible parties are participating in investigating and, if necessary, remediating former MGP 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, the Company and its subsidiaries 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. PEC There are 12 former MGP sites and 14 other sites or groups of sites associated with PEC that have required or are anticipated to require investigation and/or remediation costs. PEC received insurance proceeds to address costs associated with environmental liabilities related to its involvement with some MGP sites. All eligible expenses related to these are charged against a specific fund containing these proceeds. As of June 30, 2003, approximately $5.2 million remains in this centralized fund with a related accrual of $5.2 million recorded for the associated expenses of environmental issues. As PEC's share of costs for investigating and remediating these sites becomes known, the fund is assessed to determine if additional accruals will be required. PEC does not believe that it can provide an estimate of the reasonably possible total remediation costs beyond what remains in the environmental insurance recovery 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 seven sites and four sites have begun remediation. PEC measures its liability for these sites based on available evidence including its experience in investigating and remediating environmentally impaired sites. The process often involves assessing and developing cost-sharing arrangements with other potentially responsible parties. Once the environmental insurance recovery fund is depleted, PEC will accrue costs for the sites to the extent its liability is probable and the costs can be reasonably estimated. Presently, PEC cannot determine the total costs that may be incurred in connection with the remediation of all sites. PEF There are two former MGP sites and 11 other active sites associated with PEF that have required or are anticipated to require investigation and/or remediation costs. As of June 30, 2003, PEF has accrued approximately $9.4 million, for probable and reasonably estimable costs at these sites. PEF does not believe that it can provide an estimate of the reasonably possible total remediation costs beyond what is currently accrued. In 2002, PEF filed a petition for annual recovery of approximately $4.0 million in environmental costs through the Environmental Cost Recovery Clause with the FPSC. PEF was successful with this filing and will recover costs through rates for investigation and remediation associated with transmission and distribution substations and transformers. As more activity occurs at these sites, PEF will assess the need to adjust the accruals. These accruals have been recorded on an undiscounted basis. PEF measures its liability for these sites based on available evidence including its experience in investigating and remediating environmentally impaired sites. This process often includes assessing and developing cost-sharing arrangements with other potentially responsible parties. Presently, PEF cannot determine the total costs that may be incurred in connection with the remediation of all sites. NCNG There are five former MGP sites associated with NCNG that have or are anticipated to have investigation or remediation costs associated with them. As of June 30, 2003, NCNG has accrued approximately $2.3 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 investigating and remediating environmentally impaired sites. This process often involves assessing and developing cost-sharing arrangements with other potentially responsible parties. NCNG does not believe it can provide an estimate of the reasonably possible total remediation costs beyond the accrual because two 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 23 connection with the investigation and/or remediation of all sites. Based upon current information, the Company does not expect the future costs at the NCNG sites to be material to the Company's financial condition or results of operations. In October 2002, the Company announced plans to sell NCNG to Piedmont Natural Gas Company, Inc. The Company will retain the environmental liability associated with the five former MGP sites. Florida Progress Corporation In 2001, FPC sold its Inland Marine Transportation business operated by MEMCO Barge Line, Inc. to AEP Resources, Inc. FPC established an accrual to address indemnities and retained an environmental liability associated with the transaction. FPC estimates that its maximum contractual liability to AEP Resources, Inc., associated with Inland Marine Transportation is $60 million. The balance in this accrual is $9.9 million at June 30, 2003. This accrual has been determined on an undiscounted basis. FPC measures its liability for this site based on estimable and probable remediation scenarios. The Company believes that it is reasonably probable that additional costs, which cannot be currently estimated, may be incurred related to the environmental indemnification provision beyond the amount accrued. The Company cannot predict the outcome of this matter. Certain historical waste sites exist that are being addressed voluntarily by Fuels. The Company cannot determine the total costs that may be incurred in connection with these sites. The Company cannot predict the outcome of this matter. Rail Services is voluntarily addressing certain historical waste sites. The Company cannot determine the total costs that may be incurred in connection with these sites. The Company cannot predict the outcome of this matter. PEC, PEF, Fuels 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. 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 environmentally impaired sites. 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. Air Quality There has been and may be further proposed federal legislation requiring reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon dioxide and mercury. Some of these proposals establish nationwide caps and emission rates over an extended period of time. This national multi-pollutant approach to air pollution control could involve significant capital 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. However, the Company cannot predict the outcome of this matter. The EPA is 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 PEC and PEF were asked to provide information to the EPA as part of this initiative and cooperated in providing the requested information. During the first quarter of 2003, PEC responded to a supplemental information request from the EPA. PEF has received a similar supplemental information request, and responded to it in the second quarter. The EPA initiated civil enforcement actions against other unaffiliated utilities as part of this initiative. Some of these actions 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 the EPA's initiative or its impact, if any, on the Company. In 1998, the EPA published a final rule addressing the 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 pre-set state NOx emission levels by May 31, 2004. PEC is currently installing controls necessary to comply with the rule. Capital expenditures needed to meet these measures in North and South Carolina could reach 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. 24 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 PEC to install nitrogen oxide controls under the state's eight-hour standard. The costs of those controls are included in the $370 million cost estimate set forth in the preceding paragraph. 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. 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 coal-fired 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 Section 126 petitions. PEC, 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 PEC and other utilities to delay the implementation of the Section 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 EPA has approved North Carolina's NOx SIP Call rule and has formally proposed to rescind the Section 126 rule. This rulemaking is expected to become final during the summer of 2003. The Company expects a favorable outcome of this matter. 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 by 2013. PEC currently has approximately 5,100 MW of coal-fired generation capacity 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 utility's 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 utilities or unless the utilities persistently earn a return substantially in excess of the rate of return established and found reasonable by the NCUC in the utilities' 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 ten-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, PEC entered into an agreement with the state of North Carolina to transfer to the state any future emissions allowances acquired as a result of compliance with the new law. 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. PEC recorded $33.5 million in the second quarter of 2003 and approximately $54 million of clean air amortization to date in 2003. Clean air expenditures to date are $8.4 million. Other Environmental Matters The Kyoto Protocol was adopted in 1997 by the United Nations to address global climate change by reducing emissions of carbon dioxide and other greenhouse gases. The United States has not adopted the Kyoto Protocol; however, a number of carbon dioxide emissions control proposals have been advanced in Congress and by the Bush administration. The Bush administration favors voluntary programs. Reductions in carbon dioxide emissions to the levels specified by the Kyoto Protocol and some legislative proposals could be materially adverse to Company financials and operations if associated costs cannot be recovered from customers. The Company favors the voluntary program approach recommended by the administration, and is evaluating options for the reduction, avoidance and sequestration of greenhouse gases. However, the Company cannot predict the outcome of this matter. 25 In 1997, the EPA's Mercury Study Report and Utility Report to Congress conveyed that mercury is not a risk to the average American and expressed uncertainty about whether reductions in mercury emissions from coal-fired power plants would reduce human exposure. Nevertheless, the EPA determined in 2000 that regulation of mercury emissions from coal-fired power plants was appropriate. Pursuant to a Court Order, the EPA is developing a Maximum Available Control Technology (MACT) standard, which is expected to become final in December 2004, with compliance in 2008. Achieving compliance with the MACT standard could be materially adverse to the Company's financial condition and results of operations. However, the Company cannot predict the outcome of this matter. b) As required under the Nuclear Waste Policy Act of 1982, PEC and PEF each entered into a contract with the U.S. Department of Energy (DOE) under which the DOE agreed to begin taking spent nuclear fuel by no later than January 31, 1998. All similarly situated utilities were required to sign the same standard contract. In April 1995, the DOE issued a final interpretation that it did not have an unconditional obligation to take spent nuclear fuel by January 31, 1998. In Indiana & Michigan Power v. DOE, the Court of Appeals vacated the DOE's final interpretation and ruled that the DOE had an unconditional obligation to begin taking spent nuclear fuel. The Court did not specify a remedy because the DOE was not yet in default. After the DOE failed to comply with the decision in Indiana & Michigan Power v. DOE, a group of utilities petitioned the Court of Appeals in Northern States Power (NSP) v. DOE, seeking an order requiring the DOE to begin taking spent nuclear fuel by January 31, 1998. The DOE took the position that their delay was unavoidable, and the DOE was excused from performance under the terms and conditions of the contract. The Court of Appeals found that the delay was not unavoidable, but did not order the DOE to begin taking spent nuclear fuel, stating that the utilities had a potentially adequate remedy by filing a claim for damages under the contract. After the DOE failed to begin taking spent nuclear fuel by January 31, 1998, a group of utilities filed a motion with the Court of Appeals to enforce the mandate in NSP v. DOE. Specifically, this group of utilities asked the Court to permit the utilities to escrow their waste fee payments, to order the DOE not to use the waste fund to pay damages to the utilities, and to order the DOE to establish a schedule for disposal of spent nuclear fuel. The Court denied this motion based primarily on the grounds that a review of the matter was premature, and that some of the requested remedies fell outside of the mandate in NSP v. DOE. Subsequently, a number of utilities each filed an action for damages in the Federal Court of Claims. The U.S. Circuit Court of Appeals (Federal Circuit) has ruled that utilities may sue the DOE for damages in the Federal Court of Claims instead of having to file an administrative claim with the DOE. PEC and PEF are in the process of evaluating whether they should each file a similar action for damages. On July 9, 2002, Congress passed an override resolution to Nevada's veto of DOE's proposal to locate a permanent underground nuclear waste storage facility at Yucca Mountain, Nevada. DOE plans to submit a license application for the Yucca Mountain facility by the end of 2004. PEC and PEF cannot predict the outcome of this matter. With certain modifications, and additional approval by the NRC, PEC's spent nuclear fuel storage facilities will be sufficient to provide storage space for spent fuel generated on PEC's system through the expiration of the current operating licenses for all of PEC's nuclear generating units. Subsequent or prior to the expiration of these licenses, or any renewal of these licenses, dry storage or acquisition of new shipping casks may be necessary. PEC obtained approval from the NRC to use additional storage space at the Harris Plant in December 2000. PEF currently is storing spent nuclear fuel onsite in spent fuel pools. If PEF does not seek renewal of the Crystal River Nuclear Plant (CR3) operating license, CR3 will have sufficient storage capacity in place for fuel consumed through the end of the expiration of the license in 2016. If PEF extends the CR3 operating license, dry storage may be necessary. c) Progress Energy, through its subsidiaries, produces synthetic fuel from coal fines. The production and sale of the synthetic fuel from these facilities qualifies for tax credits under Section 29 of the Code (Section 29) if certain requirements are satisfied, including a requirement that the synthetic fuel differs significantly in chemical composition from the coal used to produce such synthetic fuel. Any synthetic fuel tax credit amounts not utilized are carried forward indefinitely. All of Progress Energy's synthetic fuel facilities have received private letter rulings (PLRs) from the Internal Revenue Service (IRS) with respect to their synthetic fuel operations. These tax credits are subject to review by the IRS, and if Progress Energy fails 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. Additionally, the ability to use tax credits currently being carried forward could be denied. Total Section 29 credits generated to date (including FPC prior to its acquisition by the Company) are approximately $1.028 billion, of which $445.6 million have been used and $582.4 million are being carried forward as of June 30, 2003. The current Section 29 tax credit program expires in 2007. 26 One synthetic fuel entity, Colona Synfuel Limited Partnership, L.L.L.P. (Colona), from which the Company (and FPC prior to its acquisition by the Company) has been allocated approximately $273.1 million in tax credits to date, is being audited by the IRS. The audit of Colona was expected. The Company is audited regularly in the normal course of business, as are most similarly situated companies. In September 2002, all of the Company's majority-owned synthetic fuel entities, including Colona, were accepted into the IRS Prefiling 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. In late June 2003, the Company was informed that IRS field auditors have raised questions regarding the chemical change associated with coal-based synthetic fuel manufactured at its Colona facility and the testing process by which the chemical change is verified. (The questions arose in connection with the Company's participation in the PFA program.) The chemical change and the associated testing process were described as part of the PLR request for Colona. Based on that application, the IRS ruled in Colona's PLR that the synthetic fuel produced at Colona undergoes a significant chemical change and thus qualifies for tax credits under Section 29 of the Internal Revenue Code. While the IRS has announced that they may revoke PLRs if test procedures and results do not demonstrate that a significant chemical change has occurred, based on the information received to date, the Company does not believe the issues warrant reversal by the IRS National Office of its prior position in the Colona PLR. The information provided by the IRS field auditors addresses only Progress Energy's Colona facility. The Company, however, applies essentially the same chemical process and uses the same independent laboratories to confirm chemical change in the synthetic fuel manufactured at each of its four other facilities. The independent laboratories used by the Company to determine significant chemical change are the leading experts in their field and are used by many other industry participants. The Company believes that the laboratories' work and the chemical change process are consistent with the bases upon which the PLRs were issued. The Company is working to resolve this matter as quickly as possible. At this time, the Company cannot predict how long the IRS process will take; however, the Company intends to continue working cooperatively with the IRS. The Company firmly believes that it is operating the Colona facility and its other plants in compliance with its PLRs and Section 29 of the Internal Revenue Code. Accordingly, the Company has no current plans to alter its synthetic fuel production schedules as a result of these matters. In addition, the Company has retained an advisor to assist in selling an interest in one or more synthetic fuel entities. The Company is pursuing the sale of a portion of its synthetic fuel production capacity that is underutilized due to limits on the amount of credits that can be generated and utilized by the Company. The Company would expect to retain an ownership interest and to operate any sold facility for a management fee. However, the IRS has suspended issuance of PLRs relating to synthetic fuel production (typically a closing condition to the sale of an interest in a synthetic fuel entity). Unless that suspension on new PLRs is lifted, it will be difficult to consummate the successful sale of interests in the Company's synthetic fuel facilities. The Company cannot predict when or if the IRS will recommence issuing such PLRs. The final outcome and timing of the Company's efforts to sell interests in synthetic fuel facilities is uncertain and while the Company cannot predict the outcome of this matter, the outcome is not expected to have a material effect on the consolidated financial position, cash flows or results of operations. d) In November of 2001, Strategic Resource Solutions Corp. (SRS) filed a claim against the San Francisco Unified School District ("the District") and other defendants claiming that SRS is entitled to approximately $10 million in unpaid contract payments and delay and impact damages related to the District's $30 million contract with SRS. On March 4, 2002, the District filed a counterclaim, seeking compensatory damages and liquidated damages in excess of $120 million, for various claims, including breach of contract and demand on a performance bond. SRS has asserted defenses to the District's claims. On March 13, 2003, the City Attorney's office announced the filing of new claims by the City Attorney and the District in the form of a cross-complaint against SRS, Progress Energy, Inc., Progress Energy Solutions, Inc., and certain individuals, alleging fraud, false claims, violations of California statutes, and seeking compensatory damages, punitive damages, liquidated damages, treble damages, penalties, attorneys' fees and injunctive relief. The City Attorney's announcement states that the City and the District seek "more than $300 million in damages and penalties." 27 The Company has reviewed the District's earlier pleadings against SRS and believes that those claims are not meritorious. SRS filed its answer to the new pleadings on April 14, 2003. The Company has reviewed the new pleadings and the Company believes that the new claims are not meritorious. The Company has filed responsive pleadings denying the allegations, and the discovery process is underway. SRS, the Company and Progress Energy Solutions, Inc. will vigorously defend and litigate all of these claims. The Company cannot predict the outcome of this matter, but the Company believes that it and its subsidiaries have good defenses to all claims asserted by both the District and the City. e) The Company and its subsidiaries are involved in various litigation matters in the ordinary course of business, some of which involve claims for substantial amounts. Where appropriate, accruals have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. The Company believes the final disposition of pending litigation would not have a material adverse effect on the Company's consolidated results of operations or financial position. 28 CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC. CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2003 CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended (Unaudited) June 30, June 30, - ---------------------------------------------------------------------------------------------------------------- (In thousands) 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 816,240 $ 834,658 $ 1,741,710 $ 1,646,139 Diversified business 2,423 3,434 5,819 6,823 - ---------------------------------------------------------------------------------------------------------------- Total Operating Revenues 818,663 838,092 1,747,529 1,652,962 - ---------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 177,020 170,977 402,562 342,703 Purchased power 68,977 90,918 142,157 164,228 Operation and maintenance 210,295 193,887 400,170 387,324 Depreciation and amortization 141,848 133,459 280,644 274,844 Taxes other than on income 35,101 36,075 79,277 74,843 Diversified business 1,595 2,754 2,535 5,815 - ---------------------------------------------------------------------------------------------------------------- Total Operating Expenses 634,836 628,070 1,307,345 1,249,757 - ---------------------------------------------------------------------------------------------------------------- Operating Income 183,827 210,022 440,184 403,205 - ---------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 2,075 3,202 3,441 4,868 Other, net (8,380) 4,652 (10,931) 1,680 - ---------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (6,305) 7,854 (7,490) 6,548 - ---------------------------------------------------------------------------------------------------------------- Interest Charges Interest charges 48,412 56,255 97,715 117,899 Allowance for borrowed funds used during (658) (2,779) (1,583) (5,873) construction - ---------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 47,754 53,476 96,132 112,026 - ---------------------------------------------------------------------------------------------------------------- Income before Income Taxes 129,768 164,400 336,562 297,727 Income Tax Expense 40,956 33,248 112,688 81,456 - ---------------------------------------------------------------------------------------------------------------- Net Income 88,812 131,152 223,874 216,271 Preferred Stock Dividend Requirement 741 741 1,482 1,482 - ---------------------------------------------------------------------------------------------------------------- Earnings for Common Stock $ 88,071 $ 130,411 $ 222,392 $ 214,789 - ---------------------------------------------------------------------------------------------------------------- See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial Statements.
29 Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) June 30, December 31, Assets 2003 2002 - ---------------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 13,072,200 $ 12,675,761 Accumulated depreciation (6,077,374) (6,356,933) - ---------------------------------------------------------------------------------------------------------- Utility plant in service, net 6,994,826 6,318,828 Held for future use 4,942 7,188 Construction work in progress 334,269 325,695 Nuclear fuel, net of amortization 168,148 176,622 - ---------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 7,502,185 6,828,333 - ---------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 12,998 18,284 Accounts receivable 260,691 301,178 Unbilled accounts receivable 143,870 151,352 Receivables from affiliated companies 32,270 36,870 Notes receivable from affiliated companies - 49,772 Taxes receivable - 55,006 Inventory 348,239 342,886 Deferred fuel cost 137,301 146,015 Prepayments and other current assets 35,459 45,542 - ---------------------------------------------------------------------------------------------------------- Total Current Assets 970,828 1,146,905 - ---------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 515,257 252,083 Nuclear decommissioning trust funds 465,043 423,293 Diversified business property, net 51,771 9,435 Miscellaneous other property and investments 184,029 209,657 Other assets and deferred debits 98,947 104,978 - ---------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 1,315,047 999,446 - ---------------------------------------------------------------------------------------------------------- Total Assets $ 9,788,060 $ 8,974,684 - ---------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ---------------------------------------------------------------------------------------------------------- Capitalization - ---------------------------------------------------------------------------------------------------------- Common stock $ 3,135,690 $ 3,089,115 Preferred stock - not subject to mandatory redemption 59,334 59,334 Long-term debt, net 2,516,941 3,048,466 - ---------------------------------------------------------------------------------------------------------- Total Capitalization 5,711,965 6,196,915 - ---------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 400,000 - Accounts payable 176,387 259,217 Payables to affiliated companies 121,081 98,572 Notes payable to affiliated companies 49,359 - Taxes accrued 4,031 - Interest accrued 56,678 58,791 Short-term obligations 363,900 437,750 Current portion of accumulated deferred income taxes 44,197 66,088 Other current liabilities 92,016 93,171 - ---------------------------------------------------------------------------------------------------------- Total Current Liabilities 1,307,649 1,013,589 - ---------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,156,722 1,179,689 Accumulated deferred investment tax credits 153,207 158,308 Regulatory liabilities 131,994 7,774 Asset retirement obligations 905,338 - Other liabilities and deferred credits 421,185 418,409 - ---------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 2,768,446 1,764,180 - ---------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 9) - ---------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 9,788,060 $ 8,974,684 - ---------------------------------------------------------------------------------------------------------- See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial Statements.
30 Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended (Unaudited) June 30, (In thousands) 2003 2002 - ----------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 223,874 $ 216,271 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 324,975 329,437 Deferred income taxes (38,115) (25,358) Investment tax credit (5,100) (6,240) Deferred fuel cost 8,714 12,757 Net (increase) decrease in accounts receivable 20,169 (13,408) Net decrease in affiliated accounts receivable 14,743 (38,213) Net increase in inventories (5,353) (1,229) Net (increase) decrease in prepayments and other current assets 8,315 (14,916) Net decrease in accounts payable (14,632) (5,109) Net increase in affiliated accounts payable 17,487 33,340 Net increase in other current liabilities 58,183 93,975 Other 50,783 21,921 - ----------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 664,043 603,228 - ----------------------------------------------------------------------------------------------------------------- Investing Activities Gross property additions (258,526) (333,308) Proceeds from assets transferred to affiliate - 243,719 Nuclear fuel additions (45,642) (49,380) Contributions to nuclear decommissioning trust (17,959) (17,915) Diversified business property additions (262) (10,439) Investments in non-utility activities (2,258) (6,886) - ----------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (324,647) (174,209) - ----------------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt - 46,505 Net decrease in short-term obligations (73,850) (207,535) Net increase (decrease) in intercompany notes 99,131 (36,374) Retirement of long-term debt (165,208) (49,754) Dividends paid to parent (203,273) (190,599) Dividends paid on preferred stock (1,482) (1,482) - ----------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (344,682) (439,239) - ----------------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents (5,286) (10,220) - ----------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of the Period 18,284 21,250 - ----------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of the Period $ 12,998 $ 11,030 - ----------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 95,287 $ 103,911 income taxes (net of refunds) $ 119,638 $ 61,163 Noncash Activities - - In February 2002, CP&L transferred the Rowan plant to Progress Ventures, Inc. and established an intercompany receivable. The property and inventory transferred totaled approximately $244 million. In April 2002, CP&L received cash proceeds in settlement of the intercompany receivable totaling approximately $244 million. This amount is reported in proceeds from assets transferred to affiliates in the investing activities section. See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial Statements.
31 Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION A. Organization. Progress Energy Carolinas, Inc. (PEC) is a public service corporation primarily engaged in the generation, transmission, distribution and sale of electricity primarily in portions of North Carolina and South Carolina. PEC 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 of 1935 (PUHCA). Both the Company and its subsidiaries are subject to the regulatory provisions of PUHCA. Effective January 1, 2003, Carolina Power & Light Company (CP&L) began doing business under the assumed name Progress Energy Carolinas, Inc. The legal name has not changed and there was no restructuring of any kind related to the name change. The current corporate and business unit structure remains unchanged. B. Basis of Presentation. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) 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 GAAP for complete financial statements. Because the accompanying consolidated interim financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the audited financial statements for the period ended December 31, 2002 and notes thereto included in PEC's Form 10-K, as amended for the year ended December 31, 2002. The amounts included in the consolidated interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present PEC'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 or future periods. In preparing financial statements that conform with GAAP, 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. Certain amounts for 2002 have been reclassified to conform to the 2003 presentation, with no effect on previously reported net income or common stock equity. 2. FINANCIAL INFORMATION BY BUSINESS SEGMENT PEC's operations consist primarily of the PEC Electric segment with no other material segments. The financial information for the PEC Electric segment for the three and six months ended June 30, 2003 and 2002 is as follows: (in thousands) Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2003 2002 2003 2002 -------------------------------------------------------------------------------------------- Revenues $ 816,240 $ 834,658 $ 1,741,710 $ 1,646,139 Segment income $ 88,394 $ 131,690 $ 223,264 $ 217,222 Total segment assets $ 9,568,769 $ 8,669,993 $ 9,568,769 $ 8,669,993 ============================================================================================
The primary differences between the PEC Electric segment and PEC consolidated financial information relate to other non-electric operations and elimination entries. 32 3. IMPACT OF NEW ACCOUNTING STANDARDS SFAS No. 148, "Accounting for Stock-Based Compensation" For purposes of the pro forma disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123," the estimated fair value of the Company's stock options is amortized to expense over the options' vesting period. PEC's information related to the pro forma impact on earnings assuming stock options were expensed for the three and six months ended June 30: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2003 2002 2003 2002 ------------ ------------- ----------- ------------ Earnings for common stock, as reported $ 88,071 $ 130,411 $ 222,392 $ 214,789 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 706 535 1,779 1,294 ------------ ------------- ----------- ------------ Pro forma earnings for common stock $ 87,365 $ 129,876 $ 220,613 $ 213,495 ============ ============= =========== ============
In April 2003, the Financial Accounting Standards Board (FASB) approved certain decisions on its stock-based compensation project. Some of the key decisions reached by the FASB were that stock-based compensation should be recognized in the income statement as an expense and that the expense should be measured as of the grant date at fair value. A significant issue yet to be resolved by the FASB is the determination of the appropriate fair value measure. The FASB continues to deliberate additional issues in this project; however, the FASB plans to issue an exposure draft in 2003 that could become effective in 2004. Derivative Instruments and Hedging Activities In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The statement amends and clarifies SFAS No. 133 on accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The new guidance incorporates decisions made as part of the Derivatives Implementation Group (DIG) process, as well as decisions regarding implementation issues raised in relation to the application of the definition of a derivative. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. PEC is currently evaluating what effects, if any, this statement will have on its results of operations and financial position. In connection with the January 2003 FASB Emerging Issues Task Force (EITF) meeting, the FASB was requested to reconsider an interpretation of SFAS No. 133. The interpretation, which is contained in the Derivatives Implementation Group's C11 guidance, relates to the pricing of contracts that include broad market indices (e.g., CPI). In particular, that guidance discusses whether the pricing in a contract that contains broad market indices could qualify as a normal purchase or sale (the normal purchase or sale term is a defined accounting term, and may not, in all cases, indicate whether the contract would be "normal" from an operating entity viewpoint). In late June 2003, the FASB issued final superseding guidance (DIG Issue C20) on this issue, which is significantly different from the tentative superseding guidance that was issued in April 2003. The new guidance is effective October 1, 2003 for PEC. DIG Issue C20 specifies new pricing-related criteria for qualifying as a normal purchase or sale, and it requires a special transition adjustment as of October 1, 2003. PEC has determined that it has one existing "normal" contract that is affected by this revised guidance. PEC is in the process of evaluating the revised guidance and related contract to determine the transition adjustment that will be necessary and to determine if the contract will be required to be recorded at fair value subsequent to October 1, 2003. SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The financial instruments within the scope of SFAS No. 150 include mandatorily redeemable stock, obligations to repurchase the issuer's equity shares by transferring assets, and certain obligations to issue a variable number of shares. SFAS No. 150 is effective immediately for such instruments entered into or modified after May 31, 2003, and is effective for previously issued financial instruments within its scope on July 1, 2003. PEC believes that the adoption of SFAS No. 150 will not have a material impact on its financial position or results of operations. 33 FIN No. 46, "Consolidation of Variable Interest Entities" In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46). This interpretation provides guidance related to identifying variable interest entities (previously know as special purpose entities or SPEs) and determining whether such entities should be consolidated. Certain disclosures are required if it is reasonably possible that a company will consolidate or disclose information about a variable interest entity when it initially applies FIN No. 46. This interpretation must be applied immediately to variable interest entities created or obtained after January 31, 2003. During the first six months of 2003, PEC did not participate in the creation of, or obtain a new variable interest in, any variable interest entity. For those variable interest entities created or obtained on or before January 31, 2003, PEC must apply the provisions of FIN No. 46 in the third quarter of 2003. PEC is currently evaluating what effects, if any, this interpretation will have on its results of operations and financial position. During this evaluation process, several arrangements have been identified to which this interpretation may apply. These arrangements include investments in approximately 50 Affordable Housing properties eligible for Section 42 tax credits. PEC divested approximately 30 of these Affordable Housing investments in July 2003, and therefore the application of FIN No. 46 is not expected to have a material impact with respect to those 30 investments. It is reasonably possible that the Company will be required to consolidate some of the remaining 20 Affordable Housing entities that are currently accounted for under the equity method. The maximum exposure to loss as a result of PEC's total funding commitments for the remaining 20 Affordable Housing investments is approximately $23.9 million. However, management believes the total loss of its investments is unlikely given the nature of the investments and the utilization of certain Section 42 tax credits to date. PEC is in the final stages of completing the adoption of FIN No. 46, but having considered the facts described herein, does not expect the results to have a material impact on its consolidated financial position, results of operation or liquidity. EITF Issue No. 03-04, "Accounting for 'Cash Balance' Pension Plans" In May 2003, the EITF reached consensus in EITF Issue No. 03-04 to specifically address the accounting for certain cash balance pension plans. The consensus reached in EITF Issue No. 03-04 requires certain cash balance pension plans to be accounted for as defined benefit plans. For cash balance plans described in the consensus, the consensus also requires the use of the traditional unit credit method for purposes of measuring the benefit obligation and annual cost of benefits earned as opposed to the projected unit credit method. PEC has historically accounted for its cash balance plans as defined benefit plans; however, PEC is required to adopt the measurement provisions of EITF 03-04 at its cash balance plans' next measurement date of December 31, 2003. Any differences in the measurement of the obligations as a result of applying the consensus will be reported as a component of actuarial gain or loss. PEC is currently evaluating what effects EITF 03-04 will have on its results of operations and financial position. 4. ASSET RETIREMENT OBLIGATIONS SFAS No. 143, "Accounting for Asset Retirement Obligations," provides accounting and disclosure requirements for retirement obligations associated with long-lived assets and was adopted by the Company effective January 1, 2003. This statement requires that the present value of retirement costs for which PEC 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 liability. Cumulative accretion and accumulated depreciation were recognized for the time period from the date the liability would have been recognized had the provisions of this statement been in effect, to the date of adoption of this statement. Upon adoption of SFAS No. 143, PEC recorded asset retirement obligations (AROs) for nuclear decommissioning of radiated plant totaling $879.7 million. PEC used an expected cash flow approach to measure these obligations. This amount includes accruals recorded prior to adoption totaling $491.3 million, which were previously recorded in accumulated depreciation. The related asset retirement costs, net of accumulated depreciation, recorded upon adoption totaled $117.3 million. The cumulative effect of adoption of this statement had no impact on the net income of PEC, as the effects were offset by the establishment of a regulatory asset in the amount of $271.1 million, pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." The regulatory asset represents the cumulative accretion and accumulated depreciation for the time period from the date the liability would have been recognized had the provisions of this statement been in effect to the date of adoption, less the amount previously recorded. Funds set aside in PEC's nuclear decommissioning trust fund for the nuclear decommissioning liability totaled $465.0 million at June 30, 2003 and $423.3 million at December 31, 2002. 34 Pro forma net income has not been presented for prior years because the pro forma application of SFAS No. 143 to prior years would result in pro forma net income not materially different from the actual amounts reported. PEC has identified but not recognized AROs related to electric transmission and distribution and telecommunications assets as the result of easements over property not owned by PEC. These easements are generally perpetual and only require retirement action upon abandonment or cessation of use of the property for the specified purpose. The ARO liability is not estimable for such easements as PEC intends to utilize these properties indefinitely. In the event PEC decides to abandon or cease the use of a particular easement, an ARO liability would be recorded at that time. PEC has previously recognized removal costs as a component of depreciation in accordance with regulatory treatment. As of June 30, 2003, the portion of such costs not representing AROs under SFAS No. 143 was $882.6 million. This amount is included in accumulated depreciation on the accompanying Consolidated Balance Sheets. PEC has collected amounts for non-radiated areas at nuclear facilities, which do not represent asset retirement obligations. These amounts totaled $63.5 million as of June 30, 2003, which is included in accumulated depreciation on the accompanying Consolidated Balance Sheets. PEC filed a request with the NCUC requesting deferral of the difference between expense pursuant to SFAS No. 143 and expense as previously determined by the NCUC. The NCUC granted the deferral of the January 1, 2003 cumulative adjustment. Because the clean air legislation discussed in Note 9 under "Air Quality" contained a prohibition against cost deferrals unless certain criteria are met, the NCUC denied the deferral of the ongoing effects. The Company has provided additional information to the NCUC that it believes will demonstrate that deferral of the ongoing effects should also be allowed. Since the NCUC order denied deferral of the ongoing effects, PEC ceased deferral of the ongoing effects during the second quarter for the six months ended June 30, 2003 related to its North Carolina retail jurisdiction. Pre-tax income for the three and six months ended June 30, 2003 increased by approximately $13.6 million, which represents a decrease in non-ARO cost of removal expense, partially offset by an increase in decommissioning expense. On April 8, 2003, the Public Service Commission of South Carolina (SCPSC) approved a joint request by PEC, Duke Energy and South Carolina Electric and Gas Company for an accounting order to authorize the deferral of all cumulative and prospective effects related to the adoption of SFAS No. 143. 5. COMPREHENSIVE INCOME Comprehensive income for the three and six months ended June 30, 2003 was $88.0 million and $223.2 million, respectively. Comprehensive income for the three and six months ended June 30, 2002 was $129.6 million and $218.2 million, respectively. Items of other comprehensive income for the periods consisted primarily of changes in fair value of derivatives used to hedge cash flows related to interest on long-term debt. 6. FINANCING ACTIVITIES On April 1, 2003, PEC reduced the size of its existing 364-day credit facility from $285 million to $165 million. The other terms of this facility were not changed. On July 30, 2003, PEC renewed its $165 million 364-day credit agreement. PEC's $285 million three-year credit agreement entered into in July 2002 remains in place, for total facilities of $450 million. On May 27, 2003, PEC redeemed $150 million of First Mortgage Bonds, 7.5% Series, Due March 1, 2023 at 103.22% of the principal amount of such bonds. PEC funded the redemption with commercial paper. On July 14, 2003, PEC announced the redemption of $100 million of First Mortgage Bonds, 6.875% Series Due August 15, 2023 at 102.84%. The date of the redemption will be August 15, 2003. PEC will fund the redemption with commercial paper. 7. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS PEC uses interest rate derivative instruments to adjust the fixed and variable rate debt components of its debt portfolio and to hedge interest rates with regard to future fixed rate debt issuances. In March, April and June of 2003, PEC entered into treasury rate locks to hedge its exposure to 35 interest rates with regard to a future issuance of debt. These agreements have a computational period of ten years and are designated as cash flow hedges for accounting purposes. These agreements have a total notional amount of $60 million. The notional amounts of the above contracts are not exchanged and do not represent exposure to credit loss. In the event of default by a counter party, the risk in the transaction is the cost of replacing the agreements at current market rates. PEC only enters into interest rate swap agreements with banks with credit ratings of single A or better. 8. OTHER INCOME AND OTHER EXPENSE Other income and expense includes interest income, gain on the sale of investments, impairment of investments and other income and expense items as discussed below. The components of other, net as shown on the Consolidated Statements of Income for the three and six months ended June 30, 2003 and 2002 are as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2003 2002 2003 2002 -------------- -------------- ------------- ------------- Other income Net financial trading gain (loss) $ 1,175 $ 792 $ (1,524) $ (1,429) Net energy brokered for resale (68) (89) 270 (446) Nonregulated energy and delivery services income 2,052 3,016 4,338 5,567 AFUDC equity 774 1,602 1,864 3,662 Investment gains - 2,960 - 2,960 Other 2,767 4,711 5,523 5,981 -------------- -------------- ------------- ------------- Total other income $ 6,700 $ 12,992 $ 10,471 $ 16,295 -------------- -------------- ------------- ------------- Other expense Nonregulated energy and delivery services expenses $ 2,022 $ 3,632 $ 3,995 $ 5,267 Donations 1,339 1,178 2,645 2,548 Investment losses 8,643 - 8,643 - Other 3,076 3,530 6,119 6,800 -------------- -------------- ------------- ------------- Total other expense $ 15,080 $ 8,340 $ 21,402 $ 14,615 -------------- -------------- ------------- ------------- Other, net $ (8,380) $ 4,652 $ (10,931) $ 1,680 ============== ============== ============= =============
Net financial trading gains and losses represent non-asset-backed trades of electricity and gas. Net energy brokered for resale represents electricity purchased externally for sale to a third party. Nonregulated energy and delivery services include power protection services and mass market programs (surge protection, appliance services and area light sales) and delivery, transmission and substation work for other utilities. Investment losses represent losses on limited partnership investment funds. 9. COMMITMENTS AND CONTINGENCIES Contingencies existing as of the date of these statements are described below. No significant changes have occurred since December 31, 2002, with respect to the commitments discussed in Note 18 of the financial statements included in PEC's 2002 Annual Report on Form 10-K, as amended. In 2003, PEC determined that its external funding levels did not fully meet the nuclear decommissioning financial assurance levels required by the NRC. Therefore, PEC obtained parent company guarantees of $276 million to meet the required levels. As of June 30, 2003, management does not believe conditions are likely for performance under the agreements discussed in this Note 9. Insurance PEC is insured against public liability for a nuclear incident. Under the current provisions of the Price Anderson Act, which limits liability for accidents at nuclear plants, PEC, as an owner of nuclear units, can be assessed a portion of any third-party liability claims arising from an accident at any commercial nuclear power plant in the United States. In the event that public liability claims from an insured nuclear incident exceed $300 million (currently available through commercial insurers), each company would be subject to pro rata assessments for each reactor owned per occurrence. Effective August 20, 2003, the retroactive premium assessments will increase to $100.6 million per reactor from the current amount of $88.1 million. The total limit available to cover nuclear liability losses will increase as well from $9.6 billion to $10.6 billion. The annual retroactive premium limit of $10 million per reactor owned will not change. 36 Contingencies Claims and uncertainties a) PEC is subject to federal, state and local regulations addressing hazardous and solid waste management, air and water quality and other environmental matters. Hazardous and Solid Waste Management Various organic materials associated with the production of manufactured gas, generally referred to as coal tar, are regulated under federal and state laws. The principal regulatory agency that is responsible for a specific former MGP site depends largely upon the state in which the site is located. There are several MGP sites to which PEC has some connection. In this regard, PEC and other potentially responsible parties, are participating in investigating and, if necessary, remediating former MGP sites with several regulatory agencies, including, but not limited to, the EPA and the North Carolina Department of Environment and Natural Resources, Division of Waste Management (DWM). In addition, PEC is periodically notified by regulators such as the EPA and various state agencies of their involvement or potential involvement in sites, other than MGP sites, that may require investigation and/or remediation. There are 12 former MGP sites and 14 other sites or groups of sites associated with PEC that have required or are anticipated to require investigation and/or remediation costs. PEC received insurance proceeds to address costs associated with PEC environmental liabilities related to its involvement with some MGP sites. All eligible expenses related to these are charged against a specific fund containing these proceeds. As of June 30, 2003, approximately $5.2 million remains in this centralized fund with a related accrual of $5.2 million recorded for the associated expenses of environmental issues. As PEC's share of costs for investigating and remediating these sites become known, the fund is assessed to determine if additional accruals will be required. PEC does not believe that it can provide an estimate of the reasonably possible total remediation costs beyond what remains in the environmental insurance recovery 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 seven sites and four sites have begun remediation. PEC measures its liability for these sites based on available evidence including its experience in investigating and remediating environmentally impaired sites. The process often involves assessing and developing cost-sharing arrangements with other potentially responsible parties. Once the environmental insurance recovery fund is depleted, PEC will accrue costs for the sites to the extent its liability is probable and the costs can be reasonably estimated. Presently, PEC cannot determine the total costs that may be incurred in connection with the remediation of all sites. PEC 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. PEC is also currently in the process of assessing potential costs and exposures at other environmentally impaired sites. As the assessments are developed and analyzed, PEC will accrue costs for the sites to the extent the costs are probable and can be reasonably estimated. Air Quality There has been and may be further proposed federal legislation requiring reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon dioxide and mercury. Some of these proposals establish nation-wide caps and emission rates over an extended period of time. This national multi-pollutant approach to air pollution control could involve significant capital costs which could be material to PEC'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. However, PEC cannot predict the outcome of this matter. The EPA is 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. PEC was asked to provide information to the EPA as part of this initiative and cooperated in providing the requested information. During the first quarter of 2003, PEC responded to a supplemental information request from the EPA. The EPA initiated civil enforcement actions against other unaffiliated utilities as part of this initiative. Some of these actions resulted in settlement agreements calling for expenditures, ranging from 37 $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. PEC cannot predict the outcome of the EPA's initiative or its impact, if any, on the Company. In 1998, the EPA published a final rule addressing the 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, to further reduce nitrogen oxide emissions in order to attain a pre-set state NOx emission levels by May 31, 2004. PEC is currently installing controls necessary to comply with the rule. Capital expenditures needed to meet these measures in North and South Carolina could reach 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 PEC's results of operations. Further controls are anticipated as electricity demand increases. PEC 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 PEC to install nitrogen oxide controls under the State's eight-hour standard. The costs of those controls are included in the $370 million cost estimate set forth in the preceding paragraph. However, further technical analysis and rulemaking may result in a requirement for additional controls at some units. PEC 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 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 coal-fired 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 Section 126 petitions. PEC, 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 PEC 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 EPA has approved North Carolina's NOx SIP Call rule and has formally proposed to rescind the Section 126 rule. This rulemaking is expected to become final during the summer of 2003. PEC expects a favorable outcome of this matter. 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. PEC expects its capital costs to meet these emission targets will be approximately $813 million by 2013. PEC 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 utility's 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 utilities or unless the utilities persistently earn a return substantially in excess of the rate of return established and found reasonable by the NCUC in the utilities' 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, PEC entered into an agreement with the state of North Carolina to transfer to the state any future emissions allowances acquired as a result of compliance with the new law. The new law also requires the state to undertake a study of mercury and carbon dioxide emissions in North Carolina. PEC cannot predict the future regulatory interpretation, implementation or impact of this new law. PEC recorded $33.5 million in the second quarter of 2003 and approximately $54 million of clean air amortization to date in 2003. Clean air expenditures to date are $8.4 million. 38 Other Environmental Matters a) The Kyoto Protocol was adopted in 1997 by the United Nations to address global climate change by reducing emissions of carbon dioxide and other greenhouse gases. The United States has not adopted the Kyoto Protocol; however, a number of carbon dioxide emissions control proposals have been advanced in Congress and by the Bush administration. The Bush administration favors voluntary programs. Reductions in carbon dioxide emissions to the levels specified by the Kyoto Protocol and some legislative proposals could be materially adverse to PEC's financials and operations if associated costs cannot be recovered from customers. PEC favors the voluntary program approach recommended by the administration, and is evaluating options for the reduction, avoidance, and sequestration of greenhouse gases. However, PEC cannot predict the outcome of this matter. In 1997, the EPA's Mercury Study Report and Utility Report to Congress conveyed that mercury is not a risk to the average American and expressed uncertainty about whether reductions in mercury emissions from coal-fired power plants would reduce human exposure. Nevertheless, EPA determined in 2000 that regulation of mercury emissions from coal-fired power plants was appropriate. Pursuant to a Court Order, the EPA is developing a Maximum Available Control Technology (MACT) standard, which is expected to become final in December 2004, with compliance in 2008. Achieving compliance with the MACT standard could be materially adverse to PEC's financial condition and results of operations. However, PEC cannot predict the outcome of this matter. b) As required under the Nuclear Waste Policy Act of 1982, PEC entered into a contract with the DOE under which the DOE agreed to begin taking spent nuclear fuel by no later than January 31, 1998. All similarly situated utilities were required to sign the same standard contract. In April 1995, the DOE issued a final interpretation that it did not have an unconditional obligation to take spent nuclear fuel by January 31, 1998. In Indiana & Michigan Power v. DOE, the Court of Appeals vacated the DOE's final interpretation and ruled that the DOE had an unconditional obligation to begin taking spent nuclear fuel. The Court did not specify a remedy because the DOE was not yet in default. After the DOE failed to comply with the decision in Indiana & Michigan Power v. DOE, a group of utilities petitioned the Court of Appeals in Northern States Power (NSP) v. DOE, seeking an order requiring the DOE to begin taking spent nuclear fuel by January 31, 1998. The DOE took the position that its delay was unavoidable, and the DOE was excused from performance under the terms and conditions of the contract. The Court of Appeals found that the delay was not unavoidable, but did not order the DOE to begin taking spent nuclear fuel, stating that the utilities had a potentially adequate remedy by filing a claim for damages under the contract. After the DOE failed to begin taking spent nuclear fuel by January 31, 1998, a group of utilities filed a motion with the Court of Appeals to enforce the mandate in NSP v. DOE. Specifically, this group of utilities asked the Court to permit the utilities to escrow their waste fee payments, to order the DOE not to use the waste fund to pay damages to the utilities, and to order the DOE to establish a schedule for disposal of spent nuclear fuel. The Court denied this motion based primarily on the grounds that a review of the matter was premature, and that some of the requested remedies fell outside of the mandate in NSP v. DOE. Subsequently, a number of utilities each filed an action for damages in the Federal Court of Claims. The U.S. Circuit Court of Appeals (Federal Circuit) ruled that utilities may sue the DOE for damages in the Federal Court of Claims instead of having to file an administrative claim with DOE. PEC is in the process of evaluating whether it should file a similar action for damages. On July 9, 2002, Congress passed an override resolution to Nevada's veto of DOE's proposal to locate a permanent underground nuclear waste storage facility at Yucca Mountain, Nevada. DOE plans to submit a license application for the Yucca Mountain facility by the end of 2004. PEC cannot predict the outcome of this matter. With certain modifications and additional approval by the NRC, PEC's spent nuclear fuel storage facilities will be sufficient to provide storage space for spent fuel generated on its system through the expiration of the current operating licenses for all of its nuclear generating units. Subsequent or prior to the expiration of these licenses, or any renewal of these licenses, dry storage or acquisition of new shipping casks may be necessary. PEC obtained NRC approval to use additional storage space at the Harris Plant in December 2000. 39 c) PEC is involved in various litigation matters in the ordinary course of business, some of which involve claims for substantial amounts. Where appropriate, accruals have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. PEC believes the final disposition of pending litigation would not have a material adverse effect on PEC's consolidated results of operations or financial position. 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis contains forward-looking statements that 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. Please review "SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion of the factors that may impact any such forward-looking statements made herein. Amounts reported in the interim Consolidated Statements of Income are not necessarily indicative of amounts expected for the respective annual or future periods due to the effects of seasonal temperature variations on energy consumption and the timing of maintenance on electric generating units, among other factors. This discussion should be read in conjunction with the accompanying financial statements found elsewhere in this report and in conjunction with the 2002 Form 10-K. RESULTS OF OPERATIONS In this section, earnings and the factors affecting earnings for the three and six months ended June 30, 2003 as compared to the same periods in 2002 are discussed. The discussion begins with a general overview, then separately discusses earnings by business segment. OVERVIEW The net income and basic earnings per share of Progress Energy, Inc. (Progress Energy or the Company) were $152.8 million or $0.65 per share and $120.6 million or $0.56 per share for the second quarter of 2003 and 2002, respectively. The Company's net income and basic earnings per share were $361.0 million or $1.54 per share and $253.1 million or $1.18 per share for the first half of 2003 and 2002, respectively. The increase in net income for the second quarter of 2003, as compared to the second quarter of 2002, is primarily due to customer growth and usage at the utilities, increased sales of natural gas, a decrease in interest expense and the impact of levelizing the estimated effective tax rate throughout the year. These items were partially offset by the impact of unfavorable weather, PEF's retail revenue sharing and higher costs associated with a planned nuclear outage. The Company's operating segments impacted earnings for the quarter and first half of the year as follows: - --------------------------------------------------------------------------------------------------------- (in millions) Three Months Ended June 30, Six Months Ended June 30, - --------------------------------------------------------------------------------------------------------- Business Segment 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------- PEC Electric $ 88.4 $ 131.7 $ 223.3 $ 217.2 PEF 61.4 76.8 132.1 134.5 Fuels 53.8 46.7 80.4 88.3 CCO 2.4 6.7 10.9 4.6 Rail 2.2 2.9 (1.2) 2.2 Other 1.2 (8.4) 1.9 (13.2) Corporate (59.1) (134.5) (100.2) (187.6) ------------------------------------------------------------ Total income from continuing operations 150.3 121.9 347.2 246.0 NCNG discontinued operations 2.5 (1.3) 13.8 7.1 ------------------------------------------------------------ Net income $ 152.8 $ 120.6 $ 361.0 $ 253.1 - -------------------------------------------------------------------------------------------------------
A detailed discussion of each of the Company's significant operating segments follows. The Company's significant operating segments and their primary operations are: o PEC Electric - engaged in the generation, transmission, distribution and sale of electricity in portions of North Carolina and South Carolina (differences between the PEC Electric segment and the PEC consolidated financial information relate to other non-electric operations and elimination entries); o PEF - engaged in the generation, transmission, distribution and sale of electricity in portions of Florida; o Fuels - engaged in natural gas drilling and production, coal mining and the production of synthetic fuels; o Competitive Commercial Operations (CCO) - engaged in nonregulated generation operations and limited trading activities; o Progress Rail Services (Rail) - engaged in various rail and railcar related services; and o Other Businesses (Other) - engaged in other nonregulated business areas including telecommunications and energy services operations. 41 In prior years' reporting, CCO and Fuels were components of the Progress Ventures segment. With the expansion of the nonregulated energy generation facilities and the current management structure, CCO is now a distinct operating segment. In addition to the operating segments listed above, the Company has other corporate activities that include holding company operations, service company operations and eliminations. These corporate activities have been included in the Other segment in the past. Additionally, earnings from wholesale customers on the regulated plants have previously been reported in both the regulated utilities' results and the results of Progress Ventures. With the realignment of the reportable business segments, this activity is now included in the regulated utilities' results only. For comparative purposes, the 2002 results have been restated to align with the new business segments. In 2002, the operations of NCNG, previously reported in the Other segment, were reclassified to discontinued operations and therefore were not included in the results from continuing operations during the periods reported. A discussion of the planned divestiture of NCNG is provided in the Discontinued Operations section that follows. In March of 2003, the SEC completed an audit of Progress Energy Service Company, LLC (Service Company) and recommended that the Company change its cost allocation methodology for allocating Service Company costs. As part of the audit process, the Company was required to change the cost allocation methodology for 2003 and record retroactive reallocations between its affiliates in the first quarter of 2003 for allocations originally made in 2001 and 2002. This change in allocation methodology and the related retroactive adjustments have no impact on consolidated expense or earnings. The impact on the affiliates is included in the segment discussion that follows. The new allocation methodology, as compared to the previous allocation methodology, generally decreases expenses in the regulated utilities and increases expenses in the nonregulated businesses. The regulated utilities' reallocations are within operation and maintenance expense, while the diversified businesses' reallocations are generally within diversified business expenses. In accordance with an SEC order under PUHCA, effective in the second quarter of 2002, tax benefits not related to acquisition interest expense that were previously held unallocated at the holding company must be allocated to the profitable subsidiaries. The allocation has no impact on the Company's consolidated tax expense or net income. The impacts on the business segments are included in the discussions below and generally decrease the income tax expense for the regulated utilities, while increasing income tax expense for the holding company. The second quarter 2002 reallocation included impacts from 2001 and the first two quarters of 2002, while the second quarter 2003 reallocation was for one quarter only. REGULATED ELECTRIC SEGMENTS The operating results of both regulated electric utilities are primarily influenced by customer demand for electricity, the ability to control costs and regulatory return on equity. Demand for electricity is based on the number of customers and their usage, with usage largely impacted by weather. In addition, the current economic conditions in the service territories may impact the demand for electricity. Effective January 1, 2003, the Company implemented SFAS No. 143, "Accounting for Asset Retirement Obligations," which 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 liability. Both electric utilities recorded asset retirement obligations (AROs) in the first quarter of 2003. At June 30, 2003, PEC Electric's AROs totaled $905.3 million and PEF's AROs totaled $310.9 million. PEC filed a request with the NCUC requesting deferral of the difference between expense pursuant to SFAS No. 143 and expense as previously determined by the NCUC. The NCUC granted the deferral of the January 1, 2003, cumulative adjustment. Because the clean air legislation enacted in North Carolina contained a prohibition against cost deferrals unless certain criteria are met, the NCUC denied the deferral of the ongoing effects. The Company has provided additional information to the NCUC that it believes will demonstrate that deferral of the ongoing effects should also be allowed. Since the NCUC order denied deferral of the ongoing effects, PEC ceased deferral of the ongoing effects during the second quarter of 2003 for the six months ended June 30, 2003 related to its North Carolina retail jurisdiction. Pre-tax income for the second quarter of 2003 increased by approximately $13.6 million, which represents a decrease in non-ARO cost of removal expense, partially offset by an increase in decommissioning expense. This earnings impact will be reversed if and when the NCUC issues an order granting deferral of the ongoing effects. 42 On April 8, 2003, the SCPSC approved a joint request by PEC Electric, Duke Energy and South Carolina Electric and Gas Company for an accounting order to authorize the deferral of all cumulative and prospective effects related to the adoption of SFAS No. 143. On January 23, 2003, the Staff of the FPSC issued a notice of proposed rule development to adopt provisions relating to accounting for asset retirement obligations under SFAS No. 143. Accompanying the notice was a draft rule presented by the staff which adopts the provisions of SFAS No. 143 along with the requirement to record the difference between amounts prescribed by the FPSC and those used in the application of SFAS No. 143 as regulatory assets or regulatory liabilities, which was accepted by all parties. Therefore, the adoption of the statement had no impact on the income of PEF due to the establishment of a regulatory liability pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." The Commission approved the draft rule in June 2003, and a final order is expected in the third quarter of 2003. PROGRESS ENERGY CAROLINAS ELECTRIC PEC Electric contributed net income of $88.4 million and $131.7 million in the second quarter of 2003 and 2002, respectively, and $223.3 million and $217.2 million for the first half of 2003 and 2002, respectively. The decrease in the second quarter of 2003 compared to the second quarter of 2002 is primarily due to unfavorable weather conditions resulting in lower usage across all customer classes, the effect of the tax benefit reallocation and higher planned nuclear outage costs, partially offset by favorable retail customer growth and usage. The increase in the first half of 2003 compared to the first half of 2002 was primarily due to strong wholesale sales, retail growth and usage and lower interest charges, offset partially by the effect of the tax benefit reallocation, higher operation and maintenance costs related to planned nuclear outages and costs incurred for the February 2003 ice storm. PEC's electric revenues for the second quarter and first half of 2003 are as follows: ------------------------------------------------------------------------------------------------------------------ (in millions of $) Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------------------------------------------------------------------------ Customer Class 2003 Change % Change 2002 2003 Change % Change 2002 ------------------------------------------------------------------------------------------------------------------ Residential $ 247.7 $ (10.8) (4.2) $ 258.5 $ 604.7 $ 37.0 6.5 $ 567.7 Commercial 198.8 (0.1) (0.1) 198.9 399.7 13.6 3.5 386.1 Industrial 155.9 (4.3) (2.7) 160.2 302.6 (3.3) (1.1) 305.9 Governmental 17.8 (0.1) (0.6) 17.9 36.4 0.9 2.5 35.5 ---------------------- ------------------------------- ---------- Total retail revenues 620.2 (15.3) (2.4) 635.5 1,343.4 48.2 3.7 1,295.2 Wholesale 154.2 (2.5) (1.6) 156.7 363.6 64.3 21.5 299.3 Unbilled 23.5 (0.6) - 24.1 (7.5) (21.9) - 14.4 Miscellaneous 18.3 (0.1) (0.5) 18.4 42.2 5.0 13.4 37.2 ---------------------- ------------------------------- ---------- Total electric revenues $ 816.2 $ (18.5) (2.2) $ 834.7 $ 1,741.7 $ 95.6 5.8 $ 1,646.1 ------------------------------------------------------------------------------------------------------------------
PEC's electric energy sales for 2003 and 2002 and the amount and percentage change by quarter and by customer class are as follows: ------------------------------------------------------------------------------------------------------------------ (in thousands of mWh) Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------------------------------------------------------------------------ Customer Class 2003 Change % Change 2002 2003 Change % Change 2002 ------------------------------------------------------------------------------------------------------------------ Residential 3,052 (210) (6.4) 3,262 7,639 392 5.4 7,247 Commercial 2,946 (81) (2.7) 3,027 5,930 112 1.9 5,818 Industrial 3,197 (164) (4.9) 3,361 6,202 (145) (2.3) 6,347 Governmental 317 (21) (6.2) 338 660 (3) (0.5) 663 ---------------------- ------------------------------- ---------- Total retail energy 9,512 (476) (4.8) 9,988 20,431 356 1.8 20,075 sales Wholesale 3,301 (194) (5.6) 3,495 7,920 1,094 16.0 6,826 Unbilled 396 (35) - 431 (84) (329) - 245 ---------------------- ------------------------------- ---------- Total mWh sales 13,209 (705) (5.1) 13,914 28,267 1,121 4.1 27,146 ------------------------------------------------------------------------------------------------------------------
Second Quarter of 2003 Compared to Second Quarter of 2002 Unfavorable weather accounted for a revenue decline of $34.1 million, with the average cooling degree days declining 37% when comparing the second quarter of 2003 to the second quarter of 2002. Retail customer growth and usage, excluding the impact of weather, accounted for $18.1 million of additional revenue in the second quarter of 2003 as compared to the second quarter of 2002, with 22,364 additional retail customers during the second quarter of 2003 as compared to 2002. 43 Operation and maintenance costs were $210.3 million for the second quarter of 2003, which represents a $16.4 million increase compared to the second quarter of 2002. A planned nuclear outage at the Harris plant during 2003 accounted for $15.1 million of this increase. Depreciation and amortization expense was $141.8 million for the second quarter of 2003, which represents an $8.3 million increase compared to the second quarter of 2002. This increase in depreciation and amortization expense results from $33.5 million in clean air amortization expensed during the second quarter of 2003 and a $7.0 million increase related to additional plant in service. These increases are partially offset by a $16.7 million reduction in accelerated nuclear amortization and the $13.6 million decrease in depreciation expense related to the ongoing effects of SFAS No. 143 in the North Carolina retail jurisdiction, as previously discussed under "REGULATED ELECTRIC SEGMENTS." The clean air legislation allows flexibility in the recognition of the clean air amortization, with a maximum of $174 million per year. The Company currently plans to amortize approximately $100 million of clean air costs in 2003. An NCUC order allowed the reduction in the accelerated nuclear amortization and extended the recovery time. Other income and expense was $6.9 million of expense for the second quarter of 2003 compared to $8.6 million of income during the second quarter of 2002. The primary driver of the unfavorability was $9.4 million of losses on limited partnership investment funds recorded during the second quarter of 2003. Interest expense was $47.7 million for the second quarter of 2003, which represents a $5.8 million decrease compared to the same period in 2002. This decrease was due to both a decrease in average outstanding debt and a slightly lower interest rate. Income tax expense was $40.0 million for the second quarter of 2003 as compared to $32.7 million for the second quarter of 2002. This variance is due to a $22.8 million lower tax benefit reallocation in the second quarter of 2003 compared to the same period in 2002, partially offset by the tax impact of changes in pre-tax income. First Half of 2003 Compared to First Half of 2002 Favorable wholesale revenues are the primary driver of the revenue increase for the first half of 2003 compared to 2002. This favorability is attributable to weather-related sales of energy to the Northeastern United States markets during the first half of 2003. For its retail customers, mild weather in North and South Carolina during the second quarter of 2003 more than offset the favorable impact of cold weather experienced in the first quarter of 2003. Retail customer growth has increased during the first half of 2003 when compared to 2002, with residential and commercial customer growth of two percent. Operation and maintenance costs increased $12.9 million compared to operation and maintenance costs of $387.3 million for the first half of 2002, primarily due to $10.4 million of storm costs in the first quarter of 2003 and $16.7 million of costs associated with a planned nuclear outage in the second quarter of 2003. These costs were partially offset by a decrease in operation and maintenance expense of $15.9 million related to the previously discussed reallocation of prior years' Service Company costs, as required by the SEC. Depreciation and amortization expense increased $5.8 million compared to depreciation and amortization expense of $278.4 million for the first half of 2002. This increase results from $53.5 million of clean air amortization in 2003 and $10.4 million of depreciation on additional assets placed into service. These increases are partially offset by a $41.6 million reduction in accelerated nuclear amortization and the $13.6 million decrease in depreciation related to the ongoing effects of SFAS No. 143 in the North Carolina retail jurisdiction, all of which are discussed previously. Other income and expense was $7.5 million of expense for the first half of 2003 compared to $6.9 million of income during the first half of 2002. The primary driver of the unfavorability was $9.4 million of losses on limited partnership investment funds recorded during the second quarter of 2003. Interest expense was $96.1 million for the first half of 2003, which represents a decrease of $15.9 million. This decrease was due to both a decrease in average outstanding debt and a slightly lower interest rate. Income tax expense was $110.1 million for the first half of 2003 as compared to $80.0 million for the first half of 2002. This variance is due to the tax impact of changes in pre-tax income and a $17.3 million lower tax benefit reallocation in the first half of 2003 compared to the same period in 2002. 44 PROGRESS ENERGY FLORIDA PEF contributed earnings for common stock of $61.4 million and $76.8 million in the second quarter of 2003 and 2002, respectively, and $132.1 million and $134.5 million in the first half of 2003 and 2002, respectively. These decreases are primarily attributed to impacts of the 2002 rate case and are partially offset by favorable retail customer growth and usage and the impact of the tax benefit reallocation, previously discussed. In March 2002, PEF settled a rate case which provided for a one-time retroactive rate refund, decreased future retail rates by 9.25% (effective May 1, 2002), provided for lower depreciation and amortization, provided for increases in certain service revenue rates and provided for revenue sharing with the retail customers if certain revenue thresholds were met. The impacts of the settlement agreement are included below. PEF's electric revenues for the second quarter and first half of 2003 and 2002 and the amount and percentage change by quarter and by customer class are as follows: ------------------------------------------------------------------------------------------------------------------ (in millions of $) Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------------------------------------------------------------------------ Customer Class 2003 Change % Change 2002 2003 Change % Change 2002 ------------------------------------------------------------------------------------------------------------------ Residential $ 413.5 $ 17.9 4.5 $ 395.6 $ 798.5 $ 23.7 3.1 $ 774.8 Commercial 192.1 8.7 4.7 183.4 342.5 (7.7) (2.2) 350.2 Industrial 56.1 1.0 1.8 55.1 103.5 (1.6) (1.5) 105.1 Governmental 45.8 2.3 5.3 43.5 83.8 0.3 0.4 83.5 Retroactive rate refund - - - - - 35.0 100.0 (35.0) Revenue sharing/rate refund (28.1) (28.1) - - (28.1) (28.1) - - ---------------------- ------------------------------- ---------- Total retail revenues 679.4 1.8 0.3 677.6 1,300.2 21.6 1.7 1,278.6 Wholesale 49.8 (6.0) (10.8) 55.8 121.1 12.8 11.8 108.3 Unbilled 7.3 1.9 - 5.4 6.6 (5.2) - 11.8 Miscellaneous 30.0 2.9 10.7 27.1 67.1 13.4 25.0 53.7 ---------------------- ------------------------------- ---------- Total electric revenues $ 766.5 $ 0.6 0.1 $ 765.9 $ 1,495.0 $ 42.6 2.9 $ 1,452.4 ------------------------------------------------------------------------------------------------------------------
PEF's electric energy sales for the second quarter and first half of 2003 and 2002 and the amount and percentage change by quarter and by customer class are as follows: ------------------------------------------------------------------------------------------------------------------ (in thousands of mWh) Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------------------------------------------------------------------------ Customer Class 2003 Change % Change 2002 2003 Change % Change 2002 ------------------------------------------------------------------------------------------------------------------ Residential 4,703 188 4.2 4,515 9,256 681 7.9 8,575 Commercial 2,951 94 3.3 2,857 5,393 80 1.5 5,313 Industrial 1,008 14 1.4 994 1,924 48 2.6 1,876 Governmental 726 11 1.5 715 1,383 48 3.6 1,335 ---------------------- ------------------------------- ---------- Total retail energy sales 9,388 307 3.4 9,081 17,956 857 5.0 17,099 sales Wholesale 890 (86) (8.8) 976 2,166 210 10.7 1,956 Unbilled 498 55 - 443 553 79 - 474 ---------------------- ------------------------------- ---------- Total mWh sales 10,776 276 2.6 10,500 20,675 1,146 5.9 19,529 ------------------------------------------------------------------------------------------------------------------
Second Quarter of 2003 Compared to Second Quarter of 2002 Retail revenues, excluding fuel revenues of $286.3 million and $259.8 million for the second quarter of 2003 and 2002, respectively, decreased as a result of the impact of the final resolution of the revenue sharing provisions in the 2002 rate settlement agreement. Fuel revenues increased compared to the prior year primarily due to increased generation. On July 9, 2003, the FPSC issued an order that required PEF to refund an additional $18.4 million related to 2002 revenue sharing. In the second quarter of 2003, PEF also recorded an additional accrual of $9.5 million related to estimated 2003 revenue sharing. This accrual will be reviewed and adjusted, if necessary, on a quarterly basis. Revenues were further reduced due to the impact of the 9.25% rate reduction that went into effect in May 2002, as part of the settlement agreement. 45 These decreases were partially offset by additional retail revenues of $11.4 million related to customer growth and usage. Operation and maintenance costs increased $0.6 million, compared to the $153.3 million incurred during the second quarter of 2002. A decrease in the pension credit of $5.4 million, due to continued weak market performance, is offset by lower spending by PEF's business units. Income tax expense was $28.0 million for the second quarter of 2003, compared to $45.6 million during the second quarter of 2002. Fluctuations in income tax expense result from the tax benefit reallocation, discussed previously, and changes in pre-tax income. First Half of 2003 Compared to First Half of 2002 Retail revenues, excluding fuel revenues of $529.3 million and $498.1 million for the first half of 2003 and 2002, respectively, decreased due to the impact of the 9.25% rate reduction, 2002 revenue sharing resolution, and the 2003 revenue sharing accrual, all of which are discussed previously. Partially offsetting these items was the absence of the impact of the $35.0 million rate refund that was recognized in 2002 as part of the settlement agreement. Strong customer growth and usage and favorable weather positively impacted revenues in 2003. The average number of customers during the first half of the year increased by approximately 34,000 or 2.3% in 2003 as compared to the same period in 2002. Operation and maintenance costs increased $8.1 million, compared to the $286.6 million incurred during the first half of 2002. The higher operation and maintenance costs were primarily due to a $10.7 million decrease in the pension credit. Income tax expense was $64.9 million for the first half of 2003, compared to $79.0 million during the first half of 2002. Fluctuations in income tax expense result from the tax benefit reallocation, discussed previously, and changes in pre-tax income. DIVERSIFIED BUSINESSES The Company's diversified businesses consist primarily of the Fuels segment, the CCO segment, the Rail segment, Progress Telecom and SRS. These businesses are explained in more detail below. Fuels The Fuels segment's operations include synthetic fuel operations, natural gas exploration and production, coal extraction and terminals operations. Fuels' results for the second quarter and first half of 2003 were impacted most significantly by the timing of synthetic fuel production and the increase in gas production. The following summarizes the net income of the Fuels segment for the second quarter and first half of 2003 and 2002. ------------------------------------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------------------------------------------------------------- (in millions) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------- Synthetic fuel operations $ 41.7 $ 44.3 $ 67.2 $ 83.1 Gas production and coal fuel operations 11.1 1.1 16.3 1.6 Other earnings (losses) 1.0 1.3 (3.1) 3.6 ------------------------------------------------------------- Income from continuing operations $ 53.8 $ 46.7 $ 80.4 $ 88.3 -------------------------------------------------------------------------------------------------------
Synthetic Fuel Operations The synthetic fuels operations generated net income of $41.7 million and $44.3 million in the second quarter of 2003 and 2002, respectively, and $67.2 million and $83.1 million in the first half of 2003 and 2002, respectively. The production and sale of synthetic fuel generate operating losses, but qualify for tax credits under Section 29 of the Code, which more than offset the effect of such losses. In late June 2003, the IRS announced that field auditors have raised questions associated with synthetic fuel manufactured at the Colona facility regarding the scientific validity of test procedures and results used to verify a significant chemical change, which is a requirement of the synthetic fuel program. The impact of this review on the Company's synthetic fuel tax credits previously taken or expected to be taken in the future cannot be predicted at this time. See the "OTHER MATTERS" section for a further discussion of the IRS review. The following summarizes the synthetic fuel operations for the second quarter and first half of 2003 and 2002. 46 ------------------------------------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------------------------------------------------------------- (in millions) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------- Tons produced 2.9 3.4 4.9 6.4 ------------------------------------------------------- Operating losses, excluding tax credits $ (36.4) $ (46.9) $ (63.5) $ (92.0) Tax credits generated 78.1 91.2 130.7 175.1 ------------------------------------------------------- Income from continuing operations $ 41.7 $ 44.3 $ 67.2 $ 83.1 -------------------------------------------------------------------------------------------------------
Total 2003 synthetic fuel sales as compared to 2002 decreased $2.6 million and $9.4 million for the second quarter and first half, respectively, primarily due to a change in the synthetic fuel production pattern for 2003. The Company anticipates total synthetic fuel production of approximately 12 million tons for 2003, which is comparable to 2002 production levels. Gas Production and Coal Fuel Operations Gas operations generated net income of $9.8 million and $0.9 million in the second quarter of 2003 and 2002, respectively, and of $14.7 million and $1.2 million in the first half of 2003 and 2002, respectively. The increase in production resulting from the acquisitions of Westchester Gas in 2002 and North Texas Gas in the first quarter of 2003 drove increased revenue and earnings. Although the Mesa operations continue to produce gas, no additional wells are being drilled at Mesa as various divestiture options are being explored. The following summarizes the gas revenues for the second quarter and first half of 2003 and 2002 by production facility. --------------------------------------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------------------------------------------------------------- (in millions) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------- Mesa $ 4.0 $ 3.5 $ 8.7 $ 6.6 Westchester Gas 13.4 1.6 28.6 1.6 North Texas Gas 10.4 - 10.4 - Other 2.7 0.8 2.6 0.8 ------------------------------------------------------------- Total gas sales $ 30.5 $ 5.9 $ 50.3 $ 9.0 -------------------------------------------------------------------------------------------------------
Coal fuel operations and other operations within the Fuels segment have immaterial impacts on comparative earnings. COMPETITIVE COMMERCIAL OPERATIONS CCO generates and sells electricity to the wholesale market through nonregulated plants. These operations also include limited financial trading activities. The following summarizes the net income, sales and generating capacity of the nonregulated plants for the second quarter and first half of 2003 and 2002. -------------------------------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, -------------------------------------------------------------------------------------------------- (in millions except megawatts) 2003 2002 2003 2002 -------------------------------------------------------------------------------------------------- Operating revenue $ 33.3 $ 23.9 $ 70.8 $ 32.9 Income from continuing operations $ 2.4 $ 6.7 $ 10.9 $ 4.6 Generation capacity (MW) - June 30 2,620 1,239 2,620 1,239 --------------------------------------------------------------------------------------------------
The second quarter increase in revenue is primarily due to increased contracted capacity and energy sales from additional plants with tolling agreements. The increase during the first half of 2003 in revenue and earnings is also related to a tolling agreement termination payment from Dynegy. The revenue increases related to higher volumes were partially offset by lower prices in the wholesale energy market, higher depreciation cost of $2.4 million related to the additional facilities and by increases in costs allocated from the Service Company of $2.1 million in accordance with the SEC audit. In the second quarter of 2003, PVI acquired from Williams Energy Marketing and Trading a full-requirements power supply agreement with Jackson Electric Membership Corp. (Jackson) in Georgia for $188 million. During 2002, the Company completed the acquisition of two electric generation projects, Walton County Power, LLC and Washington County Power, LLC. The acquisition resulted in goodwill of $64.1 million. The Company performed the annual goodwill impairment test in the first quarter of 2003 which indicated no impairment. However, modest changes in either assumptions or market conditions could cause some or all of the $64 million of goodwill related to the CCO operating segment to become impaired. 47 The 466-megawatt Rowan combined cycle unit and the 600-megawatt Washington combustion turbine facilities were completed and placed into service in June 2003. The Washington plant has a tolling agreement with LG&E Power Trading & Marketing through December 31, 2004. The 480-megawatt Effingham combined cycle facility is expected to be placed into service in August 2003 and will complete CCO's nonregulated build-out with a total capacity of 3,100 megawatts. Including the Jackson contract and the impact of the Dynegy contract termination, mentioned previously, the Company has contracts for 68%, 74% and 50% of planned production capacity for 2003 through 2005, respectively. The 2005 decline results from the expiration of four contracts. The Company continues to pursue opportunities with both current customers and other potential customers. Rail Rail's operations include railcar and locomotive repair, trackwork, rail parts reconditioning and sales, scrap metal recycling, railcar leasing and other rail related services. The Company intends to sell the assets of Railcar Ltd., a leasing subsidiary, in 2003 and has classified these assets as assets held for sale at June 30, 2003. Progress Rail contributed net income of $2.2 million and $2.9 million for the second quarter of 2003 and 2002, respectively, and a net loss of $1.2 million and net income of $2.2 million for the first half of 2003 and 2002, respectively. As a result of the SEC order, Rail incurred additional Service Company allocations of $1.2 and $6.9 million in the first quarter and first half of 2003, respectively. These increased costs were partially offset by improvements in the recycling business and reduced operating costs. An SEC order approving the merger of FPC requires the Company to divest Rail by November 30, 2003. The Company is pursuing alternatives, but does not expect to find the right divestiture opportunity by that date. Therefore, the Company has sought a three year extension from the SEC. Other Businesses Segment Progress Energy's Other segment primarily includes the operations of SRS, Progress Telecom and small nonregulated subsidiaries of PEC. Holding company operations and other corporate functions that have previously been included in the Other segment have been removed and are being reported separately. The segment contributed income from continuing operations of $1.2 million and a loss from continuing operations of $8.4 million in the second quarter of 2003 and 2002, respectively, and income from continuing operations of $1.9 million and a loss of $13.2 million in the first half of 2003 and 2002, respectively. The improvement in both the quarter and the half is related to Progress Telecom's lower depreciation charges resulting from the impairment of a significant portion of its assets in the third quarter of 2002. Additionally, SRS recognized a loss in the second quarter of 2002 related to the sale of certain portions of its operations. CORPORATE SERVICES Corporate Services includes the operations of the Holding Company, the Service Company, and consolidation entities, as summarized below (expenses are indicated by positive numbers). ------------------------------------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------------------------------------------------------------- (in millions) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------- Interest expense $ 73.3 $ 75.7 $ 144.3 $ 146.7 Contingent value obligations 1.7 (1.5) - (12.8) Tax reallocation 9.3 30.0 18.6 30.0 Tax levelization 4.8 58.4 (5.4) 79.6 Other income taxes (31.3) (31.5) (62.4) (63.4) Other expenses 1.2 3.5 5.1 7.6 ----------------------------------------------------------- Loss from continuing operations $ 59.0 $ 134.6 $ 100.2 $ 187.7 -------------------------------------------------------------------------------------------------------
Progress Energy issued 98.6 million contingent value obligations (CVOs) in connection with the 2000 FPC 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. At June 30, 2003 and 2002, the CVOs had fair market values of approximately $13.8 million and $29.1 million, respectively. Progress Energy recorded an unrealized loss of $1.7 million and unrealized gain of $1.5 million for the second quarter of 48 2003 and 2002, respectively, to record the changes in fair value of the CVOs, which had average unit prices of $0.14 and $0.30 at June 30, 2003 and 2002, respectively. The CVO values at June 30, 2003 were unchanged from the January 1, 2003 values, thus requiring no recognition of an unrealized gain or loss in the first half. A $12.8 million unrealized gain was recorded for the first half of 2002. GAAP requires 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 increased by $4.8 million and $58.4 million for the second quarter of 2003 and 2002, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was decreased by $5.4 million and increased $79.6 million for the first half of 2003 and 2002, respectively. The tax credits associated with the Company's synthetic fuel operations primarily drive the required levelization amount. 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. DISCONTINUED OPERATIONS In the fourth quarter of 2002, the Company's Board of Directors approved the sale of NCNG to Piedmont Natural Gas Company, Inc. As a result of this action, the operating results of NCNG were reclassified to discontinued operations for all reportable periods. Progress Energy expects the sale to close during the third quarter of 2003 for net proceeds of approximately $400 million. An estimated loss on the sale of NCNG of $29.4 million was recognized in the fourth quarter of 2002. LIQUIDITY AND CAPITAL RESOURCES Progress Energy, Inc. Statement of Cash Flows and Financing Activities Cash provided by operating activities increased $114.9 million for the six months ended June 30, 2003, when compared to the corresponding period in the prior year. The increase in cash from operating activities for the 2003 period is due to improved operating cash flow at PVI and Progress Fuels, which offset lower cash from operations at the utility operations. Net cash used in investing activities decreased $137.9 million for the six months ended June 30, 2003, when compared to the corresponding period in the prior year. The decrease in cash used in investing activities is primarily due to lower capital spending at PVI, which acquired generating assets from LG&E in February 2002 for approximately $350 million. During the first six months of 2003, $366.5 million was spent in diversified business property additions. This amount includes the acquisition of the natural gas reserves in February 2003 for $148 million. In addition to the $366.5 million spent on diversified business property additions, PVI also purchased a wholesale energy supply contract for approximately $190 million. The increase in operating cash flow and lower capital expenditures resulted in an increase of $253 million of net cash flow before common dividend payments and other financing activity for the six month period ending June 30, 2003 compared with the corresponding period for the prior year. On February 21, 2003, PEF issued $425 million of First Mortgage Bonds, 4.80% Series, Due March 1, 2013 and $225 million of First Mortgage Bonds, 5.90% Series, Due March 1, 2033. Proceeds from this issuance were used to repay the balance of its outstanding commercial paper, to refinance its secured and unsecured indebtedness, including PEF's First Mortgage Bonds 6.125% Series Due March 1, 2003, which were retired on March 1, 2003, and to redeem on March 24, 2003, the $150 million aggregate outstanding balance of its 8% First Mortgage Bonds due 2022 at 103.75% of the principal amount of such bonds. On April 1, 2003, PEF entered into a new $200 million 364-day credit agreement and a new $200 million three-year credit agreement, replacing its prior credit facilities (which had been a $90 million 364-day facility and a $200 million five-year facility). The new PEF credit facilities contain a defined maximum total debt to total capital ratio of 65%; as of June 30, 2003 the calculated ratio was 52.6%. The new credit facilities also contain a requirement that the ratio of EDITDA, as defined in the facilities, to interest expense to be at least 3 to 1; as of June 30, 2003 the calculated ratio was 8.7 to 1. Also on April 1, 2003, PEC reduced the size of its existing 364-day credit facility from $285 million to $165 million. The other terms of this facility were not changed. On July 30, 2003, PEC renewed its $165 million 49 364-day credit agreement PEC's $285 million three-year credit agreement entered into in July 2002 remains in place, for total facilities of $450 million. On May 27, 2003, PEC redeemed $150 million of First Mortgage Bonds, 7.5% Series, Due March 1, 2023 at 103.22% of the principal amount of such bonds. PEC funded the redemption with commercial paper. In March 2003, Progress Genco Ventures, LLC (Genco), a wholly owned subsidiary of PVI, terminated its $50 million working capital credit facility. A related construction facility initially provided for Genco to draw up to $260 million. The amount outstanding under this facility is $241 million as of June 30, 2003. During the second quarter of 2003 Genco determined it did not need to make any additional draws under this facility. As a result of this decision, the drawn amount of $241 million will not increase. On July 14, 2003, PEC announced the redemption of $100 million of First Mortgage Bonds, 6.875% Series Due August 15, 2023 at 102.84%. The date of the redemption will be August 15, 2003. PEC will fund the redemption with commercial paper. For the three months ended June 30, 2003, the Company issued approximately 2.4 million shares representing approximately $98 million in proceeds from its Investor Plus Stock Purchase Plan and its employee benefit plans during the second quarter ended June 30, 2003. For the six months ended June 30, 2003, the Company has issued 4.2 million shares through these plans, resulting in $172 million of cash proceeds. Future Commitments The current portion of long-term debt of $1.1 billion includes $500 million of Progress Energy's 6.55% senior unsecured notes due March 1, 2004. The Company expects to have sufficient commercial paper capacity to retire this issue due to the proceeds from the sale of North Carolina Natural Gas (NCNG) in the summer of 2003. The proceeds from the sale of NCNG are expected to be approximately $400 million and will be used to reduce commercial paper. The current portion of long-term debt also includes $400 million of secured debt issued by PEC. These amounts are expected to be refinanced or retired through commercial paper, capital market transactions and with internal generation of funds. As of June 30, 2003, Progress Energy's guarantees were approximately $1 billion, up from approximately $785 million as of March 31, 2003. The increase is due primarily to a $285 million performance guarantee associated with the purchase of a wholesale power supply contract, as discussed previously. OTHER MATTERS PEF Rate Case Settlement On March 27, 2002, the parties in PEF'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 provides that PEF will operate under a Revenue Sharing Incentive Plan (the Plan) through 2005 and thereafter until terminated by the FPSC. The Plan provides that all retail base revenues between the established threshold and cap will be shared on a 2/3 - 1/3, customer/shareholder basis. All retail base rate revenues above the retail base rate revenue caps established for each year will be refunded 100% to retail customers on an annual basis. For 2002, the refund to customers was limited to 67.1% of the retail base rate revenues that exceeded the 2002 cap. The retail base revenue cap for 2003 is $1.393 billion and will increase $37 million each year thereafter. As of December 31, 2002, $4.7 million was accrued and was refunded to customers in March 2003. On February 24, 2003, the parties to the Agreement filed a motion seeking an order from the FPSC to enforce the Agreement. In this motion, the parties disputed PEF's calculation of retail revenue subject to refund and contended that the refund should have been approximately $23 million. On July 9, 2003, the FPSC ruled that PEF must provide an additional $18.4 million to its retail customers related to the 2002 revenue sharing calculation. PEF recorded this refund in the second quarter 2003 as a charge against electric operating revenue and will refund this amount by no later than October 31, 2003. In the second quarter of 2003, PEF also recorded an additional accrual of $9.5 million related to estimated 2003 revenue sharing. 50 Synthetic Fuels Tax Credits Progress Energy, through its subsidiaries, produces synthetic fuel from coal fines. The production and sale of the synthetic fuel from these facilities qualifies for tax credits under Section 29 of the Code (Section 29) if certain requirements are satisfied, including a requirement that the synthetic fuel differs significantly in chemical composition from the coal used to produce such synthetic fuel. Any synthetic fuel tax credit amounts not utilized are carried forward indefinitely. All of Progress Energy's synthetic fuel facilities have received private letter rulings (PLRs) from the Internal Revenue Service (IRS) with respect to their synthetic fuel operations. These tax credits are subject to review by the IRS, and if Progress Energy fails 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. Additionally, the ability to use tax credits currently being carried forward could be denied. Total Section 29 credits generated to date (including FPC prior to its acquisition by the Company) are approximately $1.028 billion, of which $445.6 million have been used and $582.4 million are being carried forward as of June 30, 2003. One synthetic fuel entity, Colona Synfuel Limited Partnership, L.L.L.P. (Colona), from which the Company (and FPC prior to its acquisition by the Company) has been allocated approximately $273.1 million in tax credits to date, is being audited by the IRS. The audit of Colona was expected. The Company is audited regularly in the normal course of business, as are most similarly situated companies. In September 2002, all of the Company's majority-owned synthetic fuel entities, including Colona, were accepted into the IRS Prefiling 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, and issues not resolved through the program may proceed to the next level of the IRS exam process. In late June 2003, the Company was informed that IRS field auditors have raised questions regarding the chemical change associated with coal-based synthetic fuel manufactured at its Colona facility and the testing process by which the chemical change is verified. (The questions arose in connection with the Company's participation in the PFA program.) The chemical change and the associated testing process were described as part of the PLR request for Colona. Based upon that application, the IRS ruled in Colona's PLR that the synthetic fuel produced at Colona undergoes a significant chemical change and thus qualifies for tax credits under Section 29 of the Internal Revenue Code. While the IRS has announced that they may revoke PLRs if test procedures and results do not demonstrate that a significant chemical change has occurred, based on the information received to date, the Company does not believe the issues warrant reversal by the IRS National Office of its prior position in the Colona PLR. The information provided by the IRS field auditors addresses only Progress Energy's Colona facility. The Company, however, applies essentially the same chemical process and uses the same independent laboratories to confirm chemical change in the synthetic fuel manufactured at each of its four other facilities. The independent laboratories used by the Company to determine significant chemical change are the leading experts in their field and are used by many other industry participants. The Company believes that the laboratories' work and the chemical change process are consistent with the bases upon which its PLRs were issued. The Company is working to resolve this matter as quickly as possible. At this time, the Company cannot predict how long the IRS process will take; however, the Company intends to continue working cooperatively with the IRS. The Company firmly believes that it is operating the Colona facility and its other plants in compliance with its PLRs and Section 29 of the Internal Revenue Code. Accordingly, the Company has no current plans to alter its synthetic fuel production schedules as a result of these matters. In addition, the Company has retained an advisor to assist in selling an interest in one or more synthetic fuel entities. The Company is pursuing the sale of a portion of its synthetic fuel production capacity that is underutilized due to limits on the amount of credits that can be generated and utilized by the Company. The Company would expect to retain an ownership interest and to operate any sold facility for a management fee. However, the IRS has suspended issuance of PLRs relating to synthetic fuel production (typically a closing condition to the sale of an interest in a synthetic fuel entity). Unless that suspension on new PLRs is lifted, it will be difficult to consummate the successful sale of interests in the Company's synthetic fuel facilities. The Company cannot predict when or if the IRS will recommence issuing such PLRs. The final outcome and timing of the Company's efforts to sell interests in synthetic fuel facilities is uncertain and while the Company cannot predict the outcome of this matter, the outcome is not expected to have a material effect on the consolidated financial position, cash flows or results of operations. 51 Nuclear Matters The Shearon Harris Nuclear Plant in New Hill, North Carolina completed a successful refueling outage on May 18, 2003, when the unit was returned to service. 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 penetration leakage and no corrosion of the head itself. During the outage, a boric acid leakage walkdown of the reactor coolant pressure boundary was also completed and no corrosion was found. The Company currently plans to re-inspect the Robinson Plant reactor head during its next refueling outage in the spring of 2004 and replace the head in the fall of 2005. The Harris Plant is ranked in the lowest susceptibility classification. During the Harris Plant's Spring 2003 outage, the Company completed a series of examinations of the entire reactor pressure vessel head and found no degradation or indication of leakage. 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 the fall of 2003. In February 2003, the NRC issued Order EA-03-009, requiring specific inspections of the reactor pressure vessel head and associated penetration nozzles at pressurized water reactors (PWRs). The Company has responded to the Order, stating that the Company intends to comply with the provisions of the Order. No adverse impact is anticipated. In April 2003, the STP Nuclear Operating Company, an unaffiliated entity, notified the NRC of a potential leak indication on the bottom head of the reactor vessel of one of its units. The Company is continuing to monitor this development for applicability to our plants and will take appropriate action if and when necessary. In January 2003, the NRC issued a final order with regard to access control. This order requires the Company to enhance its current access control program by January 7, 2004. The Company expects that it will be in full compliance with the order by the established deadline. The NRC continues to issue additional orders designed to increase security at nuclear facilities. In April 2003, one of the orders issued by the NRC imposes revisions to the Design Basis Threat and requires power plants to implement additional protective actions to protect against sabotage by terrorists and other adversaries. The Company expects that it will be in full compliance with the order by the established deadline. As the NRC, other governmental entities and the industry continue to consider security issues, it is possible that more extensive security plans could be required. Franchise Litigation Six cities, with a total of approximately 49,000 customers, have sued PEF in various circuit courts in Florida. As discussed below, two of the six cities, with a total of approximately 21,000 customers, have subsequently settled their lawsuits with PEF and signed new, 30-year franchise agreements. The lawsuits principally seek 1) a declaratory judgment that the cities have the right to purchase PEF'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 PEF to continue to collect from PEF's customers and remit to the cities, franchise fees during the pending litigation, and as long as PEF continues to occupy the cities' rights-of-way to provide electric service, notwithstanding the expiration of the franchise ordinances under which PEF had agreed to collect such fees. Five circuit courts have entered orders requiring arbitration to establish the purchase price of PEF's electric distribution system within five cities. Two appellate courts have upheld these circuit court decisions and authorized cities to determine the value of PEF's electric distribution system within the cities through arbitration. To date, no city has attempted to actually exercise the option to purchase any portion of PEF's electric distribution system. Arbitration in one of the cases (the City of Casselberry) was held in August 2002 and an award was issued in October 2002 setting the value of PEF's distribution system within that city at approximately $22 million. On April 2, 2003, PEF filed a rate filing with the FERC to recover $10.6 million in stranded costs from the City of Casselberry in the event the City ultimately chooses and is allowed to form a municipal electric utility. PEF's rate filing has been abated pending settlement discussions between the parties. On July 28, the City approved a settlement agreement and a new, 30-year franchise agreement with PEF. The settlement resolves all pending litigation with that city. A second arbitration (with the City of Winter Park) was completed in February 2003. That arbitration panel issued an award on May 29, 2003 setting the value of PEF's distribution system within the City of Winter Park at approximately $31.5 million, not including separation and reintegration and construction 52 work in progress, which could add several million dollars to the award. The panel also awarded PEF approximately $10.7 million in stranded costs. The City of Winter Park has scheduled a September 9, 2003 referendum where citizens will decide whether to issue bonds of up to approximately $50 million to acquire PEF's electric distribution system. At this time, whether and when there will be further proceedings regarding the City of Winter Park cannot be determined. A third arbitration (with the Town of Belleair) was completed on June 16, 2003. A decision from the arbitration panel has not yet been issued in that case. A fourth arbitration (with the City of Apopka) has been scheduled for January 2004. On August 4, 2003, the City of Longwood approved a 30-year franchise and a settlement agreement with PEF, which will resolve all pending litigation with the City of Longwood. Arbitration in the remaining city's litigation (the City of Edgewood) has not yet been scheduled. As part of the above litigation, two appellate courts have also reached opposite conclusions regarding whether PEF must continue to collect from its customers and remit to the cities "franchise fees" under the expired franchise ordinances. PEF has filed an appeal with the Florida Supreme Court to resolve the conflict between the two appellate courts. The Florida Supreme Court has set oral argument for August 27, 2003. The Company cannot predict the outcome of these matters at this time. Progress Energy Carolinas, Inc. The information required by this item is incorporated herein by reference to the following portions of Progress Energy's Management's Discussion and Analysis of Financial Condition and Results of Operations, insofar as they relate to PEC: RESULTS OF OPERATIONS; LIQUIDITY AND CAPITAL RESOURCES and OTHER MATTERS. RESULTS OF OPERATIONS The results of operations for the PEC Electric segment are identical between PEC and Progress Energy. The results of operations for PEC's non-utility subsidiaries for the six months ended June 30, 2003 and 2002 are not material to PEC's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities increased $61 million for the six months ended June 30, 2003, when compared to the corresponding period in the prior year. The increase was caused primarily by changes in working capital. Cash used in investing activities increased approximately $150 million for the six months ended June 30, 2003, when compared to the corresponding period in the prior year. The increase was mostly due to $244 million in cash proceeds received during the second quarter of 2002 for the sale of generating assets to Progress Ventures during the first quarter of 2002. The sales proceeds were offset by a decrease in construction spending. During the first six months of 2003, $322 million was spent on PEC's construction program, nuclear fuel additions and contributions to its nuclear decommissioning fund. This amount was approximately $80 million less than the corresponding period last year. The decrease was due to lower construction expenditures associated with generation assets transferred to PVI during 2002. As of June 30, 2003, PEC's liquidity, contractual cash obligations and other commercial commitments have not changed materially from what was reported in the 2002 Annual Report on Form 10-K, as amended. On April 1, 2003, PEC reduced the size of its existing 364-day credit facility from $285 million to $165 million. The other terms of this facility were not changed. On July 30, 2003, PEC renewed its $165 million 364-day credit agreement PEC's $285 million three-year credit agreement entered into in July 2002 remains in place, for total facilities of $450 million. On May 27, 2003, PEC redeemed $150 million of First Mortgage Bonds, 7.5% Series, Due March 1, 2023 at 103.22% of the principal amount of such bonds. PEC funded the redemption with commercial paper. On July 14, 2003, PEC announced the redemption of $100 million of First Mortgage Bonds, 6.875% Series Due August 15, 2023 at 102.84%. The date of the redemption will be August 15, 2003 and the redemption will be funded by PEC with commercial paper. The current portion of long-term debt includes $400 million of secured debt issued by PEC. The current portion of long-term debt is expected to be refinanced or retired through commercial paper, capital market transactions and internal generation of funds. 54 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, 2002. The Company's exposure to market value risk with respect to the CVOs has also not changed materially since December 31, 2002. On February 21, 2003, PEF issued $425 million of First Mortgage Bonds, 4.80% Series, Due March 1, 2013 and $225 million of First Mortgage Bonds, 5.90% Series, Due March 1, 2033. Proceeds from this issuance were used to repay the balance of its outstanding commercial paper, to refinance its secured and unsecured indebtedness, including PEF's First Mortgage Bonds 6.125% Series Due March 1, 2003, and to redeem the aggregate outstanding balance of its 8% First Mortgage Bonds Due 2022. In March, April and June of 2003, PEC entered into treasury rate locks to hedge its exposure to interest rates with regard to a future issuance of debt. These agreements have a computational period of ten years and are designated as cash flow hedges for accounting purposes. The agreements have a total notional amount of $60 million. Effective March 24, 2003, PEF redeemed $150 million of First Mortgage Bonds, 8% Series, Due December 1, 2022 at 103.75% of the principle amount of such bonds. The exposure to changes in interest rates from the Company's fixed rate and variable rate long-term debt at June 30, 2003 has changed from December 31, 2002. The total fixed rate long-term debt at June 30, 2003 was $9.27 billion, with an average interest rate of 6.70% and fair market value of $10.68 billion. The total variable rate long-term debt at June 30, 2003, was $1.10 billion, with an average interest rate of 1.41% and fair market value of $1.11 billion. The exposure to changes in interest rates from the Company's commercial paper and FPC mandatorily redeemable securities of trust at June 30, 2003, was not materially different than at December 31, 2002. Progress Energy Carolinas, Inc. PEC has certain market risks inherent in its financial instruments, which arise from transactions entered into in the normal course of business. PEC's primary exposures are changes in interest rates with respect to long-term debt and commercial paper, and fluctuations in the return on marketable securities with respect to its nuclear decommissioning trust funds. PEC's exposure to return on marketable securities for the decommission trust funds has not changed materially since December 31, 2002. In March, April and June of 2003, PEC entered into treasury rate locks to hedge its exposure to interest rates with regard to a future issuance of debt. These agreements have a computational period of ten years and are designated as cash flow hedges for accounting purposes. The exposure to changes in interest rates from the PEC's fixed rate long-term debt, variable rate long-term debt and commercial paper at June 30, 2003 was not materially different than at December 31, 2002. 54 Item 4. Controls and Procedures Progress Energy, Inc. Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, Progress Energy carried out an evaluation, with the participation of Progress Energy's management, including Progress Energy's Chairman and Chief Executive Officer, and Chief Financial Officer, of the effectiveness of Progress Energy's disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, Progress Energy's Chairman and Chief Executive Officer, and Chief Financial Officer concluded that Progress Energy's 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 Progress Energy's periodic SEC filings. There has been no change in Progress Energy's internal control over financial reporting during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, Progress Energy's internal control over financial reporting. Progress Energy Carolinas, Inc. Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, PEC carried out an evaluation, with the participation of PEC's management, including PEC's Chairman and Chief Executive Officer, and Chief Financial Officer, of the effectiveness of PEC's disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, PEC's Chairman and Chief Executive Officer, and Chief Financial Officer concluded that PEC's disclosure controls and procedures are effective in timely alerting them to material information relating to PEC (including its consolidated subsidiaries) required to be included in PEC's periodic SEC filings. There has been no change in PEC's internal control over financial reporting during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, PEC's internal control over financial reporting. 55 PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal aspects of certain matters are set forth in Part I, Item 1. See Note 15 to the Progress Energy, Inc. Consolidated Interim Financial Statements and Note 9 to the PEC's Consolidated Interim Financial Statements. 1. Strategic Resource Solutions Corp. ("SRS") v. San Francisco Unified School District, et al., Sacramento Superior Court, Case No. 02AS033114 In November of 2001, SRS filed a claim against the San Francisco Unified School District ("the District") and other defendants claiming that SRS is entitled to approximately $10 million in unpaid contract payments and delay and impact damages related to the District's $30 million contract with SRS. On March 4, 2002, the District filed a counterclaim, seeking compensatory damages and liquidated damages in excess of $120 million, for various claims, including breach of contract and demand on a performance bond. SRS has asserted defenses to the District's claims. On March 13, 2003, the City Attorney's office announced the filing of new claims by the City Attorney and the District in the form of a cross-complaint against SRS, Progress Energy, Inc., Progress Energy Solutions, Inc., and certain individuals, alleging fraud, false claims, violations of California statutes, and seeking compensatory damages, punitive damages, liquidated damages, treble damages, penalties, attorneys' fees and injunctive relief. The City Attorney's announcement states that the City and the District seek "more than $300 million in damages and penalties." The Company has reviewed the District's earlier pleadings against SRS and believes that those claims are not meritorious. SRS filed its answer to the new pleadings on April 14, 2003. The Company has reviewed the new pleadings and the Company believes that the new claims are not meritorious. The Company has filed responsive pleadings denying the allegations, and the discovery process is underway. SRS, the Company and Progress Energy Solutions, Inc. will vigorously defend and litigate all of these claims. The Company cannot predict the outcome of this matter, but the Company believes that it and its subsidiaries have good defenses to all claims asserted by both the District and the City. Item 4. Submission of Matters to a Vote of Security Holders Progress Energy, Inc. (a) The Annual Meeting of the Shareholders of Progress Energy, Inc. was held on May 14, 2003. (b) The meeting involved the election of five Class II directors to serve for three-year terms. Proxies for the meeting were solicited pursuant to Regulation 14, there was no solicitation in opposition to management's nominees as listed below, and all nominees were elected. (c) Results of matters voted on were as follows: Election of Directors Class II Votes For Votes Withheld (Term Expiring in 2006) Edwin B. Borden 193,007,893 4,613,431 James E. Bostic, Jr. 192,204,838 5,416,487 David L. Burner 192,182,065 5,439,259 Richard L. Daugherty 192,186,613 5,434,712 Richard A. Nunis 193,138,277 4,483,047 56 Shareholder Proposals The shareholder proposal requesting that the Board adopt a policy requiring that all stock option grants to senior executives be performance-based was presented, but was not approved by the shareholders. The number of shares voted for the proposal was 32,819,916. The number of shares voted against the proposal was 129,021,383. The number of abstaining votes was 4,662,102. The delivered not voted total was 31,157,923. The shareholder proposal requesting that the Board establish a policy of expensing stock options on its annual income statement was presented, but was not approved by the shareholders. The number of shares voted for the proposal was 72,431,261. The number of shares voted against the proposal was 88,376,736 The number of abstaining votes was 5,655,400. The delivered not voted total was 31,157,926. Carolina Power & Light Company, doing business as Progress Energy Carolinas, Inc. (a) The Annual Meeting of the Shareholders of Carolina Power & Light Company was held on May 14, 2003. (b) The meeting involved the election of five Class II directors to serve three-year terms. Proxies for the meeting were solicited pursuant to Regulation 14, there was no solicitation in opposition to management's nominees as listed below, and all nominees were elected. (c) The total votes for the election of directors were as follows: Class II Votes For Votes Withheld (Term Expiring in 2006) Edwin B. Borden 159,941,669 1,470 James E. Bostic, Jr. 159,941,819 1,320 David L. Burner 159,941,802 1,339 Richard L. Daugherty 159,941,826 1,313 Richard A. Nunis 159,941,437 1,702 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Progress Progress Energy Number Description Energy, Inc. Carolinas, Inc. ------ ----------- ------------ --------------- 10(i) Amended and Restated Progress Energy, Inc. Restoration X X Retirement Plan, effective as of July 10, 2002 10(ii) Progress Energy, Inc. Non-Employee Director Stock Unit X X Plan, amended and restated effective July 10, 2002 10(iii) Amended and Restated Supplemental Senior Executive X X Retirement Plan of Progress Energy, Inc., effective January 1, 1984 (As last amended effective July 10, 2002) 10(iv) Amended Management Incentive Compensation Plan of X X Progress Energy, Inc., as amended January 1, 2003 57 10(v) Amendment and Restatement, dated as of July 30, 2003, to X the 364-Day Revolving Credit Agreement among Carolina Power & Light Company (d/b/a Progress Energy Carolinas, Inc.) and certain Lenders 31(a) Certifications pursuant to Section 302 of the X X Sarbanes-Oxley Act of 2002 - Chairman and Chief Executive Officer 31(b) Certifications pursuant to Section 302 of the X X Sarbanes-Oxley Act of 2002 - Executive Vice President and Chief Financial Officer 32(a) Certifications pursuant to Section 906 of the X X Sarbanes-Oxley Act of 2002 - Chairman and Chief Executive Officer 32(b) Certifications pursuant to Section 906 of the X X Sarbanes-Oxley Act of 2002 - Executive Vice President and Chief Financial Officer
(b) Reports on Form 8-K since the beginning of the quarter: Progress Energy, Inc. Financial Item Statements Reported Included Date of Event Date Filed 5 No April 1, 2003 April 1, 2003 9, 12 Yes April 23, 2003 April 23, 2003 7, 9 No April 30, 2003 April 30, 2003 9 No May 30, 2003 May 30, 2003 7, 9 No May 30, 2003 June 11, 2003 5 No June 24, 2003 June 24, 2003 9, 12 Yes July 23, 2003 July 23, 2003 Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. Financial Item Statements Reported Included Date of Event Date Filed 5 No April 1, 2003 April 1, 2003 9, 12 Yes April 23, 2003 April 23, 2003 9, 12 Yes July 23, 2003 July 23, 2003 58 SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROGRESS ENERGY, INC. CAROLINA POWER & LIGHT COMPANY Date: August 11, 2003 (Registrants) By: /s/ Peter M. Scott III ------------------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer By: /s/ Robert H. Bazemore, Jr. ------------------------------- Robert H. Bazemore, Jr. Vice President and Controller Chief Accounting Officer 59 EX-10 3 pei_exhibit10i-.txt EXHIBIT 10(I) TO 2003 2ND QTR FORM 10-Q Exhibit 10(i) Amended and Restated Progress Energy, Inc. Restoration Retirement Plan Carolina Power & Light Company established the Carolina Power & Light Company Restoration Retirement Plan (the "Plan"), effective as of January 1, 1998 ("Effective Date"), and amended and restated the Plan effective January 1, 1999 and 2000. The Sponsor hereby restates and amends the Plan effective as of July 10, 2002. ARTICLE I PURPOSE The purpose of the Plan is to provide a means by which certain employees may be provided benefits which otherwise would be provided under the Retirement Plan, in the absence of certain restrictions imposed by applicable law on benefits which may be provided under the Retirement Plan. The Plan is intended to constitute an unfunded retirement plan for a select group of management or highly compensated employees within the meaning of Title I of the Employee Retirement Income Security Act of 1974, as amended. ARTICLE II DEFINITIONS Capitalized terms which are not defined herein shall have the meaning ascribed to them in the Retirement Plan. 2.1 "Actuarial Value" shall mean an equivalent lump sum value as of the Benefit Commencement Date using the average 30-year Treasury Rate for the month of August immediately preceding the calendar year the determination is made and the GAR 94 mortality table (50% male, 50% female). 2.2 "Affiliated Company" shall mean any corporation or other entity that is required to be aggregated with the Sponsor pursuant to Sections 414(b), (c), (m), or (o) of the Code, but only to the extent so required. 2.3 "Benefit Commencement Date" shall mean the effective date for the payment of a Participant's Accrued Benefit under the Retirement Plan, whether in the form of a lump sum or an annuity. 2.4 "Board" shall mean the Board of Directors of the Sponsor. 2.5 "Change in Control" shall occur on 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 until a majority of the members of the Board receive written certification from the Committee on Organization and Compensation of the Board that such event has occurred. Any determination that such an event has occurred shall, if made in good faith on the basis of information available at that time, be conclusive and binding on the Board, the Sponsor, the Company, the Participants and their beneficiaries for all purposes of the Plan. 2.6 "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.7 "Committee" shall mean a committee selected by the Plan Administrator to hear claim disputes under Article IV of the Plan. 2.8 "Company" shall mean Progress Energy, Inc. or any successor to it in the ownership of substantially all of its assets and each Affiliated Company that, with the consent of the Board, adopts the Plan and is included in Appendix A, as in effect from time to time. Appendix A shall set forth any limitations 2 imposed on employees of Affiliated Companies that adopt the Plan including any limitations on benefit accruals, notwithstanding any provision in the Plan to the contrary. 2.9 "Compensation and Benefit Limitations" shall mean (a) the limitation on compensation under the Retirement Plan in accordance with Section 401(a)(17) of the Code and (b) any limits on benefits paid under the Retirement Plan that are necessary for compliance with Section 415 of the Code. 2.10 "Continuing Directors" shall mean the members of the Board as of July 10, 2002; provided, however, that any person becoming a director subsequent to such date whose election or nomination for election was supported by 75 percent or more of the directors who then comprised Continuing Directors shall be considered to be a Continuing Director. 2.11 "Deferrals" shall mean a Participant's deferrals of compensation under the MDCP to the extent not utilized in calculating a Participant's Accrued Benefit under the Retirement Plan. 2.12 "Eligible Employee" shall mean any member of the Retirement Plan who is not a Participant in the Sponsor's Supplemental Senior Executive Retirement Plan and who has not retired or terminated his or her employment with the Company prior to the Effective Date. 2.13 "MDCP" shall mean the Progress Energy, Inc. Amended and Restated Management Deferred Compensation Plan. 2.14 "Participant" shall mean an Eligible Employee who participates in the Plan pursuant to Article III. An Eligible Employee shall remain a Participant under the Plan until the earlier of (a) all amounts payable on his or her behalf under the Plan have been paid, (b) the Eligible Employee no longer has a Restoration Accrued Benefit, (c) the Eligible Employee has a Termination without a Vested Restoration Accrued Benefit, or (d) the Eligible Employee becomes a Participant in the Sponsor's Supplemental Senior Executive Retirement Plan. 2.15 "Restoration Accrued Benefit" shall mean, as of any determination date, the excess of (a) a Participant's Accrued Benefit calculated under the Retirement Plan (1) assuming a Participant's Compensation under the Retirement Plan includes Deferrals of a Participant and (ii) without regard to the Compensation and Benefit Limitations, over (b) a Participant's Accrued Benefit calculated under the Retirement Plan. For purposes of this Section 2.15, a Participant's Accrued Benefit for purposes of clauses (a) and (b) above shall be calculated in the form of a Single Life Annuity for a Participant who does not have a Spouse and in the form of a 50% Qualified Joint and Survivor Annuity for a Participant who has a Spouse, with such calculation performed without regard to any other form of benefit elected by a Participant under the Retirement Plan. 2.16 "Retirement Plan" shall mean the Progress Energy Pension Plan, as it may be amended from time to time, or any successor plan. 2.17 "Sponsor" shall mean Progress Energy, Inc. 3 2.18 "Spouse" shall mean the spouse of a Participant as would be determined at the applicable time under the definition of Spouse in the Retirement Plan (or any successor provisions). 2.19 "Termination" shall mean a termination of employment with the Sponsor and all Affiliated Companies. 2.20 "Vested Restoration Accrued Benefit" shall mean a Participant's Restoration Accrued Benefit when the Participant becomes fully vested under the provisions of the Retirement Plan (or any successor provisions) or as provided in Article VI of the Plan. Unless the context clearly indicates to the contrary in interpreting the Plan, any references to the masculine alone shall include the feminine and the singular shall include the plural. ARTICLE III PARTICIPATION AND BENEFITS 3.1 Participation. An Eligible Employee will participate in the Plan when he or she has a Restoration Accrued Benefit. 3.2 Amount of Benefit Payable. Subject to the forfeiture provisions of Section 3.4 and lump sum payment provisions of Section 3.5 of the Plan, a Participant who becomes eligible for the payment of a benefit under the Retirement Plan, shall be entitled to monthly benefit payments commencing on his Benefit Commencement Date based on the Participant's Restoration Accrued Benefit calculated immediately prior to the Benefit Commencement Date and actuarially adjusted as if an annuity were being paid under the Retirement Plan as of the Benefit Commencement Date. The monthly payment shall be in the form of a Single Life Annuity if the Participant has no Spouse and in the form of a 50% Joint and Survivor Annuity if the Participant has a Spouse, with the Spouse determined at the Benefit Commencement Date entitled to any survivor benefit upon the death of the Participant. 3.3 Pre-Retirement Death Benefit. Subject to the provisions of Section 3.5, if a surviving Spouse of a deceased Participant would have been eligible for a preretirement death benefit under the Retirement Plan (i.e., the Spouse being married to the Participant for a one-year period prior to the date of death), then upon such Participant's death, such Spouse shall be entitled to a monthly benefit payment under the Plan commencing on the first day of the month in which he or she would be entitled to commence receiving a monthly death benefit under the Retirement Plan, equal to the amount, if any, by which (a) exceeds (b) each month, where (a) is the Spouse's monthly death benefit that would be payable in accordance with the provisions of the Retirement Plan determined as if (i) the Participant's Compensation under the Retirement Plan included Deferrals and (ii) the Compensation and Benefit Limitations did not apply, and (b) is the actual monthly death benefit payable under the Retirement Plan, and assuming for purposes of clauses (a) and (b) that the Spouse elected a monthly annuity as a death benefit under the Retirement Plan. 3.4 Other Termination of Employment; Forfeitures. Neither Eligible Employees, Participants nor their Spouses or Beneficiaries are entitled to any benefits under the Plan except as otherwise provided in this Article III and 4 under Article VI of the Plan. Any Participant who terminates employment with the Sponsor and any of its Affiliated Companies prior to a Change in Control and without being 100% vested under the Retirement Plan shall not be eligible to receive any benefits under the Plan and shall forfeit his or her Restoration Accrued Benefit. Any Participant ceasing to be an Eligible Employee because he or she becomes a Participant in the Supplemental Senior Executive Retirement Plan shall forfeit his or her Restoration Accrued Benefit. Notwithstanding any other provision of the Plan, no benefit shall be payable under the Plan with respect to an Eligible Employee whose employment with the Sponsor or any of its Affiliated Companies is terminated for Cause. As used herein, the term "Cause" shall be limited to (a) action by the Eligible Employee involving willful malfeasance having a material adverse effect on the Sponsor or any of its Affiliated Companies (b) substantial and continuing willful refusal by the Eligible Employee to perform the duties ordinarily performed by an employee in the same position and having similar duties as the Eligible Employee, (c) the Eligible Employee being convicted of a felony, or (d) willful failure to comply with the Sponsor or the applicable Affiliated Company's Code of Conduct or other Policy or Procedure. 3.5 Lump Sum Payments. The Committee shall provide for the payment under the Plan of a cash lump sum amount in lieu of the annuity otherwise payable under Sections 3.2 or 3.3, if the annuity amount to be paid is less that $100 per month. For a Participant (or spouse) whose benefit under the Retirement Plan is based upon the Participant's Cash Balance Account, the lump sum shall be equal to what the Restoration Accrued Benefit would be if "Cash Balance Account" were substituted for "Accrued Benefit" in Section 2.15 and Restoration Accrued Benefit referred to a dollar amount. For a Participant (or spouse) whose benefit under the Retirement Plan is based on the Final Average Pay Formula Pension, the lump sum shall be equal to the Actuarial Value of the annuity payments that would otherwise be made to the Participant (or spouse) under Sections 3.2 or 3.3, as the case may be. ARTICLE IV PLAN ADMINISTRATION 4.1 Administration. The Plan shall be administered by the Sponsor's Vice President, Human Resources (the "Plan Administrator"). The Plan Administrator and the Committee shall have full authority to administer and interpret the Plan, determine eligibility for benefits, make benefit payments and maintain records hereunder, all in their sole and absolute discretion, subject to the allocation of responsibilities set forth below. 4.2 Delegated Responsibilities. The Plan Administrator shall have the authority to delegate any of his or her responsibilities to such persons as he or she deems proper. 4.3 Claims. (a) Claims Procedure. If any Participant, Spouse or Beneficiary has a claim for benefits which is not being paid, such claimant may file with the Plan Administrator a written claim setting forth the amount and nature of the claim, supporting facts, and the claimant's address. The Plan 5 Administrator shall notify each claimant of its decision in writing by registered or certified mail within sixty (60) days after its receipt of a claim or, under special circumstances, within ninety (90) days after its receipt of a claim. If a claim is denied, the written notice of denial shall set forth the reasons for such denial, refer to pertinent Plan provisions on which the denial is based, describe any additional material or information necessary for the claimant to realize the claim, and explain the claim review procedure under the Plan. (b) Claims Review Procedure. A claimant whose claim has been denied or such claimant's duly authorized representative may file, within sixty (60) days after notice of such denial is received by the claimant, a written request for review of such claim by the Committee. If a request is so filed, the Committee shall review the claim and notify the claimant in writing of its decision within sixty (60) days after receipt of such request. In special circumstances, the Committee may extend for up to sixty (60) additional days the deadline for its decision. The notice of the final decision of the Committee shall include the reasons for its decision and specific references to the Plan provisions on which the decision is based. The decision of the Committee shall be final and binding on all parties. ARTICLE V MISCELLANEOUS 5.1 Amendment and Termination. The Board may amend, modify or terminate the Plan at any time, provided, however, that no such amendment or termination shall reduce any Participant's Vested Restoration Accrued Benefit under the Plan as of the date of such amendment or termination, unless at the time of such amendment or termination, affected Participants and spouses become entitled to an amount equal to the equivalent actuarial value, to be determined in the sole discretion of the Committee, of such Vested Restoration Accrued Benefit under another plan, program or practice adopted by a Company. In the event the Plan is terminated, the Sponsor shall determine whether to pay Vested Restoration Accrued Benefits in the form of an actuarial equivalent lump sum payment or defer the payment of Vested Restoration Accrued Benefits until the payment of Early Retirement Pensions or Normal Retirement Pensions under the Retirement Plan. 5.2 Source of Payments. Each Company will pay with respect to its own Eligible Employees all benefits arising under the Plan and all costs, charges and expenses relating thereto out of its general assets. 5.3 Non-Assignability of Benefits. Except as otherwise required by law, neither any benefit payable hereunder nor the right to receive any future benefit under the Plan may 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 a person eligible for any benefits under the Plan becomes bankrupt, the interest under the Plan of the person affected may be terminated by the Plan Administrator which, in his or her sole discretion, may cause the same to be held or applied for the benefit of one or more of the dependents of such person or make any other disposition of such benefits that it deems appropriate. 6 5.4 Plan Unfunded. Nothing in the Plan shall be interpreted or construed to require a Company in any manner to fund any obligation to the Participants, terminated Participants, or beneficiaries hereunder. Nothing contained in the Plan nor any action taken hereunder shall create, or be construed to create, a trust of any kind, or a fiduciary relationship between a Company and the Participants, terminated Participants, beneficiaries, or any other persons. Any funds which may be accumulated by a Company in order to meet any obligations under the Plan shall for all purposes continue to be a part of the general assets of a Company; provided, however, that a Company may establish a trust to hold funds intended to provide benefits hereunder to the extent the assets of such trust become subject to the claims of the general creditors of such Company in the event of bankruptcy or insolvency of such Company. To the extent that any Participant, terminated Participant, or beneficiary acquires aright to receive payments from a Company under the Plan, such rights shall be no greater than the rights of any unsecured general creditor of such Company. 5.5 Applicable Law. All questions pertaining to the construction, validity and effect of the Plan shall be determined in accordance with the laws of the State of North Carolina to the extent not preempted by Federal law. 5.6 Limitation of Rights. The Plan is a voluntary undertaking on the part of the Sponsor and each Company. Neither the establishment of the Plan nor the payment of any benefits hereunder, nor any action of the Sponsor, a Company or the Plan Administrator shall be held or construed to be a contract of employment between the Sponsor, a Company and any Eligible Employee or to confer upon any person any legal right to be continued in the employ of the Sponsor or a Company. The Sponsor and each Company expressly reserves the right to discharge, discipline or otherwise terminate the employment of any Eligible Employee at any time. Participation in the Plan gives no right or claim to any benefits beyond those which are expressly provided herein and all rights and claims hereunder are limited as set forth in the Plan. 5.7 Severability. In the event any provision of the Plan shall be held illegal or invalid, or the inclusion of any Participant would serve to invalidate the Plan as an unfunded plan for a select group of management or highly compensated employees under ERISA, then the illegal or invalid provision shall be deemed to be null- and void, and the Plan shall be construed as if it did not contain that provision and in the case of the inclusion of any such Participant, a separate plan, with the same provisions as the Plan, shall be deemed to have been established for the Participant or Participants ultimately determined not to constitute a select group of management or highly compensated employees. 5.8 Headings. The headings to the Articles and Sections of the Plan are inserted for reference only, and are not to be taken as limiting or extending the provisions hereof. 5.9 Incapacity. If the Plan Administrator shall determine that a Participant, or any other person entitled to a benefit under the Plan (the "Recipient") is unable to care for his or her affairs because of illness, accident, or mental or physical incapacity, or because the Recipient is a minor, the Plan Administrator may direct that any benefit payment due the Recipient be paid to his or her duly appointed legal representative, or, if no such representative is appointed, to the Recipient's spouse, child, parent, or other 7 blood relative, or to a person with whom the Recipient resides or who has incurred expense on behalf of the Recipient. Any such payment so made shall be a complete discharge of the liabilities of the Plan with respect to the Recipient. 5.10 Binding Effect and Release. Obligations incurred by the Sponsor or a Company pursuant to this Plan shall be binding upon the Sponsor or a Company, its successors and assigns, and inure to the benefit of the Participant or his Eligible Spouse. All persons accepting benefits under the Plan shall be deemed to have consented to the terms of the Plan. Any payment or distribution to any person entitled to benefits under the Plan shall be in full satisfaction of all claims against the Plan, the Committee, and the Sponsor and any Company arising by virtue of the Plan. ARTICLE VI CHANGE IN CONTROL Upon the occurrence of a Change in Control, the following provisions shall become effective immediately: 6.1 Vesting. There shall be full Vesting of each Participant's Restoration Accrued Benefit, regardless of any termination of employment prior to eligibility for an Early Retirement Pension under the Retirement Plan, if he or she is otherwise vested under the Retirement Plan. 6.2 No Reduction Benefit. No amendment or termination of the Plan may reduce any Participant's Restoration Accrued Benefit as of the date of such amendment or termination. 6.3 Contributions to Trust. The Sponsor shall irrevocably set aside funds in one or more grantor trusts, subject to the provisions of Section 5.4, in an amount that is sufficient to pay each Participant (or Spouse) the benefits accrued under the Plan as of the date of the Change in Control. Any such trust shall be subject to the claims of the general creditors of the Sponsor in the event of the bankruptcy or insolvency of the Sponsor. 8 APPENDIX A North Carolina Natural Gas Company solely with respect to accrued benefits on or after January 1, 2000 so that no Restoration Accrued Benefit is calculated under the Plan with respect to employment prior to January 1, 2000. Progress Energy Florida, Inc. (non-bargaining employees) solely with respect to accrued benefits on or after January 1, 2002 so that no Restoration Accrued Benefit is calculated under the Plan with respect to employment prior to January 1, 2002. Progress Telecom Corporation solely with respect to accrued benefits on or after January 1, 2002 so that no Restoration Accrued Benefit is calculated under the Plan with respect to employment prior to January 1, 2002. Progress Fuels Corporation (corporate employees) solely with respect to accrued benefits on or after January 1, 2002 so that no Restoration Accrued Benefit is calculated under the Plan with respect to employment prior to January 1, 2002. Progress Energy Carolinas, Inc. Progress Energy Service Company, LLC Progress Energy Ventures, Inc. 9 EX-10 4 pei_exhibit10ii-.txt EXHIBIT 10(II) TO 2003 2ND QTR FORM 10-Q Exhibit 10(ii) PROGRESS ENERGY, INC. NON-EMPLOYEE DIRECTOR STOCK UNIT PLAN 1.0 RECITALS 1.1 Whereas, Carolina Power & Light Company ("CP&L") adopted the Carolina Power & Light Company Retirement Plan for Outside Directors (the "Directors Retirement Plan") in 1986, which provided for a fixed-dollar retirement benefit for non-employee directors of CP&L following their termination of service as a member of the Board of Directors of CP&L. 1.2 Whereas, effective January 1, 1998, CP&L froze the Directors Retirement Plan so that no further benefits would accrue under such plan, and adopted the Carolina Power & Light Company Non-Employee Director Stock Unit Plan (the "Plan"), the purpose of which was to provide deferred compensation to the non-employee directors of CP&L based on the value of CP&L common stock. 1.3 Whereas, sponsorship of the Plan was transferred to CP&L Energy, Inc. effective August 1, 2000, and the name of the Plan was subsequently changed to Progress Energy, Inc. Non-Employee Director Stock Unit Plan. 1.4 Whereas, the Company desires to amend and restate the Plan to reflect the new name of the Plan and to provide additional protection to participants in the event of a Change of Control. 1.5 Now, therefore, effective July 10, 2002, the Company adopts this amended and restated Progress Energy, Inc. Non-Employee Director Stock Unit Plan. 2.0 PURPOSE 2.1 Purpose. The purpose of the Plan is to attract and retain highly qualified individuals as non-employee directors of the Company, and to provide deferred compensation to the Company's non-employee directors based on the value of the Company's stock. 3.0 DEFINITIONS The following terms shall have the following meanings unless the context indicates otherwise: 3.1 "Annual Stock Unit Grant" shall mean a grant of Stock Units as described in Section 5.2 below. 3.2 "Board" shall mean the Board of Directors of the Company. 3.3 "Change of Control" shall mean the earliest of the following dates: (1) 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 Company, becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Securities Act of 1934) of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities (excluding the acquisition of securities of the Company by an entity at least eighty percent (80%) of the outstanding voting securities of which are, directly or indirectly, beneficially owned by the Company); or (2) the date of consummation of a tender offer for the ownership of more than fifty percent (50%) of the Company's then outstanding voting securities; or (3) the date of consummation of a merger, share exchange or consolidation of the Company 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 Company 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 Company or such surviving or acquiring entity outstanding immediately after such merger or consolidation; or (4) the date, when as a result of a tender offer or exchange offer for the purchase of securities of the Company (other than such an offer by the Company 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 of Directors; or (5) the date the shareholders of the Company approve a plan of complete liquidation or winding-up of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets; or (6) the date of any event which the Board of Directors determines should constitute a Change of Control. A Change of Control shall not be deemed to have occurred until a majority of the members of the Board of Directors receive written certification from the Committee that one of the events set forth in this Section 3.3 as occurred. Any determination that an event described in this Section 3.3 has occurred shall, if made in good faith on the basis of information available 2 at that time, be conclusive and binding on the Board of Directors, the Company, the Participants and their beneficiaries for all purposes of the Plan. 3.4 "Committee" shall mean the Board's Committee on Organization and Compensation. 3.5 "Common Stock" shall mean the common stock of the Company. 3.6 "Company" shall mean Progress Energy, Inc., a North Carolina corporation, including any successor entity. 3.7 "Continuing Directors" shall mean the members of the Board as of July 10, 2002; provided, however, that any person becoming a director subsequent to such date whose election or nomination for election was supported by 75 percent or more of the directors who then comprised Continuing Directors shall be considered to be a Continuing Director. 3.8 "Distribution Date" shall mean the later of (i) the date a Participant is no longer a member of the Board or (ii) the date such Participant attains age 65. 3.9 "Effective Date" shall mean January 1, 1998. 3.10 "Common Stock Value" shall mean: (1) the average of the highest and lowest selling prices of Common Stock on the relevant date (or on the last preceding trading date if Common Stock was not traded on the relevant date) if Common Stock is readily tradable on a national securities exchange or other market system; or (2) an amount determined in good faith by the Board as the fair market value of Common Stock on the date of determination if Common Stock is not readily tradable on a national securities exchange or other market system. 3.11 "Initial Stock Unit Grant" shall mean a grant of Stock Units us described in Section 5.1 below. 3.12 "Matching Stock Unit Grant" shall mean a grant of Stock Units as described in Section 5.3 below. 3.13 "Participant" shall mean a member of the Board who is not an employee of the Company or any of its Subsidiaries. 3.14 "Stock Unit" shall mean a unit maintained by the Company for bookkeeping purposes, equal in value to one (1) share of Common Stock. 3.15 "Stock Unit Account" shall mean a bookkeeping account established and maintained (or caused to be established and maintained) by the Company for the Participant which shall record the number of Stock Units granted to the 3 Participant under Section 5 below. This account shall be established (or caused to be established) by the Company for bookkeeping purposes only, and no separate funds shall be segregated by the Company for the benefit of the Participant. 3.16 "Plan" shall mean the Progress Energy, Inc. Non-Employee Director Stock Unit Plan. 3.17 "Subsidiary" shall mean a corporation of which the Company directly or indirectly owns more than 50 percent of the Voting Stock (meaning the capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation) or any other business entity in which the Company directly or indirectly has an ownership interest of more than 50 percent. 4.0 ADMINISTRATION 4.1 Responsibility. The Committee shall have the responsibility, in its sole discretion, to control, operate, manage and administer the Plan in accordance with its terms. 4.2 Authority of the Committee. The Committee shall have all the discretionary authority that may be necessary or helpful to enable it to discharge its responsibilities with respect to the Plan, including but not limited to the following: (a) to determine eligibility for participation in the Plan; (b) to correct any defect, supply any omission, or reconcile any inconsistency in the Plan in such manner and to such extent as it shall deem appropriate in its sole discretion to carry the same into effect; (c) to issue administrative guidelines as an aid to administer the Plan and make changes in such guidelines as it from time to time deems proper; (d) to make rules for carrying out and administering the Plan and make changes in such rules as it from time to time deems proper; (e) to the extent permitted under the Plan, grant waivers of Plan terms, conditions restrictions, and limitations; (f) to make reasonable determinations as to a Participant's eligibility for benefits under the Plan, including determinations as to vesting; and (g) to take any and all other actions it deems necessary or advisable for the proper operation or administration of the Plan. 4.3 Action by the Committee. The Committee may act only by a majority of its members. Any determination of the Committee may be made, without a meeting, by a writing or writings signed by all of the members of the Committee. In addition, the Committee may authorize any one or more of its members to execute and deliver documents on behalf of the Committee. 4 4.4 Delegation of Authority. The Committee may delegate to one or more of its members, or to one or more agents, such administrative duties as it may deem advisable; provided, however, that any such delegation shall be in writing. In addition, the Committee, or any person to whom it has delegated duties as aforesaid, may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. The Committee may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company, or the Subsidiary whose employees have benefited from the Plan, as determined by the Committee. 4.5 Determinations and Interpretations by the Committee. All determinations and interpretations made by the Committee shall be binding and conclusive on all Participants and their heirs, successors, and legal representatives. 4.6 Information. The Company shall furnish to the Committee in writing all information the Committee may deem appropriate for the exercise of its powers and duties in the administration of the Plan. Such information may include, but shall not be limited to, the full names of all Participants, their earnings and their dates of birth, employment, retirement or death. Such information shall be conclusive for all purposes of the Plan, and the Committee shall be entitled to rely thereon without any investigation thereof. 4.7 Self-Interest. No member of the Committee may act, vote or otherwise influence a decision of the Committee specifically relating to his or her benefits, if any, under the Plan. 5.0 STOCK UNIT GRANTS 5.1 Rollover. CP&L granted an Initial Stock Unit Grant to the Participants listed on Schedule A (who were participants in the CP&L Retirement Plan for Outside Directors) who elected by December 31, 1997, pursuant to an election made in writing to the CP&L Vice President-Human Resources to rollover their accrued benefit under such plan (the "Accrued Benefit") into the Plan. The number of shares underlying each Initial Stock Unit Grant was equal to the present value of the Participant's Accrued Benefit as of December 31, 1997, divided by the Common Stock Value of CP&L common stock on the last trading day of 1997. Any fractional Stock Unit greater than 50 percent was rounded up to one Stock Unit, and any fractional Stock Unit equal to or less than 50 percent was disregarded. Such number of Stock Units underlying the Initial Stock Unit Grant was entered and recorded in the Participant's Stock Unit Account, and later adjusted to reflect the change in the capital structure of CP&L as a result of which CP&L became a Subsidiary of the Company. 5.2 Annual Grant. The Company shall grant to each Participant who has been a member of the Board for a least 1 year an Annual Stock Unit Grant equal to 350 Stock Units. The Annual Stock Unit Grant shall be made on or about the 5 date of the Company's annual meeting of shareholders. The Company shall enter and record (or shall cause to be entered and recorded) in the Participant's Stock Unit Account such number of Stock Units underlying the Annual Stock Unit Grant. 5.3 Matching Grant. With respect to any specific year, if the corporate incentive goals established by the Board are met for purposes of determining the Company stock incentive matching contributions under the Progress Energy 401(k) Savings and Stock Ownership Plan, the Company shall grant to each Participant on or about the date of the Company's annual meeting of shareholders following such year a Matching Stock Unit Grant equal to up to 350 Stock Units in accordance with the terms of such program. The Company shall enter and record (or shall cause to be entered and recorded) in the Participant's Stock Unit Account such number of Stock Units underlying the Annual Stock Unit Grant. 5.4 Dividend Stock Units. On the date that any holder of Common Stock receives a dividend with respect to Common Stock, the Company shall grant to each Participant, and shall enter and record (or shall cause to be entered and recorded) in each such Participant's Stock Unit Account a number of Stock Units equal to the result of (x) the dollar amount of such dividend paid with respect to one share of Common Stock multiplied by (y) the number of Stock Units in the Stock Unit Account as of the date such dividend is paid divided by (z) the Common Stock Value as of the date such dividend is paid. Any fractional Stock Unit greater than 50 percent shall be rounded up to one Stock Unit, and any fractional Stock Unit equal to or less than 50 percent shall be disregarded. 6.0 BENEFIT 6.1 Vesting. A Participant shall be entitled to a Benefit described in this Section 6 only after such Participant has been a member of the Board for 5 years. If there is a Change in Control, the Participant shall be entitled to a Benefit described in this Section 6 as of the date of the Change in Control, regardless of the number of years such Participant has been a member of the Board. 6.2 Timing of Benefit. In accordance with Section 6.4 below, the Company shall pay or begin paying a Benefit to a vested Participant during the 60-day period following the Distribution Date. If the Participant has selected annual payments in accordance with Section 6.4(b) below, all payments other than the first payment shall be made on the applicable anniversary of the Distribution Date. 6.3 Valuation. The value of a Participant's Stock Unit Account for purposes of the Benefit shall be equal to the product of (x) the number of Stock Units in the Participant's Stock Unit Account as of the Distribution Date or the applicable anniversary of the Distribution Date multiplied by (y) the Common Stock Value on the Distribution Date or the applicable anniversary of the Distribution Date, in accordance with Section 6.4 below. 6 6.4 Form of Benefit. The Company shall pay a Benefit to a vested Participant in one of the following four (4) forms, as selected by the Participant within 60 days after becoming a Participant: (a) a lump sum payment, with such payment equal to the value of the Participant's Stock Unit Account as of the Distribution Date: or (b) annual payments over 5, 10 or 15 years, with each annual payment equal to (x) the value of the Participant's Stock Unit Account as of the Distribution Date or the applicable anniversary of the Distribution Date divided by (y) the number of payments yet to be made. 6.5 Change of Form of Benefit. The Participant may change the form of Benefit, provided, however, that such change is made at least six (6) months prior to the Distribution Date. 6.6 Death of Participant Prior to the Distribution Date. If the Participant's death occurs prior to the Distribution Date, the Company shall pay or begin paying a Benefit to a vested Participant's beneficiary (as designated by the Participant under Section 6.8 below) on the first day of the sixth month following the date of the Participant's death, and if the Participant has selected a form of Benefit under Section 6.4(b) above, the Company shall pay the remaining annual payments on the anniversary of the first payment date as determined under this Section 6.6. 6.7 Death of Participant Following the Distribution Date. If the Participant's death occurs following the Distribution Date, the Company shall continue to pay the Benefit to the Participant's beneficiary (as designated by the Participant under Section 6.8 below) following the date of the Participant's death in the form of Benefit selected by the Participant in accordance with Section 6.4 above. 6.8 Designation of Beneficiary. Within 60 days after becoming a Participant, a Participant shall designate a beneficiary to receive the Benefit in the event of the Participant's death. If the Participant does not designate a beneficiary, the beneficiary shall be deemed to be the Participant's spouse on the date of the Participant's death, and if the Participant does not have a spouse on the date of his or her death, then the Participant's estate shall be deemed to be the beneficiary under this Section 6. 7.0 TAXES 7.1 Withholding Taxes. The Company shall be entitled to withhold from any and all payments made to a Participant under the Plan all federal, state, local and/or other taxes or imposts which the Company determines are required to be so withheld from such payments or by reason of any other payments made to or on behalf of the Participant or for his or her benefit hereunder. 7.2 No Guarantee of Tax Consequences. No person connected with the Plan in any capacity, including, but not limited to, the Company and any Subsidiary and their directors, officers, agents and employees makes any representation, 7 Commitment, or guarantee that any tax treatment, including, but not limited to, federal, state and local income, estate and gift tax treatment, will be applicable with respect to amounts deferred under the Plan, or paid to or for the benefit of a Participant under the Plan, or that such tax treatment will apply to or be available to a Participant on account of participation in the Plan. 8.0 TERM OF PLAN; AMENDMENT AND TERMINATION 8.1 Term. The Plan shall be effective as of the Effective Date. The Plan shall remain in effect until the Board terminates the Plan. 8.2 Termination or Amendment of Plan. The Board may suspend or terminate the Plan at any time with or without prior notice and the Board may amend the Plan at any time with or without prior notice; provided, however, that no action authorized by this Section 8.2 shall reduce the balance of the Stock Unit Account credited to a Participant or adversely affect the vesting of such account. 9.0 MISCELLANEOUS 9.1 Adjustments. If there shall be any change in Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, split up, spin-off, combination of shares, exchange of shares, dividend in kind or other like change in capital structure or distribution (other than normal cash dividends) to holders of Common Stock, the number of Stock Units and the Participant's Stock Unit Account shall be adjusted to equitably reflect such change or distribution. 9.2 Governing Law. The Plan and all actions taken in connection herewith shall be governed by and construed in accordance with the laws of the State of North Carolina without reference to principles of conflict of laws, except as superseded by applicable federal law. 9.3 No Right Title or Interest in Company Assets. Participants shall have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, beneficiary, legal representative or any other person. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan. 9.4 No Right to Continued Service. The Participant's rights, if any, to continue to serve the Company as a member of the Board shall not be enlarged or otherwise affected by his or her participation in the Plan. 8 9.5 Other Rights. The Plan shall not affect or impair the rights or obligations of the Company or a Participant under any other written plan, contract, arrangement, or pension, profit sharing or other compensation plan. 9.6 Severability. If any term or condition of the Plan shall be invalid or unenforceable to any extent or in any application, then the remainder of the Plan, with the exception of such invalid or unenforceable provision, shall not be affected thereby and shall continue in effect and application to its fullest extent. If, however, the Committee determines in its sole discretion that any term or condition of the Plan which is invalid or unenforceable is material to the interests of the Company, the Committee may declare the Plan null and void in its entirety. 9.7 Incapacity. If the Committee determines that a Participant or a designated beneficiary is unable to care for his or her affairs because of illness or accident or because he or she is a minor, any benefit due the Participant or designated beneficiary may be paid to the Participant's spouse or to any other person deemed by the Committee to have incurred expense for such Participant (including a duly appointed guardian, committee or other legal representative), and any such payment shall be a complete discharge of the Company's obligation hereunder. 9.8 Transferability of Rights. No Participant or spouse of a Participant shall have any right to encumber, transfer or otherwise dispose of or alienate any present or future right or expectancy which the Participant or such spouse may have at any time to receive payments of benefits hereunder, which benefits and the right thereto are expressly declared to be nonassignable and nontransferable, except to the extent required by law. Any attempt to transfer or assign a benefit, or any rights granted hereunder, by a Participant or the spouse of a Participant shall be null and void and without effect. 9.9 Entire Document. The Plan, as set forth herein, supersedes any and all prior practices, understandings, agreements, descriptions or other non-written arrangements respecting severance, and written employment or severance contracts signed by the Company. 9.10 Change of Control. In the case of a Change of Control, the Company, subject to the restrictions in this Section 9.10 and in Section 9.3, shall irrevocably set aside funds in one or more grantor trusts in an amount that is sufficient to pay each Participant the value of the Participant's Stock Unit Account as of the date on which the Change of Control occurs. The obligations and responsibilities of the Company under this Plan shall be assumed by any successor or acquiring corporation, and all of the rights, privileges and benefits of the Participants hereunder shall continue following the Change of Control. 9 SCHEDULE A Participants Who Are Eligible To Receive Initial Stock Unit Grants 1. Edwin B. Borden 2. Richard L. Daugherty 3. Robert L. Jones 4. Felton J. Capel 5. Charles W. Coker 6. Estell C. Lee 7. Leslie M. Baker, Jr. 8. William O. McCoy 9. J. Tylee Wilson 10 EX-10 5 pei_exhibit10iii-.txt EXHIBIT 10(III) TO 2003 2ND QTR FORM 10-Q Exhibit 10(iii) AMENDED AND RESTATED SUPPLEMENTAL SENIOR EXECUTIVE RETIREMENT PLAN OF PROGRESS ENERGY, INC. Effective January 1, 1984 (As last amended effective July 10, 2002) TABLE OF CONTENTS Page ARTICLE I STATEMENT OF PURPOSE.........................................................1 ARTICLE II DEFINITIONS..................................................................1 2.01 Terms..........................................................1 2.02 Affiliated Company.............................................1 2.03 Assumed Deferred Vested Pension Benefit........................2 2.04 Assumed Early Retirement Pension Benefit.......................2 2.05 Assumed Normal Retirement Pension Benefit......................2 2.06 Board..........................................................3 2.07 Change in Control..............................................3 2.08 Committee......................................................5 2.09 Company........................................................5 2.10 Continuing Director............................................5 2.11 Designated Beneficiary.........................................5 2.12 Early Retirement Date..........................................5 2.13 Eligible Spouse................................................6 2.14 Final Average Salary...........................................6 2.15 Normal Retirement Date.........................................7 2.16 Participant....................................................7 2.17 Pension........................................................7 2.18 Plan...........................................................7 2.19 Retirement Plan................................................7 2.20 Salary.........................................................7 2.21 Service........................................................8 2.22 Severance Date.................................................8 2.23 Social Security Benefit........................................8 2.24 Spouse's Pension..............................................10 2.25 Target Early Retirement Benefit...............................10 2.26 Target Normal Retirement Benefit..............................10 2.27 Target Pre-Retirement Death Benefit...........................10 2.28 Target Severance Benefit......................................10 ARTICLE III ELIGIBILITY AND PARTICIPATION...............................................10 3.01 Eligibility...................................................10 3.02 Date of Participation.........................................11 3.03 Duration of Participation.....................................11 i ARTICLE IV RETIREMENT BENEFITS.........................................................11 4.01 Normal Retirement Benefit.....................................11 4.02 Early Retirement Benefit......................................12 4.03 Commencement and Duration.....................................13 4.04 Surviving Spouse Benefit......................................14 4.05 Re-employment of Retired Participant..........................14 ARTICLE V RETIREMENT DEATH BENEFITS...................................................14 5.01 Eligibility...................................................14 5.02 Amount........................................................14 5.03 Alternative Benefit...........................................14 5.04 Commencement and Duration.....................................15 ARTICLE VI SEVERANCE BENEFITS..........................................................15 6.01 Eligibility...................................................15 6.02 Amount........................................................15 6.03 Commencement and Duration.....................................16 6.04 Surviving Spouse Benefit......................................16 ARTICLE VII ADMINISTRATION..............................................................17 7.01 Committee.....................................................17 7.02 Voting........................................................17 7.03 Records.......................................................17 7.04 Liability.....................................................17 7.05 Expenses......................................................18 ARTICLE VIII AMENDMENT AND TERMINATION...................................................18 ARTICLE IX MISCELLANEOUS...............................................................18 9.01 Non-Alienation of Benefits....................................18 9.02 No Trust, Created.............................................19 9.03 No Employment Agreement.......................................19 ii 9.04 Binding Effect................................................20 9.05 Suicide.......................................................20 9.06 Claims for Benefits...........................................20 9.07 Entire Plan...................................................21 9.08 Change in Control.............................................21 ARTICLE X CONSTRUCTION................................................................21 10.01 Governing Law.................................................21 10.02 Gender........................................................21 10.03 Headings, etc.................................................21 10.04 Action........................................................21 iii ARTICLE I STATEMENT OF PURPOSE This Plan is designed and implemented for the purpose of enhancing the earnings and growth of Progress Energy, Inc. (the "Sponsor") by providing to the limited group of senior management employees largely responsible for such earnings and long-term growth deferred compensation in the form of supplemental retirement income benefits, thereby increasing the incentive of such key senior management employees to make the Sponsor and its Affiliated Companies more profitable. The benefits are normally payable to Participants upon retirement or death. The terms of the benefits operate in conjunction with the Participant's benefits payable under the Progress Energy Pension Plan and are designed to supplement such pension plan benefits and provide the Participant with additional financial security upon retirement or death. The Plan is intended to constitute an unfunded retirement plan for a select group of management or highly compensated employees within the meaning of Title I of the Employee Retirement Income Security Act of 1974, as amended. The Sponsor hereby restates and amends the Plan effective July 10, 2002. ARTICLE II DEFINITIONS 2.01 Terms. Unless otherwise clearly required by the context, the terms used herein shall have the following meaning. Capitalized terms that are not defined below shall have the meaning ascribed to them in the Retirement Plan. 2.02 Affiliated Company. Shall mean any corporation or other entity that is required to be aggregated with the Sponsor pursuant to Section 414(b), (c), (m), or (o) of the Internal Revenue Code of 1996, as amended (the "Code"), but only to the extent required. 2.03 Assumed Deferred Vested Pension Benefit. Shall mean the monthly benefit of the deferred vested Pension to commence on his Normal Retirement Date payable in the form of an annuity to which a separated Participant would be entitled under the Retirement Plan, calculated with the following assumptions based on such Participant's marital status at the time benefits hereunder commence: (a) In the case of a Participant with an Eligible Spouse, in the form of a 50% Qualified Joint and Survivor Annuity as provided in the Retirement Plan. (b) In the case of a Participant without an Eligible Spouse, in the form of a Single Life Annuity as provided in the Retirement Plan. (c) Without regard to any other benefit payment option under the Retirement Plan. 2.04 Assumed Early Retirement Pension Benefit. Shall mean the monthly benefit of the normal retirement Pension payable in the form of an annuity to which a Participant would be entitled under the Retirement Plan at his Normal Retirement Date, based upon his projected years of Service at his Normal Retirement Date and calculated with the following assumptions based upon his marital status at the time benefits hereunder commence: (a) In the case of a Participant with an Eligible Spouse, in the form of a 50% Qualified Joint and Survivor Annuity as provided in the Retirement Plan. (b) In the case of a Participant without an Eligible Spouse, in the form of a Single Life Annuity as provided in the Retirement Plan. (c) Without regard to any other benefit payment option under the Retirement Plan. 2.05 Assumed Normal Retirement Pension Benefit. Shall mean the monthly benefit of the normal retirement Pension payable in the form of an annuity to which 2 a Participant would be entitled under the Retirement Plan if he retired at his Normal Retirement Date, calculated with the following assumptions based on his marital status at the time benefits hereunder commence: (a) In the case of a Participant with an Eligible Spouse, in the form of a 50% Qualified Joint and Survivor Annuity as provided in the Retirement Plan. (b) In the case of a Participant without an Eligible Spouse, in the form of a Single Life Annuity as provided in the Retirement Plan. (c) Without regard to any other benefit payment option under the Retirement Plan. 2.06 Board. Shall mean the Board of Directors of Sponsor. 2.07 Change in Control. Shall occur on 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 3 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 until a majority of the members of the Board receive written certification from the Committee that such event has occurred. Any determination that such an event has occurred shall, if made in good faith on the basis of information 4 available at that time, be conclusive and binding on the Committee, the Sponsor, the Company, the Participants and their beneficiaries for all purposes of the Plan. 2.08 Committee. Shall mean the Committee on Organization and Compensation of the Board. 2.09 Company. Shall mean Progress Energy, Inc. or any successor to it in the ownership of substantially all of its assets, and each Affiliated Company that, with the consent of the Board adopts the Plan and is included in Appendix A, as in effect from time to time. Appendix A shall set forth any limitations imposed on employees of Affiliated Companies that adopt the Plan, including limitations on "Service," notwithstanding any provision of the Plan to the contrary. 2.10 Continuing Director. Shall mean the members of the Board as of July 10, 2002; 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. 2.11 Designated Beneficiary. Shall mean one or more beneficiaries as designated by a Participant in writing delivered to the Committee. In the event no such written designation is made by a Participant or if such beneficiary shall not be living or in existence at the time for commencement of payment to any Designated Beneficiary under the Plan, the Participant shall be deemed to have designated his estate as such beneficiary. 2.12 Early Retirement Date. Shall mean the date on which a Participant who qualifies for the early retirement benefit of Section 4.02 hereof retires from the employ of the Company and its affiliated entities. 5 2.13 Eligible Spouse. Shall mean the spouse of a Participant who, under the laws of the State where the marriage was contracted, is deemed married to that Participant on the date on which the payments from this Plan are to begin to the Participant, except that for purposes of Articles V and VI hereof, Eligible Spouse shall mean a person who is married to a Participant for a period of at least one year prior to his death. 2.14 Final Average Salary. Shall mean a Participant's average monthly Salary (as defined in Section 2.18 hereof) during the 36 completed calendar months of highest compensation within the 120-month period immediately preceding the earliest to occur of the Participant's death, Severance Date, Early Retirement Date, or Normal Retirement Date, whichever is applicable. Provided, however, if a Participant becomes entitled to a benefit hereunder while under a period of long-term disability under the Sponsor's Group Insurance Plan, Final Average Salary shall be determined for the 12 calendar months immediately preceding the commencement of such period of long-term disability. Provided, further, in determining average monthly Salary (i) annual incentives and other similar payments shall be deemed received in twelve (12) equal payments beginning with the eleventh preceding month and ending with the month in which actual payment is made, and (ii) amounts of compensation deferred under any deferred compensation plan or arrangement shall be deemed received in the months such payments would have been received assuming no deferral had occurred. For years of Service granted under the terms of a written employment agreement as provided under Section 2.21, Salary during each such month is deemed to be zero dollars ($0.00) for purposes of calculating Final Average Salary. 6 2.15 Normal Retirement Date. Shall mean the first day of the calendar month coinciding with or next following the Participant's 65th birthday. 2.16 Participant. Shall mean an employee of the Company who is eligible and is participating in this Plan in accordance with Article III hereof. 2.17 Pension. Shall mean a level monthly annuity which is payable under the Retirement Plan as of the Benefit Commencement Date if the Participant elected an annuity form of benefit. 2.18 Plan. Shall mean the "Supplemental Senior Executive Retirement Plan of Progress Energy, Inc." as contained herein and as it may be amended from time to time hereafter. 2.19 Retirement Plan. Shall mean the "Progress Energy Pension Plan" (as amended effective January 1, 2002) as it may be amended from time to time hereafter. 2.20 Salary. Shall mean the sum of (1) The annual base compensation paid by the Company to a Participant, and (2) annual cash awards made under incentive compensation programs excluding, however, any payment made under the Sponsor's Long-Term Compensation Program or the Sponsor's 1997 and 2002 Equity Incentive Plans, and (3) amounts of annual compensation deferred under any deferred compensation plan or arrangement (including, without limitation, the "Executive Deferred Compensation Plan," the "Deferred Compensation Plan for Key Management Employees of Progress Energy, Inc.," the "Progress Energy, Inc. Management Deferred Compensation Plan" and the "Progress Energy 401(k) Savings and Stock Ownership Plan") and which, but for the deferral, would have been reflected in Internal Revenue Service Form W-2. 7 2.21 Service. Shall have the same meaning as "Eligibility Service," determined as provided in Sections 2.02 and 3.01 of the Retirement Plan, plus any additional years of service that may be granted to the Participant in connection with this Plan under the terms of a written employment agreement (or any amendment thereto) entered into between the Company and the Participant. 2.22 Severance Date. Shall mean the earlier of: (a) The date a Participant leaves the employ of the Company and all affiliated entities other than on account of his death, a period of long-term disability under the Company's Group Insurance Plan, or retirement at either his Early Retirement Date or upon or after his Normal Retirement Date, or (b) The first anniversary of the date on which a Participant is first absent from the service of the Sponsor and all Affiliated Companies, with or without pay, other than on account of his death, a period of long-term disability under the Company's Group Insurance Plan, or his retirement at either his Early Retirement Date or upon or after his Normal Retirement Date. If a Participant shall leave the employ of the Company and all Affiliated Companies under circumstances described in (b) and shall during such absence (and before the first anniversary of commencement of said absence) quit or be discharged, his Severance Date shall be the date he quits or is discharged. 2.23 Social Security Benefit. Means the monthly amount of benefit which a Participant is or would be entitled to receive at age 65 as a primary insurance amount under the federal Social Security Act, as amended, whether or not he applies for such benefit, and even though he may lose part or all 8 of such benefit through delay in applying for it, by making application prior to age 65 for a reduced benefit, by entering into covered employment, or for any other reason. The amount of such Social Security Benefit to which the Participant is or would be entitled shall be estimated by the Committee for the purposes of this Plan as of the January 1 of the year in which his Severance Date or retirement occurs on the following basis: (a) For a Participant entitled to a normal retirement benefit, on the basis of the federal Social Security Act as in effect on the January 1 coincident with or next preceding his Normal Retirement Date (regardless of any retroactive changes made by legislation enacted after said January 1); (b) For a Participant entitled to an early retirement benefit, on the basis of the federal Social Security Act as in effect on the January 1 coincident with or next preceding his Early Retirement Date (regardless of any retroactive change made by legislation enacted after said January 1), assuming that his employment, and Salary in effect at his Early Retirement Date, continued to age 65; or (c) For a Participant entitled to a severance benefit, on the basis of the federal Social Security Act as in effect on the January 1 coincident with or next preceding his Severance Date (regardless of any retroactive change made by legislation enacted after said January 1), assuming that his employment, and Salary in effect at his Severance Date, continued to age 65. For purposes of the calculations required under paragraphs (a) and (b) above, if a Participant is disabled under a period of long-term disability under the Company's Group Insurance Plan, said Social 9 Security Benefit shall be calculated as if his Salary in effect at the commencement of such period of long-term disability continued to age 65. 2.24 Spouse's Pension. Shall mean the actual monthly benefit payable to an Eligible Spouse under the Retirement Plan, assuming the Eligible Spouse elected a 50% Joint and Survivor Annuity form of benefit. 2.25 Target Early Retirement Benefit. Shall mean an amount equal to a Participant's Final Average Salary determined at his Early Retirement Date multiplied by four percent (4%) for each projected year of Service at his Normal Retirement Date up to a maximum of sixty-two percent (62%). 2.26 Target Normal Retirement Benefit. Shall mean an amount equal to a Participant's Final Average Salary determined at his Normal Retirement Date multiplied by four percent (4%) for each projected year of Service at his Normal Retirement Date up to a maximum of sixty-two percent (62%). 2.27 Target Pre-Retirement Death Benefit. Shall mean an amount equal to a deceased Participant's Final Average Salary determined at his death multiplied by four percent (4%) for each year of Service at his death up to a maximum of sixty-two percent (62%). 2.28 Target Severance Benefit. Shall mean an amount equal to a Participant's Final Average Salary determined at his Severance Date multiplied by four percent (4%) for each year of Service at his Severance Date up to a maximum of sixty-two percent (62%). ARTICLE III ELIGIBILITY AND PARTICIPATION 3.01 Eligibility. Any executive employee of a Company who has served on the Senior Management Committee of the Sponsor and who has been a Senior Vice 10 President or above for a minimum period of three (3) years and who has at least ten (10) years of Service shall be eligible to participate in this Plan. 3.02 Date of Participation. Each executive who is eligible to become a Participant under Section 3.01 shall become a Participant on the first day of the month following the month in which he is first eligible to participate. 3.03 Duration of Participation. Each executive who becomes a Participant shall continue to be a Participant until the termination of his employment with the Company or, if later, the date he is no longer entitled to benefits under this Plan. ARTICLE IV RETIREMENT BENEFITS 4.01 Normal Retirement Benefit. (a) Eligibility. A Participant whose employment with the Company terminates on or after his Normal Retirement Date shall be eligible for the normal retirement benefit described in this Section 4.01. (b) Amount and Form. The monthly payment hereunder shall be in the form of a Single Life Annuity if the Participant has no Eligible Spouse and in the form of a 50% Qualified Joint and Survivor Annuity if the Participant has an Eligible Spouse. The eligible Participant's normal retirement benefit shall be a monthly amount equal to his Target Normal Retirement Benefit reduced by the sum of (1) his Assumed Normal Retirement Pension Benefit and (2) his Social Security Benefit. (c) Commencement and Duration. Monthly normal retirement benefit payments shall commence at the same time as the eligible Participant's normal retirement Pension payable from the Retirement Plan and shall continue 11 in monthly installments thereafter ending with a payment for the month in which such eligible Participant's death occurs, unless the benefit is being paid in the form of a Qualified Joint and Survivor Annuity, in which case the survivor benefit shall be paid to the Eligible Spouse, if living, for his or her life. If at the time of commencement of payment such eligible Participant does not have an Eligible Spouse the monthly benefit payments shall be guaranteed for one hundred twenty (120) monthly payments with any such guaranteed payments remaining at such Participant's death payable to his Designated Beneficiary. 4.02 Early Retirement Benefit. (a) Eligibility. Upon recommendation of the Chief Executive Officer of the Company and approval of the Committee, a Participant whose employment with the Company terminates upon or after his attainment of age fifty-five (55) with at least fifteen (15) years of Service (except for purposes of calculating benefits payable under Article V. PRE-RETIREMENT DEATH BENEFITS and Article VI. SEVERANCE BENEFITS, as applicable) but prior to his Normal Retirement Date, shall be eligible for the early retirement benefit described in this Section 4.02. (b) Amount and Form. The monthly payment hereunder shall be in the form of a Single Life Annuity if the Participant has no Eligible Spouse and in the form of a 50% Qualified Joint and Survivor Annuity if the Participant has an Eligible Spouse. The eligible Participant's early retirement benefit shall be a monthly amount equal to his Target Early 12 Retirement Benefit reduced by the sum of (1) his Assumed Early Retirement Pension Benefit and (2) his Social Security Benefit; provided, however, such benefit will be reduced, where applicable, by the following: (i) The amount of, 2.5% for each year that such benefit is received prior to his Normal Retirement Date, and (ii) If such eligible Participant's projected years of Service at his Normal Retirement Date are less than fifteen (15), his Target Early Retirement Benefit and his Assumed Early Retirement Pension Benefit shall be calculated based upon his actual years of Service at his Early Retirement Date rather than upon his projected years of Service at his Normal Retirement Date. 4.03 Commencement and Duration. Monthly early retirement benefit payments shall commence on the first day of the month following the Participant's attainment of age 65, provided, such Participant may make written application to the Committee to have payments commence on the first day of any month following his Early Retirement Date and the decision of the Committee, based upon its sole and absolute discretion, to allow such early commencement of payment shall be final. After commencement of payment, said early retirement benefit payments shall continue in monthly installments thereafter ending with a payment for the month in which such eligible Participant's death occurs, unless the benefit is being paid in the form of a Qualified Joint and Survivor Annuity, in which case the survivor benefit shall be paid to the Eligible Spouse, if living, for his or her life. If at 13 the time of commencement of payment such eligible Participant does not have an Eligible Spouse, the monthly benefit payments shall be guaranteed for one hundred twenty (120) monthly payments with any such guaranteed payments remaining at such Participant's death payable to his Designated Beneficiary. 4.04 Surviving Spouse Benefit. The surviving Eligible Spouse of a Participant who is receiving a Qualified Joint and Survivor Benefit as a normal retirement benefit or as an early retirement benefit shall be eligible for the surviving spouse benefit upon the death of the Participant for the duration of the Eligible Spouse's life. 4.05 Re-employment of Retired Participant. A retired Participant receiving or eligible to receive the retirement benefits described in Sections 4.01 and 4.02 hereof who is reemployed by the Company shall be ineligible to again participate in this Plan. ARTICLE V RETIREMENT DEATH BENEFITS 5.01 Eligibility. A Participant's surviving Eligible Spouse shall be eligible for the pre- retirement death benefit as described in this Article V if such Participant dies while in the employ of the Company with 10 or more years of Service. 5.02 Amount. Such surviving Eligible Spouse shall be entitled to a monthly pre-retirement death benefit payable in the form of an annuity in an amount equal to the difference, if any, between (a) forty percent (40%) of the Target Pre-Retirement Death Benefit and (b) the Spouse's Pension. 5.03 Alternative Benefit. If greater than the monthly benefit of Section 5.02 hereof, the surviving Eligible Spouse of a Participant who dies while in the employ of the Company after attaining age fifty-five (55) with fifteen (15) years of Service shall be entitled to a monthly pre-retirement death benefit equal to fifty percent (50%) of the early retirement benefit the 14 Participant would have been entitled to receive under Section 4.02 hereof (calculated using both reductions, where applicable, in subsections 4.02(b)(i) and 4.02(b)(ii)) as if he had retired immediately prior to his death with the recommendation of the Chief Executive Officer and approval of the Committee. 5.04 Commencement and Duration. The surviving Eligible Spouse's monthly pre-retirement death benefit payments shall commence in the month following the Participant's death and shall be paid in monthly installments thereafter ending with a payment for the month in which such surviving Eligible Spouse's death occurs. ARTICLE VI SEVERANCE BENEFITS 6.01 Eligibility. Upon his termination of employment with the Company at his Severance Date, a Participant who has completed ten (10) or more years of Service shall be eligible for one of the severance benefits described in this Article VI. 6.02 Amount. (a) If at his Severance Date such eligible Participant is not entitled to a deferred vested Pension pursuant to Section 5.03 of the Retirement Plan or an early retirement Pension pursuant to Section 5.02 of the Retirement Plan, his severance benefit shall be a monthly amount equal to his Target Severance Benefit reduced by his Social Security Benefit. (b) If at his Severance Date such eligible Participant is entitled to a deferred vested Pension pursuant to Section 5.03 of the Retirement Plan, his severance benefit shall be a monthly amount equal to his 15 Target Severance Benefit reduced by the sum of (1) his Assumed Deferred Vested Pension Benefit and (2) his Social Security Benefit. (c) If at his Severance Date such eligible Participant is entitled to an early retirement Pension pursuant to Section 5.02 of the Retirement Plan, his severance benefit shall be a monthly amount equal to his Target Severance Benefit reduced by the sum of (1) his Assumed Early Retirement Pension Benefit and (2) his Social Security Benefit; provided, however, such Assumed Early Retirement Pension Benefit shall be calculated based upon his actual years of Service at his Severance Date rather than upon his projected years of Service at his Normal Retirement Date. 6.03 Commencement and Duration. Monthly severance benefit payments shall commence on the eligible Participant's Normal Retirement Date and shall continue in monthly installments thereafter ending with a payment for the month in which such eligible Participant's death occurs. 6.04 Surviving Spouse Benefit. (a) Eligibility. The surviving Eligible Spouse of a Participant who is receiving or who dies after attaining age fifty-five (55) entitled to receive a severance benefit hereunder shall be eligible for the surviving spouse benefit described in this Section 6.04. (b) Such surviving Eligible Spouse shall be entitled to a monthly surviving spouse benefit in an amount equal to fifty percent (50%) of the severance benefit which the deceased Participant was receiving or 16 entitled to receive at his Normal Retirement Date under either Section 6.02(a) or 6.02(b) hereof on the day before his death. (c) Commencement and Duration. The monthly surviving spouse benefit payment shall commence in the month following the Participant's death and shall be paid in monthly installments thereafter ending with a payment for the month in which such surviving Eligible Spouse's death occurs. ARTICLE VII ADMINISTRATION 7.01 Committee. This Plan shall be administered by the Committee. The Committee shall have all powers necessary to enable it to carry out its duties in the administration of the Plan. Not in limitation, but in application of the foregoing, the Committee shall have the duty and power to determine all questions that may arise hereunder as to the status and rights of Participants in the Plan. 7.02 Voting. The Committee shall act by a majority of the number then constituting the Committee, and such action may be taken either by vote at a meeting or in writing , without a meeting. 7.03 Records. The Committee shall keep a complete record of all its proceedings and all data relating to the administration of the Plan. The Committee shall select one of its members as a Chairman. The Committee shall appoint a Secretary to keep minutes of its meetings and the Secretary may or may not be a member of the Committee. The Committee shall make such rules and regulations for the conduct of its business as it shall deem advisable. 7.04 Liability. To the extent permitted by law, no member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to 17 his own gross negligence or willful misconduct. The Sponsor shall indemnify the members of the Committee against any and all claims, losses, damages, expenses, including counsel fees, incurred by them, and any liability, including any amounts paid in settlement with their approval, arising from their action or failure to act, except when the same is judicially determined to be attributable to their gross negligence or willful misconduct. 7.05 Expenses. The cost of payments from this Plan and the expenses of administering the Plan shall borne by each Company with respect to its own employees. ARTICLE VIII AMENDMENT AND TERMINATION The Sponsor reserves the right, at any time or from time to time, by action of its Board, to modify or amend in whole or in part any or all provisions of the Plan. In addition, the Sponsor reserves the right by action of its Board to terminate the Plan in whole or in part. Provided, however, any such modification, amendment or termination shall not reduce benefits accrued at such time nor increase vesting requirements with respect to such accrued benefits. ARTICLE IX MISCELLANEOUS 9.01 Non-Alienation of Benefits. No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such 18 benefits. If the Participant or Eligible Spouse shall become bankrupt, or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right hereunder, then such right or benefit shall, in the discretion of the Committee, cease and terminate, and in such event, the Committee may hold or apply the same or any part thereof for the benefit of the Participant or his spouse, children, or other dependents, or any of them, in such manner and in such amounts and proportions as the Committee may deem proper. 9.02 No Trust, Created. The obligations of the Sponsor and each Company to make payments hereunder shall constitute a liability of the Sponsor and each Company, as the case may be, to a Participant. Such payments shall be made from the general funds of the Sponsor or a Company, and the Sponsor or a Company shall not be required to establish or maintain any special or separate fund, or purchase or acquire life insurance on a Participant's life, or otherwise to segregate assets to assure that such payment shall be made, and neither a Participant nor Eligible Spouse shall have any interest in any particular asset of the Sponsor or a Company by reason of its obligations hereunder. Nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between the Sponsor, a Company and a Participant or any other person. 9.03 No Employment Agreement. Neither the execution of this Plan nor any action taken by the Sponsor or a Company pursuant to this Plan shall be held or construed to confer on a Participant any legal right to be continued as an employee of the Sponsor or a Company in an executive position or in any other capacity whatsoever. This Plan shall not be deemed to constitute a contract of employment between the Sponsor or a Company and a Participant, nor shall any provision herein restrict the right of any Participant to terminate his employment with the Sponsor or a Company. 19 9.04 Binding Effect. Obligations incurred by the Sponsor or a Company pursuant to this Plan shall be binding upon and inure to the benefit of the Sponsor or a Company, its successors and assigns, and the Participant or his Eligible Spouse. 9.05 Suicide. No benefit shall be payable under the Plan to a Participant or Eligible Spouse where such Participant dies as a result of suicide within two (2) years of his commencement of participation herein. 9.06 Claims for Benefits. Each Participant or Eligible Spouse must claim any benefit to which he is entitled under this Plan by a written notification to the Committee. If a claim is denied, it must be denied within a reasonable period of time, and be contained in a written notice stating the following: A. The specific reason for the denial. B. Specific reference to the Plan provision on which the denial is based. C. Description of additional information necessary for the claimant to present his claim, if any, and an explanation of why such material is necessary. D. An explanation of the Plan's claims review procedure. The claimant will have 60 days to request a review of the denial by the Committee, which will provide a full and fair review. The request for review must be in writing delivered to the Committee. The claimant may review pertinent documents, and he may submit issues and comments in writing. The decision by the Committee with respect to the review must be given within 60 days after receipt of the request, unless special circumstances require an extension (such as for a hearing). In no event shall the decision be delayed beyond 120 days after receipt of 20 the request for review. The decision shall be written in a manner calculated to be understood by the claimant, and it shall include specific reasons and refer to specific Plan provisions as to its effect. 9.07 Entire Plan. This document and any amendments contain all the terms and provisions of the Plan and shall constitute the entire Plan, any other alleged terms or provisions being of no effect. 9.08 Change in Control. In the event of a Change in Control, the Sponsor shall irrevocably set aside funds in one or more grantor trusts in an amount that is sufficient to pay each Participant (or Designated Beneficiary) the amount of benefits accrued under the Plan as of the date of the Change in Control. Any such trust shall be subject to the claims of the general creditors of the Company in the event of the bankruptcy or insolvency of the Company. ARTICLE X CONSTRUCTION 10.01Governing Law. This Plan shall be construed and governed in accordance with the laws of the State of North Carolina, to the extent not preempted by Federal Law. 10.02Gender. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary. 10.03Headings, etc. The cover page of this Plan, the Table of Contents and all headings used in this Plan are for convenience of reference only and are not part of the substance of this Plan. 10.04Action. Any action under this Plan required or permitted by the Sponsor shall be by action of its Board or its duly authorized designee. 21 APPENDIX A North Carolina Natural Gas Company ("NCNG"); provided that for all purposes of the Plan, Service for an employee of NCNG on December 31, 1999 (as defined in Section 2.21) shall include employment only with NCNG (or another adopting Company) on or after January 1, 2000; and further provided that the accrued benefit calculated under Sections 2.03, 2.04 and 2.05 shall not include the "Accrued Benefit" under Supplement A, Paragraph A-2 of the Retirement Plan, attributable to the NCNG Employees Pension Plan. Progress Energy Florida, Inc. (non-bargaining employees) ("PEF"); provided that for all purposes of the Plan, Service for an employee of PEF on December 31, 2001 (as defined in Section 2.21) shall include employment only with PEF (or another adopting Company) on or after January 1, 2002; and further provided that the accrued benefit calculated under Sections 2.03, 2.04 and 2.05 shall not include the "Accrued Benefit" under Supplement B, Paragraph B-2(a) of the Retirement Plan, attributable to the FPC Plan. Progress Telecom Corporation ("PTC"); provided that for all purposes of the Plan, Service for an employee of PTC on December 31, 2001 (as defined in Section 2.21) shall include employment only with PTC (or another adopting Company) on or after January 1, 2002; and further provided that the accrued benefit calculated under Sections 2.03, 2.04 and 2.05 shall not include the "Accrued Benefit" under Supplement B, Paragraph B-2(a) of the Retirement Plan, attributable to the FPC Plan. Progress Fuels Corporation (corporate employees) ("PFC"); provided that for all purposes of the Plan, Service for an employee of PFC on December 31, 2001 (as defined in Section 2.21) shall include employment only with PFC (or another adopting Company) on or after January 1, 2002; and further provided that the accrued benefit calculated under Sections 2.03, 2.04 and 2.05 shall not include the "Accrued Benefit" under Supplement B, Paragraph B-2(a) of the Retirement Plan, attributable to the FPC Plan. Progress Energy Carolinas, Inc. Progress Energy Service Company, LLC Progress Energy Ventures, Inc. EX-10 6 pei_exhibit10iv-.txt EXHIBIT 10(IV) TO 2003 2ND QTR FORM 10-Q Exhibit 10(iv) AMENDED MANAGEMENT INCENTIVE COMPENSATION PLAN OF PROGRESS ENERGY, INC. AS AMENDED JANUARY 1, 2003 TABLE OF CONTENTS Page ARTICLE I PURPOSE........................................... 1 ARTICLE II DEFINITIONS....................................... 1 ARTICLE III ADMINISTRATION.................................... 7 ARTICLE IV PARTICIPATION..................................... 8 ARTICLE V AWARDS............................................ 8 ARTICLE VI DISTRIBUTION AND DEFERRAL OF AWARDS............... 12 ARTICLE VII TERMINATION OF EMPLOYMENT......................... 18 ARTICLE VIII MISCELLANEOUS..................................... 18 ARTICLE I PURPOSE The purpose of the Management Incentive Compensation Plan (the "Plan") of Progress Energy, Inc. (the "Sponsor") is to promote the financial interests of the Sponsor and its Affiliated Companies, including its growth, by (i) attracting and retaining executive officers and other management-level employees who can have a significant positive impact on the success of the Sponsor and its Affiliated Companies; (ii) motivating such personnel to help the Sponsor and its Affiliated Companies achieve annual incentive, performance and safety goals; (iii) motivating such personnel to improve their own as well as their business unit/work group's performance through the effective implementation of human resource strategic initiatives; and (iv) providing annual cash incentive compensation opportunities that are competitive with those of other major corporations. The Sponsor amends and restates the Plan effective January 1, 2003. ARTICLE II DEFINITIONS The following definitions are applicable to the Plan: 1. "Award": The benefit payable to a Participant hereunder, consisting of a Corporate Component and a Noncorporate Component. 2. "Affiliated Company": Any corporation or other entity that is required to be aggregated with the Sponsor pursuant to Sections 414(b), (c), (m), or (o) of the Internal Revenue Code of 1986, as amended (the "Code"), but only to the extent required. 3. "Board": The Board of Directors of the Sponsor. 4. "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. 5. "Change of Control": 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 2 (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 Company of all or substantially all of the Sponsor's assets; or 3 (f) the date of any event which the Board determines should constitute a Change of Control. A Change of Control shall not be deemed to have occurred until a majority of the members of the Board receive written certification from the Compensation Committee that one of the events set forth in this Section 5 has occurred. Any determination that an event described in this Section 5 has occurred shall, if made in good faith on the basis of information available at that time, be conclusive and binding on the Compensation Committee, the Sponsor, each Affiliated Company, the Participant and their Beneficiaries for all purposes of the Plan. 6. "Company": Progress Energy, Inc., a North Carolina corporation, or any successor to it in the ownership of substantially all of its assets and each Affiliated Company that, with the consent of the Compensation Committee, adopts the Plan and is included in Exhibit B, as in effect from time to time. 7. "Compensation Committee": The Organization and Compensation Committee of the Board of Directors of the Sponsor. 8. "Continuing Director": 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. 9. "Corporate Factor": The factor determined by the Compensation Committee to be utilized in calculating the Corporate Component of an Award pursuant to Article V, Section 3.a. hereof, which can range from 0 to 2.0. 10. "Corporate Component": That portion of an Award based upon the overall performance of the Sponsor, as determined in Article V, Section 3.a. hereof. 4 11. "Date of Retirement": The first day of the calendar month immediately following the Participant's Retirement. 12. "Designated Beneficiary": The beneficiary designated by the Participant, pursuant to procedures established by the Human Resources Department of the Company, 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. 13. "EBITDA": The earnings of the Sponsor before interest, taxes, depreciation, and amortization as determined from time to time by the Compensation Committee. 14. "EBITDA Growth": The percentage increase (if any) in EBITDA of the Sponsor for any Year, as compared to the previous Year as determined from time to time by the Compensation Committee. 15. "Effective Date": The Effective Date of this Plan, as amended, is of January 1, 2003. 16. "Noncorporate Component": That portion of an Award based upon the level of attainment of a Company, business unit/group, departmental, and individual Performance Measures, as provided in Article V, Section 3.b. hereof, which can range from 0 to 2.0. 17. "Participant": An employee of any Company who is selected pursuant to Article IV hereof to be eligible to receive an Award under the Plan. 18. "Peer Group": The utilities included in the Standard & Poor's Utility (Electric Power Companies) Index. 5 19. "Performance Measure": A goal or goals established for measuring the performance of a Company, business unit/group, department, or individual used for the purpose of computing the Noncorporate Component of an Award for a Participant. 20. "Performance Unit": A unit or credit, linked to the value of the Sponsor's Common Stock under the terms set forth in Article VI hereof. 21. "Plan": The Management Incentive Compensation Plan of Progress Energy, Inc. as contained herein, and as it may be amended from time to time. 22. "Retirement": A Participant's termination of employment with a Company after having met at least one of the following requirements: at least age 65 with 5+ years of service, at least age 55 with 15+ years of service, or 35+ years of service regardless of age. 23. "Salary": The compensation paid by a Company to a Participant in a relevant Year, consisting of regular or base compensation, such compensation being understood not to include bonuses, if any, or incentive compensation, if any. Provided, that such compensation shall not be reduced by any cash deferrals of said compensation made under any other plans or programs maintained by such Company. 24. "Section 16 Participants": Those Participants who are subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Individuals who are subject to Section 16 of the 1934 Act include, without limitation, directors and certain officers of the Sponsor, and any individual who beneficially owns more than ten percent of a class of the Sponsor's equity securities registered under Section 12 of the 1934 Act. 25. "Senior Management Committee": The Senior Management Committee of the Company. 6 26. "Target Award Opportunity": The target for an Award under this Plan as set forth in Section 2 of Article V hereof. 27. "Year": A calendar year. ARTICLE III ADMINISTRATION The Plan shall be administered by the Chief Executive Officer of the Sponsor. Except as otherwise provided herein, the Chief Executive Officer of the Sponsor shall have sole and complete authority to (i) select the Participants; (ii) establish and adjust (either before or during the relevant Year) a Participant's Performance Measures, their relative percentage weight, and the performance criteria necessary for attainment of various performance levels; (iii) approve Awards; (iv) establish from time to time regulations for the administration of the Plan; and (v) interpret the Plan and make all determinations deemed necessary or advisable for the administration of the Plan, all subject to its express provisions. Notwithstanding the foregoing, the Compensation Committee shall (a) approve the performance criteria and Awards for all Participants who are members of the Senior Management Committee; (b) determine the total payout under the Plan up to a maximum of four percent (4%) of the Sponsor's after-tax income for a relevant Year; and (c) certify to the Board that a Change of Control has occurred as provided in Section 5 of Article II. A majority of the Compensation Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the members of the Committee without a meeting, shall be the acts of such Committee. 7 ARTICLE IV PARTICIPATION The Chief Executive Officer of the Sponsor shall select from time to time the Participants in the Plan for each Year from those employees of each Company who, in his opinion, have the capacity for contributing in a substantial measure to the successful performance of the Company that Year. No employee shall at any time have a right to be selected as a Participant in the Plan for any Year nor, having been selected as a Participant for one Year, have the right to be selected as a Participant in any other Year. ARTICLE V AWARDS 1. Eligibility. In order for any Participant to be eligible to receive an Award, two conditions must be met. First, a contribution must be earned by one or more groups of employees under the Employee Stock Incentive Plan feature of the Sponsor's 401(k) Savings & Stock Ownership Plan. Second, the Sponsor must also meet minimum threshold performance levels for return on common equity, EBITDA Growth, and other measures for the relevant Year as may be established by the Compensation Committee. Threshold performance for return on common equity and EBITDA Growth is the weighted average of a Peer Group of utilities, averaged over the most recent three-year period. To satisfy threshold performance, the Sponsor must be above the three-year average with respect to return on common equity and EBITDA Growth. 2. Target Award Opportunities. The following table sets forth Target Award Opportunities, expressed as a percentage of Salary, for various levels of participation in the Plan: 8 - ------------------------------------------------------------------------------- Participation Target Award Opportunities - ------------------------------------------------------------------------------- Chief Executive Officer of Sponsor* 85% - ------------------------------------------------------------------------------- Chief Operating Officer of Sponsor* 70% - ------------------------------------------------------------------------------- Presidents*/Executive Vice Presidents* 55% - ------------------------------------------------------------------------------- Senior Vice Presidents* 45% - ------------------------------------------------------------------------------- Department Heads 35% - ------------------------------------------------------------------------------- Other Participants: Key Managers 25% Other Managers 20% - ------------------------------------------------------------------------------- *Senior Management Committee level positions. The Target Award Opportunity for the Chief Executive Officer of the Sponsor shall be 85%; however, the Compensation Committee of the Board shall be authorized to change that amount from year to year, or to award an amount of compensation based on other considerations, in its complete discretion. 3. Award Components. Awards under the Plan to which Participants are eligible consist of the sum of a Corporate Component and a Noncorporate Component. The portion of the Target Award Opportunities attributable to the Corporate Component and Noncorporate Component, respectively, for various levels of participation, is set forth in the following table: - ------------------------------------------------------------------------------ Participants Corporate Noncorporate Component Component - ------------------------------------------------------------------------------ Chief Executive Officer of Sponsor* 100% - - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Chief Operating Officer of Sponsor* 100% - - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Presidents*/Executive Vice Presidents* 75% 25% - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Senior Vice Presidents* 75% 25% - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Department Heads 50% 50% - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Other Participants 50% 50% - ------------------------------------------------------------------------------ *Senior Management Committee level positions. a. Corporate Component. The Corporate Component of an Award is based upon the overall performance of the Sponsor. In the event the conditions set forth in Section 1 of Article V are met and the Compensation Committee, in its discretion, determines an appropriate Corporate Factor, that Corporate Factor shall be multiplied by the portion of a Participant's Target Award Opportunity 9 attributable to the Corporate Component in order to determine the percentage of such Participant's Salary which will comprise the Corporate Component of his or her Award. Notwithstanding the foregoing, if the second condition set forth in Section 1 of Article V is not fully met, the Compensation Committee may nevertheless in its discretion determine an appropriate Corporate Factor and grant a Corporate Component of an Award to the Participants. b. Noncorporate Component. The Noncorporate Component of an Award for a Participant is based upon the level of attainment of Company, business unit/group, departmental and individual Performance Measures. Performance Measures for each Participant and their relative weight are determined pursuant to authority granted in Article III hereof. (i) Performance Levels. There are three levels of performance related to each of a Participant's Performance Measures: outstanding, target, and threshold. The specific performance criteria for each level of a Participant's Performance Measures shall be set forth in writing prior to the beginning of an applicable Year, or within thirty (30) days after a Participant first becomes eligible to participate in the Plan, and shall be determined pursuant to authority granted in Article III hereof. The payout percentages to be applied to each Participant's Target Award Opportunity are as follows: Performance Level Payout Percenge Outstanding 200% Target 100% Threshold 50% Payout percentages shall be adjusted for performance between the designated performance levels, provided, however, that performance which falls below the 10 "Threshold" performance level results in a payout percentage of zero unless the Chief Executive Officer of Sponsor directs otherwise. (ii) Determination of Noncorporate Component. In order to determine a Participant's Noncorporate Component, if any, for a particular Year, the Chief Executive Officer of Sponsor initially shall determine the appropriate payout percentage for each of such Participant's Performance Measures. Thereafter, each payout percentage is multiplied by the percentage weight assigned to each such Performance Measure and the results added together. That aggregate amount is multiplied by the Participant's Target Award Opportunity for the Noncorporate Award Component for the respective Year and the result is multiplied by the Participant's Salary. (iii) Change of Job Status. Participants who change organizations during a Year will have their Noncorporate Component prorated based upon the Performance Measures achieved in each organization and the length of time served in each organization. In the discretion of the Chief Executive Officer of Sponsor, employees may become Participants during a Year based on promotions and may receive an Award prorated based on the length of time served in the qualifying job and the Performance Measures achieved while in the qualifying job. 4. New Participants. Any Award that is earned during the Year of selection shall be pro rated based on the length of time served in the qualifying job. 5. Adjustment of Award Amount. In the event of documented performance of a Participant during a Year that is either deficient or exceptional, the Chief Executive Officer of Sponsor, in his sole discretion, may adjust the Award payable to such Participant for such Year. 11 6. Example. Attached as Exhibit A and incorporated by reference is an example of the process by which an Award is granted hereunder. Said exhibit is intended solely as an example and in no way modifies the provisions of this Article V. ARTICLE VI DISTRIBUTION AND DEFERRAL OF AWARDS 1. Distribution of Awards. Unless a Participant elects to defer an award pursuant to the remaining provisions of this Article VI, awards under the Plan earned during any Year shall be paid in cash in the succeeding Year, normally no later than March of such succeeding Year. 2. Deferral Election. A Participant may elect to defer the Plan Award he or she has earned for any Year by completing and submitting to the Vice President, Human Resources, a deferral election form by the later of (i) November 30 of the Year in which the Award is earned or (ii) the thirtieth (30th) day after first becoming eligible to participate in the deferral election provisions of the Plan. Such election shall apply to the Participant's Award, if any, otherwise to be paid after the Year during which it was earned. A Participant's deferral election may apply to 100%, 75%, 50%, or 25% of the Plan Award; provided, however, that in no event shall the amount deferred be less than $1,000. The election to defer shall be irrevocable as to the Award earned during the particular Year. 3. Period of Deferral. At the time of a Participant's deferral election, a Participant must also select a distribution date and form of distribution. Subject to Section 6, the distribution date may be: (a) any date that is at least five (5) years subsequent to the date the Plan Award would otherwise be payable, but not later than the second anniversary of the Participant's Date of Retirement; or (b) any date that is within two years following the Participant's 12 Date of Retirement. Subject to Section 6, the form of distribution may be either (i) a lump sum or (ii) equal installments over a period extending from two years to ten years, as elected by the Participant. Subject to Section 6, a Participant may extend the distribution date for one or more additional Year(s) by making a new deferral election at least one (1) year before the previously selected distribution date occurs; provided, however, that (a) in no event shall the subsequent distribution date be a date that is more than two years beyond the Participant's Date of Retirement and (b) such a change will only be available once for each deferred Award. Additionally, a Participant may elect to change the form of distribution by making a new form of distribution election, provided, however, that (a) any change in the form of distribution must be made at least one (1) year before any distribution occurs and (b) such a change will only be available once for each deferred Award. 4. Performance Units. All Awards which are deferred under the Plan shall be recorded in the form of Performance Units. Each Performance Unit is generally equivalent to a share of the Sponsor's Common Stock. In converting the cash award to Performance Units, the number of Performance Units granted shall be determined by dividing the amount of the Award by 85% of the average value of the opening and closing price of a share of the Sponsor's Common Stock on the last trading day of the month preceding the date of the Award. The Performance Units attributable to the 15% discount from the average value of the Sponsor's Common Stock shall be referred to as the "Incentive Performance Units." The Incentive Performance Units and any adjustments or earnings attributable to those Performance Units shall be forfeited by the Participant if he or she terminates employment either voluntarily or involuntarily other than for death or Retirement prior to five years from March 15 of the Year in which payment 13 would have been made if the Award had not been deferred; provided, however, that if before such date the employment of the Participant is terminated by the Company without Cause following a Change in Control, the Incentive Performance Units shall not be forfeited but shall be payable to the Participant in accordance with Section 8 of this Article VI. 5. Plan Accounts. A Plan Deferral Account will be established on behalf of each Participant, and the number of Performance Units awarded to a Participant shall be recorded in each Participant's Plan Deferral Account as of the first of the month coincident with or next following the month in which a deferral becomes effective. The number of Performance Units recorded in a Participant's Plan Deferral Account shall be adjusted to reflect any splits or other adjustments in the Sponsor's Common Stock, the payment of any cash dividends paid on the Sponsor's Common Stock and the payment of Awards under this Plan to the Participant. To the extent that any cash dividends have been paid on the Sponsor's Common Stock, the number of Performance Units shall be adjusted to reflect the number of Performance Units that would have been acquired if the same dividend had been paid on the number of Performance Units recorded in the Participant's Plan Deferral Account on the dividend record date. For purposes of determining the number of Performance Units acquired with such dividend, the average of the opening and closing price of the Sponsor's Common Stock on the payment date of the Sponsor's Common Stock dividend shall be used. Each Participant shall receive an annual statement of the balance of his Plan Deferral Account, which shall include the Incentive Performance Units and associated earnings and adjustments that are subject to being forfeited as provided above. 6. Payment of Deferred Plan Awards. Subject to Section 4 related to forfeiture of Incentive Performance Units, Deferred Plan Awards shall be paid in cash by each Company on the deferred distribution date specified by the 14 Participant in accordance with Section 3, or as soon as practicable thereafter. To convert the Performance Units in a Participant's Plan Deferral Account to a cash payment amount, Performance Units shall be multiplied by the average of the opening and closing price of the Sponsor's Common Stock on the last trading day preceding the applicable distribution date specified by the Participant for the Deferred Plan Award. Except as otherwise provided, deferred amounts will be paid either in a single lump-sum payment or in up to ten (10) annual payments as elected by the Participant at the time of the deferral election. In the event that a Participant elects to receive the deferred Plan Award in equal annual payments, the amount of the Award to be received in each year shall be determined as follows: (a) To determine the amount of the initial annual payment, the number of Performance Units in the Participant's Plan Deferral Account will be divided by the total number of annual payments to be received, and the result will be multiplied by the average of the opening and closing price of the Sponsor's Common Stock on the last trading day preceding the due date of the initial payment. (b) To determine the amount of each successive annual payment, the Plan Deferral Account balance will be divided by the number of annual payments remaining, and the result will be multiplied by the average of the opening and closing price of the Sponsor's Common Stock on the last trading day preceding the due date of the annual payment. 7. Termination of Employment/Effect on Deferral Election. If the employment of a Participant terminates prior to the last day of a Year for which a Plan Award is determined, then any deferral election made with respect to such Plan Award for such Year shall not become effective and any Plan Award to which the 15 Participant is otherwise entitled shall be paid as soon as practicable after the end of the Year during which it was earned, in accordance with paragraph 1 of this Article VI. 8. Termination of Employment/Acceleration of Deferral. Notwithstanding the foregoing, if a Participant terminates employment by reason other than death or Retirement, full payment of all amounts due to the Participant shall be accelerated and paid on the first day of the month following the date of termination, or as soon as practicable thereafter. Incentive Performance Units shall be subject to forfeiture to the extent provided in Section 4. 9. Financial Hardship Payments. In the event of a severe financial hardship occasioned by an emergency, including, but not limited to, illness, disability or personal injury sustained by the Participant or a member of the Participant's immediate family, a Participant may apply to receive a distribution earlier than initially elected. The Chief Executive Officer of Sponsor or his designee may, in his sole discretion, either approve or deny the request. The determination made by the Chief Executive Officer of Sponsor will be final and binding on all parties. If the request is granted, the payments will be accelerated only to the extent reasonably necessary to alleviate the financial hardship. Incentive Performance Units shall not be subject to early distribution under this Section 9 until five years from March 15 of the Year in which payment would have been made if the Award had not been deferred. 10. Death of a Participant. If the death of a Participant occurs before a full distribution of the Participant's Plan Deferral Account is made, payment shall be made to the Designated Beneficiary of the Participant in accordance with the schedule specified in the Participant's Deferral Election form. Said payment shall be made as soon as practical following notification that death has occurred. 16 11. Non-Assignability of Interests. The interests herein and the right to receive distributions under this Article VI 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 a Participant becomes bankrupt, the interests of the Participant under this Article VI may be terminated by the Chief Executive Officer of Sponsor, which, in his sole discretion, may cause the same to be held or applied for the benefit of one or more of the dependents of such Participant or make any other disposition of such interests that he deems appropriate. 12. Unfunded Deferrals. Nothing in this Plan, including this Article VI, shall be interpreted or construed to require the Sponsor or any Company in any manner to fund any obligation to the Participants, terminated Participants or beneficiaries hereunder. 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 Sponsor or any Company and the Participants, terminated Participants, beneficiaries, or any other persons. Any funds which may be accumulated in order to meet any obligation under this Plan shall for all purposes continue to be a part of the general assets of the Sponsor or Company; provided, however, that the Sponsor or Company may establish a trust to hold funds intended to provide benefits hereunder to the extent the assets of such trust become 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. To the extent that any Participant, terminated Participant, or beneficiary acquires a right to receive payments from the Sponsor or Company under this Plan, such rights shall be no greater than the rights of any unsecured general creditor of the Sponsor or Company. 13. Change of Control. In the case of a Change of Control, the Company shall, subject to the restrictions in this Section 13 and Section 12 of Article 17 VI, 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 of Control occurs, of the benefits to which Participants (or their Designated Beneficiaries) would be entitled pursuant to the terms of the Plan if the value of their Plan Deferral Account would be paid in a lump sum upon the Change of Control. ARTICLE VII TERMINATION OF EMPLOYMENT Except as otherwise provided in this Article VII, a Participant must be actively employed by a Company on the next January 1 immediately following the Year for which a Plan Award is earned in order to be entitled to payment of the full amount of any Award for that Year. In the event the active employment of a Participant shall terminate or be terminated for any reason before the next January 1 immediately following the Year for which a Plan Award is earned, such Participant shall receive his or her Award for the year, if any, in an amount that the Chief Executive Officer of the Sponsor deems appropriate. Notwithstanding the foregoing provisions of this Article VII, in the event the employment of the Participant is terminated by the Company without Cause following a Change in Control, the Award of the Participant for the Year in which the termination occurs shall equal the amount of the Award which would have been earned for the Year if the Participant had remained in the employment of the Company until the next January 1, pro rated to reflect the portion of the Year completed by the Participant as an employee; provided, however, that such Award shall not be less than the Target Award Opportunity of the Participant for the Year, pro rated to reflect the portion of the Year completed by the Participant as an employee. 18 ARTICLE VIII MISCELLANEOUS 1. Assignments and Transfers. The rights and interests of a Participant under the Plan may not be assigned, encumbered or transferred except, in the event of the death of a Participant, by will or the laws of descent and distribution. 2. Employee Rights Under the Plan. No Company employee or other person shall have any claim or right to be granted an Award under the Plan or any other incentive bonus or similar plan of the Sponsor or any Company. Neither the Plan, participation in the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Sponsor or any Company. 3. Withholding. The Sponsor or Company (as applicable) shall have the right to deduct from all amounts paid in cash any taxes required by law to be withheld with respect to such cash payments. 4. Amendment or Termination. The Compensation Committee may in its sole discretion amend, suspend or terminate the Plan or any portion thereof at any time; provided, that in the event of a Change of Control, no such action shall take effect prior to the January 1 next following the Year in which occurs the Change of Control. No action to amend, suspend or terminate the Plan shall affect the right of a Participant to the payment of a Plan Award earned prior to the effective date of such action. 5. Governing Law. This Plan shall be construed and governed in accordance with the laws of the state of North Carolina. 6. Entire Agreement. This document (including the Exhibits attached hereto) sets forth the entire Plan. 19 EXHIBIT A (to be supplied) EXHIBIT B Progress Energy Carolinas, Inc. Progress Energy Service Company, LLC Progress Energy Florida, Inc. Progress Energy Ventures, Inc. Progress Fuels Corporation (corporate employees) DESIGNATION OF BENEFICIARY MANAGEMENT INCENTIVE COMPENSATION PLAN OF PROGRESS ENERGY, INC. As provided in the Management Incentive Compensation Plan of Progress Energy, Inc., I hereby designate the following person as my beneficiary in the event of my death before a full distribution of my Deferral Account is made. PRIMARY BENEFICIARY: ------------------------------- ------------------------------- ------------------------------- CONTINGENT BENEFICIARY: ------------------------------- ------------------------------- ------------------------------- Any and all prior designations of one or more beneficiaries by me under the Management Incentive Compensation Plan of Progress Energy, Inc. are hereby revoked and superseded by this designation. I understand that the primary and contingent beneficiaries named above may be changed or revoked by me at any time by filing a new designation with the Sponsor's Human Resources Department. DATE: ---------------------- SIGNATURE OF PARTICIPANT: ------------------------------ The Participant named above executed this document in our presence on the date set forth above WITNESS: WITNESS: ------------------------- ---------------------------- EX-10 7 pei_exhibit10v-.txt EXHIBIT 10(V) TO 2003 2ND QTR FORM 10-Q Exhibit 10(v) EXECUTION COPY AMENDMENT AND RESTATEMENT AMENDMENT AND RESTATEMENT, dated as of July 30, 2003 (this "Amendment and Restatement"), to that certain 364-DAY REVOLVING CREDIT AGREEMENT, dated as of July 31, 2002, (the "Existing Agreement"; and as amended by this Amendment and Restatement, the "Amended and Restated Agreement"), among Carolina Power & Light Company (d/b/a/ Progress Energy Carolinas, Inc., the "Company"), certain Lenders named therein (the "Lenders") and Citibank, N.A., as Administrative Agent (the "Administrative Agent"). PRELIMINARY STATEMENT The Company, the Lenders and the Administrative Agent previously entered into the Existing Agreement. The parties hereto now wish to amend the Existing Agreement in its entirety to read as set forth in the Existing Agreement with the amendments set forth below. The parties therefore agree as follows (capitalized terms used but not defined herein having the meanings assigned to such terms in the Existing Agreement): SECTION 1. Amendment to Existing Agreement. Effective as of the date of the Termination Date (as defined in the Existing Agreement without giving effect to this Amendment and Restatement, the "Current Termination Date")) and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, the Existing Agreement is hereby amended as follows: (a) By adding the following new definition in the appropriate alphabetical order: "Borrowing" means a borrowing consisting of Advances of the same Type made on the same day by each of the Lenders pursuant to Section 2.01 or Converted pursuant to Section 2.09 or Section 2.10. (b) By deleting the definition of "Revolving Period" in Section 1.01 thereof in its entirety and substituting the following therefor: "Revolving Period" means the period beginning on the date hereof and ending on July 28, 2004, 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. 1 (c) By adding the following new paragraphs to the end of Section 8.02 thereof: Notwithstanding the foregoing, the Company hereby agrees that it will provide to the Administrative Agent all information, documents and other materials that it is obligated to furnish to the Administrative Agent pursuant to clauses (i), (ii) and (iii) of Section 5.01(i) of this Agreement (collectively, the "Communications"), by transmitting the Communications in an electronic/soft medium in a format acceptable to the Administrative Agent to oploanswebadmin@citigroup.com within the time requirements specified in clauses (i), (ii) and (iii) of Section 5.01(i), as the case may be. In addition, the Company agrees to continue to provide the Communications to the Administrative Agent in the manner specified in this Agreement but only to the extent requested by the Administrative Agent. The Company further agrees that the Administrative Agent may make the Communications available to the Lenders by posting the Communications on Intralinks or a substantially similar electronic transmission systems (the "Platform"). The Company acknowledges that the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution. THE PLATFORM IS PROVIDED "AS IS" AND "AS AVAILABLE". THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE COMMUNICATIONS, OR THE ADEQUACY OF THE PLATFORM AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS OR OMISSIONS IN THE COMMUNICATIONS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY THE AGENT PARTIES IN CONNECTION WITH THE COMMUNICATIONS OR THE PLATFORM. IN NO EVENT SHALL THE 2 ADMINISTRATIVE AGENT OR ANY OF ITS AFFILIATES OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ADVISORS OR REPRESENTATIVES (COLLECTIVELY, THE "AGENT PARTIES") HAVE ANY LIABILITY TO THE COMPANY, ANY LENDER OR ANY OTHER PERSON OR ENTITY FOR DAMAGES OF ANY KIND, including, without limitation, direct or indirect, special, incidental or consequential damages, losses or expenses (WHETHER IN TORT, CONTRACT OR OTHERWISE) ARISING OUT OF THE COMPANY'S OR THE ADMINISTRATIVE AGENT'S TRANSMISSION OF COMMUNICATIONS THROUGH THE INTERNET, EXCEPT TO THE EXTENT THE LIABILITY OF ANY AGENT PARTY IS FOUND IN A FINAL NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED PRIMARILY FROM SUCH AGENT PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT; PROVIDED, HOWEVER, THE PLATFORM OR AN OWNER OR OPERATOR OF THE PLATFORM SHALL NOT BE CONSIDERED AN AGENT PARTY. The Administrative Agent agrees that the receipt of the Communications by the Administrative Agent at its e-mail address set forth above shall constitute effective delivery of the Communications to the Administrative Agent for purposes of this Agreement. Each Lender agrees that notice to it (as provided in the next sentence) specifying that the Communications have been posted to the Platform shall constitute effective delivery of the Communications to such Lender for purposes of this Agreement. Each Lender agrees (i) to notify the Administrative Agent in writing (including by electronic communication) from time to time of such Lender's e-mail address or addresses to which the foregoing notice may be sent by electronic transmission and (ii) that the foregoing notice may be sent to such e-mail address or addresses. Nothing herein shall prejudice the right of the Administrative Agent or any Lender to give any notice or other communication pursuant to this Agreement in any other manner as specified herein. 3 SECTION 2. Adjustments to the Commitments. Each Lender that consents to this Amendment and Restatement by duly completing, executing and delivering to the Administrative Agent a signature page to this Amendment and Restatement (each such Lender being an "Extending Lender") shall also indicate on its signature page hereto whether and by what amount such Lender would be willing, in such Lender's sole discretion, to increase its Commitment on and after the Current Termination Date in the event that any Lender does not consent to this Amendment and Restatement (any such Lender being a "Declining Lender"). The Administrative Agent may determine, in its sole discretion, the amount by which the Commitment of each Extending Lender that has agreed to increase its Commitment (each such Lender being an "Increasing Commitment Lender") shall be increased; provided that (i) no Increasing Commitment Lender's Commitment may be increased by an amount in excess of the amount of the increase offered by such Increasing Commitment Lender, as set forth on such Increasing Commitment Lender's signature page to this Amendment and Restatement, and (ii) the aggregate amount of the Commitments after giving effect to all such increases shall not exceed the aggregate amount of the Commitments immediately prior to the Current Termination Date. The Administrative Agent shall notify the Lenders and the Company, no later than three Business Days prior to the Current Termination Date, of the Commitments of the Extending Lenders that will be in effect on and after the Current Termination Date, after giving effect to any increases in such Commitments pursuant to the procedures set forth in this Section 2. From and after the Current Termination Date, and subject to the satisfaction of the condition precedent set forth in clause (b) of Section 3 below, the Commitment of each Declining Lender shall be zero. SECTION 3. Conditions of Effectiveness of Amendment. This Amendment shall become effective as of the date first written above when, and only when, on or prior to the Current Termination Date: (a) the Administrative Agent shall have received counterparts of this Amendment and Restatement executed by the Company and Lenders that consent to this Amendment and Restatement representing at least 85% of the Commitments (after giving effect to any adjustments to the Commitments under Section 2), (b) the Administrative Agent shall have received opinions of counsel to the Company substantially in the forms of Exhibit A-1 and Exhibit A-2 attached hereto upon which each Lender and the Administrative Agent may rely, and (c) either (i) the Commitment of, and all outstanding Loans made by, any Declining Lender shall have been assigned to one or more Increasing Commitment Lenders in accordance with the provisions of Section 8.07 of the Existing Agreement pursuant to an Assignment and Acceptance in substantially the form of Exhibit B to the Existing Agreement or (ii) such Commitment shall have been terminated and all such Loans shall have been repaid in full. 4 SECTION 4. Representations and Warranties of the Company. The Company represents and warrants that (a) the representations and warranties contained in Section 4.01 (including without limitation those regarding any required approvals of or notices to governmental bodies) of the Existing Agreement are true and correct on and as of the date first above written as though made on and as of such date, and (b) no event has occurred and is continuing, or would result from the execution and delivery of this Amendment and Restatement, 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. SECTION 5. Reference to and Effect on the Existing Agreement. Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Existing Agreement to "this Agreement", "hereunder", "hereof" and each reference in any Note to "the Credit Agreement," "thereunder" or "thereof" or, in either case, words of like import referring to the Existing Agreement shall mean and be a reference to the Amended and Restated Agreement, as amended hereby. Except as specifically amended above, the Existing Agreement and the Notes are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. The execution, delivery and effectiveness of this Amendment and Restatement shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or the Administrative Agent under the Existing Agreement or any Note, nor constitute a waiver of any provision of the Existing Agreement or any Note. SECTION 6. Costs, Expenses and Taxes. The Company agrees to pay on demand all costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment and Restatement, and the other instruments and documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of King & Spalding, counsel for the Administrative Agent with respect thereto and with respect to advising the Administrative Agent as to its rights and responsibilities hereunder and thereunder, and all costs and expenses (including, without limitation, reasonable counsel fees and expenses), if any, in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Amendment and Restatement. In addition, the Company agrees to pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Amendment and Restatement, and the other instruments and documents to be delivered hereunder, and agrees to save the Lenders and the Administrative Agent harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. SECTION 7. Execution in Counterparts. This Amendment and Restatement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 8. Governing Law. This Amendment and Restatement shall be governed by, and construed in accordance with, the internal laws of the State of New York. 5 S-1 IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Restatement to be executed by their respective officers thereunto duly authorized, as of the date first above written. CAROLINA POWER & LIGHT COMPANY By_______________________________ Thomas R. Sullivan Treasurer CITIBANK, N.A., as Administrative Agent By_______________________________ Name: Title: S-2 Lenders: Existing Commitment The undersigned Lender hereby: $ ---------------- Consents to the Amendment and Restatement: __________________ Declines to consent to the Amendment and Restatement: ________________ Consents to an increase in the amount of its Commitment, pursuant to the provisions of Section 2 of the Amendment and Restatement, of up to: $___________ CITIBANK, N.A. By_______________________________ Name: Title: S-3 Existing Commitment The undersigned Lender hereby: $ ---------------- Consents to the Amendment and Restatement: __________________ Declines to consent to the Amendment and Restatement: ________________ Consents to an increase in the amount of its Commitment, pursuant to the provisions of Section 2 of the Amendment and Restatement, of up to: $___________ WACHOVIA BANK, NATIONAL ASSOCIATION By_______________________________ Name: Title: S-4 Existing Commitment The undersigned Lender hereby: $ ---------------- Consents to the Amendment and Restatement: __________________ Declines to consent to the Amendment and Restatement: ________________ Consents to an increase in the amount of its Commitment, pursuant to the provisions of Section 2 of the Amendment and Restatement, of up to: $___________ JPMORGAN CHASE BANK By_______________________________ Name: Title: S-5 Existing Commitment The undersigned Lender hereby: $ ---------------- Consents to the Amendment and Restatement: __________________ Declines to consent to the Amendment and Restatement: ________________ Consents to an increase in the amount of its Commitment, pursuant to the provisions of Section 2 of the Amendment and Restatement, of up to: $___________ BANK ONE, NA By_______________________________ Name: Title: S-6 Existing Commitment The undersigned Lender hereby: $ ---------------- Consents to the Amendment and Restatement: _________________ Declines to consent to the Amendment and Restatement: ________________ Consents to an increase in the amount of its Commitment, pursuant to the provisions of Section 2 of the Amendment and Restatement, of up to: $___________ MELLON BANK, N.A. By_______________________________ Name: Title: S-7 Existing Commitment The undersigned Lender hereby: $ ---------------- Consents to the Amendment and Restatement: __________________ Declines to consent to the Amendment and Restatement: ________________ Consents to an increase in the amount of its Commitment, pursuant to the provisions of Section 2 of the Amendment and Restatement, of up to: $___________ NORDDEUTSCHE LANDESBANK GIROZENTRALE, New York/Cayman Islands Branch By_______________________________ Name: Title: By_______________________________ Name: Title: S-8 Existing Commitment The undersigned Lender hereby: $ ---------------- Consents to the Amendment and Restatement: __________________ Declines to consent to the Amendment and Restatement: ________________ Consents to an increase in the amount of its Commitment, pursuant to the provisions of Section 2 of the Amendment and Restatement, of up to: $___________ SUNTRUST BANK, ATLANTA By_______________________________ Name: Title: S-9 Existing Commitment The undersigned Lender hereby: $ ---------------- Consents to the Amendment and Restatement: __________________ Declines to consent to the Amendment and Restatement: ________________ Consents to an increase in the amount of its Commitment, pursuant to the provisions of Section 2 of the Amendment and Restatement, of up to: $___________ BARCLAYS BANK PLC By_______________________________ Name: Title: S-10 Existing Commitment The undersigned Lender hereby: $ ---------------- Consents to the Amendment and Restatement: __________________ Declines to consent to the Amendment and Restatement: ________________ Consents to an increase in the amount of its Commitment, pursuant to the provisions of Section 2 of the Amendment and Restatement, of up to: $___________ BANK OF AMERICA, N.A. By_______________________________ Name: Title: S-11 Existing Commitment The undersigned Lender hereby: $ ---------------- Consents to the Amendment and Restatement: __________________ Declines to consent to the Amendment and Restatement: ________________ Consents to an increase in the amount of its Commitment, pursuant to the provisions of Section 2 of the Amendment and Restatement, of up to: $___________ THE BANK OF NEW YORK By_______________________________ Name: Title: EXHIBIT A-1 FORM OF OPINION OF COUNSEL FOR THE COMPANY [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 us as counsel for Carolina Power & Light Company (the "Company") in connection with the Amendment and Restatement, dated as of July 30, 2003 (the "Amendment and Restatement"), of the 364-day Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement", and as amended by the Amendment and Restatement, the "Amended and Restated 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"). Capitalized terms used but not defined herein shall have the same meaning assigned to such terms in the Credit Agreement. In connection with the preparation, execution and delivery of the Amended and Restated Agreement, we have examined or have had examined under my supervision: (1) The Credit Agreement. (2) The Amendment and Restatement. (3) The opinion letter of even date herewith, addressed to you by Frank A. Schiller, General Counsel to the Company and delivered in connection with the Amendment and Restatement. 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 2 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 Amended and Restated 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 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 are of the opinion that the Amended and Restated Agreement 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 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 Amended and Restated 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 Amended and Restated Agreement, which (i) purport to excuse, release or exculpate a party for liability for or indemnify a party against the consequences of its own acts, (ii) purport to make void any act done in contravention thereof, (iii) purport to authorize a party to make binding determinations in its sole discretion, (iv) relate to the effects of laws which may be enacted in the future, (v) require waivers, consents or amendments to be made only in writing, (vi) purport to waive rights of offset or to create rights of set off other than as provided by statute, or (vii) purport to permit acceleration of indebtedness and the exercise of remedies by reason of the occurrence of an immaterial breach of the Amended and Restated 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. 3 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 Amended and Restated Agreement after the date hereof. Very truly yours, EXHIBIT A-2 FORM OF OPINION OF GENERAL 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 me as Vice President of Progress Energy Service Company, LLC and counsel to Carolina Power & Light Company (the "Company") in connection with the Amendment and Restatement, dated as of July 30, 2003 (the "Amendment and Restatement"), of the 364-day Credit Agreement, dated as of July 31, 2002 (the "Credit Agreement", and as amended by the Amendment and Restatement, the "Amended and Restated Agreement"), among the Company, the lenders from time to time party thereto (the "Lenders") and Citibank, N.A., as Administrative Agent for the Lenders (the "Administrative Agent"). Capitalized terms used but not defined herein shall have the same meaning assigned to such terms in the Credit Agreement. In connection with the preparation, execution and delivery of the Amended and Restated Agreement, I have examined: (1) The Credit Agreement. (2) The Amendment and Restatement. (3) The Restated Charter of the Company (the "Charter"). (5) The Bylaws of the Company and all amendments thereto (the "Bylaws"). (6) The NCUC Order and the SCPSC Order. I 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 I have deemed 2 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 Company 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 Company), and the due execution and delivery, pursuant to due authorization, of the Amended and Restated Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. 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 Company in connection with the transactions contemplated by the Amended and Restated Agreement. I am or the 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, the laws of the State of South Carolina for purposes of the first sentence of the opinion in paragraph 1 below, and for purposes of the opinion expressed in paragraph 3, 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 Company 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 Company of the Amendment and Restatement are within the Company'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 Company (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 Company. The Amendment and Restatement has been duly executed and delivered by the Company. 3. 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 and delivery by the Company of the Amendment and Restatement or the performance by the Company of the Amended and Restated 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. 4. To my knowledge, except as described in the reports and registration statements which the Company has filed with the Securities and Exchange Commission, there are no pending or overtly threatened actions or 3 proceedings against the Company 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 Amended and Restated Agreement or that are likely to have a materially adverse effect upon the financial condition or operations of the Company or any of the Subsidiaries. The opinions set forth above are subject to the qualification that, except as provided in paragraph 3 above, no opinion is expressed herein as to the enforceability of the Amended and Restated 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 (i) any other Person that may become a Lender under the Amended and Restated Agreement after the date hereof and (ii) Hunton & Williams, in connection with its opinion delivered on the date hereof. Very truly yours, EX-31 8 pei_exhibit31-.txt EXHIBIT 31 TO 2003 2ND QTR FORM 10-Q Exhibit 31(a) 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2003 /s/ William Cavanaugh III ------------------------- William Cavanaugh III Chairman and Chief Executive Officer Exhibit 31(b) 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2003 /s/ Peter M. Scott III ---------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer Exhibit 31(a) 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. .. Date: August 11, 2003 /s/ William Cavanaugh III ------------------------- William Cavanaugh III Chairman and Chief Executive Officer Exhibit 31(b) 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. .. Date: August 11, 2003 /s/ Peter M. Scott III ---------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer EX-32 9 pei_exhibit32-.txt EXHIBIT 32 TO 2003 2ND QTR FORM 10-Q Exhibit 32(a) CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Progress Energy, Inc. (the "Company") for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William Cavanaugh III, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ William Cavanaugh III - ------------------------- William Cavanaugh III Chairman and Chief Executive Officer August 11, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32(b) CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Progress Energy, Inc. (the "Company") for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter M. Scott III, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Peter M. Scott III - ---------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer August 11, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32(a) CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Carolina Power & Light Company (the "Company") for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William Cavanaugh III, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ William Cavanaugh III - -------------------------- William Cavanaugh III Chairman and Chief Executive Officer August 11, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32(b) CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Carolina Power & Light Company (the "Company") for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter M. Scott III, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Peter M. Scott III - ------------------------ Peter M. Scott III Executive Vice President and Chief Financial Officer August 11, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----