-----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, VwIz6VTx/tkjuAozah4a37BDvUljTFgImObusS/um70DxgTRmciyOLEzVopn37VW P7u0cLENM7aJhabr1E0uyQ== 0001094093-03-000195.txt : 20031112 0001094093-03-000195.hdr.sgml : 20031111 20031112093837 ACCESSION NUMBER: 0001094093-03-000195 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031112 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: 03991044 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: 03991043 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/PEC 2003 3RD QTR. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 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 registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether Progress Energy, Inc. (Progress Energy) 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 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 October 31, 2003, each registrant had the following shares of common stock outstanding: Registrant Description Shares Progress Energy Common Stock (Without Par Value) 245,065,096 PEC 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 September 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 2. Changes in Securities and Use of Proceeds Item 6. Exhibits and Reports on Form 8-K Signatures 2 GLOSSARY OF TERMS The following abbreviations or acronyms used in the text of this combined Form 10-Q are defined below: TERM DEFINITION AFUDC Allowance for funds used during construction the Agreement Stipulation and Settlement Agreement APB No. 28 Accounting Principles Board Opinion No. 28, "Interim Financial Reporting" ARO Asset retirement obligation Bcf Billion cubic feet CCO Competitive Commercial Operations the Code Internal Revenue Code Colona Colona Synfuel Limited Partnership, L.L.L.P. the Company Progress Energy, Inc. and subsidiaries CPI Consumer Price Index CR3 Progress Energy Florida Inc.'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 United States 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" Florida Progress or 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. MACT Maximum Available Control Technology Mesa Mesa Hydrocarbons, LLC 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 of FPC Capital I Progress Energy Progress Energy, Inc. Progress Rail Progress Rail Services Corporation Progress Telecom Progress Telecommunications Corporation 3 Progress Ventures Business unit of Progress Energy primarily made up of nonregulated energy generation, gas, coal and synthetic fuel operations and energy marketing 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 Code Section 42 Section 42 of the Internal Revenue 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 Corporation the Trust FPC Capital I Trust Westchester Westchester Gas Company
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; recurring seasonal fluctuations in demand for electricity; 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 and PEC; the ability of the Company and PEC to maintain their current credit ratings; the impact of derivative contracts used in the normal course of business; 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 manage the risks involved with the operation of its nonregulated plants, including 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 operations; 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, and PEC's Form 8-K filed on September 8, 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 September 30, 2003 CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended (Unaudited) September 30, September 30, - ---------------------------------------------------------------------------------------------------------------------- (In thousands except per share data) 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------------------------- Operating Revenues Utility $ 1,914,004 $ 1,908,817 $ 5,150,678 $ 5,007,321 Diversified business 526,762 403,562 1,418,800 1,103,707 - ---------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 2,440,766 2,312,379 6,569,478 6,111,028 - ---------------------------------------------------------------------------------------------------------------------- Operating Expenses Utility Fuel used in electric generation 488,607 448,960 1,293,561 1,185,769 Purchased power 254,627 269,108 667,194 675,066 Operation and maintenance 368,769 325,495 1,067,848 1,000,827 Depreciation and amortization 220,136 205,922 663,819 628,295 Taxes other than on income 107,222 104,989 304,499 294,217 Diversified business Cost of sales 433,817 365,481 1,219,934 1,072,818 Depreciation and amortization 45,333 28,563 111,751 86,625 Impairment of long-lived assets - 304,986 - 304,986 Other 42,739 58,655 128,082 114,937 - ---------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 1,961,250 2,112,159 5,456,688 5,363,540 - ---------------------------------------------------------------------------------------------------------------------- Operating Income 479,516 200,220 1,112,790 747,488 - ---------------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 2,166 3,293 8,464 11,673 Impairment of investments - (25,011) - (25,011) Other, net (3,067) 10,806 (14,950) 14,249 - ---------------------------------------------------------------------------------------------------------------------- Total Other Income (Expense) (901) (10,912) (6,486) 911 - ---------------------------------------------------------------------------------------------------------------------- Interest Charges Net interest charges 146,006 142,242 461,774 482,571 Allowance for borrowed funds used during construction (1,932) (624) (7,041) (7,530) - ---------------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 144,074 141,618 454,733 475,041 - ---------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations before Income Tax 334,541 47,690 651,571 273,358 Income Tax Benefit (3,112) (109,383) (33,258) (129,710) - ---------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations 337,653 157,073 684,829 403,068 Discontinued Operations, Net of Tax (18,691) (5,139) (4,888) 2,013 - ---------------------------------------------------------------------------------------------------------------------- Net Income $ 318,962 $ 151,934 $ 679,941 $ 405,081 - ---------------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 239,025 216,079 236,183 214,700 - ---------------------------------------------------------------------------------------------------------------------- Basic Earnings per Common Share Income from Continuing Operations $ 1.42 $ 0.72 $ 2.90 $ 1.88 Discontinued Operations, Net of Tax ($ 0.08) ($ 0.01) ($ 0.02) $ 0.01 Net Income $ 1.34 $ 0.71 $ 2.88 $ 1.89 - ---------------------------------------------------------------------------------------------------------------------- Diluted Earnings per Common Share Income from Continuing Operations $ 1.42 $ 0.71 $ 2.89 $ 1.87 Discontinued Operations, Net of Tax ($ 0.08) ($ 0.01) ($ 0.02) $ 0.01 Net Income $ 1.34 $ 0.70 $ 2.87 $ 1.88 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Dividends Declared per Common Share $0.560 $0.545 $1.680 $1.635 - ----------------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 6 Progress Energy, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands except share data) September 30, December 31, Assets 2003 2002 - --------------------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 21,198,711 $ 20,152,787 Accumulated depreciation (10,162,434) (10,480,880) - --------------------------------------------------------------------------------------------------------------- Utility plant in service, net 11,036,277 9,671,907 Held for future use 13,177 15,109 Construction work in progress 862,125 752,336 Nuclear fuel, net of amortization 219,574 216,882 - --------------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 12,131,153 10,656,234 - --------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 100,146 61,358 Accounts receivable 813,110 737,369 Unbilled accounts receivable 190,867 225,011 Inventory 816,425 875,485 Deferred fuel cost 327,213 183,518 Assets of discontinued operations - 490,429 Prepayments and other current assets 328,969 260,804 - --------------------------------------------------------------------------------------------------------------- Total Current Assets 2,576,730 2,833,974 - --------------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 649,956 393,215 Nuclear decommissioning trust funds 883,837 796,844 Diversified business property, net 2,147,456 1,884,271 Miscellaneous other property and investments 446,026 463,776 Goodwill 3,719,327 3,719,327 Prepaid pension costs 52,575 60,169 Other assets and deferred debits 672,272 517,182 - --------------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 8,571,449 7,834,784 - --------------------------------------------------------------------------------------------------------------- Total Assets $ 23,279,332 $ 21,324,992 - --------------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - --------------------------------------------------------------------------------------------------------------- Common Stock Equity Common stock without par value, 500,000,000 shares authorized, 244,929,214 and 237,992,513 shares issued and outstanding, respectively $ 5,223,644 $ 4,929,104 Unearned ESOP common stock (88,734) (101,560) Accumulated other comprehensive loss (221,603) (237,762) Retained earnings 2,366,769 2,087,227 - --------------------------------------------------------------------------------------------------------------- Total Common Stock Equity 7,280,076 6,677,009 - --------------------------------------------------------------------------------------------------------------- Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption 92,831 92,831 Long-Term Debt 9,760,671 9,747,293 - --------------------------------------------------------------------------------------------------------------- Total Capitalization 17,133,578 16,517,133 - --------------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 868,008 275,397 Accounts payable 566,201 677,197 Income taxes accrued 156,928 - Interest accrued 135,550 220,400 Dividends declared 136,398 132,232 Short-term obligations - 694,850 Customer deposits 167,755 158,214 Liabilities of discontinued operations - 124,767 Other current liabilities 453,366 429,222 - --------------------------------------------------------------------------------------------------------------- Total Current Liabilities 2,484,206 2,712,279 - --------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 753,423 932,813 Accumulated deferred investment tax credits 194,037 206,221 Regulatory liabilities 548,321 119,766 Asset retirement obligations 1,242,165 - Other liabilities and deferred credits 923,602 836,780 - --------------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 3,661,548 2,095,580 - --------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 15) - --------------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 23,279,332 $ 21,324,992 - ---------------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 7 Progress Energy, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended (Unaudited) September 30, (In thousands) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 679,941 $ 405,081 Adjustments to reconcile net income to net cash provided by operating activities: (Income) loss from discontinued operations 4,888 (2,013) Impairment of long-lived assets and investments - 329,997 Depreciation and amortization 852,015 835,659 Deferred income taxes (208,260) (313,654) Investment tax credit (12,184) (14,790) Deferred fuel credit (143,695) (37,290) Net increase in accounts receivable (91,003) (99,777) Net (increase) decrease in inventories 62,951 (25,930) Net (increase) decrease in prepayments and other current assets 43,440 (28,377) Net increase in accounts payable (22,049) 59,184 Net increase in income taxes, net 140,450 162,213 Net decrease in other current liabilities 18,776 (52,906) Other 109,805 74,330 - ----------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 1,435,075 1,291,727 - ----------------------------------------------------------------------------------------------------------------------- Investing Activities Gross utility property additions (759,374) (771,309) Diversified business property additions (475,992) (455,102) Nuclear fuel additions (96,031) (56,029) Acquisition of businesses, net of cash - (365,232) Acquisition of intangibles (198,234) (3,079) Proceeds from sales of subsidiaries and investments 477,502 11,931 Other (37,364) (94,861) - ----------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (1,089,493) (1,733,681) - ----------------------------------------------------------------------------------------------------------------------- Financing Activities Issuance of common stock, net of issuance costs 283,846 31,916 Issuance of long-term debt, net of issuance costs 1,243,046 1,770,622 Net increase (decrease) in short-term indebtedness (695,899) 117,953 Net decrease in cash provided by checks drawn in excess of bank balances (53,476) (37,471) Retirement of long-term debt (699,157) (1,045,380) Dividends paid on common stock (403,383) (358,978) Other 18,457 (31,126) - ----------------------------------------------------------------------------------------------------------------------- Net Cash (Used In) Provided by Financing Activities (306,566) 447,536 - ----------------------------------------------------------------------------------------------------------------------- Cash Used in Discontinued Operations (228) (640) - ----------------------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 38,788 4,942 Cash and Cash Equivalents at Beginning of the Period 61,358 53,708 - ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of the Period $ 100,146 $ 58,650 - ----------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 516,081 $ 540,512 - income taxes (net of refunds) $ 97,301 $ 109,520
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, PEC and PEF, 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 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 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 Accounting Principles Board Opinion (APB) No. 28, "Interim Financial Reporting," 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 decreased by $35.4 million and $39.1 million for the three months ended September 30, 2003 and 2002, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was decreased by $40.8 million and increased $40.5 million for the nine months ended September 30, 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. 9 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 180 billion cubic feet (Bcf) from Republic Energy, Inc. and two other privately-owned companies, all headquartered in Texas. The primary assets in the acquisitions have been contributed to 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 million. See Note 7 for additional information. 3. DIVESTITURES A. NCNG Divestiture On September 30, 2003, the Company completed the sale of 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. Net proceeds from the sale were used to reduce debt. Based on net proceeds associated with the NCNG sale of $443.3 million, the Company recorded an after-tax loss of $8.9 million during the third quarter of 2003. In the fourth quarter of 2002, the Company recorded an estimated after-tax loss of $29.4 million. The Company anticipates adjustments to the loss on the divestiture during the fourth quarter of 2003 related to employee benefit settlements and the finalization of other operating estimates. 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 September 30, 2003 and 2002 was $3.3 million and $3.9 million, respectively. Amounts allocated for the nine months ended September 30, 2003 and 2002 were $10.2 million and $11.9 million, respectively. The Company ceased recording depreciation upon classification of the assets as discontinued operations in the fourth quarter of 2002. After-tax depreciation expense recorded by NCNG during the three months ended September 30, 2002 was $3.1 million and during the nine months ended September 30, 2002 was $8.9 million. Results of discontinued operations were as follows: Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2003 2002 2003 2002 -------------- ------------- --------------- -------------- Revenues $ 59,348 $ 60,589 $ 284,389 $ 211,214 ============== ============= =============== ============== Earnings (loss) before income taxes $ (16,108) $ (6,527) $ 6,494 $ 2,423 Income tax expense (benefit) (6,313) (1,388) 2,486 410 -------------- ------------- --------------- -------------- Net earnings (loss) from discontinued operations (9,795) (5,139) 4,008 2,013 -------------- ------------- --------------- -------------- Estimated loss on disposal of discontinued operations, including applicable income tax expense of $3,522 (8,896) - (8,896) - -------------- ------------- --------------- -------------- Earnings (loss) from discontinued operations $ (18,691) $ (5,139) $ (4,888) $ 2,013 ============== ============= =============== ==============
10 The major balance sheet classes included in assets and liabilities of discontinued operations in the Consolidated Balance Sheets as of December 31, 2002 are as follows: (in thousands) Utility plant, net $ 398,931 Current assets 72,821 Deferred debits and other assets 18,677 --------------- Assets of discontinued operations $ 490,429 =============== Current liabilities $ 76,372 Deferred credits and other liabilities 48,395 --------------- Liabilities of discontinued operations $ 124,767 =============== The sale of ENCNG resulted in net proceeds of $7.5 million and a pre-tax loss of $2.2 million, which is included in other, net on the Consolidated Statements of Income for the three and nine months ended September 30, 2003. The Company's equity investment in ENCNG of $7.7 million as of December 31, 2002 is included in miscellaneous other property and investments in the Consolidated Balance Sheets. B. Mesa Hydrocarbons, Inc. Divestiture In September 2003, the Finance Committee as authorized by the Company's Board of Directors adopted a resolution approving the sale of certain gas producing properties owned by Mesa Hydrocarbons, LLC, a wholly-owned subsidiary of Progress Fuels Corporation, which is included in the Fuels segment. The $79.7 million book value of the assets to be sold has been grouped as assets held for sale and are included in other current assets on the accompanying Consolidated Balance Sheets as of September 30, 2003. The primary components of assets held for sale are oil and gas leases and wells. On October 1, 2003, the Company completed the sale of these assets. Net proceeds of approximately $97 million will be used to reduce debt. The Company will record this transaction in the fourth quarter of 2003. C. Railcar Ltd. Divestiture In December 2002, the Progress Energy Board of Directors adopted a resolution authorizing the sale of the majority of the assets of Railcar Ltd., a leasing subsidiary included in the Rail Services segment. 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 September 30, 2003. The assets are recorded at $33.1 million and $23.6 million as of September 30, 2003 and December 31, 2002, respectively. On March 12, 2003, the Company signed a letter of intent with The Andersons, Inc. to sell the majority of Railcar Ltd. assets. A definitive purchase agreement was signed on November 6, 2003 with the buyers, including Cap Acquire LLC. A significant portion 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 buyers as part of the sales transaction. The transaction is targeted to close in 2003, but is subject to various closing conditions including financing. 4. FINANCIAL INFORMATION BY BUSINESS SEGMENT The Company currently provides services through the following business segments: PEC Electric, PEF, Fuels, Competitive Commercial Operations (CCO), Rail and Other. PEC Electric and PEF are engaged in the generation, transmission, distribution and sale of electric energy in portions of North Carolina, South Carolina and Florida. These electric operations are subject to the rules and regulations of the FERC, the NCUC, the SCPSC and the FPSC. PEC Electric also distributes and sells electricity to other utilities, primarily on the east coast of the United States. 11 Fuels' operations, which are located in the United States, include synthetic fuel operations; natural gas production; and coal fuel extraction, manufacturing and delivery. CCO's operations, which are located in the southeastern United States, include nonregulated generation and energy marketing activities. Rail's operations include railcar repair, rail parts reconditioning and sales, railcar leasing and sales, and scrap metal recycling. These activities include maintenance and reconditioning of salvageable scrap components of railcars, locomotive repair and right-of-way maintenance. Rail's operations are located in the United States, Canada and Mexico. The Other segment, whose operations are primarily in the United States, is made up of other nonregulated business areas including telecommunications and other nonregulated subsidiaries that do not separately meet the disclosure requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Included in this segment's 2002 losses are asset impairments and certain other charges related to the telecommunications operations of $224.8 million. Prior to 2003, PEC Electric was referred to as CP&L Electric, PEF was referred to as Florida Power Electric, and Fuels and CCO were collectively referred to as Progress Ventures. The nature of the PEC Electric and PEF segments is unchanged from previous years' reporting. With the expansion of the nonregulated energy generation facilities and the current management structure, CCO is now a distinct operating segment. In addition to these reportable operating segments, 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 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, this activity is now included in the regulated utilities' results only. 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. For comparative purposes, the 2002 results have been restated to align with the new business segment structure. The profit or loss of the identified segments plus the loss of Corporate represents the Company's total income from continuing operations. Revenues --------------------------------------------------- Segment (in thousands) Unaffiliated Intersegment Total Profit (Loss) ------------ --------------- ---------------- ------------ Three Months Ended September 30, 2003 PEC Electric $ 1,009,889 $ - $ 1,009,889 $ 159,998 PEF 904,115 - 904,115 114,341 Fuels 236,691 135,739 372,430 79,752 CCO 66,653 - 66,653 12,671 Rail 208,795 951 209,746 706 Other 14,679 3,578 18,257 (3,588) Corporate (56) (140,268) (140,324) (26,227) ------------ --------------- ---------------- ------------ Consolidated totals $ 2,440,766 $ - $ 2,440,766 $ 337,653 ------------ --------------- ---------------- ------------ Three Months Ended September 30, 2002 PEC Electric $ 1,045,180 $ - $ 1,045,180 $ 179,308 PEF 863,637 - 863,637 123,774 Fuels 161,962 132,839 294,801 52,123 CCO 44,345 - 44,345 20,853 Rail 179,712 1,282 180,994 733 Other 17,543 3,562 21,105 (225,884) Corporate - (137,683) (137,683) 6,166 ------------ --------------- ---------------- ------------ Consolidated totals $ 2,312,379 $ - $ 2,312,379 $ 157,073 ------------ --------------- ---------------- ------------
12 Revenues Segment ----------------------------------------------- Profit (in thousands) Unaffiliated Intersegment Total (Loss) Assets ------------ --------------- ---------------- ------------ ------------- Nine Months Ended September 30, 2003 PEC Electric $ 2,751,599 $ - $ 2,751,599 $ 383,262 $ 9,736,103 PEF 2,399,079 - 2,399,079 246,457 6,048,238 Fuels 639,159 380,813 1,019,972 160,139 1,117,205 CCO 137,486 - 137,486 23,579 1,700,765 Rail 600,344 951 601,295 (498) 595,104 Other 41,758 11,214 52,972 (2,648) 279,120 Corporate 53 (392,978) (392,925) (125,462) 3,802,797 ------------ --------------- ---------------- ------------ ------------- Consolidated totals $ 6,569,478 $ - $ 6,569,478 $ 684,829 $ 23,279,332 ------------ --------------- ---------------- ------------ ------------- Nine Months Ended September 30, 2002 PEC Electric $ 2,691,320 $ - $ 2,691,320 $ 396,530 $ 8,785,416 PEF 2,316,001 - 2,316,001 258,271 5,079,718 Fuels 435,657 389,434 825,091 140,450 843,422 CCO 77,291 - 77,291 25,478 1,538,285 Rail 529,818 2,632 532,450 2,979 579,947 Other 60,941 10,496 71,437 (239,254) 450,511 Corporate - (402,562) (402,562) (181,386) 3,840,874 ------------ --------------- ---------------- ------------ ------------- Consolidated totals $ 6,111,028 $ - $ 6,111,028 $ 403,068 $ 21,118,173 ------------ --------------- ---------------- ------------ -------------
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. The exercise price at which options are granted by the Company equals the market price at the grant date and 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 nine months ended September 30 is as follows: (in millions except per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ---------------------------- 2003 2002 2003 2002 --------------- ------------- ------------ -------------- Net income, as reported $ 318,962 $ 151,934 $ 679,941 $ 405,081 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 2,794 1,686 7,070 4,798 --------------- ------------- ------------ -------------- Pro forma net income $ 316,168 $ 150,248 $ 672,871 $ 400,283 =============== ============= ============ ============== Basic earnings per share As reported $ 1.34 $ 0.71 $ 2.88 $ 1.89 Pro forma $ 1.33 $ 0.70 $ 2.85 $ 1.87 Fully diluted earnings per share As reported $ 1.34 $ 0.70 $ 2.87 $ 1.88 Pro forma $ 1.32 $ 0.69 $ 2.84 $ 1.86
13 During 2003, the Financial Accounting Standards Board (FASB) has approved certain decisions in conjunction with its stock-based compensation project. Some of the key decisions reached by the FASB were that stock-based compensation should be recognized as an expense and that the expense should be measured as of the grant date at fair value. The FASB continues to deliberate additional issues in this project and plans to issue an exposure draft in early 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. Interpretations and implementation issues with regard to SFAS No. 149 continue to evolve. Based on its analysis and understanding to date, and considering the types of contracts historically entered into, the Company does not anticipate that this statement will have a significant impact on its results of operations or 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 determined that it has one existing "normal" contract that is affected by this revised guidance. The contract is a purchase power agreement with Broad River LLC, which is a subsidiary of Calpine Corporation. Pursuant to the provisions of DIG Issue C20, PEC will record a pre-tax fair value loss transition adjustment of $37.6 million in the fourth quarter of 2003, which will be reported as a cumulative effect of a change in accounting principle. The subject contract meets the DIG Issue C20 criteria for normal purchase or sale and, therefore, was designated as a normal purchase as of October 1, 2003. The liability of $37.6 million associated with the fair value loss will be amortized to earnings over the term of the related contract. 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 was effective for previously issued financial instruments within its scope on July 1, 2003. The FPC Capital I Preferred Securities, as discussed in Note 12, were reported as debt prior to July 1, 2003. Therefore, the adoption of SFAS No. 150 did not have a material impact on the Company's financial position or results of operations as of and for the periods ended September 30, 2003. 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 and determining whether such entities should be consolidated. FIN No. 46 requires an enterprise to consolidate a variable interest entity when the enterprise (a) absorbs a majority of the variable interest entity's expected losses, (b) receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Prior to the effective date of FIN No. 46, entities were generally consolidated by an enterprise that had control through ownership of a majority voting interest in the entity. FIN No. 46 applies immediately to variable interest entities created or obtained after January 31, 2003. During the first nine months of 2003, the Company did not participate in the creation of, or obtain a new variable interest in, any variable interest entity. On October 9, 2003, the FASB issued Staff Position No. FIN 46-6, which allowed for the optional deferral of the effective date of FIN No. 46 from July 1, 2003 until December 31, 2003, for interests held by a public company in variable interest entities created prior to February 1, 2003. Because the Company expects additional transitional guidance to be issued, it has deferred its implementation of FIN No. 46 until December 31, 2003. 14 The Company has entered into arrangements with several variable interest entities through its Railcar, Ltd. subsidiary. These agreements include six synthetic leases with a master trust, a servicing contract with the Railcar Asset Financing Trust (RAFT), and a receivables securitization transaction with a commercial paper conduit. Because the Company expects to divest of its interests in all of these arrangements in 2003, the adoption of FIN No. 46 related to these variable interests is not expected to have a significant effect on the Company's financial position or results of operations. If the Company does not divest of its interests in 2003 as expected, under the current guidance the Company would consolidate the master trust and record an increase in both total assets and total liabilities of approximately $25.8 million. As of September 30, 2003, the maximum cash obligations under all three of these arrangements total approximately $39.2 million. Management believes this maximum loss exposure is significantly reduced based on the current fair values of the underlying assets of the entities. Upon adoption of FIN No. 46 as currently issued, the Company expects to deconsolidate the FPC Capital I Trust (the Trust), which holds FPC-obligated mandatorily redeemable preferred securities (see Note 12). The Trust is a variable interest entity, but the Company does not absorb a majority of the Trust's expected losses and therefore is not its primary beneficiary. In connection with the planned deconsolidation as of December 31, 2003, the Company expects to record an additional equity investment in the Trust of approximately $9.3 million, an increase in outstanding debt of approximately $8.0 million, and a gain of approximately $1.3 million relating to the cumulative effect of a change in accounting principle. See Note 12 for a discussion of the Company's guarantees with the Trust. The Company also has investments in 14 limited partnerships accounted for under the equity method for which it may be the primary beneficiary. These partnerships invest in and operate low-income housing and historical renovation properties that qualify for federal and state tax credits. The Company has not concluded whether it is the primary beneficiary of these partnerships. These partnerships are partially funded with financing from third party lenders, which is secured by the assets of the partnerships. The creditors of the partnerships do not have recourse to the Company. As of September 30, 2003, the maximum exposure to loss as a result of the Company's investments for these limited partnerships is approximately $15.5 million. The Company expects to complete its evaluation of these partnerships under FIN No. 46 during the fourth quarter of 2003. If the Company had consolidated these 14 entities as of September 30, 2003, it would have recorded an increase to both total assets and total liabilities of approximately $45.8 million. The Company is also evaluating several other potential variable interest entities created before January 31, 2003, for which the Company would not be the primary beneficiary based on the current guidance. These arrangements include equity investments in approximately 20 limited partnerships, limited liability corporations and venture capital funds, and two building leases with special purpose entities. If all of these entities were determined to be variable interest entities, the aggregate maximum loss exposure as of September 30, 2003 under these arrangements totals approximately $37.3 million. The creditors of these variable interest entities do not have recourse to the general credit of the Company in excess of the aggregate maximum loss exposure. The Company expects to complete its evaluation of these entities under FIN No. 46 during the fourth quarter of 2003. 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 effect of this standard on the Company is dependent on other factors that also affect the determination of actuarial gains and losses and the subsequent amortization of such gains and losses. However, the Company does not expect the adoption of EITF 03-04 to have a material effect on its results of operations or financial position. 15 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 irradiated 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 $883.8 million at September 30, 2003 and $796.8 million at December 31, 2002. In accordance with SFAS No. 143, unrealized gains and losses on the nuclear decommissioning trust fund are now included in regulatory liabilities rather than accumulated depreciation. The balances of these regulatory liabilities as of September 30, 2003 were $84.3 million for PEC and $78.1 million for PEF. 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, which is included in other, net on the Consolidated Statements of Income for the nine months ended September 30, 2003. The ongoing impact on earnings related to accretion and depreciation was not significant for the three or nine months ended September 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 September 30, 2003, the portions of such costs not representing AROs under SFAS No. 143 were $908.7 million for PEC and $955.8 million for PEF. The amounts for PEC and PEF are included in accumulated depreciation on the accompanying Consolidated Balance Sheets. PEC and PEF have collected amounts for non-irradiated areas at nuclear facilities, which do not represent asset retirement obligations. The amounts at September 30, 2003 were $65.7 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 September 30, 2003, this amounted to $142.4 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. 16 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 initially denied the deferral of the ongoing effects. During the second quarter of 2003, PEC ceased deferral of the ongoing effects 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 represented a decrease in non-ARO cost of removal expense, partially offset by an increase in decommissioning expense. PEC requested reconsideration from the NCUC regarding the ongoing effects. During the third quarter of 2003, the NCUC issued an order allowing the deferral of the ongoing effects of SFAS No. 143 and PEC reversed the second quarter income statement impact in accordance with the NCUC's decision. Therefore, the ongoing effects of SFAS No. 143 have no impact on the income of PEC for the nine months ended September 30, 2003. 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. 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. A final order was issued 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, 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 September 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 September 30, 2003 and December 31, 2002 are as follows: September 30, 2003 December 31, 2002 ------------------------------------------- ------------------------------------------ (in thousands) Gross Carrying Amount Accumulated Gross Carrying Amount Accumulated Amortization Amortization --------------------- --------------------- --------------------- -------------------- Synthetic fuel intangibles $ 140,469 $(59,481) $ 140,469 $(45,189) Power agreements acquired 221,218 (15,161) 33,000 (5,593) Other 60,117 (10,357) 40,968 (7,792) --------------------- --------------------- --------------------- -------------------- Total $ 421,804 $(84,999) $ 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 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 Electric Membership Corp., located in Jefferson, Georgia for $188 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 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 $33.0 million were recorded and are amortized based on the economic benefits of the contracts through December 31, 2004, which approximates straight-line. 17 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 September 30, 2003 and 2002, respectively, was $10.7 million and $8.3 million. Amortization expense recorded on intangible assets for the nine months ended September 30, 2003 and 2002, respectively, was $26.4 million and $24.5 million. The estimated annual amortization expense for intangible assets for 2003 through 2007, in millions, is approximately $36.8, $41.3, $34.8, $35.9 and $36.1, respectively. 8. COMPREHENSIVE INCOME Comprehensive income for the three and nine months ended September 30, 2003 was $337.9 million and $696.1 million, respectively. Comprehensive income for the three and nine months ended September 30, 2002 was $141.8 million and $398.2 million, respectively. Changes in other comprehensive income for the 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 $70 million of PEF's First Mortgage Bonds, 6.125% Series, Due March 1, 2003, and to redeem on March 24, 2003, the $150 million aggregate outstanding balance of its 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 September 30, 2003. During the three months ended September 30, 2003, Genco determined it did not need to make any additional draws under this facility. 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 September 30, 2003 the calculated ratio, as defined, was 51.3%. 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 September 30, 2003 the calculated ratio, as defined, was 8.1 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 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 1, 2003, $110 million of PEF's First Mortgage Bonds, 6.0% Series, Due July 1, 2003 and $35 million of PEF's medium-term notes, 6.62% Series, matured; PEF funded the redemption with commercial paper. On August 15, 2003, PEC redeemed $100 million of First Mortgage Bonds, 6.875% Series, Due August 15, 2023 at 102.84%. PEC funded the redemption with commercial paper. On September 11, 2003, PEC issued $400 million of First Mortgage Bonds, 5.125% Series, Due September 15, 2013 and $200 million of First Mortgage Bonds, 6.125% Series, Due September 15, 2033. Proceeds from this issuance were used to reduce the balance of PEC's outstanding commercial paper and short-term notes payable to affiliated companies, which notes represent PEC's borrowings under an internal money pool operated by Progress Energy. On September 30, 2003, Progress Energy completed the sale of NCNG and the Company's equity investment in ENCNG. Net proceeds of approximately $450 million were used to reduce debt. 18 In addition, the Company received net proceeds of approximately $97 million in October 2003 for the sale of its Mesa gas properties located in Colorado. Net proceeds will primarily be used to reduce short-term debt. For the three months ended September 30, 2003, the Company issued approximately 2.7 million shares representing approximately $112 million in proceeds from its Investor Plus Stock Purchase Plan and its employee benefit plans. For the nine months ended September 30, 2003, the Company issued approximately 6.9 million shares through these plans, resulting in approximately $284 million of cash proceeds. On October 31, 2003, PEF announced the redemption of $100 million of its First Mortgage Bonds, 7% Series, Due 2023 at 103.19% of the principal amount of such bonds. PEF intends to redeem the bonds on December 1, 2003 with commercial paper 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. The amount of this loss was not material. As of September 30, 2003, Progress Energy had $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, May and June of 2003, PEC entered into treasury rate locks to hedge its exposure to interest rates with regard to a future issuance of fixed-rate debt. These agreements had a computational period of ten years and were designated as cash flow hedges for accounting purposes. The agreements, with a total notional amount of $110 million, were terminated simultaneously with the pricing of the PEC First Mortgage Bonds in September 2003. The $4.2 million gain 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 Fuels Corporation periodically enters into derivative instruments to hedge its exposure to price fluctuations on natural gas sales. As of September 30, 2003, Progress Fuels Corporation had approximately 12.6 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. 19 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 Nine Months Ended September 30, September 30, ----------------------------- ------------------------------- 2003 2002 2003 2002 ------------- ------------ ------------ --------------- Weighted-average common shares - basic 239,025 216,079 236,183 214,700 Restricted stock awards 959 746 965 709 Stock options 2 59 12 173 ------------- ------------ ------------ --------------- Weighted-average shares - fully dilutive 239,986 216,884 237,160 215,582 ------------- ------------ ------------ ---------------
12. FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A SUBSIDIARY HOLDING SOLELY FPC GUARANTEED NOTES In April 1999, 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 accompanying Consolidated Balance Sheets. Upon adoption of the current FIN No. 46 standard, the Company anticipates deconsolidating the 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 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. The retail base rate revenue sharing threshold amounts for 2003 are $1.333 billion and 20 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 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 refunded this amount by October 31, 2003. For the nine months ended September 30, 2003, PEF recorded an additional accrual of $5.4 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. New rates became effective on March 28, 2003. On September 12, 2003, PEF asked the FPSC to approve a cost adjustment in its annual fuel filing, primarily related to rising costs of fuel that will increase retail customer bills beginning January 1, 2004. The total amount of the fuel adjustment requested above current levels was approximately $322 million. A decision from the FPSC is expected on November 12, 2003. PEC obtained SCPSC and NCUC approval of fuel factors in annual fuel-adjustment proceedings. The SCPSC approved PEC's petition to leave billing rates unchanged from the prior year by order issued March 28, 2003. The NCUC approved an increase of $19.6 million by order issued September 25, 2003. On October 16, 2003, PEC made a filing with the North Carolina Utilities Commission (NCUC) to seek permission to defer expenses incurred from Hurricane Isabel and the February 2003 winter storms. As a result of rising storm costs and the frequency of major storm damage, Progress Energy has asked the NCUC to allow the company to create a deferred account in which the company would place expenses incurred as a result of named tropical storms, hurricanes and significant winter storms. The future amortization of such deferred costs would be includable as allowable costs in base rate filings. The Company estimates that it would charge $23.5 million in 2003 from Hurricane Isabel and from current year ice storms to the deferred account, if approved. Any additional major storm activity in 2003 could cause the amount to increase. 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, the 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 $31.3 million and an immaterial amount invested in GridSouth and GridFlorida, respectively, at September 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 of 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 was conducted by the FERC on 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. 21 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 accompanying Consolidated Statements of Income are as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------- (in thousands) 2003 2002 2003 2002 -------------- ----------- ------------ --------------- Other income Net financial trading gain (loss) $ 607 $ (169) $ (2,026) $ (1,598) Net energy brokered for resale (189) 1,909 (33) 2,664 Nonregulated energy and delivery services income 5,185 7,563 16,427 20,022 Contingent value obligation mark-to-market gain (loss) (3,945) 9,371 (3,945) 22,192 Investment gains - 8,000 - 10,960 AFUDC equity 1,986 2,728 7,900 6,806 Other 2,532 (2,755) 8,127 4,133 -------------- ----------- ------------ --------------- Total other income $ 6,176 $ 26,647 $ 26,450 $ 65,179 -------------- ----------- ------------ --------------- Other expense Nonregulated energy and delivery services expenses $ 4,596 $ 6,492 $ 14,292 $ 15,933 Donations 3,910 3,447 10,920 10,453 Investment losses 558 952 9,201 6,704 Other (a) 179 4,950 6,987 17,840 -------------- ----------- ------------ --------------- Total other expense $ 9,243 $ 15,841 $ 41,400 $ 50,930 -------------- ----------- ------------ --------------- Other, net $ (3,067) $ 10,806 $ (14,950) $ 14,249 ============== =========== ============ =============== (a) 2003 includes reduction of approximately $6 million in the FPC contractual environmental liability as discussed in Note 15.
Net financial trading gains and losses represent non-asset-backed trades of electricity and gas. Net energy brokered for resale represents electricity purchased for simultaneous 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 primarily 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 a) As a part of normal business, Progress Energy and certain subsidiaries enter into various agreements providing financial or performance assurances 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. As of September 30, 2003, management does not believe conditions are likely for significant performance under the guarantees of performance issued by or on behalf of affiliates discussed herein. 22 Guarantees as of September 30, 2003, are summarized in the table below and discussed more fully in the subsequent paragraphs. (in millions) Guarantees issued on behalf of affiliates Guarantees supporting nonregulated portfolio and energy marketing activities issued by Progress Energy $ 330.6 Guarantees supporting nuclear decommissioning 276.0 Guarantee supporting power supply agreements 312.0 Standby letters of credit 9.6 Surety bonds 1.6 Other guarantees 8.2 Guarantees issued on behalf of third parties Other guarantees 26.4 ------------ Total $ 964.4 ============
Guarantees Supporting Nonregulated Portfolio and Energy Marketing Activities Progress Energy has issued approximately $330.6 million of guarantees on behalf of Progress Ventures (the business unit) and its subsidiaries for obligations under tolling agreements, transmission agreements, gas agreements, construction agreements, fuel procurement agreements and trading operations. Approximately $68 million of these guarantees were issued during the year to support energy marketing activities. The majority of the marketing contracts supported by the guarantees contain language regarding downgrade events, ratings triggers, monthly netting of exposure and/or payments and offset provisions in the event of a default. Based upon current business levels at September 30, 2003, if the Company's ratings were to decline below investment grade, the Company estimates that it may have to deposit cash or provide letters of credit or other cash collateral of approximately $145 million for the benefit of the Company's counterparties to support ongoing operations within a 90-day period. 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 guarantees from Progress Energy in the amount of $276.0 million. Guarantees 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 may be required to provide additional security for this guarantee in form and amount (not to exceed $285 million) acceptable to Jackson. During the third quarter, PVI entered into an agreement with Morgan Stanley Capital Group Inc. to fulfill Morgan Stanley's obligations to schedule resources and supply energy to Oglethorpe Power Corporation of Georgia through March 31, 2005. The Company issued a payment and performance guarantee to Morgan Stanley related to the power supply agreement. In the event that Progress Energy's credit ratings fall below investment grade, Progress Energy estimates that it may have to deposit cash or provide letters of credit or other cash collateral of approximately $27 million for the benefit of Morgan Stanley as of September 30, 2003. Standby Letters of Credit The Company has issued $9.6 million of 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. 23 Surety Bonds At September 30, 2003, the Company had $1.6 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 of approximately $34.6 million. Included in the $34.6 million are $26.4 million of guarantees issued on behalf of third parties of which $16.4 million is related to obligations on leasing arrangements and $10 million in support of synfuel operations at a third party plant. The Company estimates it will have to perform under the guarantees related to the leasing agreements and as such $2.4 million has been accrued and is reflected in the accompanying Consolidated Balance Sheets. The remaining $8.2 million in affiliate guarantees are related primarily to prompt performance payments, lease obligations and other payments subject to contingencies. 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 increased to $100.6 million per reactor from the previous amount of $88.1 million. The total limit available to cover nuclear liability losses increased as well from $9.6 billion to $10.8 billion. The annual retroactive premium limit of $10 million per reactor owned did not change. C. Claims and uncertainties Environmental 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 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 9 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 September 30, 2003, approximately $8.7 million remains in this centralized fund with a related accrual of $8.7 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 three sites, investigation has begun but remediation cannot be estimated at five sites and remediation has begun at one site. PEC measures its liability for these sites based on available evidence including its experience in investigating and remediating environmentally impaired sites. 24 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. In September 2003, the Company sold NCNG to Piedmont Natural Gas Company, Inc. As part of the sales agreement, the Company retained responsibility to remediate five former NCNG MGP sites to state standards pursuant to an Administrative Order by consent. These sites are anticipated to have investigation or remediation costs associated with them. NCNG had previously accrued approximately $2.2 million for probable and reasonably estimable remediation costs at these sites. These accruals have been recorded on an undiscounted basis. At the time of the sale, the liability for these costs and the related accrual was transferred to a subsidiary of PEC. PEC does not believe it can provide an estimate of the reasonably possible total remediation costs beyond the accrual because two of the five sites have not begun investigation activities. Therefore, PEC cannot currently determine the total costs that may be incurred in connection with the investigation and/or remediation of all sites. Based upon current information, the Company does not expect the future costs at these sites to be material to the Company's financial condition or results of operations. PEF As of September 30, 2003, PEF has accrued $23.6 million for probable and estimable costs related to various environmental sites. Of this accrual, $16.6 million is for costs associated with the investigation and remediation of transmission and distribution substations and transformers which are more fully discussed below. The remaining $7.0 million is related to two former MGP sites and 10 other active sites associated with PEF that have required or are anticipated to require investigation and/or remediation costs. 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 accrued approximately $3.4 million for investigation and remediation associated with transmission and distribution substations and transformers and received approval from the FPSC for annual recovery of these environmental costs through the Environmental Cost Recovery Clause (ECRC). In September 2003, PEF also accrued an additional $15.1 million for similar environmental costs as a result of increased sites and estimated costs per site. PEF plans to seek approval from the FPSC to recover these costs through the ECRC. 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. Florida Progress Corporation In 2001, Progress Fuels sold its Inland Marine Transportation business operated by MEMCO Barge Line, Inc. to AEP Resources, Inc. Progress Fuels established an accrual to address indemnities and retained an environmental liability associated with the transaction. Progress Fuels estimates that its contractual liability to AEP Resources, Inc., associated with Inland Marine Transportation is $3.5 million at September 30, 2003 and has accrued such amount. The previous accrual of $9.9 million was reduced based on a change in estimate. This accrual has been determined on an undiscounted basis. Progress Fuels measures its liability for this site based on estimable and probable remediation scenarios. The Company believes that it is not reasonably probable that additional costs will 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 and Fuels 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 these matters. 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. 25 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. 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 by early 2004. The Company expects a favorable outcome of this matter. 26 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 did not record any clean air amortization in the third quarter of 2003 and recorded approximately $54 million of clean air amortization to date in 2003. Clean air expenditures to date were $16.4 million as of September 30, 2003. 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. 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. 27 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. PEC is currently in the design phase for adding dry storage capability at the Robinson Plant. 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. Other Contingencies a) Progress Energy, through its subsidiaries, produces coal-based solid synthetic fuel. 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 those generated by FPC prior to its acquisition by the Company) are approximately $1.121 billion, of which $489.1 million have been used and $631.9 million are being carried forward as of September 30, 2003. The current Section 29 tax credit program expires at the end of 2007. 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 $286.6 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 June 2003, the Company was informed that IRS field auditors had 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. In October 2003, the National Office of the IRS informed the Company that it had rejected the IRS field auditors' challenges regarding whether the synthetic fuel produced at the Company's Colona facility was the result of a significant chemical change. The National Office had concluded that the experts, engaged by Colona who test the synthetic fuel for chemical change, use reasonable scientific methods to reach their conclusions. Accordingly, the National Office will not take any adverse action on the PLR that has been issued for the Colona facility. 28 A written decision memorializing the National Office's conclusions should be available within the next two months. At that time, the IRS field auditors will have the right to ask for reconsideration of the National Office's decision. Although this ruling applies only to the Colona facility, the Company believes that the National Office's reasoning should be equally applicable to the other Progress Energy facilities, given that the Company 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 other facilities. However, the IRS has not yet formally informed the Company as to its position on the Company's other facilities. Although this is a significant event, the audits of the Colona facility and the Company's other facilities are not yet completed. Progress Energy continues to believe that it operates its facilities in conformity with its PLRs and Section 29. Accordingly, the Company has no current plans to alter its synthetic fuel production schedule 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. 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. b) 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. SRS has amended its claims and asserted new claims against the District and other parties, including a former SRS employee and a former District employee. 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, SRS, and Progress Energy Solutions, Inc. all have filed responsive pleadings denying the allegations, and the discovery process is underway. On October 2, 2003, the District filed a motion for leave to amend its cross-complaint to add PEC as an additional defendant and the parties have stipulated that the pleadings may be so amended. PEC will file a responsive pleading denying the allegations. 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 the District and other claimants. c) On August 21, 2003, PEC was served as a co-defendant in a purported class action lawsuit styled as Collins v. Duke Energy Corporation, Civil Action No. 03CP404050, in South Carolina's Circuit Court of Common Pleas for the Fifth Judicial Circuit. PEC is one of three electric utilities operating in South Carolina named in the suit. The plaintiffs are seeking damages for the alleged improper use of electric easements but have not asserted a dollar amount for their damage claims. The complaint alleges that the licensing of attachments on electric utility poles, towers and other structures to non-utility third parties or telecommunication companies for other than the electric utilities' internal use along the electric right-of-way constitutes a trespass. On September 19, 2003, PEC filed a motion to dismiss all counts of the complaint on substantive and procedural grounds. On October 6, 2003, the plaintiffs filed a motion to amend their complaint. PEC believes the amended complaint asserts the same factual allegations as are in the original complaint and also seeks money damages and injunctive relief. The court has not yet held any hearings or made any rulings in this case. PEC intends to vigorously defend itself against the claims asserted by the plaintiffs. PEC cannot predict the outcome of any future proceedings in this case. 29 d) 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. 16. SUBSEQUENT EVENT On November 3, 2003, Progress Telecom Corporation (PTC), Progress Telecommunications Corporation (PTC Communications), and Caronet, Inc. (Caronet), all of which are indirectly wholly-owned subsidiaries of Progress Energy, agreed to enter into a Contribution Agreement (Agreement) with EPIK Communications, Inc. (EPIK). EPIK is a wholly-owned subsidiary of Odyssey Telecorp, Inc. (Odyssey). The Company plans to account for this transaction as a business combination. Under terms of the Agreement, on November 4, 2003, PTC was converted into a limited liability company and renamed Progress Telecom, LLC (PTC LLC). The Agreement provides that PTC Communications, Caronet and EPIK will contribute substantially all of their assets and transfer certain liabilities to PTC LLC in exchange for membership interests in PTC LLC. Following the contribution of their respective net assets, PTC Communications will hold a 55 percent membership interest in PTC LLC; Caronet will hold a 5 percent membership interest; and EPIK will hold a 40 percent membership interest. After the contribution of net assets to PTC LLC, the stock of Caronet will be sold to an affiliate of Odyssey for cash and Caronet will then become an indirect wholly-owned subsidiary of Odyssey. Following consummation of the transactions described above, PTC Communications will hold a 55 percent ownership interest in PTC LLC, and Odyssey will hold a 45 percent ownership interest in PTC LLC through EPIK and Caronet. The Company anticipates closing the transaction by the end of the year; however, the closing is subject to certain conditions precedent, including receipt of applicable governmental and regulatory permits and approvals. 30 CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC. CONSOLIDATED INTERIM FINANCIAL STATEMENTS September 30, 2003 CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended (Unaudited) September 30, September 30, - ---------------------------------------------------------------------------------------------------------------- (In thousands) 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 1,009,889 $ 1,045,180 $ 2,751,599 $ 2,691,320 Diversified business 2,392 4,304 8,211 11,127 - ---------------------------------------------------------------------------------------------------------------- Total Operating Revenues 1,012,281 1,049,484 2,759,810 2,702,447 - ---------------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 233,537 219,594 636,098 562,297 Purchased power 98,213 123,365 240,370 287,593 Operation and maintenance 205,667 183,686 605,838 571,009 Depreciation and amortization 135,129 130,530 415,773 405,375 Taxes other than on income 44,326 43,502 123,603 118,345 Diversified business 946 7,505 3,480 13,320 Impairment of diversified business long-lived assets - 101,251 - 101,251 - ---------------------------------------------------------------------------------------------------------------- Total Operating Expenses 717,818 809,433 2,025,162 2,059,190 - ---------------------------------------------------------------------------------------------------------------- Operating Income 294,463 240,051 734,648 643,257 - ---------------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 985 330 4,426 5,198 Impairment of investment - (25,011) - (25,011) Other, net (3,190) (5,551) (14,121) (3,870) - ---------------------------------------------------------------------------------------------------------------- Total Other Expense (2,205) (30,232) (9,695) (23,683) - ---------------------------------------------------------------------------------------------------------------- Interest Charges Interest charges 46,893 49,390 144,609 167,289 Allowance for borrowed funds used during 318 276 (1,265) (5,597) construction - ---------------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 47,211 49,666 143,344 161,692 - ---------------------------------------------------------------------------------------------------------------- Income before Income Taxes 245,047 160,153 581,609 457,882 Income Tax Expense 87,473 66,014 200,161 147,471 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 157,574 $ 94,139 $ 381,448 $ 310,411 Preferred Stock Dividend Requirement 741 741 2,223 2,223 - ---------------------------------------------------------------------------------------------------------------- Earnings for Common Stock $ 156,833 $ 93,398 $ 379,225 $ 308,188 - ---------------------------------------------------------------------------------------------------------------- See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial Statements.
31 Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) September 30, December 31, Assets 2003 2002 - ---------------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 13,211,543 $ 12,675,761 Accumulated depreciation (6,190,180) (6,356,933) - ---------------------------------------------------------------------------------------------------------- Utility plant in service, net 7,021,363 6,318,828 Held for future use 5,256 7,188 Construction work in progress 300,458 325,695 Nuclear fuel, net of amortization 147,343 176,622 - ---------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 7,474,420 6,828,333 - ---------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 63,435 18,284 Accounts receivable 306,242 301,178 Unbilled accounts receivable 119,477 151,352 Receivables from affiliated companies 18,266 36,870 Notes receivable from affiliated companies 122,577 49,772 Taxes receivable - 55,006 Inventory 332,757 342,886 Deferred fuel cost 135,063 146,015 Prepayments and other current assets 35,500 45,542 - ---------------------------------------------------------------------------------------------------------- Total Current Assets 1,133,317 1,146,905 - ---------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 522,036 252,083 Nuclear decommissioning trust funds 480,135 423,293 Diversified business property, net 13,584 9,435 Miscellaneous other property and investments 199,122 209,657 Other assets and deferred debits 106,519 104,978 - ---------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 1,321,396 999,446 - ---------------------------------------------------------------------------------------------------------- Total Assets $ 9,929,133 $ 8,974,684 - ---------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ---------------------------------------------------------------------------------------------------------- Capitalization - ---------------------------------------------------------------------------------------------------------- Common stock $ 1,950,392 $ 1,929,515 Unearned ESOP common stock (88,734) (101,560) Accumulated other comprehensive loss (79,506) (82,769) Retained earnings 1,395,525 1,343,929 - ---------------------------------------------------------------------------------------------------------- Total Common Stock Equity 3,177,677 3,089,115 - ---------------------------------------------------------------------------------------------------------- Preferred stock - not subject to mandatory redemption 59,334 59,334 Long-term debt, net 3,108,211 3,048,466 - ---------------------------------------------------------------------------------------------------------- Total Capitalization 6,345,222 6,196,915 - ---------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 300,000 - Accounts payable 164,726 259,217 Payables to affiliated companies 77,022 98,572 Notes payable to affiliated companies 670 - Taxes accrued 36,055 - Interest accrued 47,468 58,791 Short-term obligations - 437,750 Current portion of accumulated deferred income taxes 39,607 66,088 Other current liabilities 109,076 93,171 - ---------------------------------------------------------------------------------------------------------- Total Current Liabilities 774,624 1,013,589 - ---------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,150,204 1,179,689 Accumulated deferred investment tax credits 150,657 158,308 Regulatory liabilities 145,976 7,774 Asset retirement obligations 918,441 - Other liabilities and deferred credits 444,009 418,409 - ---------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 2,809,287 1,764,180 - ---------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 10) - ---------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 9,929,133 $ 8,974,684 - ---------------------------------------------------------------------------------------------------------- See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial Statements.
32 Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended (Unaudited) September 30, (In thousands) 2003 2002 - ----------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 381,448 $ 310,411 Adjustments to reconcile net income to net cash provided by operating activities: Impairment of long-lived assets and investments - 126,262 Depreciation and amortization 486,285 487,454 Deferred income taxes (46,413) (73,640) Investment tax credit (7,651) (9,285) Deferred fuel cost (credit) 10,952 (22,596) Net (increase) decrease in accounts receivable 6,353 (36,966) Net (increase) decrease in affiliated accounts receivable 31,706 (47,021) Net increase in inventories 17,302 11,893 Net (increase) decrease in prepayments and other current assets 10,555 (9,173) Net increase (decrease) in accounts payable (48,393) 27,621 Net increase (decrease) in affiliated accounts payable (36,783) 3,163 Net increase in other current liabilities 96,649 89,923 Other 54,870 63,341 - ----------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 956,880 921,387 - ----------------------------------------------------------------------------------------------------------------- Investing Activities Gross property additions (347,193) (454,807) Proceeds from sale of assets and investments 25,671 243,719 Diversified business property additions and acquisitions (358) (11,625) Nuclear fuel additions (45,657) (56,051) Contributions to nuclear decommissioning trust (25,656) (25,573) Other investing activities (1,416) (12,333) - ----------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (394,609) (316,670) - ----------------------------------------------------------------------------------------------------------------- Financing Activities Issuance of long-term debt, net 588,291 542,290 Net decrease in short-term obligations (437,750) (8,250) Net increase in intercompany notes (72,806) (114,638) Retirement of long-term debt (269,217) (706,747) Dividends paid to parent (327,629) (300,000) Dividends paid on preferred stock (2,223) (2,223) Other 4,214 (22,488) - ----------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (517,120) (612,056) - ----------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 45,151 (7,339) - ----------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of the Period 18,284 21,250 - ----------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of the Period $ 63,435 $ 13,911 - ----------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 150,512 $ 169,092 - income taxes (net of refunds) $ 209,736 $ 181,444 Noncash Activities o In February 2002, PEC 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, PEC received cash proceeds in settlement of the intercompany receivable totaling approximately $244 million. This amount is reported in proceeds from sale of assets and investments in the investing activities section. See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial Statements.
33 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 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/A 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 normal recurring 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, 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. FINANCIAL INFORMATION BY BUSINESS SEGMENT PEC's operations consist primarily of the PEC Electric segment which is engaged in the generation, transmission, distribution and sale of electric energy primarily in portions of North Carolina and South Carolina. These electric operations are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC), the North Carolina Utilities Commission (NCUC), the Public Service Commission of South Carolina (SCPSC), and the U.S. Nuclear Regulatory Commission (NRC). The Other segment, whose operations are primarily in the United States, is made up of other nonregulated business areas including telecommunications and other nonregulated subsidiaries that do not separately meet the disclosure requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" and consolidation entities and eliminations. Included are the telecommunications operations of Caronet, Inc., which recognized an $87.4 million after-tax asset and investment impairment in September 2002. 34 The financial information for PEC segments for the three and nine months ended September 30, 2003 and 2002 is as follows: (in thousands) Three Months Ended September 30, 2003 2002 ----------------------------------------- ------------------------------------------ PEC Electric Other Total PEC Electric Other Total ----------------------------------------- ------------------------------------------ Total revenues $ 1,009,889 $ 2,392 $ 1,012,281 $ 1,045,180 $ 4,304 $ 1,049,484 Segment profit (loss) 159,998 (3,165) 156,833 179,308 (85,910) 93,398 Total segment assets $ 9,736,103 $ 193,030 $ 9,929,133 $ 8,785,416 $ 220,667 $ 9,006,083 ===================================================================================================================== (in thousands) Nine Months Ended September 30, 2003 2002 ----------------------------------------- ------------------------------------------ PEC Electric Other Total PEC Electric Other Total ----------------------------------------- ------------------------------------------ Total revenues $ 2,751,599 $ 8,211 $ 2,759,810 $ 2,691,320 $ 11,127 $ 2,702,447 Segment profit (loss) 383,262 (4,037) 379,225 396,530 (88,342) 308,188 Total segment assets $ 9,736,103 $ 193,030 $ 9,929,133 $ 8,785,416 $ 220,667 $ 9,006,083 =====================================================================================================================
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 nine months ended September 30 is as follows: Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2003 2002 2003 2002 ------------ ------------- ----------- ------------ Earnings for common stock, as reported $ 156,833 $ 93,398 $ 379,225 $ 308,188 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 2,357 1,018 4,136 2,312 ------------ ------------- ----------- ------------ Pro forma earnings for common stock $ 154,476 $ 92,380 $ 375,089 $ 305,876 ============ ============= =========== ============
During 2003, the Financial Accounting Standards Board (FASB) has approved certain decisions in conjunction with its stock-based compensation project. Some of the key decisions reached by the FASB were that stock-based compensation should be recognized statement as an expense and that the expense should be measured as of the grant date at fair value. The FASB continues to deliberate additional issues in this project and plans to issue an exposure draft in early 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. Interpretations and implementation issued with regard to SFAS No. 149 continue to evolve. Based on its analysis and understanding to date, and considering the types of contracts historically entered into, PEC does not anticipate that this statement will have a significant impact on its results of operations or 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). 35 In 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 determined that it has one existing "normal" contract that is affected by this revised guidance. The contract is a purchase power agreement with Broad River LLC, which is a subsidiary of Calpine Corporation. Pursuant to the provisions of DIG Issue C20, PEC will record a pre-tax fair value loss transition adjustment of $37.6 million in the fourth quarter of 2003, which will be reported as a cumulative effect of a change in accounting principle. The subject contract meets the DIG Issue C20 criteria for normal purchase or sale and, therefore, was designated as a normal purchase as of October 1, 2003. The liability of $37.6 million associated with the fair value loss will be amortized to earnings over the term of the related contract. 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 was effective for previously issued financial instruments within its scope on July 1, 2003. The adoption of SFAS No. 150 did not have a material impact on PEC's 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 and determining whether such entities should be consolidated. FIN No. 46 requires an enterprise to consolidate a variable interest entity when the enterprise (a) absorbs a majority of the variable interest entity's expected losses, (b) receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Prior to the effective date of FIN No. 46, entities were generally consolidated by an enterprise that had control through ownership of a majority voting interest in the entity. FIN No. 46 applies immediately to variable interest entities created or obtained after January 31, 2003. During the first nine months of 2003, PEC did not participate in the creation of, or obtain a new variable interest in, any variable interest entity. On October 9, 2003, the FASB issued Staff Position No. FIN 46-6, which allowed for the optional deferral of the effective date of FIN No. 46 from July 1, 2003 until December 31, 2003, for interests held by a public company in variable interest entities created prior to February 1, 2003. Because PEC expects additional transitional guidance to be issued, it has deferred its implementation of FIN No. 46 until December 31, 2003. PEC has investments in 14 limited partnerships accounted for under the equity method for which it may be the primary beneficiary. These partnerships invest in and operate low-income housing and historical renovation properties that qualify for federal and state tax credits. PEC has not concluded whether it is the primary beneficiary of these partnerships. These partnerships are partially funded with financing from third party lenders, which is secured by the assets of the partnerships. The creditors of the partnerships do not have recourse to PEC. As of September 30, 2003, the maximum exposure to loss as a result of PEC's investments for these limited partnerships is approximately $15.5 million. PEC expects to complete its evaluation of these partnerships under FIN No. 46 during the fourth quarter of 2003. If PEC had consolidated these 14 entities as of September 30, 2003, it would have recorded an increase to both total assets and total liabilities of approximately $45.8 million. PEC is also evaluating several other potential variable interest entities created before January 31, 2003, for which PEC would not be the primary beneficiary based on the current guidance. These arrangements include equity investments in approximately 14 limited partnerships, limited liability corporation and venture capital funds, and two building leases with special purpose entities. If all of these entities were determined to be variable interest entities, the aggregate maximum loss exposure as of September 30, 2003 under these arrangements totals approximately $25.7 million. The creditors of these variable interest entities do not have recourse to the general credit of PEC in excess of the aggregate maximum loss exposure. PEC expects to complete its evaluation of these entities under FIN No. 46 during the fourth quarter of 2003. 36 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. The effect of this standard on PEC is dependent on other factors that also affect the determination of actuarial gains and losses and the subsequent amortization of such gains and losses. However, PEC does not expect the adoption of EITF 03-04 to have a material effect on its results of operations or 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 irradiated 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 $480.1 million at September 30, 2003 and $423.3 million at December 31, 2002. In accordance with SFAS No. 143, unrealized gains and losses on the nuclear decommissioning trust fund are now included in regulatory liabilities rather than accumulated depreciation. The balance of this regulatory liability as of September 30, 2003 was $84.3 million for PEC. 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 September 30, 2003, the portion of such costs not representing AROs under SFAS No. 143 was $908.7 million. This amount is included in accumulated depreciation on the accompanying Consolidated Balance Sheets. PEC has collected amounts for non-irradiated areas at nuclear facilities, which do not represent asset retirement obligations. These amounts totaled $65.7 million as of September 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 10 under "Air Quality" contained a prohibition against cost deferrals unless certain criteria are met, the NCUC initially denied the deferral of the ongoing effects. During the second quarter of 2003, PEC ceased deferral of the ongoing effects for the six months ended June 30, 2003 related to its North Carolina retail jurisdiction. Pre-tax income for the three and 37 six months ended June 30, 2003 increased by approximately $13.6 million, which represented a decrease in non-ARO cost of removal expense, partially offset by an increase in decommissioning expense. PEC requested reconsideration from the NCUC regarding the ongoing effects. During the third quarter of 2003, the NCUC issued an order allowing the deferral of the ongoing effects and PEC reversed the second quarter income statement impact in accordance with the NCUC's decision. Therefore, the ongoing effects of SFAS No. 143 have no impact on the income of PEC for the nine months ended September 30, 2003. 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. 5. COMPREHENSIVE INCOME Comprehensive income for the three and nine months ended September 30, 2003 was $161.5 million and $384.7 million, respectively. Comprehensive income for the three and nine months ended September 30, 2002 was $89.7 million and $307.9 million, respectively. Changes in 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 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 was August 15, 2003. PEC funded the redemption with commercial paper. On September 11, 2003, PEC issued $400 million of First Mortgage Bonds, 5.125% Series, Due September 15, 2013 and $200 million of First Mortgage Bonds, 6.125% Series, due September 15, 2033. Proceeds from this issuance were used to reduce the balance of PEC's outstanding commercial paper and short-term notes payable to affiliated companies, which represent PEC's borrowings under an internal money pool operated by Progress Energy. 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, May and June of 2003, PEC entered into treasury rate locks to hedge its exposure to interest rates with regard to a future issuance of fixed-rate debt. These agreements had a computational period of ten years and were designated as cash flow hedges for accounting purposes. These agreements, with a total notional amount of $110 million, were terminated simultaneously with the pricing of the PEC First Mortgage Bonds in September 2003. The $4.2 million gain 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. 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. REGULATORY MATTERS PEC obtained SCPSC and NCUC approval of fuel factors in annual fuel-adjustment proceedings. The SCPSC approved PEC's petition to leave billing rates unchanged from the prior year by order issued March 28, 2003. The NCUC approved an increase of $19.6 million by order issued September 25, 2003. On October 16, 2003, PEC made a filing with the North Carolina Utilities Commission (NCUC) to seek permission to defer expenses incurred from Hurricane Isabel and the February 2003 winter storms. As a result of rising storm costs and the frequency of major storm damage, Progress Energy has asked the NCUC to allow the company to create a deferred account in which the company would place expenses incurred as a result of named tropical storms, hurricanes and significant winter storms. The future amortization 38 of such deferred costs would be includable as allowable costs in base rate filings. The Company estimates that it would charge $23.5 million in 2003 from Hurricane Isabel and from current year ice storms to the deferred account, if approved. Any additional major storm activity in 2003 could cause the amount to increase. 9. 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 accompanying Consolidated Statements of Income for the three and nine months ended September 30, 2003 and 2002 are as follows: Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2003 2002 2003 2002 -------------- -------------- ------------- ------------- Other income Net financial trading gain (loss) $ 384 $ (169) $ (1,139) $ (1,598) Net energy brokered for resale 246 440 516 888 Nonregulated energy and delivery services income 1,632 4,503 5,971 10,069 AFUDC equity (728) 2,367 1,136 6,028 Investment gains - - - 2,960 Other 4,000 (3,099) 9,522 3,098 -------------- -------------- ------------- ------------- Total other income $ 5,534 $ 4,042 $ 16,006 $ 21,445 -------------- -------------- ------------- ------------- Other expense Nonregulated energy and delivery services expenses $ 1,979 $ 4,528 $ 5,974 $ 9,796 Donations 1,398 1,367 4,043 3,915 Investment losses 558 952 9,202 2,857 Other 4,789 2,746 10,908 8,747 -------------- -------------- ------------- ------------- Total other expense $ 8,724 $ 9,593 $ 30,127 $ 25,315 -------------- -------------- ------------- ------------- Other, net $ (3,190) $ (5,551) $(14,121) $ (3,870) ============== ============== ============= =============
Net financial trading gains and losses represent non-asset-backed trades of electricity and gas. Net energy brokered for resale represents electricity purchased for simultaneous 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 primarily represent losses on limited partnership investment funds. 10. 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/A. Guarantees 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 September 30, 2003, management does not believe conditions are likely for performance under the agreements discussed herein. PEC has a small amount of guarantees outstanding as of September 30, 2003; however, there have been no significant changes in these amounts since year end. 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 39 increased to $100.6 million per reactor from the previous amount of $88.1 million. The total limit available to cover nuclear liability losses increased as well from $9.6 billion to $10.8 billion. The annual retroactive premium limit of $10 million per reactor owned did not change. 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 manufactured gas plant (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 9 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 September 30, 2003, approximately $8.7 million remains in this centralized fund with a related accrual of $8.7 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 three sites, investigation has begun but remediation cannot be estimated at five sites and remediation has begun at one site. 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. In September 2003, the Company sold NCNG to Piedmont Natural Gas Company, Inc. As part of the sales agreement, the Company retained responsibility to remediate five former NCNG MGP sites to state standards pursuant to an Administrative Order by consent. These sites are anticipated to have investigation or remediation costs associated with them. NCNG had previously accrued approximately $2.2 million for probable and reasonably estimable remediation costs at these sites. These accruals have been recorded on an undiscounted basis. At the time of the sale, the liability for these costs and the related accrual was transferred to a subsidiary of PEC. PEC does not believe it can provide an estimate of the reasonably possible total remediation costs beyond the accrual because two of the five sites have not begun investigation activities. Therefore, PEC cannot currently determine the total costs that may be incurred in connection with the investigation and/or remediation of all sites. Based upon current information, the Company does not expect the future costs at these sites to be material to the Company's financial condition or results of operations. 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. 40 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 $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 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 by early 2004. 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 41 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 did not record any clean air amortization in the third quarter of 2003 and recorded approximately $54 million of clean air amortization to date in 2003. Clean air expenditures to date were $16.4 million as of September 30, 2003. 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 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) 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 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. 42 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. PEC is currently in the design phase for adding dry storage capability at the Robinson Plant. c) On August 21, 2003, PEC was served as a co-defendant in a purported class action lawsuit styled as Collins v. Duke Energy Corporation, Civil Action No. 03CP404050, in South Carolina's Circuit Court of Common Pleas for the Fifth Judicial Circuit. PEC is one of three electric utilities operating in South Carolina named in the suit. The plaintiffs are seeking damages for the alleged improper use of electric easements but have not asserted a dollar amount for their damage claims. The complaint alleges that the licensing of attachments on electric utility poles, towers and other structures to non-utility third parties or telecommunication companies for other than the electric utilities' internal use along the electric right-of-way constitutes a trespass. On September 19, 2003, PEC filed a motion to dismiss all counts of the complaint on substantive and procedural grounds. On October 6, 2003, the plaintiffs filed a motion to amend their complaint. PEC believes the amended complaint asserts the same factual allegations as are in the original complaint and also seeks money damages and injunctive relief. The court has not yet held any hearings or made any rulings in this case. PEC intends to vigorously defend itself against the claims asserted by the plaintiffs. PEC cannot predict the outcome of any future proceedings in this case. d) 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. 11. SUBSEQUENT EVENT On November 3, 2003, Progress Telecom Corporation (PTC), Progress Telecommunications Corporation (PTC Communications), and Caronet, Inc. (Caronet), all of which are indirectly wholly-owned subsidiaries of Progress Energy, agreed to enter into a Contribution Agreement (Agreement) with EPIK Communications, Inc. (EPIK). EPIK is a wholly-owned subsidiary of Odyssey Telecorp, Inc. (Odyssey). The Company plans to account for this transaction as a business combination. Under terms of the Agreement, on November 4, 2003, PTC was converted into a limited liability company and renamed Progress Telecom, LLC (PTC LLC). The Agreement provides that PTC Communications, Caronet and EPIK will contribute substantially all of their assets and transfer certain liabilities to PTC LLC in exchange for membership interests in PTC LLC. Following the contribution of their respective net assets, PTC Communications will hold a 55 percent membership interest in PTC LLC; Caronet will hold a 5 percent membership interest; and EPIK will hold a 40 percent membership interest. After the conbtribution of net assets to PTC LLC, the stock of Caronet will be sold to an affiliate of Odyssey for cash and Caronet will then become an indirect wholly-owned subsidiary of Odyssey. Following consummation of the transactions described above, PTC Communications will hold a 55 percent ownership interest in PTC LLC, and Odyssey will hold a 45 percent ownership interest in PTC LLC through EPIK and Caronet. The Company anticipates closing the transaction by the end of the year; however, the closing of all of these transactions is subject to certain conditions precedent, including receipt of applicable governmental and regulatory permits and approvals. 43 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 nine months ended September 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 $319.0 million or $1.34 per share and $151.9 million or $0.71 per share for the three months ended September 30, 2003 and 2002, respectively. The Company's net income and basic earnings per share were $679.9 million or $2.88 per share and $405.1 million or $1.89 per share for the nine months ended September 30, 2003 and 2002, respectively. Net income for the three and nine months ended September 30, 2003 as compared to the same period in 2002 increased primarily due to the inclusion in 2002 of a $224.8 million impairment of assets in the telecommunications business. Absent the impact of the impairment, net income decreased $57.7 million for the three month period and increased $50.0 million for the nine month period. The decrease quarter over quarter was primarily due to milder weather in 2003, higher operations and maintenance (O&M) costs at the utilities, the loss from discontinued operations of NCNG, and the negative impact of the change in the fair value of contingent value obligations. These decreases were partially offset by increased sales of natural gas and higher synthetic fuel earnings. The increase for the nine month period was largely attributable to the impact of levelizing the estimated effective tax rate throughout the year and continued customer growth and usage, partially offset by the impact of the change in the fair value of contingent value obligations, higher O&M costs at the utilities, the net impact of the 2002 Florida rate settlement, and milder weather in 2003. The Company's segments contributed segment profits or losses for the three and nine months ended September 30, 2003 and 2002 as follows: - ------------------------------------------------------------------------------------------------ (in millions) Three Months Ended Nine Months Ended September 30, September 30, - ------------------------------------------------------------------------------------------------ Business Segment 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------ PEC Electric $160.0 $179.3 $383.3 $396.5 PEF 114.3 123.8 246.5 258.3 Fuels 79.8 52.1 160.1 140.5 CCO 12.7 20.9 23.6 25.5 Rail 0.7 0.7 (0.5) 3.0 Other (3.6) (225.9) (2.6) (239.3) -------------------------------------------------------- Total Segment Profit 363.9 150.9 810.4 584.5 Corporate (26.2) 6.2 (125.5) (181.4) -------------------------------------------------------- Income from continuing operations 337.7 157.1 684.8 403.1 NCNG discontinued operations (18.7) (5.2) (4.9) 2.0 -------------------------------------------------------- Net income $319.0 $151.9 $679.9 $405.1 - ------------------------------------------------------------------------------------------------ (Totals may not foot due to rounding.)
44 The significant operating segments and their primary operations are: o PEC Electric - engaged in the generation, transmission, distribution and sale of electricity primarily 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 primarily in portions of Florida; o Fuels - engaged in natural gas production, coal mining and synthetic fuels production; o Competitive Commercial Operations (CCO) - engaged in nonregulated generation operations and energy marketing; o Progress Rail Services (Rail) - engaged in various rail and railcar related services; and o Other Businesses (Other) - engaged in other nonregulated business areas, primarily telecommunications and energy services operations. 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. 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 (O&M) 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 2002 reallocation included impacts from 2001. 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 September 30, 2003, PEC Electric's AROs totaled $918.4 million and PEF's AROs totaled $315.1 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, 45 the NCUC initially denied the deferral of the ongoing effects. During the second quarter of 2003, PEC ceased deferral of the ongoing effects related to its North Carolina retail jurisdiction. Pre-tax income for the six months ended June 30, 2003 increased by approximately $13.6 million, which represented a decrease in non-ARO cost of removal expense, partially offset by an increase in decommissioning expense. This second quarter earnings impact was reversed in the third quarter when the NCUC issued an order allowing the deferral of the ongoing effects of SFAS No. 143. 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." A final order was approved in the third quarter of 2003. PROGRESS ENERGY CAROLINAS ELECTRIC PEC Electric contributed segment profits of $160.0 million and $179.3 million in the three months ended September 30, 2003 and 2002, respectively, and $383.3 million and $396.5 million for the nine months ended September 30, 2003 and 2002, respectively. The decrease in the three months ended September 30, 2003 as compared to the same period in 2002 is primarily due to milder weather conditions which suppressed sales across most customer classes and higher storm and other O&M costs, partially offset by higher customer growth and usage and the effect of the tax benefit reallocation from Corporate. The decrease in the nine months ended September 30, 2003 as compared to the same period in 2002 is primarily due to milder weather, O&M costs related to the ice storms in the first quarter of 2003 and Hurricane Isabel in the third quarter of 2003 and higher benefit costs. These unfavorable impacts are offset partially by strong wholesale sales, retail growth and usage and lower interest charges. On October 16, 2003, PEC made a filing with the North Carolina Utilities Commission (NCUC) to seek permission to defer expenses incurred from Hurricane Isabel and the February 2003 winter storms. As a result of rising storm costs and the frequency of major storm damage, Progress Energy has asked the NCUC to allow the company to create a deferred account in which the company would place expenses incurred as a result of named tropical storms, hurricanes and significant winter storms. The future amortization of such deferred costs would be includable as allowable costs in base rate filings. The Company estimates that it would charge $23.5 million in 2003 from Hurricane Isabel and from current year ice storms to the deferred account, if approved. Any additional major storm activity in 2003 could cause the amount to increase. PEC's electric revenues for the three and nine months ended September 30, 2003 and 2002 and the amount and percentage change by customer class are as follows: - ------------------------------------------------------------------------------------------------------------------ (in millions of $) Three Months Ended September 30, Nine Months Ended September 30, - ------------------------------------------------------------------------------------------------------------------ Customer Class 2003 Change % Change 2002 2003 Change % Change 2002 - ------------------------------------------------------------------------------------------------------------------ Residential $ 385.5 $ 0.9 0.2% $ 384.6 $ 990.1 $ 37.7 4.0% $ 952.3 Commercial 250.0 5.4 2.2% 244.6 649.7 19.0 3.0% 630.8 Industrial 178.9 (4.1) (2.2%) 183.0 481.5 (7.4) (1.5%) 488.9 Governmental 23.9 0.5 2.1% 23.4 60.3 1.4 2.4% 58.9 ---------------------- ------------------------------- ---------- Total retail revenues 838.3 2.7 0.3% 835.6 2,181.6 50.7 2.4% 2,130.9 Wholesale 174.3 (19.6) (10.1%) 193.9 537.9 44.7 9.1% 493.2 Unbilled (24.4) (18.6) - (5.8) (31.9) (40.4) - 8.5 Miscellaneous 21.7 0.2 0.9% 21.5 64.0 5.3 9.0% 58.7 ---------------------- ------------------------------- ---------- Total electric revenues $ 1,009.9 $ (35.3) (3.4%) $ 1,045.2 $ 2,751.6 $ 60.3 2.2% $ 2,691.3 - ------------------------------------------------------------------------------------------------------------------
46 PEC's electric energy sales for the three and nine months ended September 30, 2003 and 2002 and the amount and percentage change by customer class are as follows: - ------------------------------------------------------------------------------------------------------------------------ (in thousands of mWh) Three Months Ended September 30, Nine Months Ended September 30, - ------------------------------------------------------------------------------------------------------------------------ Customer Class 2003 Change % Change 2002 2003 Change % Change 2002 - --------------------------------------- ----------- ------------ -------------------- ---------- ------------ ---------- Residential 4,424 (61) (1.4%) 4,485 12,063 331 2.8% 11,732 Commercial 3,687 12 0.3% 3,675 9,616 124 1.3% 9,492 Industrial 3,414 (155) (4.3%) 3,569 9,616 (301) (3.0%) 9,917 Governmental 420 (5) (1.2%) 425 1,081 (7) (0.6%) 1,088 ----------- ----------- -------------------- ---------- ---------- Total retail energy sales 11,945 (209) (1.7%) 12,154 32,376 147 0.5% 32,229 Wholesale 3,950 (580) (12.8%) 4,530 11,870 514 4.5% 11,356 Unbilled (465) (247) - (218) (549) (576) - 27 ----------- ----------- -------------------- ---------- ---------- Total mWh sales 15,430 (1,036) (6.3%) 16,466 43,697 85 0.2% 43,612 - --------------------------------------- ----------- ------------ -------------------- ---------- ------------ ----------
Three months ended September 30, 2003 compared to three months ended September 30, 2002 Milder weather in 2003 accounted for a retail revenue decline of approximately $25 million, excluding fuel revenues which are primarily offset by fuel expenses and thus have no earnings impact, with the average cooling degree days declining 16% when comparing the three months ended September 30, 2003 to the same period in 2002. Retail customer growth and usage, excluding the impact of weather and the effect of fuel costs, accounted for $4.8 million of additional revenue in the three months ended September 30, 2003 as compared to the same period in 2002. PEC Electric had approximately 1,319,000 retail customers at September 30, 2003, which represents an increase of 22,000 from September 30, 2002. The wholesale revenues decline is primarily attributable to a milder summer in 2003 as compared to 2002. O&M costs were $205.7 million for the three months ended September 30, 2003, which represents a $22.0 million increase compared to the same period in 2002. Included in the 2003 spending is $13.5 million associated with Hurricane Isabel restoration efforts. Rising benefit costs also negatively impacted O&M in 2003. Income tax expense was $86.5 million for the three months ended September 30, 2003, a $23.5 million decrease compared to the same period in 2002. This variance is due to an $8.0 million higher tax benefit reallocation in the three months ended September 30, 2003 compared to the same period in 2002 and by the tax impact of lower pre-tax income. Nine months ended September 30, 2003 compared to nine months ended September 30, 2002 Mild weather in North and South Carolina during the late spring and summer months of 2003 more than offset the favorable impact of colder weather experienced in the first quarter of 2003, with a total unfavorable revenue impact in the retail markets from weather of approximately $38.1 million excluding the effect of fuel costs. Favorable wholesale revenues and retail customer growth and usage, excluding the effect of weather, partially offset the unfavorable weather impact. The wholesale favorability is primarily attributable to weather-related sales of energy to the Northeastern United States markets during the first half of 2003. O&M costs increased $34.8 million when compared to $571.0 million for the nine months ended September 30, 2002, primarily due to $10.9 million of ice storm costs in the first quarter of 2003, $13.6 million of hurricane restoration costs in September 2003, $21.5 million of costs associated with a planned nuclear outage in 2003 and continued increases in benefit costs. These increases 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 $10.4 million compared to depreciation and amortization expense of $405.4 million for the nine months ended September 30, 2002. This increase results from $53.6 million of clean air amortization in 2003 and $15.7 million of depreciation on additional assets placed into service. These increases are partially offset by a $54.8 million reduction in accelerated nuclear amortization. The clean air and accelerated nuclear amortization programs allow flexibility in the amount amortized each year. Both programs are currently meeting the appropriate amortization requirements. The Company currently expects to recognize approximately $90 million of clean air amortization in 2003. Other income and expense was $4.6 million of expense for the nine months ended September 30, 2003 compared to $3.8 million of income during the nine months ended September 30, 2002. The primary driver of the unfavorability was $10.0 million of losses on limited partnership investment funds recorded during the nine months ended September 30, 2003. Interest expense was $143.3 million for the nine months ended September 30, 2003, which represents a decrease of $18.3 million. This decrease was due to both a decrease in average outstanding debt and slightly lower interest rates. 47 Income tax expense was $196.5 million for the nine months ended September 30, 2003 as compared to $190.0 million for the nine months ended September 30, 2002. This variance is due to the tax impact of changes in pre-tax income and a $9.2 million lower tax benefit reallocation for the nine months ended September 30, 2003 compared to the same period in 2002. PROGRESS ENERGY FLORIDA PEF contributed segment profits of $114.3 million and $123.8 million in the three months ended September 30, 2003 and 2002, respectively, and $246.5 million and $258.3 million in the nine months ended September 30, 2003 and 2002, respectively. The decrease in profits for the three months ended September 30, 2003 when compared to 2002 is primarily due to increased pension expense and an unfavorable impact of the tax benefit reallocation from Corporate, partially offset by favorable interest charges. Weather had a slight negative impact, but was offset by customer growth and usage. The decrease in profits when comparing the nine months periods results primarily from the net impact of the 2002 rate settlement and higher pension expense, partially offset by a slightly favorable weather impact, improved customer growth and usage and favorable interest charges. 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 three and nine months ended September 30, 2003 and 2002 and the amount and percentage change by customer class are as follows: - ------------------------------------------------------------------------------------------------------------------ (in millions of $) Three Months Ended September 30, Nine Months Ended September 30, - ------------------------------------------------------------------------------------------------------------------ Customer Class 2003 Change % Change 2002 2003 Change % Change 2002 - ------------------------------------------------------------------------------------------------------------------ Residential $ 501.8 $32.0 6.8% $469.8 $ 1,300.3 $55.6 4.5% $ 1,244.7 Commercial 214.3 14.8 7.4% 199.5 556.7 7.0 1.3% 549.7 Industrial 56.9 4.3 8.2% 52.6 160.4 2.7 1.7% 157.7 Governmental 49.3 4.2 9.3% 45.1 133.1 4.6 3.6% 128.5 Retroactive rate refund - - - - - 35.0 - (35.0) Revenue sharing/rate refund 4.1 4.1 - - (23.9) (23.9) - - ---------------------- ------------------------------- ---------- Total retail revenues 826.4 59.4 7.7% 767.0 2,126.6 81.0 4.0% 2,045.6 Wholesale 51.8 (6.1) (10.5%) 57.9 172.9 6.8 4.1% 166.1 Unbilled (3.9) (12.3) - 8.4 2.7 (17.5) - 20.2 Miscellaneous 29.8 (0.5) (1.7%) 30.3 96.9 12.8 15.2% 84.1 ---------------------- ------------------------------- ---------- Total electric revenues $ 904.1 $40.5 4.7% $863.6 $ 2,399.1 $83.1 3.6% $ 2,316.0 - ------------------------------------------------------------------------------------------------------------------
PEF's electric energy sales for the three and nine ended September 30, 2003 and 2002 and the amount and percentage change by customer class are as follows: - ------------------------------------------------------------------------------------------------------------------ (in thousands of mWh) Three Months Ended September 30, Nine Months Ended September 30, - ------------------------------------------------------------------------------------------------------------------ Customer Class 2003 Change % Change 2002 2003 Change % Change 2002 - ------------------------------------------------------------------------------------------------------------------ Residential 5,739 236 4.3% 5,503 14,996 918 6.5% 14,078 Commercial 3,334 127 4.0% 3,207 8,727 208 2.4% 8,519 Industrial 1,028 45 4.6% 983 2,951 92 3.2% 2,859 Governmental 805 46 6.1% 759 2,204 109 5.2% 2,095 ---------------------- ------------------------------- ---------- Total retail energy sakes 10,906 454 4.3% 10,452 28,878 1,327 4.8% 27,551 sales Wholesale 1,006 (14) (1.4%) 1,020 3,172 196 6.6% 2,976 Unbilled (112) (326) - 214 441 (248) - 689 ---------------------- ------------------------------- ---------- Total mWh sales 11,800 114 1.0% 11,686 32,491 1,275 4.1% 31,216 - ------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2003 compared to three months ended September 30, 2002 Retail revenues, excluding fuel revenues of $370.0 million and $332.1 million for the three months ended September 30, 2003 and 2002, respectively, increased $21.5 million as a result of favorable customer growth, partially offset by lower customer usage. Fuel revenues, which are primarily offset by fuel expenses and thus have no earnings impact, increased compared to the prior year primarily due to increased generation and higher fuel prices. 48 Operations and maintenance (O&M) costs increased $16.7 million, when compared to the $146.8 million incurred during the three months ended September 30, 2002. This increase is primarily related to increased pension expense and other benefit costs. Depreciation and amortization increased $8.7 million when compared to the $73.4 million incurred during the three months ended September 30, 2002 primarily due to additional depreciable assets placed in service. Interest charges decreased $17.7 million when compared to $25.8 million incurred in the three months ended September 2002 primarily due to the reversal of a regulatory liability for accrued interest related to previously resolved tax matters. Income tax expense increased $6.2 million when compared to $56.0 million incurred during three months ended September 30, 2002 primarily from the $10.1 million lower tax benefit reallocation, in accordance with an SEC order, partially offset by lower pretax income. Nine months ended September 30, 2003 compared to nine months ended September 30, 2002 Retail revenues, excluding fuel revenues of $945.3 million and $898.9 million for the nine months ending September 30, 2003 and 2002, respectively, increased primarily due to the impact of the $35.0 million retroactive rate refund that was recognized in 2002 as part of the settlement agreement, continued customer growth and usage and favorable weather. Partially offsetting these gains were the impact of the 9.25% rate reduction, the 2002 revenue sharing refund which was resolved in 2003, and the 2003 revenue sharing accrual, all of which are discussed previously. The average number of customers for the nine months ended September 30, 2003 increased by approximately 35,200 or 2.4% in 2003 as compared to the same period in 2002. O&M costs increased $24.8 million when compared to the $433.4 million incurred during the nine months ended September 30, 2002 primarily due to increased pension expenses and other benefit costs. Depreciation and amortization increased $23.0 million when compared to the $218.0 million incurred during the nine months ended September 30, 2002 primarily due to increased assets placed into service, which accounted for $12.1 million of the increase, and the amortization of a purchased power contract. This purchased power was completely amortized as of September 30, 2003. The amortization of the purchased power contract is recovered through a cost recovery clause and therefore has no impact on earnings. Interest charges decreased $19.6 million when compared to the $82.1 million incurred during the nine months ended September 30, 2002 primarily due to the reversal of a regulatory liability for accrued interest related to previously resolved tax matters. Income tax expense decreased $7.9 million when compared to the $135.0 million incurred during the nine months ended September 30, 2002. Fluctuations in income tax expense result from the tax benefit reallocation and lower pretax income. DIVERSIFIED BUSINESSES The Company's diversified businesses consist of the Fuels segment, the CCO segment, the Rail segment, Other segment. These businesses are explained in more detail below. FUELS The Fuels segment's operations include synthetic fuels production, natural gas production, coal extraction and terminals operations. Fuels' results for the three and nine months ended September 30, 2003 as compared to the same periods in 2002 were impacted most significantly by the increase in gas production and, for the nine months then ended, by the timing of synthetic fuels production. The following summarizes Fuels' segment profits for the three and nine months ended September 30, 2003 and 2002. - ----------------------------------------------------------------------------------------------------------- Three Months Ended September 30, Nine Months Ended September 30, - ----------------------------------------------------------------------------------------------------------- (in millions) 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------------------- Synthetic fuel operations $58.7 $48.7 $125.9 $131.8 Gas production 11.1 2.5 25.8 3.7 Coal fuel and other operations 10.0 0.9 8.4 5.0 --------------------------------------------------------------------- Segment Profits $79.8 $52.1 $160.1 $140.5 - -----------------------------------------------------------------------------------------------------------
49 Synthetic Fuel Operations The synthetic fuels operations generated net profits of $58.7 million and $48.7 million in the three months ended September 30, 2003 and 2002, respectively, and $125.9 million and $131.8 million in the nine months ended September 30, 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 had 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. In October 2003, the National Office of the IRS informed the Company it had rejected challenges regarding whether the synthetic fuels produced at the Colona facility was the result of a significant chemical change. After an extensive review of the process and analysis involved, the National Office concluded that the experts, who test the synthetic fuel for chemical change, use reasonable scientific methods to reach their conclusions. See Note 15 to the Progress Energy Notes to the Consolidated Interim Financial Statements. The following summarizes the synthetic fuel operations for the three and nine months ended September 30, 2003 and 2002. - ----------------------------------------------------------------------------------------------------------- Three Months Ended September 30, Nine Months Ended September 30, - ----------------------------------------------------------------------------------------------------------- (in millions) 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------------------- Tons produced 3.0 3.0 7.9 9.4 ----------------------------------------------------------------- Operating losses, excluding tax credits $ (34.0) $ (30.0) $(97.5) $ (122.0) Tax credits generated 92.7 78.7 223.4 253.8 ----------------------------------------------------------------- Net profits $ 58.7 $ 48.7 $125.9 $ 131.8 - -----------------------------------------------------------------------------------------------------------
The change in synthetic fuel production between the nine months ended September 30, 2003 and the nine months ended September 30, 2002 is primarily due to an internal 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. The 2003 tax credits also include a $12.7 million favorable true-up from 2002. Gas Production Gas operations generated profits of $11.1 million and $2.5 million in the three months ended September 30, 2003 and 2002, respectively, and $25.8 million and $3.7 million in the nine months ended September 30, 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 in 2003 as compared to 2002. In October 2003, the Company completed the sale of certain gas producing properties owned by Mesa Hydrocarbons, LLC for net proceeds of approximately $97 million. See Note 3B of the Progress Energy Notes to the Consolidated Interim Financial Statements for a further discussion of this sale. The following summarizes the gas production and revenues for the three and nine months ended September 30, 2003 and 2002 by production facility. - -------------------------------------------------------------------------------------------------------- Gas Production Three Months Ended September 30, Nine Months Ended September 30, - ------------------------------------------------------------------------------------------------------- (in millions of cubic feet) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------ Mesa 1.3 1.6 4.4 4.2 Westchester Gas 3.3 1.9 9.1 2.4 North Texas Gas 3.0 - 4.6 - ------------------------------------------------------------------ Total gas production 7.6 3.5 18.1 6.6 - ------------------------------------------------------------------------------------------------------ - -------------------------------------------------------------------------------------------------------- Gas Sales Three Months Ended September 30, Nine Months Ended September 30, - ------------------------------------------------------------------------------------------------------ (in millions) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------ Mesa $ 4.0 $ 3.7 $ 12.8 $10.3 Westchester Gas 16.4 5.8 45.0 7.4 North Texas Gas 14.0 - 24.4 - Other 1.8 1.6 4.4 2.4 ------------------------------------------------------------------ Total gas sales $36.2 $11.1 $ 86.6 $20.1 - ------------------------------------------------------------------------------------------------------
50 COMPETiTIVE COMMERCIAL OPERATIONS CCO generates and sells electricity to the wholesale market through nonregulated plants. These operations also include marketing activities. - ---------------------------------------------------------------------- Three Months Ended Nine Months Ended (in millions) September 30, September 30 - ---------------------------------------------------------------------- 2003 2002 2003 2002 -------------------------------------------------- Total Sales $ 66.7 $ 44.3 $ 137.5 $ 77.3 Segment Profits $ 12.7 $ 20.9 $ 23.6 $ 25.5 - ---------------------------------------------------------------------- Generating capacity increased from 1,554 megawatts at September 30, 2002 to 3,100 megawatts at September 30, 2003, with the Effingham, Rowan Phase 2 and Washington plants being placed into service during 2003. The increase in revenue for the three and nine months ended September 30, 2003 when compared to the same periods in 2002 is primarily due to increased contracted capacity on newly constructed plants and energy revenue from a new full-requirements power supply agreement. The increase during the nine months ended September 30, 2003 in revenue and earnings is also related to a tolling agreement termination payment received in the first quarter of 2003. The revenue increases related to higher volumes were partially offset by higher depreciation costs of $8.6 million and $12.2 million for the three and nine months ended September 30, 2003, when compared to the same periods in 2002, related to the additional facilities and by increases in interest charges, other fixed costs and costs allocated from the Service Company. Additionally CCO capitalized interest of $2.5 million and $10.5 million in the three and nine months ended September 30, 2003, compared to $12.7 million and $14.5 million for the same periods in 2002. 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, which resulted in additional revenues of $10.8 million and $13.4 million for the three and nine months ended September 30, 2003 when compared to the same periods in 2002. The Company has contracts for 68%, 85% and 50% of planned production capacity for 2003 through 2005, respectively. The 2005 decline results from the expiration of four tolling contracts. The Company continues to pursue opportunities with both current customers and other potential customers. 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 was placed into service in August 2003 and completes CCO's nonregulated build-out with a total capacity of 3,100 megawatts. 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 September 30, 2003. See Note 3C of the Progress Energy Notes to the Consolidated Interim Financial Statements. Progress Rail contributed segment profit of $0.7 million for both the three months ended September 30, 2003 and 2002, respectively, and a segment loss of $0.5 million and segment profit of $3.0 million for the for the nine months ended September 30, 2003 and 2002, respectively. As a result of an SEC order, Rail incurred additional Service Company allocations during the three and nine months ended September 30, 2003, respectively, when compared to the same periods in 2002. These increased costs were partially offset by improvements in the recycling business and reduced operating costs. An SEC order approving the merger of FPC required 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 sought, and in October 2003, was granted approval of, a three year extension from the SEC. 51 OTHER BUSINESSES SEGMENT Progress Energy's Other segment primarily includes the operations of SRS and Telecom. SRS is engaged in providing energy services to industrial, commercial and institutional customers to help manage energy costs and currently focuses its activities in the southeastern United States. Telecom provides broadband capacity services, dark fiber and wireless services in Florida and the eastern United States. The Other segment contributed segment losses of $3.6 million and $225.9 million in the three months ended September 30, 2003 and 2002, respectively, and $2.6 million and $239.3 million in the nine months ended September 30, 2003 and 2002, respectively. Included in the 2002 segment losses is an asset impairment and other charges in the telecommunications business of $224.8 million. CORPORATE SERVICES Corporate Services includes the operations of the Holding Company, the Service Company, and consolidation entities, as summarized below. - ----------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, - ----------------------------------------------------------------------------------------- Income (expense) in millions 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------- Other interest expense $ (77.5) $ (66.6) $ (221.8) $ (213.3) Contingent value obligations (3.9) 9.4 (3.9) 22.2 Tax levelization 35.4 39.1 40.8 (40.5) Tax reallocation (9.1) (4.1) (27.9) (37.1) Other income taxes 31.4 24.0 93.5 90.3 Other income (expenses) (2.5) 4.4 (6.2) (3.0) ---------------------------------------------------- Segment profit (loss) $ (26.2) $ 6.2 $ (125.5) $ (181.4) - -----------------------------------------------------------------------------------------
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 September 30, 2003 and 2002, the CVOs had fair market values of approximately $17.8 million and $13.8 million, respectively. Progress Energy recorded an unrealized loss of $3.9 million and unrealized gain of $9.4 million for the three months ended September 30, 2003 and 2002, respectively, to record the changes in fair value of the CVOs, which had average unit prices of $0.18 and $0.20 at September 30, 2003 and 2002, respectively. A $3.9 million unrealized loss and a $22.2 unrealized gain was recorded for the for the nine months ended September 30, 2003 and 2002, respectively. 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 decreased by $35.4 million and $39.1 million for the three months ended September 30, 2003 and 2002, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was decreased by $40.8 million and increased $40.5 million for the nine months ended September 30, 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 2002, the Company approved the sale of NCNG and the Company's equity investment in ENCNG 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. A $29.4 million after-tax estimated loss on the sale of the assets was recognized in the fourth quarter of 2002. The sale closed on September 30, 2003, at which time an additional after-tax loss of $8.9 million was recognized. Net proceeds of approximately $450 million from the sale of NCNG and ENCNG were used to reduce outstanding short-term debt. LIQUIDITY AND CAPITAL RESOURCES Progress Energy, Inc. Cash provided by operating activities increased $143 million for the nine months ended September 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 reduced working capital needs at PVI and Progress Fuels, which offset lower cash from operations at the utility operations. The lower working capital requirements were due largely to reduced inventory levels at Progress Fuels. 52 Net cash used in investing activities decreased $644 million for the nine months ended September 30, 2003, when compared to the corresponding period in the prior year. The decrease in cash used in investing activities is primarily due to the receipt of approximately $450 million from the sale of NCNG and ENCNG in September which was used to reduce debt. In addition, lower capital spending at PVI, which acquired generating assets from LG&E in February 2002 for approximately $350 million, contributed to the decrease. During the first nine months of 2003, $476 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 $476 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 $787 million of net cash flow before common dividend payments and other financing activity for the nine month period ending September 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 $70 million of 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. 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 September 30, 2003. During the three months ended September 30, 2003 Genco determined it did not need to make any additional draws under this facility. 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 September 30, 2003 the calculated ratio, as defined, was 51.3%. 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 September 30, 2003 the calculated ratio, as defined, was 8.1 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. On July 1, 2003, $110 million of PEF's First Mortgage Bonds, 6.0% Series, Due July 1, 2003 and $35 million of PEF's medium-term notes, 6.62% Series, matured. PEF funded the redemption with commercial paper. On August 15, 2003, PEC redeemed $100 million of First Mortgage Bonds, 6.875% Series Due August 15, 2023 at 102.84%. On August 27, 2003, Standard & Poor's (S&P) credit rating agency announced that it had lowered its corporate credit rating on Progress Energy Inc., PEC, PEF, and Florida Progress to BBB from BBB+. The outlook of the ratings was changed from negative to stable. These changes have not had a material impact on the companies' access to capital or their financial results. On September 11, 2003, PEC issued $400 million of First Mortgage Bonds, 5.125% Series, Due September 15, 2013 and $200 million of First Mortgage Bonds, 6.125% Series, Due September 15, 2033. Proceeds from this issuance were used to reduce the balance of PEC's outstanding commercial paper, and short-term notes payable to affiliated companies, which notes represent PEC's borrowings under an internal money pool operated by Progress Energy. In October 2003, the Company received net proceeds of approximately $97 million for the sale of its Mesa gas properties located in Colorado. 53 On October 31, 2003, PEF announced the redemption of $100 million of its First Mortgage Bonds, 7% Series Due 2023 at 103.19% of the principal amount of such bonds. PEF intends to redeem the bonds on December 1, 2003 with commercial paper proceeds. For the three months ended September 30, 2003, the Company issued approximately 2.7 million shares representing approximately $112 million in proceeds from its Investor Plus Stock Purchase Plan and its employee benefit plans. For the nine months ended September 30, 2003, the Company has issued approximately 6.9 million shares through these plans, resulting in approximately $284 million of cash proceeds. The amount and timing of future sales of company securities will depend on market conditions, operating cash flow, asset sales and the specific needs of the Company. The Company may from time to time sell securities beyond the amount needed to meet capital requirements in order to allow for the early redemption of long-term debt, the redemption of preferred stock, the reduction of short-term debt or for other general corporate purposes. Future Commitments As of September 30, 2003, the current portion of long-term debt of $868 million 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 application of net proceeds from the sale of NCNG in September 2003 to reduce commercial paper balances. The current portion of long-term debt also includes $300 million of secured debt issued by PEC. These amounts are expected to be refinanced or retired through commercial paper, capital market transactions and with internally-generated funds. As of September 30, 2003, Progress Energy's guarantees issued on behalf of third parties were approximately $26.4 million. 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 an 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. 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 of 2003 as a charge against electric operating revenue and refunded this amount by October 31, 2003. For the nine months ended September 30, 2003, PEF has recorded an additional accrual of $5.4 million related to estimated 2003 revenue sharing. Synthetic Fuels Tax Credits Progress Energy, through its subsidiaries, produces a coal-based solid synthetic fuel. 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 those generated by FPC prior to its acquisition by the Company) are approximately $1.121 billion, of which $489.1 million have been used and $631.9 million are being carried forward as of September 30, 2003. The current Section 29 tax credit program expires at the end of 2007. 54 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 $286.6 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 June 2003, the Company was informed that IRS field auditors had 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. In October 2003, the National Office of the IRS informed the Company that it had rejected the IRS field auditors' challenges regarding whether the synthetic fuel produced at the Company's Colona facility was the result of a significant chemical change. The National office had concluded that the experts, engaged by Colona who test the synthetic fuel for chemical change, use reasonable scientific methods to reach their conclusions. Accordingly, the National Office will not take any adverse action on the PLR that has been issued for the Colona facility. A written decision memorializing the National Office's conclusions should be available within the next two months. At that time, the IRS field auditors will have the right to ask for reconsideration of the National Office's decision. Although this ruling applies only to the Colona facility, the Company believes that the National Office's reasoning should be equally applicable to the other Progress Energy facilities, given that the Company 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 other facilities. However, the IRS has not yet formally informed the Company as to its position on the Company's other facilities. Although this is a significant event, the audits of the Colona facility and the Company's other facilities are not yet completed. Progress Energy continues to believe that it operates its facilities in conformity with its PLRs and Section 29. Accordingly, the Company has no current plans to alter its synthetic fuel production schedule 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. 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. Nuclear Matters On August 9, 2002, the Nuclear Regulatory Commission (NRC) issued an additional bulletin dealing with head leakage due to cracks near the control rod nozzles. The NRC 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 2004 and replace the head in 2005. The Harris Plant is ranked in the lowest susceptibility classification. During the Harris Plant's 2003 outage, the Company completed a series of examinations of the entire reactor pressure vessel head and found no degradation or indication of leakage. 55 In October 2001, at PEF's 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. The Company replaced the vessel head at CR3 during its regularly scheduled refueling outage completed on November 5, 2003, when the unit was returned to service. 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. 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 responded to the Order, stating that it 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. On August 21, 2003 the NRC issued Bulletin 2003-02 requesting PWR licensees to address inspection plans for reactor pressure vessel lower head penetrations. The Company intends to comply with the provisions of the order. 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 Four cities, with a total of approximately 31,000 customers, have litigation pending against PEF in various circuit courts in Florida. As discussed below, three other cities, with a total of approximately 30,000 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. Arbitration in one of the cases (the City of Casselberry) was held in August 2002. Following arbitration, the parties entered settlement discussions, and on July 28, 2003 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 13,000-customer 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 costs and construction work in progress, which could add several million dollars to the award. The panel also awarded PEF approximately $10.7 million in stranded costs. On September 9, 2003, Winter Park voters passed a referendum that would authorize the City to issue bonds of up to approximately $50 million to acquire PEF's electric distribution system. The City has not yet definitively decided whether it will acquire the system, but has indicated that it will seek wholesale power supply bids and bids to operate and maintain the 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 2,500-customer Town of Belleair) was completed on June 16, 2003. On September 2, 2003, the arbitration panel issued an award in that case setting the value of the electric distribution system within the Town at approximately $6.3 million. The panel further required the Town to pay to PEF its requested $690,000 in separation and reintegration costs and approximately $1.5 million in stranded costs. The Town has not yet decided whether it will attempt to acquire the system. At this time, whether and when there will be further proceedings regarding the Town of Belleair cannot be determined. A fourth arbitration (with the 13,000-customer City of Apopka) has been scheduled for January 2004. Arbitration in the remaining city's litigation (the 1,500-customer 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 held oral argument in one of the appeals on August 27, 2003. Subsequently, the Court requested briefing from the parties in the other appeal. Briefing likely will be completed in the second appeal in early November. The Company cannot predict the outcome of these matters at this time. 56 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 nine months ended September 30, 2003 and 2002 are not material to PEC's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities increased $35 million for the nine months ended September 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 $78 million for the nine months ended September 30, 2003, when compared to the corresponding period in the prior year. Excluding the $244 million in cash proceeds received in April 2002 for the sale of generating assets to Progress Ventures, cash used in investing activities decreased $166 million primarily due to lower construction spending. During the first nine months of 2003, $418.5 million was spent on PEC's construction program, nuclear fuel additions and contributions to its nuclear decommissioning fund. This amount was approximately $118 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 September 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/A. 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 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 was August 15, 2003 and the redemption was funded by PEC with commercial paper. On September 11, 2003, PEC issued $400 million of First Mortgage Bonds, 5.125% Series, Due September 15, 2013 and $200 million of First Mortgage Bonds, 6.125% Series, Due September 15, 2033. The current portion of long-term debt includes $300 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 internally generated of funds. 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. 57 In March, April, May 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 had a computational period of ten years and were designated as cash flow hedges for accounting purposes. The agreements have a total notional amount of $110 million. The agreements were terminated simultaneously with the pricing of the PEC First Mortgage Bonds in September 2003. The $4.2 million gain 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. The exposure to changes in interest rates from the Company's fixed rate and variable rate long-term debt at September 30, 2003 has changed from December 31, 2002. The total fixed rate long-term debt at September 30, 2003 was $9.3 billion, with an average interest rate of 6.60% and fair market value of $10.3 billion. The total variable rate long-term debt at September 30, 2003, was $1.1 billion, with an average interest rate of 1.29% and fair market value of $1.1 billion. The exposure to changes in interest rates from the Company's commercial paper and FPC mandatorily redeemable securities of trust at September 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, May 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 had a computational period of ten years and were designated as cash flow hedges for accounting purposes. The agreements, with a total notional amount of $110 million, were terminated simultaneously with the pricing of the PEC First Mortgage Bonds in September 2003. The $4.2 million gain 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. 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 September 30, 2003 was not materially different than at December 31, 2002. 58 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 September 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 September 30, 2003 that has materially affected, or is reasonably likely to materially affect, PEC's internal control over financial reporting. 59 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 10 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. SRS has amended its claims and asserted new claims against the District and other parties, including a former SRS employee and a former District employee. 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, SRS, and Progress Energy Solutions, Inc. all have filed responsive pleadings denying the allegations, and the discovery process is underway. On October 2, 2003, the District filed a motion for leave to amend its cross-complaint to add PEC as an additional defendant and the parties have stipulated that the pleadings may be so amended. PEC will file a responsive pleading denying the allegations. 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 the District and other claimants. 2. Collins v. Duke Energy Corporation, Civil Action No. 03CP404050 On August 21, 2003, PEC was served as a co-defendant in a purported class action lawsuit styled as Collins v. Duke Energy Corporation, Civil Action No. 03CP404050, in South Carolina's Circuit Court of Common Pleas for the Fifth Judicial Circuit. PEC is one of three electric utilities operating in South Carolina named in the suit. The plaintiffs are seeking damages for the alleged improper use of electric easements but have not asserted a dollar amount for their damage claims. The complaint alleges that the licensing of attachments on electric utility poles, towers and other structures to non-utility third parties or telecommunication companies for other than the electric utilities' internal use along the electric right-of-way constitutes a trespass. On September 19, 2003, PEC filed a motion to dismiss all counts of the complaint on substantive and procedural grounds. On October 6, 2003, the plaintiffs filed a motion to amend their complaint. PEC believes the amended complaint asserts the same factual allegations as are in the original complaint and also seeks money damages and injunctive relief. The court has not yet held any hearings or made any rulings in this case. PEC intends to vigorously defend itself against the claims asserted by the plaintiffs. PEC cannot predict the outcome of any future proceedings in this case. 60 Item 2. Changes in Securities and Use of Proceeds RESTRICTED STOCK AWARDS: (a) Securities Delivered. On September 16, 2003 and October 1, 2003, 4,800 and 8,000 restricted shares, respectively, of the Company's Common Shares were granted to certain key employees pursuant to the terms of the Company's 2002 Equity Incentive Plan (Plan), which was approved by the Company's shareholders on May 8, 2002. Section 9 of the Plan provides for the granting of Restricted Stock by the Organization and Compensation Committee of the Company's Board of Directors, (the Committee) to key employees of the Company, including its Affiliates or any successor, and to outside directors of the Company. The Common Shares delivered pursuant to the Plan were acquired in market transactions directly for the accounts of the recipients and do not represent newly issued shares of the Company. (b) Underwriters and Other Purchasers. No underwriters were used in connection with the delivery of Common Shares described above. The Common Shares were delivered to certain key employees of the Company. The Plan defines "key employee" as an officer or other employee of the Company who is selected for participation in the Plan. (c) Consideration. The Common Shares were delivered to provide an incentive to the employee recipients to exert their utmost efforts on the Company's behalf and thus enhance the Company's performance while aligning the employee's interest with those of the Company's shareholders. (d) Exemption from Registration Claimed. The Common Shares described in this Item were delivered on the basis of an exemption from registration under Section 4(2) of the Securities Act of 1933. Receipt of the Common Shares required no investment decision on the part of the recipients. All award decisions were made by the Committee, which consists entirely of non-employee directors. 61 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Progress Progress Energy Number Description Energy, Inc. Carolinas, Inc. 10(i) Progress Energy, Inc. $250,000,000 364-Day Amended and X Restated Credit Agreement dated as of November 10, 2003. 31(a) Certifications pursuant to Section 302 of the Sarbanes- X X Oxley Act of 2002 - Chairman and Chief Executive Officer 31(b) Certifications pursuant to Section 302 of the Sarbanes- X X Oxley Act of 2002 - Executive Vice President and Chief Financial Officer 32(a) Certifications pursuant to Section 906 of the Sarbanes- X X Oxley Act of 2002 - Chairman and Chief Executive Officer 32(b) Certifications pursuant to Section 906 of the Sarbanes- X X Oxley Act of 2002 - Executive Vice President and Chief Financial Officer (b) Reports filed or furnished on Form 8-K since the beginning of the quarter: Progress Energy, Inc. Financial Item Statements Reported Included Date of Event Date Filed or Furnished 9, 12 Yes July 23, 2003 July 23, 2003 7, 9 Yes August 29, 2003 August 29, 2003 5 No August 29, 2003 September 2, 2003 9, 12 Yes October 22, 2003 October 22, 2003 Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. Financial Item Statements Reported Included Date of Event Date Filed or Furnished 9, 12 Yes July 23, 2003 July 23, 2003 5 No August 29, 2003 September 2, 2003 5, 7 Yes September 8, 2003 September 8, 2003 5, 7 No September 8, 2003 September 12, 2003 9, 12 Yes October 22, 2003 October 22, 2003
62 SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROGRESS ENERGY, INC. CAROLINA POWER & LIGHT COMPANY Date: November 12, 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 63 EX-10 3 pei_exhibit10i-.txt EXHIBIT 10(I) - AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10(i) EXECUTION COPY ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT Dated as of November 10, 2003 PROGRESS ENERGY, INC. (Borrower) and THE BANKS LISTED ON THE SIGNATURE PAGES HEREOF (Banks) and CITIBANK, N.A. (Administrative Agent) ================================================================================ CITIGROUP GLOBAL MARKETS, INC. and J.P. MORGAN SECURITIES INC. (Joint Lead Arrangers) JPMORGAN CHASE BANK (Syndication Agent) TABLE OF CONTENTS Section Page Article I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms............................................1 Section 1.02. Computation of Time Periods.....................................12 Section 1.03. Accounting Terms................................................12 Article II AMOUNTS AND TERMS OF THE ADVANCES Section 2.01. The Advances...................................................12 Section 2.02. Making the Advances.............................................13 Section 2.03. Fees............................................................14 Section 2.04. Reduction and Increase of the Commitments.......................14 Section 2.05. Repayment of Advances...........................................16 Section 2.06. Interest on Advances............................................16 Section 2.07. Additional Interest on Eurodollar Rate Advances.................16 Section 2.08. Interest Rate Determination.....................................17 Section 2.09. Voluntary Conversion of Advances................................18 Section 2.10. Prepayments of Advances.........................................18 Section 2.11. Increased Costs.................................................19 Section 2.12. Illegality......................................................20 Section 2.13. Payments and Computations.......................................20 Section 2.14. Sharing of Payments, Etc........................................21 Section 2.15. Extension of Commitment Termination Date.......................21 Section 2.16. Term Loan Conversion Option.....................................23 Article III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Closing.................................24 Section 3.02. Conditions Precedent to Each Borrowing and to the Exercise of the Term Loan Conversion Option..............................24 Article IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of the Borrower..................25 i Article V COVENANTS OF THE COMPANY Section 5.01. Affirmative Covenants...........................................27 Section 5.02. Negative Covenants..............................................30 Article VI EVENTS OF DEFAULT Section 6.01. Events of Default...............................................31 Article VII THE AGENT Section 7.01. Authorization and Action........................................33 Section 7.02. The Agent's Reliance, Etc.......................................33 Section 7.03. The Administrative Agent and its Affiliates.....................34 Section 7.04. Lender Credit Decision..........................................34 Section 7.05. Indemnification.................................................34 Section 7.06. Successor Administrative Agent..................................34 Article VIII MISCELLANEOUS Section 8.01. Amendments, Etc.................................................35 Section 8.02. Notices, Etc....................................................36 Section 8.03. No Waiver; Remedies.............................................36 Section 8.04. Costs, Expenses, Taxes and Indemnification......................36 Section 8.05. Right of Set-off................................................39 Section 8.06. Binding Effect..................................................39 Section 8.07. Assignments and Participations..................................39 SECTION 8.08. Tax Disclosure..................................................43 Section 8.09. Governing Law...................................................43 Section 8.10. Waiver of Jury Trial............................................44 Section 8.11. Execution in Counterparts.......................................44 Section 8.12. Severability....................................................44 Section 8.13. Headings........................................................44 Section 8.14. Entire Agreement................................................44 SCHEDULES I - List of Commitments and Applicable Lending Offices ii EXHIBITS A-1 - Form of Notice of Borrowing A-2 - Form of Notice of Conversion B - Form of Assignment and Acceptance C-1 - Form of Opinion of General Counsel to the Borrower C-2 - Form of Opinion of Special Counsel for the Borrower C-3 - Form of Opinion of General Counsel to the Borrower upon Extension of the Commitment Termination Date or Exercise of the Term Loan Conversion Option C-4 - Form of Opinion of Special Counsel for the Borrower upon Extension of the Commitment Termination Date or Exercise of the Term Loan Conversion Option D - Form of Opinion of Counsel for the Administrative Agent and the Arrangers E - Form of Request for Extension of Commitment Termination Date F - Form of Term Loan Conversion Notice G - Form of Compliance Certificate iii AMENDED AND RESTATED CREDIT AGREEMENT Dated as of November 10, 2003 This AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") is made by PROGRESS ENERGY, INC., a North Carolina corporation (the "Borrower"), the banks listed on the signature pages hereof (the "Banks") and CITIBANK, N.A. ("Citibank"), as administrative agent (the "Administrative Agent") for the Lenders (as hereinafter defined). This Agreement amends and restates in its entirety the Existing Credit Facility (as hereinafter defined). Article I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Additional Lender" shall have the meaning assigned such term in Section 2.04(b). "Administrative Agent" has the meaning specified in the introductory paragraph of this Agreement. "Advance" means an advance by a Lender to the Borrower as part of a Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by, or is under common control with such Person or is a director or officer of such Person. "Applicable Lending Office" means, with respect to each Lender, (i) such Lender's Domestic Lending Office in the case of a Base Rate Advance, or (ii) such Lender's Eurodollar Lending Office, in the case of a Eurodollar Rate Advance. "Applicable Margin" means for each Type of Advance at all times during which any Applicable Rating Level set forth below is in effect, the interest rate per annum set forth below next to such Applicable Rating Level: 2 - -------------------------------- -------------------------- ------------------------------------- Applicable Rating Level Applicable Margin for Applicable Margin for Base Rate Eurodollar Rate Advances Advances - -------------------------------- -------------------------- ------------------------------------- 1 0.525% 0% - -------------------------------- -------------------------- ------------------------------------- 2 0.750% 0% - -------------------------------- -------------------------- ------------------------------------- 3 0.850% 0% - -------------------------------- -------------------------- ------------------------------------- 4 0.950% 0% - -------------------------------- -------------------------- ------------------------------------- 5 1.125% 0.125% - -------------------------------- -------------------------- ------------------------------------- 6 1.875% 0.875% - -------------------------------- -------------------------- -------------------------------------
provided, that (i) the Applicable Margins for Eurodollar Rate Advances set forth above for each Applicable Rating Level shall increase by 0.250% at any time following the exercise of the Term Loan Conversion Option at Levels 1, 2, 3, 4 or 5 and by 0.500% at Level 6, (ii) the Applicable Margins for Eurodollar Rate Advances set forth above for each Applicable Rating Level shall increase at any time the aggregate principal amount of Advances outstanding is greater than 33% of the aggregate Commitments by 0.125% at Levels 1, 2, 3, 4 and 5 and by 0.250% at Level 6, (iii) the Applicable Margins set forth above for each Applicable Rating Level shall increase upon the occurrence and during the continuance of any Event of Default by 2.0%, and (iv) any change in the Applicable Margin resulting from a change in the Applicable Rating Level shall become effective upon the date of announcement of a change in the Moody's Rating or the S&P Rating that results in a change in the Applicable Rating Level. "Applicable Rating Level" at any time shall be determined in accordance with the then-applicable S&P Rating and the then-applicable Moody's Rating as follows: - ------------------------------------------------------------------------------- S&P Rating/Moody's Rating Applicable Rating Level - ------------------------------------------------------------------------------- A or higher or A2 or higher 1 - ------------------------------------------------------------------------------- A- or A3 2 - ------------------------------------------------------------------------------- BBB+ or Baa1 3 - ------------------------------------------------------------------------------- BBB or Baa2 4 - ------------------------------------------------------------------------------- BBB- and Baa3 5 - ------------------------------------------------------------------------------- lower than BBB- and Baa3 or unrated 6 - ------------------------------------------------------------------------------- 3 In the event that the S&P Rating and the Moody's Rating are not at the same Applicable Rating Level but differ by only one Applicable Rating Level, then the higher of the two ratings shall determine the Applicable Rating Level. In the event that the S&P Rating and the Moody's Rating differ by more than one Applicable Rating Level, then the Applicable Rating Level immediately below the higher of the two ratings shall be the Applicable Rating Level. The Applicable Rating Level shall be redetermined on the date of announcement of a change in the S&P Rating or the Moody's Rating. "Arrangers" means Citigroup Global Markets, Inc. and J.P. Morgan Securities Inc. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit B hereto. "Banks" has the meaning specified in the introductory paragraph of this Agreement. "Base Rate" means, for any Interest Period or any other period, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the higher from time to time of: (i) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; and (ii) 1/2 of one percent per annum above the Federal Funds Rate in effect from time to time. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.06(a). "Borrower" has the meaning specified in the introductory paragraph of this Agreement. "Borrowing" means a borrowing consisting of simultaneous Advances of the same Type made by each of the Lenders pursuant to Section 2.01 or Converted pursuant to Section 2.08 or 2.09. "Business Day" means a day of the year on which banks are not required or authorized to close at the principal office of any Lender and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Change of Control" means the occurrence, after the date of this Agreement, of (i) any Person or "group" (within the meaning of Rule 13(d) or 14(d) of the Securities and Exchange Commission under the Exchange Act), directly or indirectly, acquiring beneficial ownership of or control over securities of the Borrower (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Borrower entitled to vote in the election of directors. "Citibank" has the meaning specified in the introductory paragraph of this Agreement. 4 "Commitment" has the meaning specified in Section 2.01. "Commitment Increase" shall have the meaning assigned such term in Section 2.04(b). "Commitment Increase Approvals" means any governmental approval, resolution of the Board of Directors of the Borrower or resolution of the Board of Directors of any Subsidiary not obtained by or on behalf of the Borrower or such Subsidiary, as applicable, and in full force and effect on the date hereof, which governmental approval or resolution is required to be obtained in order to authorize the Commitment Increase and the performance by the Borrower and the Subsidiaries of their respective obligations under this Agreement after giving effect to the Commitment Increase. "Commitment Termination Date" means, with respect to a Lender, the earlier to occur of (i) the Extension Date, or as to any Lender that has extended its Commitment pursuant to Section 2.15, such later date that may be established pursuant to Section 2.15, and (ii) the date of termination in whole of the Commitments pursuant to Section 2.04 or 6.01. "Consolidated" refers to the consolidation of the accounts of the Borrower and its subsidiaries in accordance with GAAP. "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type, or the selection of a new, or the renewal of the same, Interest Period for Eurodollar Rate Advances, pursuant to Section 2.08(g) or 2.09. "CP&L" means the Carolina Power & Light Company. "Declining Lender" has the meaning assigned to that term in Section 2.15. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "EBITDA" means, with respect to the Borrower and its Consolidated Subsidiaries for any period, the sum of (i) net income (or net loss), (ii) Interest Expense, (iii) income tax expense, (iv) depreciation expense, (v) amortization expense and (vi) other non-cash charges deducted in determining net income (or net loss), in each case determined in accordance with GAAP. "Eligible Assignee" means (i) any other Lender or any Affiliate of a Lender meeting the criteria set forth in clause (ii) hereof and (ii) (A) any other commercial bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator), (B) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator), (C) a commercial bank organized under the laws of any other country that is a member of the OECD or has concluded special lending arrangements with the International Monetary Fund associated with its 5 General Arrangements to Borrow of the Cayman Islands, or a political subdivision of any such country, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator); provided that such bank is acting through a branch or agency located in the United States or in the country in which it is organized or another country that is described in this clause (C), (D) the central bank of any country that is a member of the OECD, or (E) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership or other entity) that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business, whose outstanding unsecured indebtedness is rated AA- or better by S&P or Aa3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured indebtedness). "Environmental Laws" means any federal, state or local laws, ordinances or codes, rules, orders, or regulations relating to pollution or protection of the environment, including, without limitation, laws relating to hazardous substances, laws relating to reclamation of land and waterways and laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollution, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to each Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1/8 of 1% per annum, if such average is not such a multiple) of the rates per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London Interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period for a period equal to such Interest Period and in an amount substantially equal to the amount of such Eurodollar Rate Advance comprising part of such Borrowing to be outstanding during such Interest Period from such Reference Bank. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing shall be determined by the Administrative Agent on the basis of the applicable rates furnished to and received by the Administrative Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.08. 6 "Eurodollar Rate Advance" means an Advance that bears interest as provided in Section 2.06(b). "Eurodollar Rate Reserve Percentage" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning assigned to that term in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934, and the regulations promulgated thereunder, in each case as amended and in effect from time to time. "Existing Credit Facility" means the Credit Agreement, dated as of November 12, 2002, as amended to the date hereof, among the Borrower, the lenders party thereto, and Citibank, N.A., as administrative agent for such lenders. "Extending Commitment Lender" has the meaning assigned to that term in Section 2.15(b). "Extension Date" means the 364th day following the date of this Agreement. "Facility Fee Percentage" means, at all times during which any Applicable Rating Level set forth below is in effect, the rate per annum set forth below next to such Applicable Rating Level: - ------------------------------------ ------------------------------------- Applicable Rating Level Facility Fee Percentage - ------------------------------------ ------------------------------------- 1 0.100% - ------------------------------------ ------------------------------------- 2 0.125% - ------------------------------------ ------------------------------------- 3 0.150% - ------------------------------------ ------------------------------------- 4 0.175% - ------------------------------------ ------------------------------------- 5 0.250% - ------------------------------------ ------------------------------------- 6 0.375% - ------------------------------------ ------------------------------------- provided, that a change in the Facility Fee Percentage resulting from a change in the Applicable Rating Level shall become effective upon the date of announcement of a change in the Moody's Rating or the S&P Rating that results in a change in the Applicable Rating Level. Notwithstanding any of the foregoing, if the Term Loan Conversion Option has been exercised, the Facility Fee Percentage shall be determined with reference to Level 6 at and after the Commitment Termination Date. 7 "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "First Mortgage Bonds" means those bonds issued from time to time by CP&L pursuant to the Mortgage. "Florida Power" means Florida Power Corporation. "Florida Power Mortgage" means the Indenture, dated as of January 1, 1944, between Florida Power, Guaranty Trust Company of New York and the Florida National Bank of Jacksonville, as modified, amended or supplemented from time to time. "Florida Power Mortgage Bonds" means those bonds issued from time to time by Florida Power pursuant to the Florida Power Mortgage. "FPC" means Florida Progress Corporation. "GenCo Financing" means the $440,000,000 credit facility among Progress Genco Ventures, LLC, certain lenders named therein and JPMorgan Chase Bank, as agent for the lenders, as amended, and the supporting agreements entered into in connection with the development, construction, operation and financing of the projects to be financed with the proceeds of such credit agreement, including (i) the "Support Guarantee", (ii) the "Tolling Guarantee", (iii) the "Fuel Guarantee" and (iv) the "Master Guarantee and Support Agreement". "GAAP" means generally accepted accounting principles, including principles of consolidation, consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). "Guaranty" of any Person means any obligation, contingent or otherwise, of such Person (i) to pay any Liability of any other Person or to otherwise protect, or having the practical effect of protecting, the holder of any such Liability against loss (whether such obligation arises by virtue of such Person being a partner of a partnership or participant in a joint venture or by agreement to pay, to keep well, to purchase assets, goods, securities or services or to take or pay, or otherwise) or (ii) incurred in connection with the issuance by a third Person of a Guaranty of any Liability of any other Person (whether such obligation arises by agreement to reimburse or indemnify such third Person or otherwise). The word "Guarantee" when used as a verb has the correlative meaning. 8 "Hostile Acquisition" shall mean any Target Acquisition (as defined below) involving a tender offer or proxy contest that has not been recommended or approved by the board of directors (or similar governing body) of the Person that is the subject of such Target Acquisition prior to the first public announcement or disclosure relating to such Target Acquisition. As used in this definition, the term "Target Acquisition" shall mean any transaction, or any series of related transactions, by which any Person directly or indirectly (i) acquires any ongoing business or all or substantially all of the assets of any other Person or division thereof, whether through purchase of assets, merger or otherwise, (ii) acquires (in one transaction or as the most recent transaction in a series of transactions) control of at least a majority in ordinary voting power of the securities of any such Person that have ordinary voting power for the election of directors or (iii) otherwise acquires control of more than a 50% ownership interest in any such Person. "Increasing Lender" shall have the meaning assigned such term in Section 2.04(b). "Indebtedness" of any Person means (i) any obligation of such Person for borrowed money, (ii) any obligation of such Person evidenced by a bond, debenture, note or other similar instrument, (iii) any obligation of such Person to pay the deferred purchase price of property or services, except a trade account payable that arises in the ordinary course of business but only if and so long as the same is payable on customary trade terms, (iv) any obligation of such Person as lessee under a capital lease, (v) any Mandatorily Redeemable Stock of such Person (the amount of such Mandatorily Redeemable Stock to be determined for this purpose as the higher of the liquidation preference and the amount payable upon redemption of such Mandatorily Redeemable Stock), (vi) any obligation of such Person to purchase securities or other property that arises out of or in connection with the sale of the same or substantially similar securities or property, (vii) any non-contingent obligation of such Person to reimburse any other Person in respect of amounts paid under a letter of credit or other Guaranty issued by such other Person to the extent that such reimbursement obligation remains outstanding after it becomes non-contingent, (viii) any Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) a mortgage, lien, pledge, charge or other encumbrance on any asset of such Person, (ix) any Liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA, (x) any Synthetic Lease Obligations of such Person and (xi) any Indebtedness of others Guaranteed by such Person. "Interest Expense" means, with respect to the Borrower and its Consolidated Subsidiaries for any period, the sum of (i) all interest expense (including all amortization of debt discount and expense and reported interest) on all Indebtedness of the Borrower and its Consolidated Subsidiaries during such period and (ii) the interest element of rental payments under operating leases, to the extent deducted in determining net income (or net loss) of the Borrower and its Consolidated Subsidiaries during such period. "Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Advance or the date of the Conversion of any Advance into such an Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as the Borrower may, in the Notice of Borrowing given by the Borrower to the Administrative Agent pursuant to Section 2.02, select; provided, however, that: 9 (i) the Borrower may not select any Interest Period that ends after the Commitment Termination Date; (ii) Interest Periods commencing on the same date for Advances comprising the same Borrowing shall be of the same duration; and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day; provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. The Administrative Agent shall promptly advise each Lender by or telecopy transmission of each Interest Period so selected by the Borrower. "Lenders" means the Lenders listed on the signature pages hereof and each Eligible Assignee that shall become a party hereto pursuant to Section 8.07. "Liability" of any Person means any indebtedness, liability or obligation of or binding upon, such Person or any of its assets, of any kind, nature or description, direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, whether arising under contract, applicable law, or otherwise, whether now existing or hereafter arising. "Majority Lenders" means at any time Lenders holding at least 66-2/3% of the aggregate principal amount of the Advances then outstanding, or, if no such principal amount is then outstanding, Lenders having at least 66-2/3% of the Commitments (provided that, for purposes hereof, neither the Borrower, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders holding such amount of the Advances or having such amount of the Commitments or (ii) determining the aggregate unpaid principal amount of the Advances or the total Commitments). "Mandatorily Redeemable Stock" means, with respect to any Person, any share of such Person's capital stock to the extent that it is (i) redeemable, payable or required to be purchased or otherwise retired or extinguished, or convertible into any Indebtedness or other Liability of such Person, (A) at a fixed or determinable date, whether by operation of a sinking fund or otherwise, (B) at the option of any Person other than such Person or (C) upon the occurrence of a condition not solely within the control of such Person, such as a redemption required to be made out of future earnings or (ii) convertible into Mandatorily Redeemable Stock. "Moody's" means Moody's Investors Service, Inc., or any successor thereto. "Moody's Rating" means, on any date of determination, the debt rating most recently announced by Moody's with respect to the Borrower's long-term senior unsecured non-credit-enhanced debt. 10 "Mortgage" means the Mortgage and Deed of Trust, dated as of May 1, 1940, from CP&L to The Bank of New York (formerly Irving Trust Company) and to Frederick G. Herbst (W.T. Cunningham, successor), as modified, amended or supplemented from time to time. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Notice of Borrowing" has the meaning specified in Section 2.02(a). "Notice of Conversion" has the meaning specified in Section 2.09. "OECD" means the Organization for Economic Cooperation and Development. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Plan" means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Borrower or any of its Affiliates and covered by Title IV of ERISA. "Progress Capital" means Progress Capital Holdings, Inc. "Portfolio Transaction" means the sale of Florida Progress's and CP&L's portfolio of affordable housing investments. "Rail Transaction" means the sale of substantially all of the assets or capital stock of either Progress Rail Services, Inc. or Railcar, Ltd. "Reference Banks" means Citibank and JPMorgan Chase Bank. "Register" has the meaning specified in Section 8.07(c). "Responsible Officer" means the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller or any Assistant Treasurer of the Borrower the signatures of whom, in each case, have been certified to the Administrative Agent and each other Lender pursuant to Section 3.01(d), or in a certificate delivered to the Administrative Agent replacing or amending such certificate. Each Lender may conclusively rely on each certificate so delivered until it shall have received a copy of a certificate from the Secretary or an Assistant Secretary of the Borrower amending, canceling or replacing such certificate. "S&P" means Standard & Poor's Ratings Group or any successor thereto. "S&P Rating" means, on any date of determination, the debt rating most recently announced by S&P with respect to the Borrower's long-term senior unsecured non-credit-enhanced debt. 11 "SEC Order" means Order Nos. 35-27728 and 70-10130 of the Securities and Exchange Commission issued September 29, 2003. "Significant Subsidiary" means CP&L, FPC, Florida Power, Progress Capital and any other Subsidiary of the Borrower that at any time constitutes a "significant subsidiary", as such term is defined in Regulation S-X of the Securities and Exchange Commission as in effect on the date hereof (17 C.F.R. Part 210). "Solvent" means, with respect to any person as of a particular date, that on such date such person is able to pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed as the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether at the time capital stock (or comparable interest) of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by said Person (whether directly or through one or more other Subsidiaries). "Synthetic Lease" means a lease transaction under which the parties intend that (i) the lease will be treated as an "operating lease" by the lessee pursuant to Statement of Financial Accounting Standards No. 13, as amended, and (ii) the lessee will be entitled to various tax and other benefits ordinarily available to owners (as opposed to lessees) of like property. "Synthetic Lease Obligations" means, with respect to any Person, the sum of (i) all remaining rental obligations of such Person as lessee under Synthetic Leases that are attributable to principal and, without duplication, (ii) all rental and purchase price payment obligations of such Person under such Synthetic Leases assuming such Person exercises the option to purchase the lease property at the end of the lease term. "Term Loan Conversion Notice" has the meaning assigned to that term in Section 2.16. "Term Loan Conversion Option" means the option of the Borrower to convert outstanding Advances into a term loan with a maturity of one year in accordance with Section 2.16. "Termination Date" means, with respect to all Lenders, the Commitment Termination Date, unless the Term Loan Conversion Option has been effectively exercised in accordance with Section 2.16, in which case the Termination Date means the earliest to occur of (i) the date the Advances become due and payable in accordance with Section 2.16, (ii) the date of repayment in full of the Advances pursuant to Section 2.10(b), and (iii) the date of acceleration of the Borrower's payment obligations hereunder in accordance with Section 6.01. 12 "Termination Event" means (i) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation under such regulations), or (ii) the withdrawal of the Borrower or any of its Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the Pension Benefit Guaranty Corporation, or (v) any other event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Total Capitalization" means the sum of the value of the common stock, retained earnings, and preferred and preference stock of the Borrower (in each case, determined in accordance with GAAP), plus Consolidated Indebtedness of the Borrower. Section 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Section 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. Article II AMOUNTS AND TERMS OF THE ADVANCES Section 2.01. The Advances. (a) Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Advances to the Borrower from time to time on any Business Day during the period from the date hereof to and including the Commitment Termination Date, in an aggregate amount outstanding not to exceed at any time the amount set forth opposite such Lender's name on Schedule I hereto or, if such Lender has entered into any Assignment and Acceptance, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c), as such amount may be reduced pursuant to Section 2.04(a) or increased pursuant to Section 2.04(b) (such Lender's "Commitment"). Each Borrowing shall be in an aggregate amount not less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Advances of the same Type made on the same day by the Lenders ratably according to their respective Commitments. Until the Commitment Termination Date, within the limits of each Lender's Commitment, the Borrower may from time to time borrow, repay pursuant to Section 2.05 or prepay pursuant to Section 2.10(b) and reborrow under this Section 2.01. 13 (b) Any Lender may request that any Advances made by it be evidenced by one or more promissory notes. In such event, the Borrower shall prepare, execute and deliver to such Lender one or more promissory notes payable to the order of such Lender (or, if requested by such Lender, to such Lender and its assignees) and in a form approved by the Administrative Agent. Section 2.02. Making the Advances. (a) Each Borrowing shall be made on notice, given not later than 10:00 A.M. (New York City time) on the day of such proposed Borrowing, in the case of a Borrowing comprised of Base Rate Advances, or on the third Business Day prior to the date of the proposed Borrowing, in the case of a Borrowing comprised of Eurodollar Rate Advances, by the Borrower to the Administrative Agent, which shall give to each Lender prompt notice thereof by telecopier. Each such notice of a Borrowing (a "Notice of Borrowing") shall be by telecopier, confirmed promptly in writing, in substantially the form of Exhibit A-1 hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing comprised of Eurodollar Rate Advances, the Interest Period for each such Advance. In the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the Administrative Agent shall promptly notify each Lender of the applicable interest rate under Section 2.06(b). Each Lender shall, before 12:00 P.M. (New York City time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. (b) Each Notice of Borrowing shall be irrevocable and binding on the Borrower and, in respect of any Borrowing comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss or expense incurred by such Lender as a result of any failure by the Borrower to fulfill on or before the date specified for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (c) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent (without duplication), forthwith on demand, such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (x) in the case of the Borrower, the interest rate applicable at the time to Advances comprising such Borrowing and (y) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement. 14 (d) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. (e) If, for any reason, a Borrowing is not made on the date specified in any Notice of Borrowing, the Administrative Agent hereby agrees to repay to each Lender the amount, if any, that such Lender has made available to the Administrative Agent as such Lender's ratable portion of such Borrowing, together with interest thereon for each day from the date such amount is made available to the Administrative Agent until the date such amount is repaid to such Lender, at the Federal Funds Rate. Section 2.03. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee on each Lender's Commitment, irrespective of usage, from the date hereof, in the case of each Bank, and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender, in the case of each other Lender, until the Termination Date at the rate per annum equal to the Facility Fee Percentage from time to time in effect. Such fee shall be calculated on the basis of actual number of days elapsed in a year of 365 or 366 days. Such fee shall be payable quarterly in arrears on the last day of each March, June, September and December during the term of such Lender's Commitment, and on the Termination Date. (b) The Borrower agrees to pay to the Administrative Agent an agency fee in such amounts and payable at such times, as shall be agreed to between them in writing. Section 2.04. Reduction and Increase of the Commitments. (a) The Borrower shall have the right, upon at least three Business Days' notice to the Administrative Agent, irrevocably to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders; provided that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount that is less than the aggregate principal amount of the Advances then outstanding; and provided, further, that each partial reduction of Commitments shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof. Once terminated or reduced, the Commitments may not be reinstated. (b) (i) At any time prior to the Termination Date, the Borrower may increase the aggregate amount of the Commitments to an amount not greater than $500,000,000 (any such increase, a "Commitment Increase") by designating either one or more of the existing Lenders (each of which, in its sole discretion, may determine whether and to what degree to offer to participate in such Commitment Increase) or one or more other banks or other financial institutions reasonably acceptable to the Administrative Agent that at the time agree, in the case of 15 any such bank or financial institution that is an existing Lender to increase its Commitment (an "Increasing Lender") and, in the case of any other such bank or financial institution (an "Additional Lender"), to become a party to this Agreement. The sum of the increases in the Commitments of the Increasing Lenders pursuant to this subsection (b) plus the Commitments of the Additional Lenders upon giving effect to the Commitment Increase shall not in the aggregate exceed the amount of the Commitment Increase. The Borrower shall provide prompt notice of any proposed Commitment Increase pursuant to this Section 2.04(b) to the Administrative Agent, which shall promptly provide a copy of such notice to the Lenders. (ii) Any Commitment Increase shall become effective upon (A) the receipt by the Administrative Agent of (1) an agreement in form and substance satisfactory to the Administrative Agent signed by the Borrower, each Increasing Lender and each Additional Lender, setting forth the new Commitment of each such Lender and setting forth the agreement of each Additional Lender to become a party to this Agreement and to be bound by all the terms and provisions hereof binding upon each Lender, (2) certified copies of the Commitment Increase Approvals and such opinions of counsel for the Borrower with respect to the Commitment Increase as the Administrative Agent may reasonably request, and (3) a certificate (the statements contained in which shall be true) of a duly authorized officer of the Borrower stating that both before and after giving effect to such Commitment Increase (x) no Event of Default has occurred and is continuing, (y) all representations and warranties made by the Borrower in this Agreement are true and correct in all material respects, and (z) all Commitment Increase Approvals have been obtained and are in full force and effect, and (B) the funding by each Increasing Lender and Additional Lender of the Loan(s) to be made by each such Lender described in paragraph (iii) below. (iii) Upon the effective date of any Commitment Increase, each Increasing Lender and each Additional Lender shall provide funds to the Administrative Agent in the manner described in Section 2.01 in an amount equal to the product of (x) the aggregate principal amount of Advances outstanding hereunder, expressed as a percentage of the Commitments (calculated, in each case, immediately prior to such Commitment Increase) and (y) the amount of such Lender's Commitment Increase. The funds so provided by any Lender shall be deemed to be an Advance or Advances made by such Lender on the date of such Commitment Increase, with such Advance(s) being (A) in an amount equal to the product of (x) the aggregate outstanding principal amount of each Advance expressed as a percentage of the Commitments (calculated, in each case, immediately prior to such Commitment Increase) and (y) the amount of such Lender's Commitment Increase and (B) of the same Type(s) and having the same Interest Period(s) as each Advance described in the preceding clause (A), such that after giving effect to such Commitment Increase and the Advances(s) made on the date of such Commitment Increase, each Advance outstanding hereunder shall consist of Advances made by the Lenders ratably in accordance with their pro rata shares of the Commitments. (iv) Notwithstanding any provision contained herein to the contrary, from and after the date of any Commitment Increase and the making of any Advances on such date pursuant to paragraph (iii) above, all calculations and payments of interest on the Advance comprising any Advances shall take into account the actual Commitment of each Lender and the principal amount outstanding of each Advance made by such Lender during the relevant period of time. 16 Section 2.05. Repayment of Advances. The Borrower shall repay the principal amount of each Advance made by each Lender on the Termination Date, subject to Section 2.16 hereof. Section 2.06. Interest on Advances. The Borrower shall pay interest on the unpaid principal amount of each Advance made by each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, plus the Applicable Margin, payable quarterly in arrears on the last day of each March, June, September and December and on the date such Base Rate Advance shall be paid in full; provided, however, that if and for so long as an Event of Default has occurred and is continuing, interest on the unpaid principal amount of each Base Rate Advance shall be payable on demand. (b) Eurodollar Rate Advances. If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of the Eurodollar Rate for such Interest Period, plus the Applicable Margin for such Eurodollar Rate Advance in effect from time to time, payable on the last day of such Interest Period and, if such Interest Period for such Advance has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period; provided, however, that if and for so long as an Event of Default has occurred and is continuing, interest on the unpaid amount of each Eurodollar Rate Advance shall be payable on demand. Section 2.07. Additional Interest on Eurodollar Rate Advances. The Borrower shall pay to each Lender additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Advance. All claims for such additional interest shall be submitted by such Lender to the Borrower (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within 90 days after the first day of such Interest Period; provided, however, that if a claim is not submitted to the Borrower within such 90-day period, such Lender shall thereby waive its claim to such additional interest incurred during such 90-day period but not to any such additional interest incurred thereafter. A certificate as to the amount of such additional interest, submitted to the Borrower (with a copy to the Administrative Agent) by such Lender, shall be conclusive and binding for all purposes, absent manifest error. 17 Section 2.08. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining the Eurodollar Rate. If any one or more of the Reference Banks shall not furnish such timely information to the Administrative Agent for determination of any such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Administrative Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.06(a) or (b), and the applicable rate, if any, furnished by each Reference Bank for determining the applicable interest rate under Section 2.06(b). (c) If fewer than two Reference Banks furnish timely information to the Administrative Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Administrative Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (e) If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Administrative Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. 18 (f) On the date on which the aggregate unpaid principal amount of Advances comprising any Borrowing shall be reduced, by prepayment or otherwise, to less than $20,000,000, such Advances shall, if they are Advances of a Type other than Base Rate Advances, automatically Convert into Base Rate Advances, and on and after such date the right of the Borrower to Convert such Advances into Advances of a Type other than Base Rate Advances shall terminate; provided, however, that if and so long as each such Advance shall be of the same Type and have the same Interest Period as Advances comprising another Borrowing or other Borrowings, and the aggregate unpaid principal amount of all such Advances shall equal or exceed $20,000,000, the Borrower shall have the right to continue all such Advances as, or to Convert all such Advances into, Advances of such Type having such Interest Period. (g) If an Event of Default has occurred and is continuing, (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended. Section 2.09. Voluntary Conversion of Advances. The Borrower may, on any Business Day prior to the Termination Date (including any date occurring on and after the effectiveness of the Term Loan Conversion Option), upon notice given to the Administrative Agent not later than 10:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion, in the case of any proposed Conversion into Eurodollar Rate Advances, and on the date of the proposed Conversion, in the case of any proposed Conversion into Base Rate Advances, and subject to the provisions of Sections 2.08 and 2.12, Convert all Advances of one Type comprising the same Borrowing into Advances of another Type; provided, however, that any Conversion of any Eurodollar Rate Advances into Advances of another Type shall be made on, and only on, the last day of an Interest Period for such Eurodollar Rate Advances, except as otherwise provided in Section 2.12. Each such notice of a Conversion (a "Notice of Conversion") shall be by telecopier, confirmed promptly in writing, in substantially the form of Exhibit A-2 hereto and shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the aggregate amount of, Type of, and Interest Periods applicable to the Advances to be Converted, (iii) the Type of Advance to which such Advances (or portions thereof) are proposed to be Converted, and (iv) if such Conversion is into or with respect to Eurodollar Rate Advances, the duration of the Interest Period for each such Advance. Section 2.10. Prepayments of Advances. (a) The Borrower shall have no right to prepay any principal amount of any Advances other than as provided in subsection (b) below. (b) The Borrower may, upon notice given to the Administrative Agent at least two Business Days prior to the proposed prepayment, in the case of any Eurodollar Rate Advance, and on the date of the proposed prepayment, in the case of any Base Rate Advance, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Advances comprising the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the amount prepaid and, in the case of any Eurodollar Rate 19 Advance, any amount payable pursuant to Section 8.04(b); provided, however, that (i) each partial prepayment shall be in an aggregate principal amount not less than $5,000,000 and in integral multiples of $1,000,000 in excess thereof and (ii) in the case of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such prepayment. Section 2.11. Increased Costs. (a) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage), in or in the interpretation of any law or regulation, or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for account of such Lender additional amounts sufficient to reimburse such Lender for such increased cost. All claims for increased cost shall be submitted by such Lender to the Borrower (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within 90 days after such introduction, such change, or the beginning of such compliance, the occurrence of which resulted in such increased cost, and the Borrower shall make such payment within five Business Days after notice of such claim is received; provided, however, that if a claim is not submitted to the Borrower within such 90-day period, such Lender shall thereby waive its claim to such increased cost incurred during such 90-day period but not to any such increased cost incurred thereafter. A certificate as to the amount of such increased cost, submitted to the Borrower (with a copy to the Administrative Agent) by such Lender, shall be conclusive and binding for all purposes, absent manifest error. (b) If any Lender determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type, then, upon demand by such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder. All claims for such additional amounts shall be submitted by such Lender (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within 90 days after such determination by such Lender, and the Borrower shall make such payment within five Business Days after notice of such claim is received; provided, however, that if a claim is not submitted to the Borrower within such 90-day period, such Lender shall thereby waive its claim to such additional amounts incurred during such 90-day period but not to any such additional amounts incurred thereafter. A certificate as to such amounts submitted to the Borrower and the Administrative Agent by such Lender shall be conclusive and binding for all purposes, absent manifest error. 20 Section 2.12. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of the Lenders to make Eurodollar Rate Advances or to Convert Advances into Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, and (ii) the Borrower shall forthwith prepay in full all Eurodollar Rate Advances of all Lenders then outstanding, together with interest accrued thereon, unless the Borrower, within five Business Days of notice from the Administrative Agent, Converts all Eurodollar Rate Advances of all Lenders then outstanding into Advances of another Type in accordance with Section 2.09. Section 2.13. Payments and Computations. (a) The Borrower shall make each payment hereunder, without condition or deduction for any counterclaim, defense, recoupment or setoff, not later than 11:00 A.M. (New York City time) on the day when due in U.S. dollars to the Administrative Agent at its address referred to in Section 8.02 in same day funds. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or fees (other than pursuant to Section 2.02(c), 2.07 or 2.11) ratably to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) All computations of interest based on the base rate referred to in clause (i) of the definition of Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or Federal Funds Rate or of fees payable hereunder shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.07 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period of which such interest or fees are payable. Each determination by the Administrative Agent (or, in the case of Section 2.07, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes. 21 (c) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender, together with interest thereon for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent at the Federal Funds Rate. Section 2.14. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances made by it (other than pursuant to Section 2.02(c), 2.07 or 2.11) in excess of its ratable share of payments on account of the Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participation in the Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery, together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.14 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. Section 2.15. Extension of Commitment Termination Date. (a) So long as no Event of Default shall have occurred and be continuing and the Commitment Termination Date shall not have occurred, then at least 30 days but not more than 45 days prior to the Extension Date, the Borrower may request that the Lenders, by written notice to the Administrative Agent (in substantially the form attached hereto as Exhibit E) with a copy to the Arrangers, consent to a 364-day extension of the Commitment Termination Date. Each Lender shall, in its sole discretion, determine whether to consent to such request and shall notify the Administrative Agent of its determination at least 20 days but not more than 30 days prior to such Extension Date. The failure to respond by any Lender within such time period shall be deemed a denial of such 22 request. The Administrative Agent shall deliver a notice to the Borrower and the Lenders at least 15 days but not more than 20 days prior to the Extension Date of the identity of the Lenders that have consented to such extension and the Lenders that have declined such consent (the "Declining Lenders"). If Lenders holding in the aggregate 50% or less of the Commitments have consented to the requested extension, the Commitment Termination Date shall not be extended, and the Commitments of all Lenders shall terminate on the then current Commitment Termination Date. (b) If Lenders holding in the aggregate more than 50% but less than 85% of the Commitments have consented to the requested extension, subject to the conditions set forth in Section 2.15(c), the Borrower will within 5 Business Days after notice from the Administrative Agent of the Lenders' determinations irrevocably notify the Administrative Agent in writing whether it still requests an extension of the Commitment Termination Date. If the Borrower still requests such extension or if Lenders holding in the aggregate 85% or more of the Commitments have consented to the requested extension, subject to the conditions set forth in Section 2.15(c), the Commitment Termination Date shall be extended as to such consenting Lenders only (and not as to any Declining Lender) for a period of 364 days from the then current Commitment Termination Date, the Commitments of any Declining Lenders shall terminate on the Commitment Termination Date (as theretofore in effect), and all Advances of such Declining Lenders shall be repaid to them on such date. If the Borrower so requests, each Lender consenting to such request shall be given the opportunity at least seven days but not more than 15 days prior to such Extension Date, in each Lender's sole discretion, to commit to increase its Commitment by submission of a written notice setting forth the desired increase in such Lender's Commitment to the Administrative Agent in amounts such that the aggregate Commitments hereunder after giving effect to any such extension and increase in the Commitments shall not exceed the aggregate Commitments immediately prior to the Extension Date. If the Administrative Agent receives commitments to increase the Commitments from the Lenders, that, when aggregated with the existing Commitments, (i) are less than or equal to the Commitments immediately prior to the Extension Date, the Administrative Agent shall accept all such Commitments, (ii) are greater than the Commitments on the date hereof, the Administrative Agent may determine, in its reasonable discretion, which Commitments to accept and the amounts by which each submitting Lender's Commitments shall be increased so that the aggregate Commitments after the Extension Date shall equal the aggregate Commitments immediately prior to the Extension Date (any Lender whose commitment to increase its Commitment hereunder is accepted by the Administrative Agent, an "Extending Commitment Lender"). If Lenders do not consent to increase the aggregate Commitments to an amount equal to the Commitments immediately prior to the Extension Date, the Borrower may, at least two days but not more than seven days prior to the Extension Date, request that the Administrative Agent, in its sole discretion, accept the Commitment or Commitments of an Eligible Assignee or Eligible Assignees such that the aggregate Commitments hereunder after the Extension Date shall not be greater than the aggregate Commitments hereunder immediately prior to the Extension Date. If the Administrative Agent shall accept the Commitment of any Extending Commitment Lender or Eligible Assignee, the Commitments of the Declining Lenders shall terminate on the Extension Date, and any Advances made by such Declining Lenders shall be repaid on such date in accordance with this Agreement. 23 (c) Each such accepted Eligible Assignee and each Extending Commitment Lender shall deliver a signature page hereto indicating that it is bound by the terms hereof and setting forth its aggregate Commitment hereunder. Such new signature page shall constitute a part hereof upon acceptance by the Administrative Agent and, in the case of any signature page submitted by any Extending Commitment Lender, shall replace such Extending Commitment Lender's signature page. Any such extension shall become effective upon the Extension Date, if the Borrower shall have delivered to the Administrative Agent and each Lender, on or prior to the Extension Date, (i) opinions of counsel to the Borrower substantially in the forms of Exhibits C-3 and C-4 attached hereto upon which each Lender and the Administrative Agent may rely, together with any governmental order referred to therein attached thereto and (ii) a certificate of a duly authorized officer of the Borrower (the statements contained in which shall be true) to the effect that (x) the representations and warranties contained in Section 4.01 are correct on and as of the Extension Date before and after giving effect to the extension of the Commitment Termination Date, as though made on and as of the Extension Date, and (y) no event has occurred and is continuing, or would result from such extension of the Commitment Termination Date, that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both. Upon satisfaction of such conditions and the effectiveness of such extension, each new Lender and Extending Commitment Lender shall make Advances to the Borrower (A) in the case of each new Lender, equal to such Lender's ratable portion of the Advances outstanding immediately prior to the Extension Date and (B) in the case of each Extending Commitment Lender, equal to such portion of such Lender's ratable portion of the Advances (assuming that such Lender's Commitment consists only of the increased portion thereof) outstanding immediately prior to the Extension Date, in each case, without giving effect to any repayment of Advances to Declining Lenders made on the Extension Date. Section 2.16. Term Loan Conversion Option. At least one Business Day but not more than 45 Business Days prior to any Commitment Termination Date, and subject to the delivery on or prior to such Commitment Termination Date of an opinion of counsel to the Borrower substantially in the form of Exhibit C-3 attached hereto, together with any required governmental approvals referred to therein and attached thereto, to the Administrative Agent and each of the Lenders, by submission of a written notice (substantially in the form of Exhibit F, the "Term Loan Conversion Notice") to the Administrative Agent, the Borrower may request that the Lenders convert all Advances outstanding hereunder on such Commitment Termination Date into term loans. Upon satisfaction of such conditions and delivery of such Term Loan Conversion Notice, all Advances outstanding on the then current Commitment Termination Date shall convert into term loans on such Commitment Termination Date, and all such converted Advances shall become due and payable on the first anniversary of such Commitment Termination Date. Notwithstanding the foregoing, any Term Loan Conversion Notice may be delivered by the Borrower in conjunction with (and simultaneously with) any request for extension of the Commitment Termination Date pursuant to Section 2.15, above. If such extension of the Commitment Termination Date shall occur as provided in Section 2.15, such Term Loan Conversion Notice shall be deemed withdrawn and shall be of no further effect. 24 Article III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Closing. The Commitments of the Lenders shall not become effective unless and until all fees due and payable by the Borrower in connection with this Agreement have been paid and the Administrative Agent shall have received the following: (a) Promissory notes, in a form acceptable to the Administrative Agent, payable to the order of each Lender that has requested such a note. (b) Copies of the resolutions of the Board of Directors of the Borrower approving this Agreement and all documents evidencing other necessary corporate action, certified by the Secretary or an Assistant Secretary of the Borrower to be true and correct, and in full force and effect on and as of the date hereof. (c) A certificate of the Secretary or an Assistant Secretary of the Borrower, dated as of the date hereof, certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the other documents to be delivered hereunder. (d) A certificate of a Responsible Officer of the Borrower, dated as of the date hereof, certifying (i) the accuracy of the representations and warranties contained herein and (ii) that no event has occurred and is continuing that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both. (e) Certified copies of all governmental approvals and authorizations required to be obtained in connection with the execution, delivery and performance by the Borrower of this Agreement. (f) Certified copies of the Restated Charter and By-Laws of the Borrower. (g) Favorable opinions of William D. Johnson, General Counsel of the Borrower, and of Hunton & Williams LLP, counsel for the Borrower, substantially in the forms of Exhibit C-1 and C-2, respectively, hereto and as to such other matters as any Lender through the Administrative Agent may reasonably request. (h) A favorable opinion of King & Spalding LLP, counsel for the Administrative Agent, substantially in the form of Exhibit D hereto. Section 3.02. Conditions Precedent to Each Borrowing and to the Exercise of the Term Loan Conversion Option. The obligation of each Lender to make an Advance on the occasion of each Borrowing (including the initial Borrowing) and to convert the Advances into term loans in accordance with Section 2.16 shall be subject to the further conditions precedent that (a) in the case of the making of an Advance, the Administrative Agent shall have received the written confirmatory Notice of Borrowing with respect thereto, (b) on the date of such Borrowing or exercise of the Term Loan Conversion Option, as the case may be, the following statements shall be true (and each of the giving of the Notice of Borrowing or Term Loan 25 Conversion Notice, as the case may be, and the acceptance by the Borrower of the proceeds of such Borrowing, in the case of a Borrowing, or the conversion of the Advances into term loans, in the case of the exercise of the Term Loan Conversion Option, shall constitute a representation and warranty by the Borrower that, on the date of such Borrowing, exercise or request, as the case may be, such statements are true): (i) The representations and warranties contained in Section 4.01 are correct on and as of the date of such Borrowing or the date of effectiveness of the Term Loan Conversion Option, as the case may be, before and after giving effect to (x) such Borrowing and to the application of the proceeds therefrom, or (y) such effectiveness, as the case may be, as though made on and as of such date; and (ii) No event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom, or the exercise of such Term Loan Conversion Option, as the case may be, that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both; and (c) the Administrative Agent shall have received such other approvals, opinions and documents as any Lender through the Administrative Agent may reasonably request. Article IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) Each of the Borrower and each Significant Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and is duly qualified to do business in and is in good standing under the laws of each other jurisdiction where the nature of its business or the nature of property owned or used by it makes such qualification necessary (except where failure to so qualify would not have a material adverse affect on the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole). (b) The execution, delivery and performance by the Borrower of this Agreement are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Borrower's charter or by-laws or (ii) any law or contractual restriction binding on or affecting the Borrower or its properties. (c) No authorization or approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement, other than the SEC Order, which has been duly issued and is in full force and effect. 26 (d) This Agreement has been duly executed and delivered by the Borrower and is, and any promissory note when delivered pursuant to Section 2.01(b) will be, the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. (e) The Consolidated balance sheets of the Borrower and its Subsidiaries as at December 31, 2002, and the related Consolidated statements of income and retained earnings of the Borrower and its Subsidiaries for the fiscal year then ended, and the Consolidated balance sheets of the Borrower and its Subsidiaries as at June 30, 2003, and the related Consolidated statements of income and retained earnings of the Borrower and its Subsidiaries, copies of each of which have been furnished to each Lender, fairly present (subject, in the case of such financial statements dated June 30, 2003, to year end adjustments) the financial condition of the Borrower and its Subsidiaries as at such dates and the results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied. Since December 31, 2002, there has been no material adverse change in the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. (f) Except as described in the reports and registration statements that the Borrower, CP&L, FPC and Florida Power have filed with the Securities and Exchange Commission prior to the date of this Agreement, there is no pending or threatened action or proceeding affecting the Borrower or any Subsidiary before any court, governmental agency or arbitrator, that may materially adversely affect the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. (g) No proceeds of any Advance will be used to acquire any security in any transaction that is subject to Sections 13 and 14 of the Exchange Act. (h) No proceeds of any Advance will be used in connection with any Hostile Acquisition. (i) The Borrower is not engaged in the business of extending credit for the purpose of buying or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to buy or carry any margin stock or to extend credit to others for the purpose of buying or carrying any margin stock. (j) Following application of the proceeds of each Advance, not more than 5% of the value of the assets (either of the Borrower only or of the Borrower and the Subsidiaries on a Consolidated basis) subject to the provisions of Section 5.02(a) or 5.02(e) will be margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). (k) No Termination Event has occurred or is reasonably expected to occur with respect to any Plan. (l) The Borrower is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 27 (m) The Borrower is in substantial compliance with all applicable laws, rules, regulations and orders of any governmental authority, the noncompliance with which would materially and adversely affect the business or condition of the Borrower, such compliance to include, without limitation, substantial compliance with ERISA, Environmental Laws and paying before the same become delinquent all material taxes, assessments and governmental charges imposed upon it or upon its property, except to the extent compliance with any of the foregoing is then being contested in good faith by appropriate legal proceedings. (n) All written information furnished by the Borrower to the Administrative Agent and the Lenders in connection with this Agreement (the "Disclosed Information") was (and all information furnished in the future by the Borrower to the Administrative Agent and the Lenders will be) complete and correct in all respects material to the creditworthiness of the Borrower when delivered. As of the date hereof, the Disclosed Information does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances under which made. (o) The Borrower is Solvent. Article V COVENANTS OF THE COMPANY Section 5.01. Affirmative Covenants. So long as any Advance or any other amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower shall, unless the Majority Lenders shall otherwise consent in writing: (a) Compliance with Laws, Etc. Except to the extent contested in good faith, comply, and cause each Subsidiary to comply, with all applicable laws, rules, regulations and orders (such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property), the non-compliance with which would materially adversely affect the Borrower's business or credit. (b) Preservation of Corporate Existence, Etc. Except as provided in Section 5.02(d), preserve and maintain, and cause each Significant Subsidiary to preserve and maintain, its corporate existence, rights (charter and statutory) and franchises. (c) Visitation Rights. At any reasonable time and from time to time, permit the Administrative Agent or any of the Lenders or any agents or representatives thereof to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower and any Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and any Subsidiary with any of their respective officers or directors. (d) Keeping of Books. Keep, and cause each Subsidiary to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower and such Subsidiary in accordance with GAAP. 28 (e) Maintenance of Properties, Etc. Maintain and preserve, and cause each Subsidiary to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. (f) Maintenance of Insurance. Maintain, and cause each Subsidiary to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates. (g) Taxes. File, and cause each Subsidiary to file, all tax returns (federal, state and local) required to be filed and paid and pay all taxes shown thereon to be due, including interest and penalties except, in the case of taxes, to the extent the Borrower or such Subsidiary is contesting the same in good faith and by appropriate proceedings and has set aside adequate reserves for the payment thereof in accordance with generally accepted accounting principles. (h) Material Obligations. Pay, and cause each Significant Subsidiary to pay, promptly as the same shall become due each material obligation of the Borrower or such Significant Subsidiary. (i) Reporting Requirements. Furnish to the Lenders: (i) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a Consolidated balance sheet of the Borrower and the Subsidiaries as at the end of such quarter and Consolidated statements of income and retained earnings of the Borrower and the Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the treasurer or the chief financial officer of the Borrower, together with a certificate of the treasurer or chief financial officer of the Borrower, setting forth in reasonable detail the calculation of the Borrower's compliance with Section 5.01(j) and stating that no Event of Default and no event that, with the giving of notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing, or if an Event of Default or such event has occurred and is continuing, a statement setting forth details of such Event of Default or event and the action that the Borrower has taken and proposes to take with respect thereto; (ii) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the annual report for such year for the Borrower and the Subsidiaries, containing Consolidated financial statements for such year certified by Deloitte & Touche or other independent public accountants acceptable to the Majority Lenders, together with a certificate of the treasurer or chief financial officer of the Borrower, substantially in the form of Exhibit G hereto, setting forth in reasonable detail the calculation of the Borrower's compliance with Section 5.01(j) and stating that no Event of Default and no event that, with the giving of notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing, or if an Event of Default or such event has occurred and is continuing, a statement setting forth details of such Event of Default or event and the action that the Borrower has taken and proposes to take with respect thereto; 29 (iii) promptly after the sending or filing thereof, copies of all reports that the Borrower sends to any of its security holders, and copies of all reports and registration statements that the Borrower or any Subsidiary files with the Securities and Exchange Commission or any national securities exchange, to the extent not delivered by the Borrower pursuant to clause (i) or (ii) of this Section 5.01(i); (iv) immediately upon any Responsible Officer's obtaining knowledge of the occurrence of any Event of Default or any event that, with the giving of notice or lapse of time, or both, would constitute an Event of Default, a statement of the chief financial officer or treasurer of the Borrower setting forth details of such Event of Default or event and the action that the Borrower proposes to take with respect thereto; (v) immediately upon obtaining knowledge thereof, notice of any change in either the Moody's Rating or the S&P Rating; (vi) as soon as possible and in any event within five days after the commencement thereof or any adverse determination or development therein, notice of all actions, suits and proceedings that may adversely affect the Borrower's ability to perform its obligations under this Agreement; (vii) as soon as possible and in any event within five days after the occurrence of a Termination Event, notice of such Termination Event; and (viii) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any Subsidiary as any Lender through the Administrative Agent may from time to time reasonably request. (j) Indebtedness to Total Capitalization. Maintain, at all times a ratio of Consolidated Indebtedness of the Borrower and its Subsidiaries to Total Capitalization of not more than .68:1.0. (k) Interest Coverage Ratio. Maintain, as of the last day of each fiscal quarter of the Borrower, a ratio of EBITDA for the 12-month period ending on such date to Interest Expense for the 12-month period ending on such date of not less than 2.5:1. (l) Use of Proceeds. Use the proceeds of each Advance solely for general corporate purposes (including, in each case, without limitation, as a commercial paper back-up). No proceeds of any Advance will be used to acquire any equity security of a class that is registered pursuant to Section 12 of the Exchange Act, or any security in any transaction that is subject to Sections 13 and 14 of the Exchange Act. (m) Ownership of Subsidiaries. Own at all times, directly or indirectly and free and clear of all liens and encumbrances, 100% of the common stock of CP&L, FPC and Florida Power. 30 Section 5.02. Negative Covenants. So long as any Advance or any other amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will not, without the written consent of the Majority Lenders: (a) Liens, Etc. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any Subsidiary to assign, any right to receive income, in each case to secure any Indebtedness of any Person, other than (i) liens, mortgages and security interests created by the Mortgage and the Florida Power Mortgage, (ii) liens and security interests against the fuel used by the Borrower in its power generating operations in favor of the suppliers thereof, (iii) liens and security interests created in connection with the GenCo Financing, and (iv) liens, mortgages and security interests securing other Indebtedness of the Borrower and its Subsidiaries not exceeding $100,000,000 in the aggregate. (b) Indebtedness. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any Indebtedness other than (i) Indebtedness hereunder, (ii) Indebtedness secured by liens and security interests permitted pursuant to clauses (ii), (iii) and (iv) of subsection 5.02(a), (iii) Indebtedness evidenced by the First Mortgage Bonds and the Florida Power Mortgage Bonds and (iv) unsecured Indebtedness, including guarantees issued in connection with the financing of pollution control facilities operated by CP&L, FPC or Florida Power, guarantees of Indebtedness incurred by any wholly-owned Subsidiary and guarantees of debt securities issued by any financing Subsidiary established to secure debt financing in the offshore markets. (c) Lease Obligations. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any obligations for the payment of rental for any property under leases or agreements to lease having a term of one year or more that would cause the direct or contingent Consolidated liabilities of the Borrower and its Subsidiaries in respect of all such obligations payable in any calendar year to exceed 10% of the Consolidated operating revenues of the Borrower and its Subsidiaries for the immediately preceding calendar year. (d) Mergers, Etc. Merge with or into or consolidate with or into, or acquire all or substantially all of the assets or securities of, any Person, unless, in each case, (i) immediately after giving effect thereto, no event shall occur and be continuing that constitutes an Event of Default or an event that with the giving of notice or lapse of time, or both, would constitute an Event of Default, and (ii) in the case of any such merger to which the Borrower is a party, such other Person is a utility company and the resulting or surviving corporation, if not the Borrower, (x) is organized and existing under the laws of the United States of America or any State thereof, (y) is a corporation satisfactory to the Majority Lenders, and (z) shall have expressly assumed, by an instrument satisfactory in form and substance to the Majority Lenders, the due and punctual payment of all amounts due under this Agreement and the performance of every covenant and undertaking of the Borrower contained in this Agreement. 31 (e) Sales, Etc. of Assets. Sell, lease, transfer or otherwise dispose of, or permit any Subsidiary to sell, lease, transfer or otherwise dispose of, any of its assets, other than the following sales: (i) sales of generating capacity to the wholesale customers of the Borrower and the Subsidiaries, (ii) sales of nuclear fuel, (iii) sales of accounts receivable, (iv) sales in connection with a transaction authorized by subsection (d) of this Section, (v) the Portfolio Transaction, (vi) the Rail Transaction, (vii) sales of investments in securities with a maturity of less than one year, or (viii) other sales not exceeding $150,000,000 in the aggregate in any fiscal year of the Borrower. (f) Margin Stock. Use any proceeds of any Advance to buy or carry margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). (g) Change in Nature of Business. Engage, or cause or permit CP&L or Florida Power to engage, in a material manner in businesses other than those in which they are engaged on the date hereof and businesses reasonably related thereto. (h) Hostile Acquisitions. Use any proceeds of any Advance in connection with any Hostile Acquisition. Article VI EVENTS OF DEFAULT Section 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Advance when due, or shall fail to pay any interest on the principal amount of any Advance or any fees or other amount payable hereunder within five Business Days after such interest or fees or other amount shall become due; or (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in any document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made or deemed made; or (c) The Borrower shall fail to perform or observe any other term, covenant or agreement contained in Section 5.01(b), 5.01(i)(iv), 5.01(j), 5.01(k), 5.01(m) or 5.02 on its part to be performed or observed; or the Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Administrative Agent or any Lender; or (d) The Borrower or any Significant Subsidiary shall fail to pay any amount in respect of any Indebtedness in excess of $10,000,000 (but excluding Indebtedness hereunder) of the Borrower or such Significant Subsidiary (as the case may be), or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or any other default 32 under any agreement or instrument relating to any such Indebtedness, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) The Borrower or any Significant Subsidiary shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Significant Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property; or the Borrower or any Significant Subsidiary shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order for the payment of money in excess of $10,000,000 shall be rendered against the Borrower or any Significant Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) Any Termination Event with respect to a Plan shall have occurred, and, 30 days after the occurrence thereof, (i) such Termination Event (if correctable) shall not have been corrected and (ii) the then present value of such Plan's vested benefits exceeds the then current value of assets accumulated in such Plan by more than the amount of $20,000,000 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount); or (h) The Borrower or any of its Affiliates as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $20,000,000; or (i) A Change of Control shall occur; then, and in any such event, the Administrative Agent shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, (i) declare the Commitments and the obligation of each Lender to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) declare the principal amount of the Advances then outstanding, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon such principal amount, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the 33 Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any Subsidiary under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the principal amount of the Advances then outstanding, all such interest and all such other amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. Article VII THE AGENT Section 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably provided for by this Agreement (including, without limitation, enforcement or collection of the Advances), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders; provided, however, that the Administrative Agent shall not be required to take any action that exposes the Administrative Agent to personal liability or that is contrary to this Agreement or applicable law. Section 7.02. The Agent's Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by each or any of them under or in connection with this Agreement, except for their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Administrative Agent: (i) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (iv) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (v) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopy or e-mail) believed by it to be genuine and signed or sent by the proper party or parties. 34 Section 7.03. The Administrative Agent and its Affiliates. With respect to its Commitments and, the Advances made by it, the Administrative Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not an Administrative Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include each Agent in its individual capacity, as applicable. The Administrative Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any Subsidiary and any Person who may do business with or own securities of the Borrower or any Subsidiary, all as if the Administrative Agent were not the Administrative Agent and without any duty to account therefor to the Lenders. Section 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Section 7.05. Indemnification. The Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed by the Borrower), ratably according to the respective principal amounts of the Advances then held by each of them (or if no Advances are at the time outstanding, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Administrative Agent under this Agreement; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by the Administrative Agent in connection with the preparation, execution, administration, or enforcement of, or legal advice in respect of rights or responsibility under, this Agreement, to the extent that the Administrative Agent is not reimbursed for such expenses by the Borrower. Section 7.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, the Administrative Agent may appoint a successor Administrative Agent, which shall 35 be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Article VIII MISCELLANEOUS Section 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, in the case of any such amendment, waiver or consent of or in respect of this Agreement, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all of the Lenders, do any of the following: (i) waive any of the conditions specified in Section 3.01 or 3.02, (ii) increase the Commitment of any Lender or subject any Lender to any additional obligations (other than pursuant to Section 2.04(b)), (iii) reduce, or waive the payment of, the principal of, or interest on, the Advances or any fees or other amounts payable to the Lenders ratably hereunder, (iv) postpone any date fixed for any payment of principal of, or interest on, the Advances or any fees or other amounts payable to the Lenders ratably hereunder, (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Advances, or the number of Lenders, which shall be required for the Lenders or any of them to take any action under this Agreement, or (vi) amend, waive, or in any way modify or suspend any provision requiring the pro rata application of payments or of Section 2.15 or of this Section 8.01; provided further, that no amendment, waiver or consent shall, unless in writing and signed by each Lender affected thereby, reduce, waive or postpone the date of payment of any amount payable to such Lender, other than any such amount payable to the Lenders ratably; and provided, further, that (A) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required hereinabove to take such action, affect the rights or duties of such Administrative Agent under this Agreement and (B) this Agreement may be amended and restated without the consent of any Lender or the Administrative Agent if, upon giving effect to such amendment and restatement, such Lender or Administrative Agent, as the case may be, shall no longer be a party to this Agreement (as so amended and restated) or have any Commitment or other obligation hereunder and shall have been paid in full all amounts payable hereunder to such Lender or the Administrative Agent, as the case may be. 36 Section 8.02. Notices, Etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telegraphic communication) and mailed, telecopied, e-mailed or delivered, if to the Borrower, at its address at 410 S. Wilmington Street, PEB 19A3, Raleigh, North Carolina 27601, Attention: Director of Financial Operations, Treasury Department, Facsimile no. (919) 546-7826, e-mail: charles.beuris@pgnmail.com; if to any Lender, at its Domestic Lending Office set forth opposite its name on Schedule I hereto; and if to the Administrative Agent, at its address at Two Penns Way, Suite 200, New Castle, Delaware 19720, Attention: Bank Loan Syndications, Facsimile no.: (212) 816-8098, e-mail: j.nicholas.mckee@citi.com; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall be effective when received by the addressee thereof. Section 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 8.04. Costs, Expenses, Taxes and Indemnification. (a) The Borrower agrees to pay on demand all costs and expenses of the Administrative Agent (and as described in clause (iv) below, the Lenders) in connection with (i) the preparation, execution, negotiation, syndication and delivery of this Agreement and the other documents to be delivered hereunder, (ii) the first Borrowing under this Agreement, (iii) any modification, amendment or supplement to this Agreement and the other documents to be delivered hereunder and (iv) the enforcement of the rights and remedies of the Lenders and the Administrative Agent under this Agreement and the other documents to be delivered hereunder (whether through negotiations or legal proceedings), all the above costs and expenses to include, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent and each of the Lenders with respect thereto. In addition, the Borrower shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Agreement and the other documents to be delivered hereunder, and agrees to save the Administrative Agent and each Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. (b) If (i) due to payments made by the Borrower due to the acceleration of the maturity of the Advances pursuant to Section 6.01 or due to any other reason, any Lender receives payments of principal of any Eurodollar Rate Advance based upon the Eurodollar Rate other than on the last day of the Interest Period for such Advance, or (ii) due to any Conversion of Eurodollar Advance other than on the last day of an Interest Period pursuant to Section 2.12, the Borrower shall, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. In addition, if the Borrower fails to prepay any Advance on the date for which 37 notice of prepayment has been given, the Borrower shall, upon demand by any Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any losses, costs or expenses (including loss of anticipated profits) that it may reasonably incur as a result of such prepayment not having been made on the date specified by the Borrower for such prepayment. (c) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.13, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender or Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Lender or Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (d) The Borrower will indemnify each Lender and the Administrative Agent for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable under this Section 8.04) paid by such Lender or Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender or Agent (as the case may be) makes written demand therefor. (e) Prior to the date of the initial Borrowing or on the date of the Assignment and Acceptance pursuant to which it became a Lender, in the case of each Lender that becomes a Lender by virtue of entering into an Assignment and Acceptance, and from time to time thereafter if requested by the Borrower or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Administrative Agent and the Borrower with the forms prescribed by the Internal Revenue Service of the United States certifying that such Lender is exempt from United States withholding taxes with respect to all payments to be made to such Lender hereunder. If for any reason during the term of this Agreement, any Lender becomes unable to submit the forms referred to above or the information or representations contained therein are no longer accurate in any material respect, such Lender shall notify the Administrative Agent and the Borrower in writing to that effect. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments hereunder are not subject to United States withholding tax, the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States. 38 (f) Any Lender claiming any additional amounts payable pursuant to Section 8.04(c) or (d) shall use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) (i) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender and (ii) to otherwise minimize the amounts due, or to become due, under Sections 8.04(c) and (d). (g) If the Borrower makes any additional payment to any Lender pursuant to Sections 8.04(c) and (d) in respect of any Taxes, and such Lender determines that it has received (i) a refund of such Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge solely as a result of any deduction or credit for any Taxes with respect to which it has received payments under Sections 8.04(c) and (d), such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Borrower such amount as such Lender shall have determined to be attributable to the deduction or withholding of such Taxes. If such Lender later determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 8.04(g), the Borrower shall upon demand of such Lender promptly repay the amount of such overpayment. Any determination made by such Lender pursuant to this Section 8.04(g) shall in the absence of bad faith or manifest error be conclusive, and nothing in this Section 8.04(g) shall be construed as requiring any Lender to conduct its business or to arrange or alter in any respect its tax or financial affairs so that it is entitled to receive such a refund, credit or reduction or as allowing any Person to inspect any records, including tax returns, of any Lender. (h) The Borrower hereby agrees to indemnify and hold harmless each Lender, the Administrative Agent, counsel to the Administrative Agent and their respective officers, directors, partners, employees, Affiliates, Subsidiaries and advisors (each, an "Indemnified Person") from and against any and all claims, damages, losses, liabilities, costs, or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding), joint and several, that may actually be incurred by or asserted or awarded against any Indemnified Person (including, without limitation, in connection with any investigation, litigation or proceeding or the preparation of a defense in connection therewith) in each case by reason of or in connection with the execution, delivery, or performance of this Agreement, or the use by the Borrower of the proceeds of any Advance, except to the extent that such claims, damages, losses, liabilities, costs, or expenses are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of the party seeking indemnification. The Borrower also agrees not to assert any claim against any Indemnified Party on any theory of liability for special or punitive damages arising out of or otherwise relating to this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances. 39 (i) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 8.04 shall survive the payment in full of principal and interest hereunder and the termination of the Commitments. Section 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Advances due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower now or hereafter existing under this Agreement, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have. Section 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Administrative Agent and when the Administrative Agent shall have been notified by each Lender that such Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of each Lender. Section 8.07. Assignments and Participations. (a) Each Lender may, with the consent of the Administrative Agent and the Borrower (such consent not to be unreasonably withheld and, in the case of the Borrower, such consent shall not be required if an Event of Default has occurred and is continuing), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the Advances owing to it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement, (ii) prior to the effectiveness of the Term Loan Conversion Option, the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than the lesser of (A) $10,000,000 and (B) all of such Lender's rights and obligations and, if the preceding clause (A) is applicable, shall be an integral multiple of $1,000,000, (iii) each such assignment shall be to an Eligible Assignee, and (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance and such parties (other than when Citibank is an assigning party) shall also deliver to the Administrative Agent a processing and recordation fee 40 of $3,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender. (c) The Administrative Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance (and copies of the related consents of the Borrower and the Administrative Agent to such assignment) delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. 41 (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit B hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. (e) Each Lender may assign to one or more banks or other entities any Advance made by it. (f) Each Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any promissory note held pursuant to Section 2.01(b) for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) the holder of any such participation, other than an Affiliate of such Lender, shall not be entitled to require such Lender to take or omit to take any action hereunder, except action (A) extending the time for payment of interest on, or the final maturity of any portion of the principal amount of, the Advances or (B) reducing the principal amount of or the rate of interest payable on the Advances. Without limiting the generality of the foregoing: (i) such participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.08, 2.12 and 8.04(b) only if, and to the same extent, the Lender from which such participating banks or other entities acquired its participation would, at the time, be entitled to claim thereunder; and (ii) such participating banks or other entities shall also, to the fullest extent permitted by law, be entitled to exercise the rights of set-off contained in Section 8.05 as if such participating banks or other entities were Lenders hereunder. (g) If any Lender (or any bank, financial institution, or other entity to which such Lender has sold a participation) shall make any demand for payment under Section 2.11(b), then within 30 days after any such demand (if, but only if, such demanded payment has been made by the Borrower), the Borrower may, with the approval of the Administrative Agent (which approval shall not be unreasonably withheld) demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Borrower all (but not less than all) of such Lender's Commitment (if any) and the Advances owing to it within the period ending on the later to occur of such 30th day and the last day of the longest of the then current Interest Periods for such Advances, provided that (i) no Event of Default or event that, with the passage of time or the giving of notice, or both, would constitute an Event of Default shall then have occurred and be continuing, (ii) the Borrower shall have satisfied all its presently due obligations to such Lender under this Agreement, and (iii) if such Eligible Assignee designated by the Borrower is not an existing Lender on the date of such demand, the Borrower shall have delivered to the Administrative Agent an administrative fee of $3,500. If any such Eligible Assignee designated by the Borrower shall fail to consummate such assignment on terms acceptable to such Lender, or if the Borrower shall fail to designate any such Eligible Assignees for all or part of such Lender's Commitment or Advances, then such demand by the Borrower shall become ineffective; it being understood 42 for purposes of this subsection (g) that such assignment shall be conclusively deemed to be on terms acceptable to such Lender, and such Lender shall be compelled to consummate such assignment to an Eligible Assignee designated by the Borrower, if such Eligible Assignee (i) shall agree to such assignment by entering into an Assignment and Acceptance in substantially the form of Exhibit B hereto with such Lender and (ii) shall offer compensation to such Lender in an amount equal to all amounts then owing by the Borrower to such Lender hereunder made by the Borrower to such Lender, whether for principal, interest, fees, costs or expenses (other than the demanded payment referred to above and payable by the Borrower as a condition to the Borrower's right to demand such assignment), or otherwise. (h) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Lender. (i) Anything in this Section 8.07 to the contrary notwithstanding, any Lender may (i) assign and pledge all or any portion of its Commitment and the Advances owing to it to any Federal Reserve Bank (and its transferees) as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank; provided, that no such assignment shall release the assigning Lender from its obligations hereunder; or (ii) assign its Commitments, Advances and other rights and obligations hereunder to any of its Affiliates upon notice to, but without the consent of, the Borrower and the Administrative Agent. (j) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC") of such Granting Lender identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Advance that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any such SPC to make any Advance, (ii) if such SPC elects not to exercise such option or otherwise fails to provide all or any part of such Advance, the Granting Lender shall be obligated to make such Advance pursuant to the terms hereof and (iii) no SPC or Granting Lender shall be entitled to receive any greater amount pursuant to Section 2.07 or 2.11 than the Granting Lender would have been entitled to receive had the Granting Lender not otherwise granted such SPC the option to provide any Advance to the Borrower. The making of an Advance by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Advance were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement for which a Lender would otherwise be liable so long as, and to the extent that, the related Granting Lender provides such indemnity or makes such payment. In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against or join any other person in instituting against such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any 43 State thereof. Notwithstanding the foregoing, the Granting Lender unconditionally agrees to indemnify the Borrower, the Administrative Agent and each Lender against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be incurred by or asserted against the Borrower, the Administrative Agent or such Lender, as the case may be, in any way relating to or arising as a consequence of any such forbearance or delay in the initiation of any such proceeding against its SPC. Each party hereto hereby acknowledges and agrees that no SPC shall have the rights of a Lender hereunder, such rights being retained by the applicable Granting Lender. Accordingly, and without limiting the foregoing, each party hereby further acknowledges and agrees that no SPC shall have any voting rights hereunder and that the voting rights attributable to any Advance made by an SPC shall be exercised only by the relevant Granting Lender and that each Granting Lender shall serve as the administrative agent and attorney-in-fact for its SPC and shall on behalf of its SPC receive any and all payments made for the benefit of such SPC and take all actions hereunder to the extent, if any, such SPC shall have any rights hereunder. In addition, notwithstanding anything to the contrary contained in this Agreement any SPC may with notice to, but without the prior written consent of any other party hereto, assign all or a portion of its interest in any Advances to the Granting Lender. This Section may not be amended without the prior written consent of each Granting Lender, all or any part of whose Advance is being funded by an SPC at the time of such amendment. Section 8.08. Tax Disclosure Notwithstanding any agreement between the parties hereto to the contrary, any Person with respect to whom participation, in any capacity, in this Agreement has been discussed (and each employee, representative, or other agent of such Person) may disclose to any and all other Persons, without limitation of any kind, the tax treatment and tax structure of this Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to such Person relating to such tax treatment and tax structure; provided, however, that such disclosure may not be made to the extent required to be kept confidential to comply with any applicable federal or state securities laws. The foregoing is intended to comply with the presumption set forth in Treasury Regulation Section 1.6011-4(b)(3)(iii) and should be interpreted in a manner consistent with such regulation. Section 8.09. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. The Borrower (i) irrevocably submits to the non-exclusive jurisdiction of any New York State court or Federal court sitting in New York City in any action arising out of this Agreement, (ii) agrees that all claims in such action may be decided in such court, (iii) waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum and (iv) consents to the service of process by mail. A final judgment in any such action shall be conclusive and may be enforced in other jurisdictions. Nothing herein shall affect the right of any party to serve legal process in any manner permitted by law or affect its right to bring any action in any other court. 44 Section 8.10. Waiver of Jury Trial. THE BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY AND LAWFULLY DO SO, ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING TO THIS AGREEMENT IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER INSTRUMENT OR DOCUMENT DELIVERED HEREUNDER OR THEREUNDER. Section 8.11. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 8.12. Severability. Any provision of this Agreement that is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section 8.13. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 8.14. Entire Agreement. This Agreement constitutes the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Except as is expressly provided for herein, nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. S-1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. PROGRESS ENERGY, INC. By --------------------------------------- Thomas R. Sullivan Treasurer S-2 $51,994,127.64 CITIBANK, N.A., as Administrative Agent and Lender By --------------------------------------- Name: Title: S-3 $51,994,127.64 JPMORGAN CHASE BANK By --------------------------------------- Name: Title: S-4 $38,230,976.48 BANK ONE, NA By --------------------------------------- Name: Title: S-5 $26,731,098.62 BANK OF AMERICA, N.A. By --------------------------------------- Name: Title: S-6 $38,230,976.48 BANK OF TOKYO-MITSUBISHI TRUST COMPANY By --------------------------------------- Name: Title: S-7 $27,526,302.90 WACHOVIA BANK, N.A. By --------------------------------------- Name: Title: S-8 $15,292,390.24 SUNTRUST BANK By --------------------------------------- Name: Title: SCHEDULE I LIST OF COMMITMENTS AND APPLICABLE LENDING OFFICES Eurodollar Domestic Name of Bank Lending Office Lending Office Commitment Citibank, N.A. Two Pennsway, Ste. 200 Same as Eurodollar Lending $51,994,127.64 New Castle, Delaware 19720 Office Attention: Bank Loan Syndications JPMorgan Chase Bank Same as Eurodollar Lending $51,994,127.64 Office Bank One, NA 1 Bank One Plaza, Suite 0363 Same as Eurodollar Lending $38,230,976.48 Chicago, Illinois 60670-0363 Office Attention: Robert G. Bussa Bank of Tokyo-Mitsubishi Trust 1251 Avenue of the Americas Same as Eurodollar Lending $38,230,976.48 Company 12th Floor Office New York, New York 10020-1104 Attention: Nicholas R. Battista Wachovia Bank. N.A. 191 Peachtree St. Same as Eurodollar Lending $27,526,302.90 Atlanta, Georgia 30303 Office Attention: Loan Administration Bank of America, N.A. Bank of America Plaza Same as Eurodollar Lending $26,731,098.62 901 Main Street Office 14th Floor, TX1-492-14-05 Dallas, Texas 75202-3714 Attention: Nora Taylor SunTrust Bank 200 South Orange Avenue Same as Eurodollar Lending $15,292,390.24 Orlando, Florida 32801 Office Attention: William Barr
EXHIBIT A-1 NOTICE OF BORROWING [Date] Citibank, N.A., as Administrative Agent for the Lenders parties to the Credit Agreement referred to below Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Bank Loan Syndications Ladies and Gentlemen: The undersigned, PROGRESS ENERGY, INC. refers to the Amended and Restated Credit Agreement, dated as of November 10, 2003 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders from time to time parties thereto, and CITIBANK, N.A., as Administrative Agent for the Lenders, and hereby gives you notice pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is , 20 . ---------- ---- (ii) The Type of Advances comprising the Proposed Borrowing is [Base Rate Advances][Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Borrowing is $ . ----- (iv) The Interest Period for each Eurodollar Rate Advance that is an Advance made as part of the Proposed Borrowing is months. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (v) the representations and warranties contained in Section 4.01 of the Credit Agreement are correct, before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (vi) no event has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. Very truly yours, PROGRESS ENERGY, INC. By --------------------------------------- Name: Title: A-1-1 EXHIBIT A-2 NOTICE OF CONVERSION [Date] Citibank, N.A., as Administrative Agent for the Lenders parties to the Credit Agreement referred to below Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Bank Loan Syndications Ladies and Gentlemen: The undersigned, PROGRESS ENERGY, INC. refers to the Amended and Restated Credit Agreement, dated as of November 10, 2003 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders from time to time parties thereto, and CITIBANK, N.A., as Administrative Agent for the Lenders, and hereby gives you notice pursuant to Section 2.09 of the Credit Agreement that the undersigned hereby requests a Conversion under the Credit Agreement, and in that connection sets forth the terms on which such Conversion (the "Proposed Conversion") is requested to be made: (vii) The Business Day of the Proposed Conversion is ______________, 20____. (viii) The Type of, and Interest Period applicable to, the Advances (or portions thereof) proposed to be Converted: . ---------------- (ix) The Type of Advance to which such Advances (or portions thereof) are proposed to be Converted: ________________________. (x) Except in the case of a Conversion to Base Rate Advances, the initial Interest Period to be applicable to the Advances resulting from such Conversion: ______________________________. (xi) The aggregate amount of Advances (or portions thereof) proposed to be Converted is $ . --------------- A-2-1 The undersigned hereby certifies that, on the date hereof, and on the date of the Proposed Conversion, no event has occurred and is continuing, or would result from such Proposed Conversion, that constitutes an Event of Default. Very truly yours, PROGRESS ENERGY, INC. By --------------------------------------- Name: Title: A-2-2 EXHIBIT B ASSIGNMENT AND ACCEPTANCE Dated , 20 -------------- ---- Reference is made to the Amended and Restated Credit Agreement, dated as of November 10, 2003 (as amended, modified and supplemented from time to time, the "Credit Agreement", the terms defined therein being used herein as therein defined), among PROGRESS ENERGY, INC., certain Lenders (as defined in the Credit Agreement) from time to time parties thereto, and CITIBANK, N.A., as Administrative Agent for the Lenders (the "Administrative Agent"). (the "Assignor") and (the "Assignee") agree as ------------- -------------- follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof that represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement, including, without limitation, such interest in the Assignor's Commitment (to the extent it has not been terminated), the Advances owing to the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment (if any) and the amount of the Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01(e) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are B-1 delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; [and] (vi) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (vii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty].(1) 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] - ---------------- (1) If the Assignee is organized under the laws of a jurisdiction outside the United States. B-2 IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. [NAME OF ASSIGNOR] [NAME OF ASSIGNEE] By By -------------------------------- -------------------------------------- Name: Name: Title: Title: Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Accepted this day ---- of , 20 ------------ -- CITIBANK, N.A., as Administrative Agent By ------------------------------- Title: PROGRESS ENERGY, INC.(2) By ------------------------------- Title: - -------------------- (2) If required. B-3 SCHEDULE 1 TO ASSIGNMENT AND ACCEPTANCE Dated , 20 -------------- ---- Section 1 Percentage Interest Assigned: % ------ Section 2 Assignee's Commitment(3): $ Aggregate Outstanding Principal Amount of Advances owing to Assignee [specify Facility]: $ Section 3 Effective Date(4) - ----------------- (3) For use in connection with the Extension. (4) This date should be no earlier than the date of acceptance by the Administrative Agent. EXHIBIT C-1 FORM OF OPINION OF GENERAL COUNSEL TO THE COMPANY November 10, 2003 To each of the Lenders parties to the Credit Agreement referred to below and to Citibank, N.A., as Administrative Agent Re: Progress Energy, Inc. Ladies and Gentlemen: This opinion is furnished to you by me as General Counsel to Progress Energy, Inc. (the "Borrower") pursuant to Section 3.01(g) of the Amended and Restated Credit Agreement, dated as of November 10, 2003 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain lenders named therein (the "Lenders") and Citibank, N.A., as Administrative Agent for the Lenders. In connection with the preparation, execution and delivery of the Credit Agreement, I have examined: (1) The Credit Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement. (3) The Amended and Restated Articles of Incorporation of the Borrower (the "Charter"). (4) The By-Laws of the Borrower and all amendments thereto (the "By-Laws"). I have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as I have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, I have, when relevant facts were not independently established by me, relied upon certificates of the Borrower or its officers or of public officials. I have assumed the authenticity of all documents submitted to me as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of signatures (other than those of the Borrower), and the due execution and delivery, pursuant to due C-1-1 authorization, of the Credit Agreement by the Lenders and the Agent and the validity and binding effect thereof on such parties. For purposes of my opinions expressed in paragraph 1 below as to existence and good standing, I have relied as of their respective dates on certificates of public officials, copies of which are attached hereto as Exhibit A. Whenever the phrase "to my knowledge" is used in this opinion it refers to my actual knowledge and the actual knowledge of the attorneys who work under my supervision and who were involved in the representation of the Borrower in connection with the transactions contemplated by the Credit Agreement. I or attorneys working under my supervision are qualified to practice law in the States of North Carolina and Florida, and the opinions expressed herein are limited to the law of the States of North Carolina and Florida, the Federal law of the United States and, in reliance on a certificate issued by the Secretary of State of South Carolina and attached hereto as part of Exhibit A, the laws of the State of South Carolina for purposes of the first sentence of opinion paragraph 1 below. Based upon the foregoing and upon such investigation as I have deemed necessary, I am of the following opinion: 1. Each of the Borrower and CP&L is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina, and CP&L is duly qualified to do business and in good standing in the State of South Carolina. Each of Florida Power and FPC is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. Progress Capital is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. The Borrower has the corporate power and authority to enter into the transactions contemplated by the Credit Agreement. 2. The execution, delivery and performance of the Credit Agreement by the Borrower have been duly authorized by all necessary corporate action on the part of the Borrower and the Credit Agreement has been duly executed and delivered by the Borrower. 3. The execution, delivery and performance of the Credit Agreement by the Borrower will not (i) violate the Charter or the By-Laws or any law, rule or regulation applicable to the Borrower (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or (ii) result in a breach of, or constitute a default under, any judgment, decree or order binding on the Borrower, or any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound. 4. No authorization, approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of the Credit Agreement, other than the SEC Order, which has been duly issued and is in full force and effect. C-1-2 5. To my knowledge, except as described in the reports and registration statements that the Borrower, CP&L, FPC and Florida Power have filed with the Securities and Exchange Commission, there are no pending or overtly threatened actions or proceedings against the Borrower or any of such Subsidiaries before any court, governmental agency or arbitrator, that may materially adversely affect the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. The opinions set forth above are subject to the qualification that no opinion is expressed herein as to the enforceability of the Credit Agreement or any other document. The foregoing opinions are solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Credit Agreement after the date hereof and (ii) Hunton & Williams LLP and King & Spalding LLP, in connection with their respective opinions delivered on the date hereof under Section 3.01 of the Credit Agreement. Very truly yours, C-1-3 EXHIBIT C-2 FORM OF OPINION OF SPECIAL COUNSEL FOR THE COMPANY November 10, 2003 To each of the Lenders parties to the Credit Agreement referred to below and to Citibank, N.A., as Administrative Agent Re: Progress Energy, Inc. Ladies and Gentlemen: This opinion is furnished to you by us as counsel for Progress Energy, Inc. (the "Borrower") pursuant to Section 3.01(g) of the Amended and Restated Credit Agreement, dated as of November 10, 2003 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain lenders named therein (the "Lenders") and Citibank, N.A., as Administrative Agent for the Lenders. In connection with the preparation, execution and delivery of the Credit Agreement, we have examined: (1) The Credit Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement. (3) The opinion letter of even date herewith, addressed to you by William D. Johnson, General Counsel to the Company and delivered in connection with the transactions contemplated by the Credit Agreement (the "Company Opinion Letter"). We have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as we have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, we have, when relevant facts were not independently established by us, relied upon certificates of the Borrower or its officers or of public officials. We have assumed the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the originals (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Lenders and the Agent and the C-2-1 validity and binding effect thereof on such parties. Whenever the phrase "to our knowledge" is used in this opinion it refers to the actual knowledge of the attorneys of this firm involved in the representation of the Borrower without independent investigation. We are qualified to practice law in the States of North Carolina, Florida and New York, and the opinions expressed herein are limited to the law of the States of North Carolina, Florida and New York and the federal law of the United States. To the extent that our opinions expressed herein depend upon opinions expressed in paragraphs 1 through 4 of the Company Opinion Letter, we have relied without independent investigation on the accuracy of the opinions expressed in the Company Opinion Letter, subject to the assumptions, qualifications and limitations set forth in the Company Opinion Letter. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the opinion that the Credit Agreement constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms except as enforcement may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting the rights of creditors generally and (b) principles of equity, whether considered at law or in equity. The opinion set forth above is subject to the following qualifications: (a) In addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (b) No opinion is expressed herein as to (i) Section 8.05 of the Credit Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (c) No opinion is expressed herein as to provisions, if any, in the Credit Agreement, which (A) purport to excuse, release or exculpate a party for liability for or indemnify a party against the consequences of its own acts, (B) purport to make void any act done in contravention thereof, (C) purport to authorize a party to make binding determinations in its sole discretion, (D) relate to the effects of laws which may be enacted in the future, (E) require waivers, consents or amendments to be made only in writing, (F) purport to waive rights of offset or to create rights of set off other than as provided by statute, or (G) purport to permit acceleration of indebtedness and the exercise of remedies by reason of the occurrence of an immaterial breach of the Credit Agreement or any related document. Further, we express no opinion as to the necessity for any Lender, by reason of such Lender's particular circumstances, to qualify to transact business in the State of New York or as to any Lender's liability for taxes in any jurisdiction. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Credit Agreement after the date hereof in accordance with the provisions thereof and (ii) King & Spalding LLP, in connection with their opinion delivered on the date hereof under Section 3.01 of the Credit Agreement. Very truly yours, C-2-2 EXHIBIT C-3 FORM OF OPINION OF GENERAL COUNSEL TO THE COMPANY UPON EXTENSION OF THE COMMITMENT TERMINATION DATE AND EXERCISE OF THE TERM LOAN CONVERSION OPTION ___________ ___, 20__ To each of the Lenders parties to the Credit Agreement referred to below and to Citibank, N.A., as Administrative Agent Re: Progress Energy, Inc. Ladies and Gentlemen: This opinion is furnished to you by me as General Counsel to Progress Energy, Inc. (the "Borrower") in connection with [the extension of the Commitment Termination Date until ________ __, _____ under Section 2.15 (the "Extension")]1 [the exercise of the Term Loan Conversion Option under Section 2.16 (the "Exercise")]2 of the Amended and Restated Credit Agreement, dated as of November 10, 2003 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain lenders from time to time parties thereto (the "Lenders") and Citibank, N.A., as Administrative Agent for the Lenders. In connection with the preparation, execution and delivery of the Credit Agreement, I have examined: (1) The Credit Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement. [(3) The Request for Extension of Commitment Termination Date and Certificate, dated _____, submitted by the Borrower in connection with the Extension.](1) [(4) The Notice of Term Loan Conversion Option, dated _____, submitted by the Borrower in connection with the Exercise.](2) (5) The Amended and Restated Articles of Incorporation of the Borrower (the "Charter"). - ------------------------ (1) For use in connection with the Extension. (2) For use in connection with the Exercise. C-3-1 (6) The By-Laws of the Borrower and all amendments thereto (the "By-Laws"). I have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as I have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, I have, when relevant facts were not independently established by me, relied upon certificates of the Borrower or its officers or of public officials. I have assumed the authenticity of all documents submitted to me as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the signatures (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. For purposes of my opinions expressed in paragraph 1 below as to existence and good standing, I have relied as of their respective dates on certificates of public officials, copies of which are attached hereto as Exhibit A. Whenever the phrase "to my knowledge" is used in this opinion it refers to the my actual knowledge and the actual knowledge of the attorneys who work under my supervision and who were involved in the representation of the Borrower in connection with the transactions contemplated by the Credit Agreement. [We have also reviewed the NCUC Order and the SCPSC Order, each of which is attached hereto.] I or attorneys working under my supervision are qualified to practice law in the States of North Carolina and Florida, and the opinions expressed herein are limited to the law of the States of North Carolina and Florida, the Federal law of the United States and, in reliance on a certificate issued by the Secretary of State of South Carolina and attached hereto as part of Exhibit A, the laws of the State of South Carolina for purposes of the first sentence of opinion paragraph 1 below. Based upon the foregoing and upon such investigation as I have deemed necessary, I am of the following opinion: 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina, and is duly qualified to do business and in good standing in the State of South Carolina. 2. The execution, delivery and performance by the Borrower of the Credit Agreement, [after giving effect to the Extension,](1) [after giving effect to the Exercise,](2) are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not violate (i) the Charter or the By-Laws or any law, rule or regulation applicable to the Borrower (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or (ii) result in breach of, or constitute a default under, any judgment, decree or order binding on the Borrower, or any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound. The Credit Agreement has been duly executed and delivered on behalf of the Borrower. - ------------------------ (1) For use in connection with the Extension. (2) For use in connection with the Exercise. C-3-2 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, delivery and performance, by the Borrower of the Credit Agreement, [after giving effect to the Extension,]1 [after giving effect to the Exercise,]2 other than the SEC Order, which has been duly issued and is in full force and effect. 4. To my knowledge, except as described in the reports and registration statements that the Borrower has filed with the Securities and Exchange Commission, there are no pending or overtly threatened actions or proceedings against the Borrower or any of the Subsidiaries before any court, governmental agency or arbitrator, that may materially adversely affect the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. The opinions set forth above are subject to the qualification that no opinion is expressed herein as to the enforceability of the Credit Agreement or any other document. The foregoing opinions are solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Credit Agreement after the date hereof and (ii) Hunton & Williams LLP and King & Spalding LLP, in connection with their opinion delivered on the date hereof under Section 3.01 of the Credit Agreement. Very truly yours, - ------------------------ (1) For use in connection with the Extension. (2) For use in connection with the Exercise. C-3-3 EXHIBIT C-4 FORM OF OPINION OF SPECIAL COUNSEL TO THE COMPANY UPON EXTENSION OF THE COMMITMENT TERMINATION DATE AND EXERCISE OF THE TERM LOAN CONVERSION OPTION ___________ ___, 20__ To each of the Lenders parties to the Credit Agreement referred to below and to Citibank, N.A., as Administrative Agent Re: Progress Energy, Inc. Ladies and Gentlemen: This opinion is furnished to you by us as counsel for Progress Energy, Inc. (the "Borrower") in connection with [the extension of the Commitment Termination Date until ________ __, _____ under Section 2.15 (the "Extension")]1 [the exercise of the Term Loan Conversion Option under Section 2.16 (the "Exercise")]2 of the Amended and Restated Credit Agreement, dated as of November 10, 2003 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain lenders from time to time parties thereto (the "Lenders") and Citibank, N.A., as Administrative Agent for the Lenders. In connection with the preparation, execution and delivery of the Credit Agreement, we have examined: (1) The Credit Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement. [(3) The Request for Extension of Commitment Termination Date and Certificate, dated _____, submitted by the Borrower in connection with the Extension.]1 [(4) The Notice of Term Loan Conversion Option, dated _____, submitted by the Borrower in connection with the Exercise.]2 (5) The opinion letter of even date herewith, addressed to you by [William D. Johnson], General Counsel to the Borrower and delivered in connection with the transactions contemplated by the Credit Agreement (the "Borrower Opinion Letter"). - ------------------------ (1) For use in connection with the Extension. (2) For use in connection with the Exercise. C-4-1 We have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as we have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, we have, when relevant facts were not independently established by us, relied upon certificates of the Borrower or its officers or of public officials. We have assumed the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the originals (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. Whenever the phrase "to our knowledge" is used in this opinion it refers to the actual knowledge of the attorneys of this firm involved in the representation of the Borrower without independent investigation. [We have also reviewed the NCUC Order and the SCPSC Order, each of which is attached hereto.] We are qualified to practice law in the States of North Carolina, Florida and New York, and the opinions expressed herein are limited to the law of the States of North Carolina, Florida and New York applicable to public utilities and the federal law of the United States. To the extent that our opinions expressed herein depend upon opinions expressed in paragraphs 1 through 4 of the Borrower Opinion Letter, we have relied without independent investigation on the accuracy of the opinions expressed in the Borrower Opinion Letter, subject to the assumptions, qualifications and limitations set forth in the Borrower Opinion Letter. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the following opinion the Credit Agreement [after giving effect to the Extension] [after giving effect to the exercise of the Term Loan Conversion Option] constitutes the valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms except as enforcement may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting the rights of creditors generally and (b) principles of equity, whether considered at law or in equity. The opinion set forth above is subject to the following qualifications: (a) In addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (b) No opinion is expressed herein as to (i) Section 8.05 of the Credit Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws or (v) the enforceability of waivers by parties of their respective rights and remedies under law. C-4-2 (c) No opinion is expressed herein as to provisions, if any, in the Credit Agreement, which (A) purport to excuse, release or exculpate a party for liability for or indemnify a party against the consequences of its own acts, (B) purport to make void any act done in contravention thereof, (C) purport to authorize a party to make binding determinations in its sole discretion, (D) relate to the effects of laws which may be enacted in the future, (E) require waivers, consents or amendments to be made only in writing, (F) purport to waive rights of offset or to create rights of set off other than as provided by statute, or (G) purport to permit acceleration of indebtedness and the exercise of remedies by reason of the occurrence of an immaterial breach of the Credit Agreement or any related document. Further, we express no opinion as to the necessity for any Lender, by reason of such Lender's particular circumstances, to qualify to transact business in the State of New York or as to any Lender's liability for taxes in any jurisdiction. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Credit Agreement after the date hereof in accordance with the provisions thereof and (ii) King & Spalding LLP, in connection with their opinion delivered on the date hereof under Section 3.01 of the Credit Agreement. Very truly yours, C-4-3 EXHIBIT D FORM OF OPINION OF COUNSEL TO THE ADMINISTRATIVE AGENT AND THE ARRANGERS [DATE] To Citibank, N.A. ("Citibank"), as Administrative Agent for the Lenders referred to below, and to each of the Arrangers and Lenders parties to the Credit Agreement referred to below Re: Progress Energy, Inc. Ladies and Gentlemen: We have acted as counsel to the Administrative Agent and the Arrangers in connection with the preparation, execution and delivery of the Amended and Restated Credit Agreement, dated as of November 10, 2003 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain Lenders from time to time parties thereto, and Citibank, N.A., as Administrative Agent for the Lenders. In this connection, we have examined the following documents: 1. a counterpart of the Credit Agreement, executed by the parties thereto; 2. the documents furnished by or on behalf of the Borrower pursuant to subsections (b) through (g) of Section 3.01 of the Credit Agreement, including, without limitation, the opinion of Hunton & Williams LLP (the "Borrower Opinion"). In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that you have independently evaluated, and are satisfied with, the creditworthiness of the Borrower and the business terms reflected in the Credit Agreement. We have relied, as to factual matters, on the documents we have examined. To the extent that our opinions expressed below involve conclusions as to matters governed by law other than the law of the State of New York, we have relied upon the Borrower Opinion and have assumed without independent investigation the correctness of the matters set forth therein, our opinions expressed below being subject to the assumptions, qualifications and limitations set forth in the Borrower Opinion. D-1 Based upon and subject to the foregoing, and subject to the qualifications set forth below, we are of the opinion that the Credit Agreement is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. Our opinion is subject to the following qualifications: (b) The enforceability of the Borrower's obligations under the Credit Agreement is subject to the effect of any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar law affecting creditors' rights generally. (c) The enforceability of the Borrower's obligations under the Credit Agreement is subject to the effect of general principles of equity, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law). Such principles of equity are of general application, and, in applying such principles, a court, among other things, might not allow a contracting party to exercise remedies in respect of a default deemed immaterial, or might decline to order an obligor to perform covenants. (d) We note further that, in addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (e) We express no opinion herein as to (i) the enforceability of Section 8.05 of the Credit Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws, or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (f) Our opinions expressed above are limited to the law of the State of New York, and we do not express any opinion herein concerning any other law. The foregoing opinion is solely for your benefit and may not be relied upon by any other person or entity. Very truly yours, D-2 EXHIBIT E FORM OF REQUEST FOR EXTENSION OF THE COMMITMENT TERMINATION DATE AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 10, 2003 ----------------------------------- PROGRESS ENERGY, INC. (Borrower) AND THE BANKS LISTED ON THE SIGNATURE PAGES HEREOF (Banks) and CITIBANK, N.A. (Administrative Agent) Request for Extension of Commitment Termination Date and Certificate of Representations and Warranties and No Default I, [______________], [_________________] of Progress Energy, Inc., do hereby request that the Commitment Termination Date of the Amended and Restated Credit Agreement, dated as of November 10, 2003 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain Lenders from time to time parties thereto, and Citibank, N.A., as Administrative Agent for the Lenders, be extended for an additional 364-day period (hereinafter the "Proposed Extension") pursuant to Section 2.15 of the Credit Agreement and, in connection therewith, hereby certify as follows: (i) as of the date hereof, the representations and warranties set forth in Section 4.01 (including without limitation those regarding any required approvals of or notices to governmental bodies) of the Credit Agreement are and will be as of the effective date of the Proposed Extension accurate both before and after giving effect to the Proposed Extension; and E-1 (ii) as of the date hereof, no Event of Default, as defined in Section 6.01 of the Credit Agreement, has occurred, nor has any event occurred, that with the giving of notice or the passage of time or both, would constitute an Event of Default, in either case both before and after giving effect to the Proposed Extension. Witness my hand this ______ day of _________, ____. ------------------------ [----------------] E-2 EXHIBIT F FORM OF REQUEST FOR TERM LOAN CONVERSION OPTION AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 10, 2003 ----------------------------------- PROGRESS ENERGY, INC. (Borrower) AND THE BANKS LISTED ON THE SIGNATURE PAGES HEREOF (Banks) and CITIBANK, N.A. (Administrative Agent) Request for Term Loan Conversion Option and Certificate of Representations and Warranties and No Default I, [______________], [_______________] of Progress Energy, Inc., do hereby exercise the Term Loan Conversion Option of the Amended and Restated Credit Agreement, dated as of November 10, 2003 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain Lenders from time to time parties thereto the Banks, and Citibank, N.A., as Administrative Agent for the Lenders, pursuant to Section 2.16 of the Credit Agreement and, in connection therewith, hereby certify as follows: (iii) as of the date hereof, the representations and warranties set forth in Section 4.01 (including without limitation those regarding any required approvals of or notices to governmental bodies) of the Credit Agreement are and will be as of the effective date of the Term Loan Conversion Option accurate both before and after giving effect thereto; and F-1 (iv) as of the date hereof, no Event of Default, as defined in Section 6.01 of the Credit Agreement, has occurred, nor has any event occurred, that with the giving of notice or the passage of time or both, would constitute an Event of Default, in either case both before and after giving effect to the effectiveness of the Term Loan Conversion Option. Witness my hand this ______ day of _________, ____. ------------------------ [----------------] Vice President and Treasurer F-2 EXHIBIT G FORM OF COMPLIANCE CERTIFICATE [Letterhead of Progress Energy, Inc.] [Date] To the Lenders party to the Credit Agreement referred to below and to Citibank, N.A. as Administrative Agent Progress Energy, Inc. Ladies and Gentlemen: This compliance certificate is furnished to you pursuant to Section 5.01(i)(ii) of the Amended and Restated Credit Agreement, dated as of November 10, 2003 (the "Credit Agreement"), among Progress Energy, Inc., a North Carolina corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks"), and Citibank, N.A. ("Citibank"), as administrative agent (the "Administrative Agent") for the Lenders (as hereinafter defined). Terms defined in the Credit Agreement are used herein as therein defined. 1. As of [_______], 200_, the ratio of Consolidated Indebtedness of the Borrower and its Subsidiaries to Total Capitalization was _____ to 1.0, calculated, in accordance with Section 5.01(j) of the Credit Agreement, as follows: A. Indebtedness as of such date was $________, calculated as follows: Current Indebtedness: Amount ------ [List all forms of current Debt] --------------------------------- $ --------------------------------- --------------------------------- --------------------------------- ----------- Total current Indebtedness $ ----------- G-1 Long-term Indebtedness : Amount ------ [list all forms of long-term Indebtedness ] -------------------------------- $ -------------------------------- -------------------------------- Total long-term Indebtedness $ ----------- Total Indebtedness (current Indebtedness plus long-term $ Indebtedness ) ----------- B. Total Capitalization as of such date was $_____, calculated as follows: Consolidated Indebtedness $ Preferred Stock $ Common Stock $ Retained Earnings $ ----------- 2. The ratio of EBITDA for the 12-month period ending on ______ to Interest Expense for the 12 month period ending on ______ was _____ to 1.0, calculated, in accordance with Section 5.01(k) of the Credit Agreement, as follows: A. EBITDA of such date was $______, calculated as follows: Net income (or loss) $ Income tax expense $ Depreciation expense $ Amortization expense $ Other non-cash charges $ Total EBITDA $ ---------- B. Interest Expense of such date was $_____, calculated as follows: All Interest Expense Amount [List all forms of interest expense on all Indebtedness of Borrower or Subsidiaries] ---------------------------------- $ ---------------------------------- ---------------------------------- Total Interest Expense $ ---------- G-2 All rental payment interest Amount [List all interest elements of rental payments under operating leases] ---------------------------------- $ ---------------------------------- ---------------------------------- Total rental payment interest $ Total Interest Expense $ ---------- 3. As of [_______], 200_, and as of the date hereof, no Event of Default and no event that, with the giving of notice or lapse of time or both, will constitute an Event of Default, has occurred and in continuing. I hereby certify that the calculations set forth in paragraph 1 hereof were prepared in accordance with GAAP. Very truly yours, PROGRESS ENERGY, INC. By: -------------------------------------- Name: Title: G-3 EX-31 4 pei_exhibit31-.txt EXHIBIT 31 - CERTIFICATIONS 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: November 12, 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: November 12, 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, Fred N. Day, IV, 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: November 12, 2003 /s/ Fred N. Day, IV ------------------- Fred N. Day, IV President 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: November 12, 2003 /s/ Peter M. Scott III ---------------------- Peter M. Scott III Executive Vice President and Chief Financial Officer EX-32 5 pei_exhibit32-.txt EXHIBIT 32 - CERTIFICATIONS 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 September 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 November 12, 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 Septembner 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 November 12, 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 September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Fred N. Day, IV, President 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/ Fred N. Day, IV - -------------------------------------- Fred N. Day, IV President and Chief Executive Officer November 12, 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 September 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 November 12, 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-----