-----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, QLA8Lrh7zlYSbEgAtoQCMMK8HH92q49CL6uZzC0keSsL24aCEWGky1FN8TpSpZCP k5eK4MaD/vQcNkJTtYMxBw== 0001094093-04-000184.txt : 20040506 0001094093-04-000184.hdr.sgml : 20040506 20040506151804 ACCESSION NUMBER: 0001094093-04-000184 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040506 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: 04784927 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: 04784928 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_1q0410q-.txt 2004 1ST QTR PGN/PEC 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Exact name of registrants as specified in their charters, state of Commission incorporation, address of principal executive offices, and telephone I.R.S. Employer File Number 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 April 30, 2004, each registrant had the following shares of common stock outstanding: Registrant Description Shares ---------- ----------- ------ Progress Energy Common Stock (Without Par Value) 246,577,745 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 March 31, 2004 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, Use of Proceeds and Issuer Purchases of Equity Securities 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 the Act Medicare Prescription Drug, Improvement and Modernization Act of 2003 AFUDC Allowance for funds used during construction the Agreement Stipulation and Settlement Agreement Bcf Billion cubic feet CCO Competitive Commercial Operations business segment Colona Colona Synfuel Limited Partnership, L.L.L.P. the Company or Progress Progress Energy, Inc. and subsidiaries Energy 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 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 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 Fuels Fuels business segment Genco Progress Genco Ventures, LLC Jackson Jackson County EMC MACT Maximum Available Control Technology Mesa Mesa Hydrocarbons, LLC MGP Manufactured gas plant NCNG North Carolina Natural Gas Corporation NCUC North Carolina Utilities Commission NOx Nitrogen oxide 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 Progress Rail Progress Rail Services Corporation PTC LLC Progress Telecom LLC 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. PWR Pressurized water reactor Rail Services or Rail Rail Services business segment RTO Regional Transmission Organization 3 SCPSC Public Service Commission of South Carolina Section 29 Section 29 of the Internal Revenue Code Service Company Progress Energy Service Company, LLC 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" SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination through Open Access Transmission and Standard Market Design SO2 Sulfur dioxide SRS Strategic Resource Solutions Corp. 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 or the Company) 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 Progress Energy, Inc. and subsidiaries' (the Company) commercial and industrial customers; the ability of the Company's subsidiaries to pay upstream dividends or distributions to it; the impact on the facilities and the businesses of the Company from a terrorist attack; the inherent risks associated with the operation of nuclear facilities, including environmental, health, regulatory and financial risks; the ability to successfully access capital markets on favorable terms; the impact that increases in leverage may have on the Company; the ability of the Company to maintain its current credit ratings; the impact of derivative contracts used in the normal course of business by the Company; investment performance of pension and benefit plans and the ability to control costs; the availability and use of Internal Revenue Code Section 29 (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 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. Many of these risks similarly impact the Company's subsidiaries. These and other risk factors are detailed from time to time in the Progress Energy and PEC United States Securities and Exchange Commission (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, 2003, which were filed with the SEC on March 12, 2004. 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 March 31, 2004 UNAUDITED CONSOLIDATED STATEMENTS of INCOME Three Months Ended March 31, (in millions except per share data) 2004 2003 - --------------------------------------------------------------------------------------------- Operating Revenues Utility $ 1,685 $ 1,654 Diversified business 549 533 - --------------------------------------------------------------------------------------------- Total Operating Revenues 2,234 2,187 - --------------------------------------------------------------------------------------------- Operating Expenses Utility Fuel used in electric generation 493 411 Purchased power 183 203 Operation and maintenance 363 335 Depreciation and amortization 202 220 Taxes other than on income 105 103 Diversified business Cost of sales 504 475 Depreciation and amortization 45 33 Other 43 50 - --------------------------------------------------------------------------------------------- Total Operating Expenses 1,938 1,830 - --------------------------------------------------------------------------------------------- Operating Income 296 357 - --------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 3 3 Other, net (25) (6) - --------------------------------------------------------------------------------------------- Total Other Expense (22) (3) - --------------------------------------------------------------------------------------------- Interest Charges Net interest charges 166 156 Allowance for borrowed funds used during construction (1) (3) - --------------------------------------------------------------------------------------------- Total Interest Charges, Net 165 153 - --------------------------------------------------------------------------------------------- Income from Continuing Operations before Income Tax and Cumulative Effect of Change in Accounting Principle 109 201 Income Tax Expense (Benefit) 1 (6) - --------------------------------------------------------------------------------------------- Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle 108 207 Discontinued Operations, Net of Tax - 11 - --------------------------------------------------------------------------------------------- Income before Cumulative Effect of Change in Accounting Principle 108 218 Cumulative Effect of Change in Accounting Principle, Net of Tax - 1 - --------------------------------------------------------------------------------------------- Net Income $ 108 $ 219 - --------------------------------------------------------------------------------------------- Average Common Shares Outstanding 241 233 - --------------------------------------------------------------------------------------------- Basic Earnings per Common Share Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle $ 0.45 $ 0.89 Discontinued Operations, Net of Tax - 0.05 Cumulative Effect of Change in Accounting Principle, Net of Tax - - Net Income $ 0.45 $ 0.94 - --------------------------------------------------------------------------------------------- Diluted Earnings per Common Share Income from Continuing Operations before Cumulative Effect of $ 0.45 $ 0.89 Change in Accounting Principle Discontinued Operations, Net of Tax - 0.05 Cumulative Effect of Change in Accounting Principle, Net of Tax - - Net Income $ 0.45 $ 0.94 - --------------------------------------------------------------------------------------------- Dividends Declared per Common Share $ 0.575 $ 0.560 - ---------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 6 PROGRESS ENERGY, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS (in millions) March 31, December 31, ASSETS 2004 2003 - ----------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 21,761 $ 21,675 Accumulated depreciation (8,204) (8,116) - ----------------------------------------------------------------------------------------------------- Utility plant in service, net 13,557 13,559 Held for future use 13 13 Construction work in progress 722 634 Nuclear fuel, net of amortization 233 228 - ----------------------------------------------------------------------------------------------------- Total Utility Plant, Net 14,525 14,434 - ----------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 41 273 Accounts receivable 794 841 Unbilled accounts receivable 193 217 Inventory 782 808 Deferred fuel cost 254 317 Prepayments and other current assets 297 375 - ----------------------------------------------------------------------------------------------------- Total Current Assets 2,361 2,831 - ----------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 626 612 Nuclear decommissioning trust funds 988 938 Diversified business property, net 2,181 2,158 Miscellaneous other property and investments 464 464 Goodwill 3,729 3,726 Prepaid pension costs 453 462 Intangibles, net 319 327 Other assets and deferred debits 237 253 - ----------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 8,997 8,940 - ----------------------------------------------------------------------------------------------------- Total Assets $ 25,883 $ 26,205 - ----------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ----------------------------------------------------------------------------------------------------- Common Stock Equity Common stock without par value, 500 million shares authorized, 246 million shares issued and outstanding $ 5,310 $ 5,270 Unearned restricted shares (20) (17) Unearned ESOP shares (79) (89) Accumulated other comprehensive loss (61) (50) Retained earnings 2,299 2,330 - ----------------------------------------------------------------------------------------------------- Total Common Stock Equity 7,449 7,444 - ----------------------------------------------------------------------------------------------------- Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption 93 93 Long-Term Debt, Affiliate 309 309 Long-Term Debt , Net 9,603 9,625 - ----------------------------------------------------------------------------------------------------- Total Capitalization 17,454 17,471 - ----------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 232 868 Accounts payable 618 699 Interest accrued 140 209 Dividends declared 141 140 Short-term obligations 507 4 Customer deposits 169 167 Other current liabilities 524 580 - ----------------------------------------------------------------------------------------------------- Total Current Liabilities 2,331 2,667 - ----------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 682 737 Accumulated deferred investment tax credits 186 190 Regulatory liabilities 2,995 2,938 Asset retirement obligations 1,289 1,271 Other liabilities and deferred credits 946 931 - ----------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 6,098 6,067 - ----------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 12) - ----------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 25,883 $ 26,205 - -----------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 7 PROGRESS ENERGY, INC. UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS Three Months Ended March 31, (in millions) 2004 2003 - -------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 108 $ 219 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations - (11) Cumulative effect of change in accounting principle - (1) Depreciation and amortization 275 280 Deferred income taxes (22) (3) Investment tax credit (4) (4) Deferred fuel cost (credit) 63 (46) Cash provided (used) by changes in operating assets and liabilities: Accounts receivable 65 16 Inventories 26 32 Prepayments and other current assets (37) (3) Accounts payable (64) 49 Other current liabilities (85) (91) Other 57 2 - -------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 382 439 - -------------------------------------------------------------------------------------------------------- Investing Activities Gross utility property additions (248) (291) Diversified business property additions (58) (229) Nuclear fuel additions (39) (68) Proceeds from sales of investments and assets 85 - Other (8) (12) - -------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (268) (600) - -------------------------------------------------------------------------------------------------------- Financing Activities Issuance of common stock 29 74 Issuance of long-term debt - 655 Net increase (decrease) in short-term indebtedness 503 (205) Retirement of long-term debt (675) (226) Dividends paid on common stock (141) (133) Other (62) (30) - -------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Financing Activities (346) 135 - -------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents (232) (26) Cash and Cash Equivalents at Beginning of Period 273 61 - -------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 41 $ 35 - -------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 232 $ 209 income taxes (net of refunds) $ 32 $ 3 - --------------------------------------------------------------------------------------------------------
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 holding company headquartered in Raleigh, North Carolina. The Company is registered under the Public Utility Holding Company Act of 1935 (PUHCA), as amended and as such, the Company and its subsidiaries are subject to the regulatory provisions of PUHCA. Through its wholly-owned subsidiaries, Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. (PEC) and Florida Power Corporation d/b/a Progress Energy Florida, Inc. (PEF), the Company's PEC Electric and PEF segments are primarily engaged in the generation, transmission, distribution and sale of electricity in portions of North Carolina, South Carolina and Florida. The Progress Ventures business unit consists of the Fuels (Fuels) and the Competitive Commercial Operations (CCO) business segments. The Fuels segment is involved in natural gas drilling and production, coal terminal services, coal mining, synthetic fuel production, fuel transportation and delivery. The CCO segment includes nonregulated electric generation and energy marketing activities. Through the Rail Services (Rail) segment, the Company is involved in nonregulated railcar repair, rail parts reconditioning and sales, and scrap metal recycling. Through its other business units, the Company engages in other nonregulated business areas, including telecommunications and energy management and related services. 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 annual 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, 2003, and notes thereto included in Progress Energy's Form 10-K for the year ended December 31, 2003. 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 increased by $39 million and decreased by $10 million for the three months ended March 31, 2004 and 2003, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. The income tax provisions for the Company differ from amounts computed by applying the Federal statutory tax rate to income before income taxes, primarily due to the recognition of synthetic fuel tax credits. 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 2003 have been reclassified to conform to the 2004 presentation. 9 C. Subsidiary Reporting Period Change In the fourth quarter of 2003, the Company ceased recording portions of Fuels' segment operations, primarily synthetic fuel operations, one month in arrears. As a result, earnings for the year ended December 31, 2003 as reported in the Company's Form 10-K, included 13 months of results for these operations. The 2003 quarterly results for periods ended March 31, June 30 and September 30 have been restated for the above-mentioned reporting period change. This resulted in four months of earnings in the first quarter. The impact of the reclassification of earnings between quarters is outlined for the first quarter of 2003 in the table below: (in millions, except per share data) As Previously Quarter As Reported Reclassification Restated --------------------------------------------------------------------------------------------------------- Income from Continuing Operations before Cumulative Effect $ 196 $ 11 $ 207 of Change in Accounting Principle Net Income $ 208 $ 11 $ 219 Basic and Diluted earnings per common share Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle $ 0.84 $ 0.05 $ 0.89 Net Income $ 0.89 $ 0.05 $ 0.94
D. 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" (SFAS No. 148), the estimated fair value of the Company's stock options is amortized to expense over the options' vesting period. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period: Three Months Ended March 31, ------------------------------ (in millions except per share data) 2004 2003 -------------- -------------- Net Income, as reported $ 108 $ 219 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 3 3 -------------- -------------- Pro forma net income $ 105 $ 216 ============== ============== Basic earnings per share As reported $0.45 $0.94 Pro forma $0.44 $0.93 Fully diluted earnings per share As reported $0.45 $0.94 Pro forma $0.43 $0.92
2. IMPACT OF NEW ACCOUNTING STANDARDS 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 or deconsolidated. 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 originally applied immediately to variable interest entities created or obtained after January 31, 2003. 10 During 2003 and the first quarter of 2004, the Company did not participate in the creation of, or obtain a significant new variable interest in, any variable interest entity. In December 2003, the FASB issued a revision to FIN No. 46 (FIN No. 46R), which modified certain requirements of FIN No. 46 and was effective for all variable interest entities as of March 31, 2004. The Company adopted FIN No. 46 for special-purpose entities as of December 31, 2003, and deconsolidated the FPC Capital I trust (the Trust) as of that date. Upon the adoption of FIN No. 46R as of March 31, 2004, no other variable interest entities were required to be deconsolidated. Upon adoption of FIN No. 46R as of March 31, 2004, the Company determined that it is the primary beneficiary of a limited partnership which invests in 17 low-income housing partnerships that qualify for federal and state tax credits. The Company consolidated the limited partnership as of March 31, 2004, the effect of which was insignificant. The Company has requested but has not received all the necessary information to determine the primary beneficiary of the limited partnership's underlying 17 partnership investments, and has applied the information scope exception in FIN No. 46R, paragraph 4(g) to the 17 partnerships. The Company has no direct exposure to loss from the 17 partnerships; the Company's only exposure to loss is from its investment of approximately $1 million in the newly- consolidated limited partnership. The Company will continue its efforts to obtain the necessary information to fully apply FIN No. 46R to the 17 partnerships. The Company believes that if the newly-consolidated limited partnership is determined to be the primary beneficiary of the 17 partnerships, the effect of consolidating the 17 partnerships would not be significant to the Company's Consolidated Balance Sheets. The Company has variable interests in two power plants resulting from long-term power purchase contracts. The Company has requested but has not received all the necessary information to determine if the counterparties are variable interest entities or to identify the primary beneficiaries, and has applied the information scope exception in FIN No. 46R, paragraph 4(g). Certain payments for fuel costs under these contracts are linked to inflation indices. The Company's only significant exposure to loss from these contracts results from fluctuations in the market price of fuel used by the two plants to produce the power purchased by the Company. Total purchases from these counterparties were approximately $9 million in each of the first quarters of 2003 and 2004. The Company will continue its efforts to obtain the necessary information to fully apply FIN No. 46R to these contracts. Although the Company has not received any financial information from these two counterparties, the Company believes that if it is determined to be the primary beneficiary of these two entities the effect of consolidating the entities could be significant to its Consolidated Balance Sheets. However, the approximate impact cannot be determined at this time. The Company also has interests in several other variable interest entities created before January 31, 2003, for which the Company is not the primary beneficiary. These arrangements include investments in approximately 33 limited partnerships, limited liability corporations and venture capital funds and two building leases with special-purpose entities. The aggregate maximum loss exposure at March 31, 2004, that the Company could be required to record in its income statement as a result of these arrangements totals approximately $39 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. 3. DIVESTITURES A. Railcar Ltd. Divestiture In December 2002, the Progress Energy Board of Directors adopted a resolution approving the sale of Railcar Ltd., a subsidiary included in the Rail Services segment. In March 2003, the Company signed a letter of intent to sell the majority of Railcar Ltd. assets to The Andersons, Inc. and the transaction closed in February 2004. Proceeds from the sale were approximately $82 million before transaction costs and taxes of approximately $13 million. The assets of Railcar Ltd. were grouped as assets held for sale and are included in other current assets on the Consolidated Balance Sheets at December 31, 2003 and March 31, 2004. The assets were recorded at approximately $6 million and $75 million at March 31, 2004 and December 31, 2003, respectively, which reflects the Company's estimates of the fair value expected to be realized from the sale of these assets less costs to sell. The primary component of assets held for sale at December 31, 2003 was property and equipment of $74 million. 11 B. NCNG Divestiture In October 2002, the Company announced the Board of Directors' approval to sell North Carolina Natural Gas Corporation (NCNG) and the Company's equity investment in Eastern North Carolina Natural Gas Company (ENCNG) to Piedmont Natural Gas Company, Inc. On September 30, 2003, the Company completed the sale. The 2003 net income of these operations is reported as discontinued operations in the Consolidated Statements of Income. Interest expense of $4 million for the three months ended March 31, 2003 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. Results of discontinued operations were as follows: (in millions) First Quarter 2003 ---------------- Revenues $ 154 ================ Earnings before income taxes $ 18 Income tax expense 7 ---------------- Net earnings from discontinued operations $ 11 ================ 4. REGULATORY MATTERS A. Retail Rate Matters PEC has exclusively utilized external funding for its decommissioning liability since 1994. Prior to 1994, PEC retained its funds internally to meet its decommissioning liability. The North Carolina Utilities Commission (NCUC) order issued in February 2004 found that by January 1, 2008 PEC must begin transitioning these amounts to external funds. The transition of $131 million must be completed by December 31, 2017, and at least 10% must be transitioned each year. PEC filed with the Public Service Commission of South Carolina (SCPSC) seeking permission to defer expenses incurred from the first quarter 2004 winter storm. The SCPSC approved PEC's request to defer the costs and amortize them over five years beginning in January 2005. Approximately $10 million related to storm costs incurred during the quarter was deferred. During the first quarter of 2004, PEC filed with the NCUC and obtained approval from the SCPSC for a depreciation study which allowed the utility to reduce the rates used to calculate depreciation expense. As a result, depreciation expense decreased $7 million compared to the prior year quarter. On April 29, 2004, PEF, the Office of Public Counsel and the Florida Industrial Power Users Group executed a Stipulation and Settlement that, upon approval by the Florida Public Service Commission (FPSC), will resolve the issue currently pending before the FPSC regarding the costs PEF will be allowed to recover through its Fuel and Purchased Power Cost Recovery clause in 2004 and beyond for waterborne coal deliveries by the Company's affiliated coal supplier, Progress Fuels Corporation. The settlement sets fixed per ton prices based on point of origin for all waterborne coal deliveries in 2004, and establishes a market-based pricing methodology for determining recoverable waterborne coal transportation costs through a competitive solicitation process or market price proxies beginning in 2005 and thereafter. The settlement will reduce the amount that PEF will charge to the Fuel and Purchased Power Cost Recovery clause for waterborne transportation by approximately $13 million beginning in 2004. Also on April 29, 2004, the parties filed a joint request with the FPSC for approval of the Stipulation and Settlement, which the FPSC is expected to act upon prior to the commencement of a hearing on the waterborne transportation issues scheduled for June 10, 2004. B. Regional Transmission Organizations In 2000, the Federal Energy Regulatory Commission (FERC) issued Order 2000 regarding regional transmission organizations (RTOs). This Order set minimum characteristics and functions that RTOs must meet, including independent transmission service. 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 12 forth in the SMD NOPR would materially alter the manner in which transmission and generation services are provided and paid for. In April 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. The FERC has not yet issued a final rule on SMD NOPR. The Company cannot predict the outcome of these matters or the effect that they may have on the GridSouth and GridFlorida proceedings currently ongoing before the FERC. It is unknown what impact the future proceedings will have on the Company's earnings, revenues or prices. The Company has recorded $33 million and $4 million related to startup costs for GridSouth and GridFlorida, respectively, at March 31, 2004. The Company expects to recover these startup costs in conjunction with the GridSouth and GridFlorida original structures or in conjunction with any alternate combined transmission structures that emerge. 5. GOODWILL AND OTHER INTANGIBLE ASSETS The Company performed the annual goodwill impairment test in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," for the CCO segment in the first quarter of 2004, and the annual goodwill impairment test for the PEC Electric and PEF segments in the second quarter of 2003, which indicated no impairment. The first annual impairment test for the Other segment will be performed in the fourth quarter 2004. The changes in the carrying amount of goodwill for the periods ended March 31, 2004 and December 31, 2003, by reportable segment, are as follows: (in millions) PEC Electric PEF CCO Other Total --------------------------------------------------------------- Balance as of January 1, 2003 $ 1,922 $ 1,733 $ 64 $ - $ 3,719 Acquisitions - - - 7 7 --------------------------------------------------------------- Balance as of December 31, 2003 $ 1,922 $ 1,733 $ 64 $ 7 $ 3,726 Purchase price adjustment - - - 3 3 --------------------------------------------------------------- Balance as of March 31, 2004 $ 1,922 $ 1,733 $ 64 $10 $ 3,729 ===============================================================
The gross carrying amount and accumulated amortization of the Company's intangible assets at March 31, 2004 and December 31, 2003, are as follows: March 31, 2004 December 31, 2003 ------------------------------------ --------------------------------- (in millions) Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization --------------------------------- --------------------------------- Synthetic fuel intangibles $ 140 $ (69) $ 140 $ (64) Power agreements acquired 221 (24) 221 (20) Other 63 (12) 62 (12) --------------------------------- --------------------------------- Total $ 424 $(105) $ 423 $ (96) ================================= =================================
13 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 (Section 29) in December 2007. The intangibles related to power agreements acquired are being amortized based on the economic benefits of the contracts. Other intangibles are primarily acquired customer contracts and permits that are amortized over their respective lives. Amortization expense recorded on intangible assets for the three months ended March 31, 2004 and 2003, was $9 million and $7 million, respectively. The estimated annual amortization expense for intangible assets for 2004 through 2008, in millions, is approximately $42, $35, $36, $36 and $17, respectively. 6. EQUITY A. 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 millions) Three Months Ended March 31, ---------------------------- 2004 2003 ----------- --------- Weighted-average common shares - basic 241 233 Restricted stock awards 1 1 ----------- --------- Weighted-average shares - fully dilutive 242 234 ----------- --------- B. Comprehensive Income Comprehensive income for the three months ended March 31, 2004 and 2003 was $97 million and $219 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. 7. FINANCING ACTIVITIES On March 1, 2004, Progress Energy used available cash and proceeds from the issuance of commercial paper to retire $500 million 6.55% senior unsecured notes. Cash and commercial paper capacity was created primarily from the sale of assets in 2003. On January 15, 2004, PEC paid at maturity $150 million 5.875% First Mortgage Bonds with commercial paper proceeds. On April 15, 2004, PEC also paid at maturity $150 million 7.875% First Mortgage Bonds with commercial paper proceeds and internally-generated funds. On March 31, 2004, PEC announced the redemption of $35 million of Darlington County 6.6% Series Pollution Control Bonds at 102.5% of par, $2 million of New Hanover County 6.30% Series Pollution Control Bonds at 101.5% of par, and $3 million of Chatham County 6.30% Series Pollution Control Bonds at 101.5% of par. All three series were fully redeemed on April 30, 2004. On February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25 million 6.48% medium term notes with excess cash. For the three months ended March 31, 2004, the Company issued approximately 0.7 million shares of its common stock for approximately $29 million in proceeds from its Investor Plus Stock Purchase Plan and its employee benefit plans. 8. BENEFIT PLANS The Company and some of its subsidiaries have a non-contributory defined benefit retirement (pension) plan for substantially all full-time employees. The Company also has supplementary defined benefit pension plans that provide benefits to higher-level employees. In addition to pension 14 benefits, the Company and some of its subsidiaries provide contributory other postretirement benefits (OPEB), including certain health care and life insurance benefits, for retired employees who meet specified criteria. The components of the net periodic benefit cost for the three months ended March 31 are: Other Postretirement Pension Benefits Benefits -------------------- --------------------- (in millions) 2004 2003 2004 2003 -------------------- --------------------- Service cost $ 13 $ 13 $ 4 $ 3 Interest cost 28 27 8 8 Expected return on plan assets (37) (36) (1) (1) Amortization of actuarial (gain) loss 5 5 1 1 Other amortization, net - - 1 1 -------------------- --------------------- Net periodic cost $ 9 $ 9 $ 13 $ 12 Additional cost / (benefit) recognition (a) (4) (4) 1 1 -------------------- --------------------- Net periodic cost / (benefit) recognized $ 5 $ 5 $ 14 $ 13 ==================== ===================== (a) Relates to the acquisition of FPC. See Note 16B of Progress Energy's Form 10-K for year ended December 31, 2003.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. In accordance with guidance issued by the FASB in FASB Staff Position FAS 106-1, the Company has elected to defer accounting for the effects of the Act due to uncertainties regarding the effects of the implementation of the Act and the accounting for certain provisions of the Act. Therefore, OPEB information presented in the financial statements does not reflect the effects of the Act. When specific authoritative accounting guidance is issued, it could require plan sponsors to change previously reported information. The Company is in the early stages of reviewing the Act and determining its potential effects on the Company. 9. 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 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. Under its risk management policy, the Company may use a variety of instruments, including swaps, options and forward contracts, to manage exposure to fluctuations in commodity prices and interest rates. Such instruments contain credit risk if the counterparty fails to perform under the contract. The Company minimizes such risk by performing credit reviews using, among other things, publicly available credit ratings of such counterparties. Potential nonperformance by counterparties is not expected to have a material effect on the consolidated financial position or consolidated results of operations of the Company. 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. In March 2004, two interest rate swap agreements totaling $200 million were terminated. These swaps were associated with Progress Energy 5.85% Notes due in 2008. The loss on the agreements was deferred and is being amortized over the life of the bonds as these agreements had been designated as fair value hedges for accounting purposes. As of March 31, 2004, Progress Energy had $650 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 2006 and April 2007. In March 2004, PEC entered into a forward swap to hedge its exposure to interest rates with regard to a future issuance of approximately $300 million of debt. This agreement has a computational period of ten years. In April 2004, PEC entered into a cash flow hedge to hedge the payment stream associated with an upcoming lease. 15 The Company holds interest rate collars with a varying notional amount and maximum of $195 million to hedge floating rate exposure associated with variable rate long-term debt. The Company is required to hedge 50% of the amount outstanding under its bank facility through March 2007. The Company also holds interest rate cash flow hedges, with a total notional amount of $400 million, related to projected outstanding balances of commercial paper. The notional amounts of interest rate derivatives 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. Progress Fuels Corporation, through Progress Ventures, Inc. (PVI), periodically enters into derivative instruments to hedge its exposure to price fluctuations on natural gas sales. As of March 31, 2004, Progress Fuels Corporation is hedging exposures to the price variability of its natural gas production through December 2005. These instruments did not have a material impact on the Company's consolidated financial position or results of operations. Nonhedging derivatives, primarily electricity and natural gas contracts, are entered into for trading purposes and for economic hedging purposes. While management believes the economic hedges mitigate exposures to fluctuations in commodity prices, these instruments are not designated as hedges for accounting purposes and are monitored consistent with trading positions. The Company recorded mark-to-market losses of $9 million in the first quarter of 2004 related to an agreement to provide energy needed to fulfill a contract obligation. 10. FINANCIAL INFORMATION BY BUSINESS SEGMENT The Company currently provides services through the following business segments: PEC Electric, PEF, Fuels, CCO, Rail Services and Other. PEC Electric and PEF are primarily 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, the FPSC and the United States Nuclear Regulatory Commission (NRC). These electric operations also distribute and sell electricity to other utilities, primarily on the east coast of the United States. Fuels' operations, which are located throughout the United States, are involved in natural gas drilling and production, coal terminal services, coal mining, synthetic fuel production, fuel transportation and delivery. CCO's operations, which are located in the southeastern United States, include nonregulated electric generation operations and marketing activities. Rail Services' operations include railcar repair, rail parts reconditioning 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 Services' operations are located in the United States, Canada and Mexico. The Other segment, whose operations are in the United States, is composed of other nonregulated business areas including telecommunications and energy service operations 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." In addition to these reportable operating segments, the Company has other corporate activities that include holding company operations, service company operations and eliminations. The profit or loss of the identified segments plus the loss of Corporate represents the Company's total income from continuing operations before cumulative effect of change in accounting principle. 16 Revenues ----------------------------------------------- Income from Continuing (in millions) Unaffiliated Intersegment Total Operations Assets ------------- ------------- ------------ --------------- ------------- FOR THE THREE MONTHS ENDED MARCH 31, 2004 PEC Electric $ 901 $ - $ 901 $ 116 $ 10,669 PEF 784 - 784 49 7,284 Fuels 255 82 337 48 1,164 CCO 33 - 33 (8) 1,764 Rail Services 240 - 240 6 543 Other 21 1 22 (2) 320 Corporate - (83) (83) (101) 4,139 ------------- ------------- ------------ --------------- ------------- Consolidated totals $ 2,234 $ - $ 2,234 $ 108 $ 25,883 ------------- ------------- ------------ --------------- ------------- FOR THE THREE MONTHS ENDED MARCH 31, 2003 PEC Electric $ 926 $ - $ 926 $ 135 PEF 728 - 728 71 Fuels 304 82 386 38 CCO 37 - 37 9 Rail Services 178 - 178 (3) Other 14 4 18 - Corporate - (86) (86) (43) ------------- ------------- ------------ --------------- Consolidated totals $ 2,187 $ - $ 2,187 $ 207 ------------- ------------- ------------ ---------------
11. OTHER INCOME AND OTHER EXPENSE Other income and expense includes interest income 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 March 31, ----------------------------- (in millions) 2004 2003 -------------- ----------- Other income Net financial trading gain $ 1 $ - Net energy brokered for resale - (2) Nonregulated energy and delivery services income 6 5 Contingent value obligation unrealized gain - 2 Income from equity investments 2 - AFUDC equity 2 2 Other 2 3 -------------- ----------- Total other income $ 13 $ 10 -------------- ----------- Other expense Nonregulated energy and delivery services expenses $ 4 $ 4 Donations 8 3 Investment losses 4 4 Contingent value obligations unrealized loss 7 - Write-off of non-trade receivable 7 - Other 8 5 -------------- ----------- Total other expense $ 38 $ 16 -------------- ----------- Other, net $ (25) $ (6) ============== ===========
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 such as surge protection, appliance services and area light sales, and delivery, transmission and substation work for other utilities. 17 12. COMMITMENTS AND CONTINGENCIES Contingencies and significant changes to the commitments discussed in Note 21 of the Company's 2003 Annual Report on Form 10-K are described below. A. Guarantees As a part of normal business, Progress Energy and certain subsidiaries enter into various agreements providing financial or performance 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 subsidiaries on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended commercial purposes. At March 31, 2004, management does not believe conditions are likely for significant performance under the guarantees of performance issued by or on behalf of affiliates discussed herein. Guarantees at March 31, 2004, 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 $ 383 Guarantees supporting nuclear decommissioning 276 Guarantee supporting power supply agreements 307 Standby letters of credit 11 Surety bonds 115 Other guarantees 1 Guarantees issued on behalf of third parties Other guarantees 10 ----------- Total $ 1,103 ===========
Guarantees Supporting Nonregulated Portfolio and Energy Marketing Activities Progress Energy has issued approximately $383 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 $38 million of these guarantees were issued during the first quarter of 2004 to support Fuels and 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 March 31, 2004, 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 $115 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 million. Guarantees Supporting Power Supply Agreements In March 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 County EMC (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 18 $280 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 $280 million) acceptable to Jackson. During the third quarter of 2003, PVI entered into an agreement with Morgan Stanley Capital Group Inc. (Morgan Stanley) 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 at March 31, 2004. Standby Letters of Credit The Company has issued $11 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. Surety Bonds At March 31, 2004, the Company had $115 million in surety bonds purchased primarily for purposes such as providing workers' compensation coverage, obtaining licenses, permits, 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 $11 million. Included in the $11 million are $10 million of guarantees issued on behalf of third parties which is in support of synthetic fuel operations at a third-party plant. The remaining $1 million in affiliate guarantees is related primarily to prompt performance payments and other payments subject to contingencies. B. Insurance Both PEC and PEF are insured against public liability for a nuclear incident up to $10,760 million per occurrence. 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 assessments of up to $101 million for each reactor owned per occurrence. Payment of such assessments would be made over time as necessary to limit the payment in any one year to no more than $10 million per reactor owned. Congress is expected to approve revisions to the Price Anderson Act during 2004 that could include increased limits and assessments per reactor owned. The final outcome of this matter cannot be predicted at this time. C. Claims and Uncertainties The Company is subject to federal, state and local regulations addressing hazardous and solid waste management, air and water quality and other environmental matters. 19 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. Both electric utilities and other potentially responsible parties (PRPs) 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, PEF and Progress Fuels Corporation have filed claims with the Company's general liability insurance carriers to recover costs arising out of actual or potential environmental liabilities. Some claims have been settled and others are still pending. While the Company 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. 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. PEC There are nine former MGP sites and other 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 sites. All eligible expenses related to these are charged against a specific fund containing these proceeds. At March 31, 2004, approximately $8 million remains in this centralized fund with a related accrual of $8 million recorded for the associated expenses of environmental issues. PEC does not believe that it can provide an estimate of the reasonably possible total remediation costs beyond what is currently accrued due to the fact that investigations have not been completed at all sites. This accrual has been recorded on an undiscounted basis. 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 PRPs. 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, all of which also are associated with PEC, to state standards pursuant to an Administrative Order on Consent. These sites are anticipated to have investigation or remediation costs associated with them. NCNG had previously accrued approximately $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 PEC. PEC does not believe it can provide an estimate of the reasonably possible total remediation costs beyond the accrual because investigations have not been completed at all sites. Therefore, PEC cannot currently determine the total costs that may be incurred in connection with the investigation and/or remediation of all sites. PEF At March 31, 2004, PEF has accrued $20 million for probable and estimable costs related to various environmental sites. Of this accrual, $10 million is for costs associated with the remediation of distribution transformers which are more fully discussed below. The remaining $10 million is related to two former MGP sites and other 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 million for investigation and remediation associated with distribution transformers and received approval from the FPSC for annual recovery of these environmental costs through the Environmental Cost Recovery Clause (ECRC). By December 2003, PEF accrued an additional $9 million for similar environmental costs as a result of increased sites and estimated costs per site. PEF has received 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. 20 In addition, PEF received insurance proceeds of approximately $3 million to address costs associated with environmental liabilities related to its involvement with some MGP and other sites. All eligible expenses related to these sites are included in the amount accrued above and charged against a fund containing these proceeds. 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 PRPs. Presently, PEF cannot determine the total costs that may be incurred in connection with the remediation of all sites. Florida Progress Corporation In 2001, FPC sold its Inland Marine Transportation business operated by MEMCO Barge Line, Inc. to AEP Resources, Inc. FPC established an accrual to address indemnities and retained an environmental liability associated with the transaction. FPC estimates that its contractual liability to AEP Resources, Inc., associated with Inland Marine Transportation, is $4 million at March 31, 2004 and has accrued such amount. The previous accrual of $10 million was reduced in 2003 based on a change in estimate. This accrual has been determined on an undiscounted basis. FPC measures its liability for this site based on estimable and probable remediation scenarios. The Company believes that it is not reasonably probable that additional costs, which cannot be currently estimated, will be incurred related to the environmental indemnification provision beyond the amount accrued. The Company cannot predict the outcome of this matter. Certain historical sites exist that are being addressed voluntarily by FPC. An immaterial accrual has been established to address investigation expenses related to these sites. The Company cannot determine the total costs that may be incurred in connection with these sites. 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. Air Quality There has been and may be further proposed legislation requiring reductions in air emissions for NOx, SO2, 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. 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. 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 by these unaffiliated utilities, ranging from $1.0 billion to $1.4 billion. A utility that was not subject to a civil enforcement action settled its New Source Review issues with the EPA for $300 million. These settlement agreements have generally called for expenditures to be made over extended time periods, and some of the companies may seek recovery of the related cost through rate adjustments or similar mechanisms. The Company cannot predict the outcome of this matter. In 2003, the EPA published a final rule addressing routine equipment replacement under the New Source Review program. The rule defines routine equipment replacement and the types of activities that are not subject to New Source Review requirements or New Source Performance Standards under the Clean Air Act. The rule was challenged in the Federal Appeals Court and its implementation stayed. The Company cannot predict the outcome of this matter. In 1998, the EPA published a final rule at Section 110 of the Clean Air Act addressing the regional transport of ozone (NOx SIP Call). The EPA's rule requires 23 jurisdictions, including North Carolina, South Carolina and Georgia, but not Florida, to further reduce NOx emissions in order to attain a preset emission level during each year's "ozone season," beginning May 31, 2004. PEC is currently installing controls necessary to comply with the rule and expects to be in compliance as required by the final rule. Total capital expenditures to meet these measures in North and South 21 Carolina could reach approximately $370 million, which has not been adjusted for inflation. The Company has spent approximately $265 million to date related to these expenditures. 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. In 1997, the EPA issued final regulations establishing a new 8-hour ozone standard. In 1999, the District of Columbia Circuit Court of Appeals ruled against the EPA with regard to the federal 8-hour ozone standard. The U.S. Supreme Court has upheld, in part, the District of Columbia Circuit Court of Appeals' decision. In April 2004, the EPA identified areas that do not meet the standard. The states with identified areas, including North and South Carolina are proceeding with the implementation of the federal 8-hour ozone standard. Both states promulgated final regulations, which will require PEC to install NOx controls under the states' 8-hour standard. The costs of those controls are included in the $370 million cost estimate above. However, further technical analysis and rulemaking may result in a requirement for additional controls at some units. The Company cannot predict the outcome of this matter. 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 NOx emissions by May 1, 2003. The final rule also includes a set of regulations that affect NOx 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. In April 2002, the EPA published a final rule harmonizing the dates for the Section 126 rule and the NOx SIP Call. 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 indicated it will rescind the Section 126 rule in a future rulemaking. The Company expects a favorable outcome of this matter. In June 2002, legislation was enacted in North Carolina requiring the state's electric utilities to reduce the emissions of NOx and SO2 from coal-fired power plants. Progress Energy expects its capital costs to meet these emission targets will be approximately $813 million by 2013. PEC has expended approximately $32 million of these capital costs through March 31, 2004. 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. PEC recognized amortization of $15 million and $20 million in the quarters ended March 31, 2004 and 2003, respectively. Pursuant to the law, PEC entered into an agreement with the state of North Carolina to transfer to the state certain NOx and SO2 emissions allowances that result from compliance with the collective NOx and SO2 emissions limitations set out in the law. The law also requires the state to undertake a study of mercury and carbon dioxide emissions in North Carolina. Operation and maintenance costs will increase due to the additional personnel, materials and general maintenance associated with the equipment. Operation and maintenance expenses are recoverable through base rates, rather than as part of this program. Progress Energy cannot predict the future regulatory interpretation, implementation or impact of this law. In 2004, a bill was introduced in the Florida legislature that would require significant reductions in NOx, SO2 and particulate emissions from certain coal, natural gas and oil-fired generating units owned or operated by investor-owned electric utilities, including PEF. The NOx and SO2 reductions would be effective beginning with calendar year 2010 and the particulate reductions would be effective beginning with calendar year 2012. Under the proposed legislation, the FPSC would be authorized to allow the utilities to recover the costs of compliance with the emission reductions over a period not greater than seven years beginning in 2005, but the utilities' rates would be frozen at 2004 levels for at least five years of the maximum recovery period. The 2004 legislature took no action on this matter. 22 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. In 2003, the EPA proposed alternative control plans that would limit mercury emissions from coal-fired power plants. The first, a Maximum Achievable Control Technology (MACT) standard applicable to every coal-fired plant, would require compliance in 2008. The second, a mercury cap and trade program, would require limits to be met in two phases, 2010 and 2018. The mercury rule is expected to become final in March 2005. Achieving compliance with the proposal could involve significant capital costs which could be material to the Company's consolidated financial position or results of operations. The Company cannot predict the outcome of this matter. In conjunction with the proposed mercury rule, the EPA proposed a MACT standard to regulate nickel emissions from residual oil-fired units. The agency estimates the proposal will reduce national nickel emissions to approximately 103 tons. The rule is expected to become final in March 2005. The Company cannot predict the outcome of this matter. In December 2003, the EPA released its proposed Interstate Air Quality Rule (commonly known as the Fine Particulate Transport Rule and/or the Regional Transport Rule). The EPA's proposal requires 28 jurisdictions, including North Carolina, South Carolina, Georgia and Florida, to further reduce NOx and SO2 emissions in order to attain preset state NOx and SO2 emissions levels (which have not yet been determined). The rule is expected to become final in 2004. The air quality controls already installed for compliance with the NOx SIP Call and currently planned by the Company for compliance with the North Carolina legislation will reduce the costs required to meet the requirements of the Interstate Air Quality Rule for the Company's North Carolina units. Additional compliance costs will be determined later this year once the rule is better defined. In March 2004, the North Carolina Attorney General filed a petition with the EPA under Section 126 of the Clean Air Act, asking the federal government to force coal-fired power plants in thirteen other states, including South Carolina to reduce their NOx and SO2 emissions. The state of North Carolina contends these out-of-state polluters are interfering with North Carolina's ability to meet national air quality standards for ozone and particulate matter. The EPA has not made a determination on the Section 126 petition, and the Company cannot predict the outcome of this matter. Water Quality As a result of the operation of certain control equipment needed to address the air quality issues outlined above, new wastewater streams may be generated at the applicable facilities. Integration of these new wastewater streams into the existing wastewater treatment processes may result in permitting, construction and treatment challenges to PEC in the immediate and extended future. After many years of litigation and settlement negotiations the EPA published regulations in February 2004 for the implementation of Section 316(b) of the Clean Water Act. The purpose of these regulations is to minimize adverse environmental impacts caused by cooling water intake structures and intake systems. Over the next several years these regulations will impact the larger base load generation facilities and may require the facilities to mitigate the effects to aquatic organisms by constructing intake modifications or undertaking other restorative activities. Substantial costs could be incurred by the facilities in order to comply with the new regulation. The Company cannot predict the outcome and impacts to the facilities at this time. The EPA has published for comment a draft Environmental Impact Statement (EIS) for surface coal mining (sometimes referred to as "mountaintop mining") and valley fills in the Appalachian coal region, where Progress Fuels currently operates a surface mine and may operate others in the future. The final EIS, when published, may affect regulations for the permitting of mines and the cost of compliance with environmental regulations. Regulatory changes for mining may also affect the cost of fuel for the coal-fueled electric generating plants. The Company cannot predict the outcome of this matter. 23 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 the Company's consolidated financial position or results of 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. Other Contingencies 1. As required under the Nuclear Waste Policy Act of 1982, PEC and PEF each entered into a contract with the United States 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 1995, the DOE issued a final interpretation that it did not have an unconditional obligation to take spent nuclear fuel by January 31, 1998. In Indiana Michigan Power v. DOE, the Court of Appeals vacated the DOE's final interpretation and ruled that the DOE had an unconditional obligation to begin taking spent nuclear fuel. The Court did not specify a remedy because the DOE was not yet in default. After the DOE failed to comply with the decision in Indiana Michigan Power v. DOE, a group of utilities petitioned the Court of Appeals in Northern States Power (NSP) v. DOE, seeking an order requiring the DOE to begin taking spent nuclear fuel by January 31, 1998. The DOE took the position that their delay was unavoidable, and the DOE was excused from performance under the terms and conditions of the contract. The Court of Appeals found that the delay was not unavoidable, but did not order the DOE to begin taking spent nuclear fuel, stating that the utilities had a potentially adequate remedy by filing a claim for damages under the contract. After the DOE failed to begin taking spent nuclear fuel by January 31, 1998, a group of utilities filed a motion with the Court of Appeals to enforce the mandate in NSP v. DOE. Specifically, this group of utilities asked the Court to permit the utilities to escrow their waste fee payments, to order the DOE not to use the waste fund to pay damages to the utilities, and to order the DOE to establish a schedule for disposal of spent nuclear fuel. The Court denied this motion based primarily on the grounds that a review of the matter was premature, and that some of the requested remedies fell outside of the mandate in NSP v. DOE. Subsequently, a number of utilities each filed an action for damages in the Federal Court of Claims. The U.S. Circuit Court of Appeals (Federal Circuit) 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. In January 2004, PEC and PEF filed a complaint with the DOE claiming that the DOE breached the Standard Contract for Disposal of Spent Nuclear Fuel by failing to accept spent nuclear fuel from various Progress Energy facilities on or before January 31, 1998. Damages due to DOE's breach will likely exceed $100 million. Similar suits have been initiated by over two dozen other utilities. In July 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. In November 2003, Congressional negotiators approved $580 million for fiscal year 2004 for the Yucca Mountain project, $123 million more than the previous year. PEC and PEF cannot predict the outcome of this matter. 24 With certain modifications and additional approval by the NRC including the installation of onsite dry storage facilities at Robinson (2005) and Brunswick (2008), 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 operating licenses for all of PEC's nuclear generating units. PEF is currently storing spent nuclear fuel onsite in spent fuel pools. PEF's nuclear unit, Crystal River Unit No. 3 (CR3), has sufficient storage capacity in place for fuel consumed through the end of the expiration of the current license in 2016. PEF will seek renewal of the CR3 operating license and if approved, additional dry storage may be necessary. 2. In November 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. In March 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. In March 2003, the City Attorney and the District filed new claims 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 filing states that the City and the District seek "more than $300 million in damages and penalties." PEC was added as a cross-defendant later in 2003. The Company, SRS, Progress Energy Solutions, Inc. and PEC all have denied the District's allegations and cross-claims. Discovery is in progress in the matter. The case has been assigned to a judge under the Sacramento County superior court's case management rules, and the judge and the parties have been conferring on scheduling and processes to narrow or resolve issues, if possible, and to get the case ready for trial. No trial date has been set. SRS and the Company are vigorously defending and litigating all of these claims. In November 2003, PEC filed a motion to dismiss the plaintiffs' first amended complaint. The Company cannot predict the outcome of this matter, but will vigorously defend against the allegations. 3. In August 2003, PEC was served as a co-defendant in a purported class action lawsuit styled as Collins v. Duke Energy Corporation et al, 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 nonutility third parties or telecommunication companies for other than the electric utilities' internal use along the electric right-of-way constitutes a trespass. In September 2003, PEC filed a motion to dismiss all counts of the complaint on substantive and procedural grounds. In October 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. In March 2004, the plaintiffs in this case filed a notice of dismissal without prejudice of their claims against PEC and Duke Energy Corporation. 4. In 2001, PEC entered into a contract to purchase coal from Dynegy Marketing and Trade (DMT). After DMT experienced financial difficulties, including credit ratings downgrades by certain credit reporting agencies, PEC requested credit enhancements in accordance with the terms of the coal purchase agreement in July 2002. When DMT did not offer credit enhancements, as required by a provision in the contract, PEC terminated the contract in July 2002. PEC initiated a lawsuit seeking a declaratory judgment that the termination was lawful. DMT counterclaimed, stating the termination was a breach of contract. On March 23, 2004, the United States District Court for the Eastern District of North Carolina ruled that PEC was liable for breach of contract, but ruled against DMT on its unfair and deceptive trade practices claim. The Court subsequently entered a judgment against PEC in the amount of approximately $10 million. PEC intends to appeal the Court's ruling, but cannot predict the outcome of this matter. PEC recorded an accrual for the judgment and a regulatory asset for the probable recovery through its fuel adjustment clause. 25 5. The Company, through its subsidiaries, is a majority owner in five entities and a minority owner in one entity that owns facilities that produce synthetic fuel as defined under the Internal Revenue Code (Code). The production and sale of the synthetic fuel from these facilities qualifies for tax credits under 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 and that the fuel was produced from a facility that was placed in service before July 1, 1998. All entities have received private letter rulings (PLRs) from the Internal Revenue Service (IRS) with respect to their synthetic fuel operations. The PLRs do not limit the production on which synthetic fuel credits may be claimed. Should the tax credits be denied on audit, and the Company fails to prevail through the IRS 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. In September 2002, all of Progress Energy's majority-owned synthetic fuel entities were accepted into the IRS's Pre-Filing Agreement (PFA) program. The PFA program allows taxpayers to voluntarily accelerate the IRS exam process in order to seek resolution of specific issues. Either the Company or the IRS can withdraw from the program at any time, and issues not resolved through the program may proceed to the next level of the IRS exam process. In February 2004, subsidiaries of the Company finalized execution of the Colona Closing Agreement with the IRS concerning their Colona synthetic fuel facilities. The Colona Closing Agreement provided that the Colona facilities were placed in service before July 1, 1998, which is one of the qualification requirements for tax credits under Section 29. The Colona Closing Agreement further provides that the fuel produced by the Colona facilities in 2001 is a "qualified fuel" for purposes of the Section 29 tax credits. This action concludes the IRS PFA program with respect to Colona. Although the execution of the Colona Closing Agreement is a significant event, the PFA process continues with respect to the four synthetic fuel facilities owned by other affiliates of Progress Energy and Florida Progress Corporation. Currently, the focus of that process is to determine that the facilities were placed in service before July 1, 1998. In management's opinion, Progress Energy is complying with all the necessary requirements to be allowed such credits under Section 29, although it cannot provide certainty, that it will prevail if challenged by the IRS on credits taken. Accordingly, the Company has no current plans to alter its synthetic fuel production schedule as a result of these matters. In October 2003, the United States Senate Permanent Subcommittee on Investigations began a general investigation concerning synthetic fuel tax credits claimed under Section 29. The investigation is examining the utilization of the credits, the nature of the technologies and fuels created, the use of the synthetic fuel and other aspects of Section 29 and is not specific to the Company's synthetic fuel operations. Progress Energy is providing information in connection with this investigation. The Company cannot predict the outcome of this matter. 6. The Company and its subsidiaries are involved in various litigation matters in the ordinary course of business, some of which involve substantial amounts. Where appropriate, accruals have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. In the opinion of management, the final disposition of pending litigation would not have a material adverse effect on the Company's consolidated results of operations or financial position. 26 CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC. CONSOLIDATED INTERIM FINANCIAL STATEMENTS March 31, 2004 UNAUDITED CONSOLIDATED STATEMENTS of INCOME Three Months Ended March 31, (in millions) 2004 2003 - ---------------------------------------------------------------------------------------- Operating Revenues Electric $ 901 $ 926 Diversified business - 3 - ---------------------------------------------------------------------------------------- Total Operating Revenues 901 929 - ---------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 224 226 Purchased power 62 73 Operation and maintenance 209 190 Depreciation and amortization 127 139 Taxes other than on income 43 44 Diversified business - 1 - ---------------------------------------------------------------------------------------- Total Operating Expenses 665 673 - ---------------------------------------------------------------------------------------- Operating Income 236 256 - ---------------------------------------------------------------------------------------- Other Income (Expense) Interest income 1 1 Other, net (12) (2) - ---------------------------------------------------------------------------------------- Total Other Expense (11) (1) - ---------------------------------------------------------------------------------------- Interest Charges Interest charges 49 49 Allowance for borrowed funds used during construction (1) (1) - ---------------------------------------------------------------------------------------- Total Interest Charges, Net 48 48 - ---------------------------------------------------------------------------------------- Income before Income Tax 177 207 Income Tax Expense 62 72 - ---------------------------------------------------------------------------------------- Net Income 115 135 Preferred Stock Dividend Requirement 1 1 - ---------------------------------------------------------------------------------------- Earnings for Common Stock $ 114 $ 134 - ----------------------------------------------------------------------------------------
See Notes to Consolidated Interim Financial Statements. 27 Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. UNAUDITED CONSOLIDATED BALANCE SHEETS (in millions) March 31, December 31, ASSETS 2004 2003 - ---------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 13,384 $ 13,331 Accumulated depreciation (5,344) (5,280) - ---------------------------------------------------------------------------------------------------- Utility plant in service, net 8,040 8,051 Held for future use 5 5 Construction work in progress 342 306 Nuclear fuel, net of amortization 170 159 - ---------------------------------------------------------------------------------------------------- Total Utility Plant, Net 8,557 8,521 - ---------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 13 238 Accounts receivable 246 265 Unbilled accounts receivable 122 145 Receivables from affiliated companies 22 27 Advances from affiliated companies 84 - Inventory 314 348 Deferred fuel cost 99 113 Prepayments and other current assets 53 82 - ---------------------------------------------------------------------------------------------------- Total Current Assets 953 1,218 - ---------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 494 477 Nuclear decommissioning trust funds 544 505 Miscellaneous other property and investments 168 169 Other assets and deferred debits 109 118 - ---------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 1,315 1,269 - ---------------------------------------------------------------------------------------------------- Total Assets $ 10,825 $ 11,008 - ---------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ---------------------------------------------------------------------------------------------------- Common Stock Equity Common stock without par value, authorized 200 million shares, 160 million shares issued and outstanding $ 1,966 $ 1,953 Unearned ESOP common stock (79) (89) Accumulated other comprehensive loss (6) (7) Retained earnings 1,368 1,380 - ---------------------------------------------------------------------------------------------------- Total Common Stock Equity 3,249 3,237 - ---------------------------------------------------------------------------------------------------- Preferred Stock - Not Subject to Mandatory Redemption 59 59 Long-Term Debt, Net 3,048 3,086 - ---------------------------------------------------------------------------------------------------- Total Capitalization 6,356 6,382 - ---------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 189 300 Accounts payable 173 188 Payables to affiliated companies 52 136 Notes payable to affiliated companies - 25 Interest accrued 46 64 Short-term obligations - 4 Other current liabilities 191 166 - ---------------------------------------------------------------------------------------------------- Total Current Liabilities 651 883 - ---------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,138 1,125 Accumulated deferred investment tax credits 146 148 Regulatory liabilities 1,222 1,175 Asset retirement obligations 945 932 Other liabilities and deferred credits 367 363 - ---------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 3,818 3,743 - ---------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 10) - ---------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 10,825 $ 11,008 - ----------------------------------------------------------------------------------------------------
See Notes to Consolidated Interim Financial Statements. 28 CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC. UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS Three Months Ended March 31, (in millions) 2004 2003 - --------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 115 $ 135 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 149 160 Deferred income taxes 22 (10) Investment tax credit (3) (3) Deferred fuel cost 13 8 Cash provided (used) by changes in operating assets and liabilities: Accounts receivable 40 20 Inventories 36 19 Prepayments and other current assets 4 7 Accounts payable (88) 14 Other current liabilities 13 62 Other 32 28 - --------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 333 440 - --------------------------------------------------------------------------------------------------------------- Investing Activities Gross property additions (123) (150) Nuclear fuel additions (39) (30) Net contributions to nuclear decommissioning trust (10) (10) Other investing activities 3 (4) - --------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (169) (194) - --------------------------------------------------------------------------------------------------------------- Financing Activities Net decrease in short-term obligations (4) (216) Net change in intercompany notes (109) 89 Retirement of long-term debt (150) - Dividends paid to parent (125) (123) Dividends paid on preferred stock (1) (1) - --------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (389) (251) - --------------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents (225) (5) Cash and Cash Equivalents at Beginning of Period 238 18 - ---------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 13 $ 13 - --------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 66 $ 58 income taxes (net of refunds) $ 1 $ 3 - ----------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Interim Financial Statements. 29 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 Carolina Power & Light Company is a public service corporation primarily engaged in the generation, transmission, distribution and sale of electricity in portions of North Carolina and South Carolina. Through its wholly-owned subsidiaries, Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. (PEC) is involved in several nonregulated business activities. 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. PEC is regulated by the North Carolina Utilities Commission (NCUC), the Public Service Commission of South Carolina (SCPSC), the Federal Energy Regulatory Commission (FERC) and the United States Nuclear Regulatory Commission (NRC). 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 annual 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, 2003 and notes thereto included in PEC's Form 10-K for the year ended December 31, 2003. 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, 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 2003 have been reclassified to conform to the 2004 presentation. C. 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" (SFAS No. 148), the estimated fair value of the Company's stock options is amortized to expense over the options' vesting period. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period: 30 (in millions) 2004 2003 ------------ ---------- Net Income, as reported $ 115 $ 135 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 2 1 ------------ ---------- Pro forma net income $ 113 $ 134 ============ ==========
2. NEW ACCOUNTING STANDARDS 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 or deconsolidated. 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 originally applied immediately to variable interest entities created or obtained after January 31, 2003. During 2003 and the first quarter of 2004, PEC did not participate in the creation of, or obtain a significant new variable interest in, any variable interest entity. In December 2003, the FASB issued a revision to FIN No. 46 (FIN No. 46R), which modified certain requirements of FIN No. 46 and was effective for all variable interest entities as of March 31, 2004. Upon the adoption of FIN No. 46R, no variable interest entities were required to be deconsolidated by PEC. Upon adoption of FIN No. 46R as of March 31 2004, PEC determined that it is the primary beneficiary of a limited partnership which invests in 17 low-income housing partnerships that qualify for federal and state tax credits. PEC consolidated the limited partnership as of March 31, 2004, the effect of which was insignificant. PEC has requested but has not received all the necessary information to determine the primary beneficiary of the limited partnership's underlying 17 partnership investments, and has applied the information scope exception in FIN No. 46R, paragraph 4(g) to the 17 partnerships. PEC has no direct exposure to loss from the 17 partnerships; PEC's only exposure to loss is from its investment of approximately $1 million in the newly-consolidated limited partnership. PEC will continue its efforts to obtain the necessary information to fully apply FIN No. 46R to the 17 partnerships. PEC believes that if the newly-consolidated limited partnership is determined to be the primary beneficiary of the 17 partnerships, the effect of consolidating the 17 partnerships would not be significant to its Consolidated Balance Sheets. PEC has variable interests in two power plants resulting from long-term power purchase contracts. PEC has requested but has not received all the necessary information to determine if the counterparties are variable interest entities or to identify the primary beneficiaries, and has applied the information scope exception in FIN No. 46R, paragraph 4(g). Certain payments for fuel costs under these contracts are linked to inflation indices. PEC's only significant exposure to loss from these contracts results from fluctuations in the market price of fuel used by the two plants to produce the power purchased by PEC. Total purchases from these counterparties were approximately $9 million in each of the first quarters of 2003 and 2004. PEC will continue its efforts to obtain the necessary information to fully apply FIN No. 46R to these contracts. Although PEC has not received any financial information from these two counterparties, PEC believes that if it is determined to be the primary beneficiary of these two entities the effect of consolidating the entities could be significant to its Consolidated Balance Sheets. However, the approximate impact cannot be determined at this time. PEC also has interests in several other variable interest entities created before January 31, 2003, for which it is not the primary beneficiary. These arrangements include investments in approximately 27 limited partnerships, limited liability corporations and venture capital funds and two building leases with special-purpose entities. The aggregate maximum loss exposure at March 31, 2004, that PEC could be required to record in its income statement as a result of these arrangements totals approximately $27 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. 31 3. REGULATORY MATTERS A. Retail Rate Matters PEC has exclusively utilized external funding for its decommissioning liability since 1994. Prior to 1994, PEC retained funds internally to meet its decommissioning liability. An NCUC order issued in February 2004 found that by January 1, 2008 PEC must begin transitioning these amounts to external funds. The transition of $131 million must be completed by December 31, 2017, and at least 10% must be transitioned each year. PEC filed with the SCPSC seeking permission to defer expenses incurred from the first quarter 2004 winter storm. The SCPSC approved PEC's request to defer the costs and amortize them over five years beginning in January 2005. Approximately $10 million related to storm costs incurred during the quarter was deferred. During the first quarter of 2004, PEC filed with the NCUC and obtained approval from the SCPSC for a depreciation study which allowed the utility to reduce the rates used to calculate depreciation expense. As a result, depreciation expense decreased $7 million compared to the prior year quarter. B. Regional Transmission Organizations In 2000, the FERC issued Order No. 2000 on RTOs, which set minimum characteristics and functions that RTOs must meet, including independent transmission service. 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. In April 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. The FERC has not yet issued a final rule on SMD NOPR. PEC cannot predict the outcome of these matters or the effect that they may have on the GridSouth proceedings currently ongoing before the FERC. It is unknown what impact the future proceedings will have on PEC's earnings, revenues or prices. PEC has recorded $33 million related to startup costs for GridSouth at March 31, 2004. PEC expects to recover these startup costs in conjunction with the GridSouth original structure or in conjunction with any alternate combined transmission structures that emerge. 4. COMPREHENSIVE INCOME Comprehensive income for the three months ended March 31, 2004 and 2003 was $116 million and $135 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. 5. FINANCING ACTIVITIES On January 15, 2004, PEC paid at maturity $150 million 5.875% First Mortgage Bonds with commercial paper proceeds. On April 15, 2004, PEC also paid at maturity $150 million 7.875% First Mortgage Bonds with commercial paper proceeds and internally-generated funds. On March 31, 2004, PEC announced the redemption of $35 million of Darlington County 6.6% Series Pollution Control Bonds at 102.5% of par, $2 million of New Hanover County 6.30% Series Pollution Control Bonds at 101.5% of par, and $3 million of Chatham County 6.30% Series Pollution Control Bonds at 101.5% of par. All three series were fully redeemed effective April 30, 2004. 32 6. BENEFIT PLANS PEC has a non-contributory defined benefit retirement (pension) plan for substantially all full-time employees. PEC also has supplementary defined benefit pension plans that provide benefits to higher-level employees. In addition to pension benefits, PEC provides contributory other postretirement benefits (OPEB), including certain health care and life insurance benefits, for retired employees who meet specified criteria. The components of the net periodic benefit cost for the three months ended March 31 are: Other Postretirement Pension Benefits Benefits --------------------- -------------------- (in millions) 2004 2003 2004 2003 --------------------- -------------------- Service cost $ 6 $ 5 $ 2 $ 2 Interest cost 13 12 4 3 Expected return on plan assets (17) (16) (1) (1) Amortization, net - - 1 1 --------------------- -------------------- Net periodic cost / (benefit) $ 2 $ 1 $ 6 $ 5 ===================== ===-================
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. In accordance with guidance issued by the FASB in FASB Staff Position FAS 106-1, PEC has elected to defer accounting for the effects of the Act due to uncertainties regarding the effects of the implementation of the Act and the accounting for certain provisions of the Act. Therefore, OPEB information presented in the financial statements does not reflect the effects of the Act. When specific authoritative accounting guidance is issued, it could require plan sponsors to change previously reported information. PEC is in the early stages of reviewing the Act and determining its potential effects on PEC. 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 2004, PEC entered into a forward swap to hedge its exposure to interest rates with regard to a future issuance of approximately $300 million of debt. In April 2004, PEC entered into a cash flow hedge to hedge the payment stream associated with an upcoming lease. 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. PEC only enters into interest rate derivative agreements with banks with credit ratings of single A or better. 8. 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 FERC, the NCUC, the SCPSC and the NRC. PEC Electric also distributes and sells electricity to other utilities, primarily on the east coast of the United States. The Other segment, whose operations are primarily in the United States, is made up of other nonregulated business areas 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. 33 The financial information for PEC segments for the three months ended March 31, 2004 and 2003 is as follows: 2004 2003 -------------------------------- ------------------------------- PEC PEC (in millions) Electric Other Total Electric Other Total -------------------------------- ------------------------------- Total revenues $ 901 $ - $ 901 $ 926 $ 3 $ 929 Segment profit (loss) 116 (2) 114 135 (1) 134 -------------------------------- -------------------------------
9. OTHER INCOME AND OTHER EXPENSE Other income and expense includes interest income 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 months ended March 31, 2004 and 2003, are as follows: (in millions) 2004 2003 ------------- -------------- Other income Net financial trading gain (loss) $ 1 $ (1) Net energy brokered for resale - (2) Nonregulated energy and delivery services income 2 2 AFUDC equity 1 1 Other 2 1 ------------- -------------- Total other income $ 5 $ 2 ------------- -------------- Other expense Nonregulated energy and delivery services expenses $ 2 $ 2 Donations 4 1 Write-off of non-trade receivable 7 - Other 4 1 ------------- -------------- Total other expense $ 17 $ 4 ------------- -------------- Other, net $ (12) $ (2) ============= ==============
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 such as surge protection, appliance services and area light sales, and delivery, transmission and substation work for other utilities. 10. COMMITMENTS AND CONTINGENCIES Contingencies existing as of the date of these statements are described below. No significant changes have occurred since December 31, 2003, with respect to the commitments discussed in Note 16 of PEC's 2003 Annual Report on Form 10-K. A. Guarantees As a part of normal business, PEC enters into various agreements providing financial or performance assessments to third parties. Such agreements include, for example, guarantees, standby letters of credit and surety bonds. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to subsidiaries on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended commercial purposes. At March 31, 2004, management does not believe conditions are likely for performance under these agreements. 34 At March 31, 2004, outstanding guarantees consisted of the following: (in millions) Standby letters of credit $ 3 Surety bonds 9 --------------- Total $ 12 =============== Standby Letters of Credit PEC has issued standby letters of credit to financial institutions for the benefit of third parties that have extended credit to PEC 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 on interest payments on outstanding debt obligations. 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 PEC. Any amounts owed by its subsidiaries are reflected in the Consolidated Balance Sheets. Surety Bonds At March 31, 2004, PEC had $9 million in surety bonds purchased primarily for purposes such as providing workers' compensation coverage and obtaining licenses, permits and rights-of-way. To the extent liabilities are incurred as a result of the activities covered by the surety bonds, such liabilities are included in the Consolidated Balance Sheets. Guarantees Issued by the Parent 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. B. Insurance PEC is insured against public liability for a nuclear incident up to $10,760 million per occurrence. 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), PEC would be subject to assessments of up to $101 million for each reactor owned per occurrence. Payment of such assessments would be made over time as necessary to limit the payment in any one year to no more than $10 million per reactor owned. Congress is expected to approve revisions to the Price Anderson Act during 2004 that could include increased limits and assessments per reactor owned. The final outcome of this matter cannot be predicted at this time. C. Claims and Uncertainties 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 (PRPs) 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) 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 its involvement or potential involvement in sites, other than MGP sites, that may require investigation and/or remediation. 35 PEC has filed claims with its general liability insurance carriers to recover costs arising out of actual or potential environmental liabilities. All claims have settled other than with insolvent carriers. These settlements have not had 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. There are nine former MGP sites and other 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 sites. All eligible expenses related to these are charged against a specific fund containing these proceeds. At March 31, 2004, approximately $8 million remains in this centralized fund with a related accrual of $8 million recorded for the associated expenses of environmental issues. PEC does not believe that it can provide an estimate of the reasonably possible total remediation costs beyond what is currently accrued due to the fact that investigations have not been completed at all sites. This accrual has been recorded on an undiscounted basis. 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 PRPs. 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, all of which also are associated with PEC, to state standards pursuant to an Administrative Order on Consent. These sites are anticipated to have investigation or remediation costs associated with them. NCNG had previously accrued approximately $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 PEC. PEC does not believe it can provide an estimate of the reasonably possible total remediation costs beyond the accrual because investigations have not been completed at all sites. Therefore, PEC cannot currently determine the total costs that may be incurred in connection with the investigation and/or remediation of all sites. Air Quality There has been and may be further proposed legislation requiring reductions in air emissions for NOx, SO2, 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 PEC's consolidated financial position or results of operations. 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. 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 by these unaffiliated utilities, 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 this matter. 36 In 2003, the EPA published a final rule addressing routine equipment replacement under the New Source Review program. The rule defines routine equipment replacement and the types of activities that are not subject to New Source Review requirements or New Source Performance Standards under the Clean Air Act. The rule was challenged in the Federal Appeals Court and its implementation stayed. The Company cannot predict the outcome of this matter. In 1998, the EPA published a final rule at Section 110 of the Clean Air Act addressing the regional transport of ozone (NOx SIP Call). The EPA's rule requires 23 jurisdictions, including North Carolina, South Carolina and Georgia, to further reduce NOx emissions in order to attain a preset emission level during each year's "ozone season," beginning May 31, 2004. PEC is currently installing controls necessary to comply with the rule and expects to be in compliance as required by the final rule. Total capital expenditures to meet these measures in North and South Carolina could reach approximately $370 million, which has not been adjusted for inflation. PEC has spent approximately $265 million to date related to these expenditures. 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. In 1997, the EPA issued final regulations establishing a new 8-hour ozone standard. In 1999, the District of Columbia Circuit Court of Appeals ruled against the EPA with regard to the federal 8-hour ozone standard. The U.S. Supreme Court has upheld, in part, the District of Columbia Circuit Court of Appeals decision. In April 2004, the EPA identified areas that do not meet the standard. The states with identified areas, including North and South Carolina are proceeding with the implementation of the federal 8-hour ozone standard . Both states promulgated final regulations, which will require PEC to install NOx controls under the states' 8-hour standard. The costs of those controls are included in the $370 million cost estimate above. 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 NOx emissions by May 1, 2003. The final rule also includes a set of regulations that affect NOx 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 126 petitions. In April 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 indicated it will rescind the Section 126 rule in a future rulemaking. PEC expects a favorable outcome of this matter. In June 2002, legislation was enacted in North Carolina requiring the state's electric utilities to reduce the emissions of NOx and SO2 from coal-fired power plants. PEC expects its capital costs to meet these emission targets will be approximately $813 million by 2013. PEC has expended approximately $32 million of these capital costs through March 31, 2004. PEC currently has approximately 5,100 MW of coal-fired generation in North Carolina that is affected by this legislation. The legislation requires the emissions reductions to be completed in phases by 2013, and applies to each utility's total system rather than setting requirements for individual power plants. The legislation also freezes the utilities' base rates for five years unless there are extraordinary events beyond the control of the utilities or unless the utilities persistently earn a return substantially in excess of the rate of return established and found reasonable by the NCUC in the utilities' last general rate case. Further, the legislation allows the utilities to recover from their retail customers the projected capital costs during the first seven years of the 10-year compliance period beginning on January 1, 2003. The utilities must recover at least 70% of their projected capital costs during the five-year rate freeze period. PEC recognized amortization of $15 million and $20 million in the quarters ended March 31, 2004 and 2003, respectively. Pursuant to the law, PEC entered into an agreement with the state of North Carolina to transfer to the state certain NOx and SO2 emissions allowances that result from compliance with the collective NOx and SO2 emission limitations set out in the law. The law also requires the state to undertake a study of mercury and carbon dioxide emissions in North Carolina. Operation and maintenance costs will increase due to the additional personnel, materials and general maintenance associated with the equipment. Operation and maintenance expenses are recoverable through base rates, rather than as part of this program. PEC cannot predict the future regulatory interpretation, implementation or impact of this law. 37 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. In 2003, the EPA proposed alternative control plans that would limit mercury emissions from coal-fired power plants. The first, a Maximum Available Control Technology (MACT) standard applicable to every coal-fired plant, would require compliance in 2008. The second, a mercury cap and trade program, would require limits to be met in two phases, 2010 and 2018. The mercury rule is expected to become final in March 2005. Achieving compliance with either proposal could involve significant capital costs which could be material to PEC's consolidated financial position or results of operations. PEC cannot predict the outcome of this matter. In conjunction with the proposed mercury rule, the EPA proposed a MACT standard to regulate nickel emissions from residual oil-fired units. The agency estimates the proposal will reduce national nickel emissions to approximately 103 tons. The rule is expected to become final in March 2005. In December 2003, the EPA released its proposed Interstate Air Quality Rule (commonly known as the Fine Particulate Transport Rule and/or the Regional Transport Rule). The EPA's proposal requires 28 jurisdictions, including North Carolina, South Carolina, Georgia and Florida, to further reduce NOx and SO2 emissions in order to attain pre-set NOx and SO2 emissions levels (which have not yet been determined). The rule is expected to become final in 2004. The air quality controls already installed for compliance with the NOx SIP Call and currently planned by PEC for compliance with the North Carolina legislation will reduce the costs required to meet the requirements of the Interstate Air Quality Rule for the Company's North Carolina units. Additional compliance costs will be determined later this year once the rule is better defined. In March 2004, the North Carolina Attorney General filed a petition with the EPA under Section 126 of the Clean Air Act, asking the federal government to force coal-fired power plants in thirteen other states, including South Carolina, to reduce their NOx and SO2 emissions. The state of North Carolina contends these out-of-state polluters are interfering with North Carolina's ability to meet national air quality standards for ozone and particulate matter. The EPA has not made a determination on the Section 126 petition, and PEC cannot predict the outcome of this matter. Water Quality As a result of the operation of certain control equipment needed to address the air quality issues outlined above, new wastewater streams may be generated at the applicable facilities. Integration of these new wastewater streams into the existing wastewater treatment processes may result in permitting, construction and treatment challenges to PEC in the immediate and extended future. After many years of litigation and settlement negotiations the EPA published regulations in February 2004 for the implementation of Section 316(b) of the Clean Water Act. The purpose of these regulations is to minimize adverse environmental impacts caused by cooling water intake structures and intake systems. Over the next several years these regulations will impact the larger base load generation facilities and may require the facilities to mitigate the effects to aquatic organisms by constructing intake modifications or undertaking other restorative activities. Substantial costs could be incurred by the facilities in order to comply with the new regulation. PEC cannot predict the outcome and impacts to the facilities at this time. 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 consolidated financial position or results of 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. 38 Other Contingencies 1. 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 1995, the DOE issued a final interpretation that it did not have an unconditional obligation to take spent nuclear fuel by January 31, 1998. In Indiana Michigan Power v. DOE, the Court of Appeals vacated the DOE's final interpretation and ruled that the DOE had an unconditional obligation to begin taking spent nuclear fuel. The Court did not specify a remedy because the DOE was not yet in default. After the DOE failed to comply with the decision in Indiana Michigan Power v. DOE, a group of utilities petitioned the Court of Appeals in Northern States Power (NSP) v. DOE, seeking an order requiring the DOE to begin taking spent nuclear fuel by January 31, 1998. The DOE took the position that its delay was unavoidable, and the DOE was excused from performance under the terms and conditions of the contract. The Court of Appeals found that the delay was not unavoidable, but did not order the DOE to begin taking spent nuclear fuel, stating that the utilities had a potentially adequate remedy by filing a claim for damages under the contract. After the DOE failed to begin taking spent nuclear fuel by January 31, 1998, a group of utilities filed a motion with the Court of Appeals to enforce the mandate in NSP v. DOE. Specifically, this group of utilities asked the Court to permit the utilities to escrow their waste fee payments, to order the DOE not to use the waste fund to pay damages to the utilities, and to order the DOE to establish a schedule for disposal of spent nuclear fuel. The Court denied this motion based primarily on the grounds that a review of the matter was premature, and that some of the requested remedies fell outside of the mandate in NSP v. DOE. Subsequently, a number of utilities each filed an action for damages in the Federal Court of Claims. The U.S. Circuit Court of Appeals (Federal Circuit) ruled that utilities may sue the DOE for damages in the Federal Court of Claims instead of having to file an administrative claim with DOE. In January 2004, PEC filed a complaint with the DOE claiming that the DOE breached the Standard Contract for Disposal of Spent Nuclear Fuel by failing to accept spent nuclear fuel from various Progress Energy facilities on or before January 31, 1998. Damages due to DOE's breach will likely exceed $100 million. Similar suits have been initiated by over two dozen other utilities. In July 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. In November 2003, Congressional negotiators approved $580 million for fiscal year 2004 for the Yucca Mountain project, $123 million more than the previous year. PEC cannot predict the outcome of this matter. With certain modifications and additional approval by the NRC including the installation of onsite dry storage facilities at Robinson (2005) and Brunswick (2008), 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 operating licenses for all of its nuclear generating units. 2. In August 2003, PEC was served as a co-defendant in a purported class action lawsuit styled as Collins v. Duke Energy Corporation et al, 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. 39 In September 2003, PEC filed a motion to dismiss all counts of the complaint on substantive and procedural grounds. In October 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. In November 2003, PEC filed a motion to dismiss the plaintiffs' first amended complaint. In March 2004, the plaintiffs in this case filed a notice of dismissal without prejudice of their claims against PEC and Duke Energy Corporation. 3. In 2001, PEC entered into a contract to purchase coal from Dynegy Marketing and Trade (DMT). After DMT experienced financial difficulties, including credit ratings downgrades by certain credit reporting agencies, PEC requested credit enhancements in accordance with the terms of the coal purchase agreement in July 2002. When DMT did not offer credit enhancements, as required by a provision in the contract, PEC terminated the contract in July 2002. PEC initiated a lawsuit seeking a declaratory judgment that the termination was lawful. DMT counterclaimed, stating the termination was a breach of contract. On March 23, 2004, the United States District Court for the Eastern District of North Carolina ruled that PEC was liable for breach of contract, but ruled against DMT on its unfair and deceptive trade practices claim. The Court subsequently entered a judgment against PEC in the amount of approximately $10 million. PEC intends to appeal the Court's ruling, but cannot predict the outcome of this matter. PEC recorded an accrual for the judgment and a regulatory asset for the probable recovery through its fuel adjustment clause. 4. PEC is involved in various litigation matters in the ordinary course of business, some of which involve substantial amounts. Where appropriate, accruals have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. In the opinion of management, the final disposition of pending litigation would not have a material adverse effect on PEC's consolidated results of operations or financial position. 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis contains forward-looking statements that involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Please review "SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion of the factors that may impact any such forward-looking statements made herein. Amounts reported in the interim Consolidated Statements of Income are not necessarily indicative of amounts expected for the respective annual or future periods due to the effects of seasonal temperature variations on energy consumption and the timing of maintenance on electric generating units, among other factors. This discussion should be read in conjunction with the accompanying financial statements found elsewhere in this report and in conjunction with the 2003 Form 10-K. RESULTS OF OPERATIONS Progress Energy is an integrated energy company, with its primary focus on the end-use and wholesale electricity markets. The Company's reportable business segments and their primary operations include: o Progress Energy Carolinas Electric (PEC Electric) - primarily engaged in the generation, transmission, distribution and sale of electricity in portions of North Carolina and South Carolina; o Progress Energy Florida (PEF) - primarily engaged in the generation, transmission, distribution and sale of electricity in portions of Florida; o Competitive Commercial Operations (CCO) - engaged in nonregulated electric generation operations and marketing activities primarily in the southeastern United States; o Fuels - primarily engaged in natural gas production in Texas and Louisiana, coal mining and related services, and the production of synthetic fuels and related services, both of which are located in Kentucky, West Virginia, and Virginia; o Rail Services (Rail) - engaged in various rail and railcar related services in 23 states, Mexico and Canada; and o Other Businesses (Other) - engaged in other nonregulated business areas, including telecommunications primarily in the eastern United States and energy services operations, which do not meet the requirements for separate segment reporting disclosure. In this section, earnings and the factors affecting earnings for the three months ended March 31, 2004 as compared to the same period in 2003 are discussed. The discussion begins with a summarized overview of the Company's consolidated earnings, which is followed by a more detailed discussion and analysis by business segment. OVERVIEW For the quarter ended March 31 2004, Progress Energy's net income was $108 million or $0.45 per share compared to $219 million or $0.94 per share for the same period in 2003. The decrease in net income as compared to prior year was due primarily to: o Lower off-system sales, primarily by PEC Electric. o Higher O&M costs at the utilities due to increased spending for scheduled plant outages in both the Carolinas and Florida and planned reliability improvements in Florida. o Decreased nonregulated generation earnings due to receipt of a contract termination payment on a tolling agreement in 2003 and higher fixed costs and interest charges in 2004. o Unrealized losses recorded on contingent value obligations. o The impact of tax levelization. Partially offsetting these items were: o Increased natural gas revenues. o Utility customer growth in the Carolinas. 41 Basic earnings per share decreased in 2004 due in part to the factors outlined above. Dilution related to the issuances under the Company's Investor Plus Stock Purchase Plan and employee benefit programs in 2003 and 2004 also reduced basic earnings per share by $0.02 in the first quarter of 2004. Beginning in the fourth quarter of 2003, the Company ceased recording portions of Fuels segment's operations, primarily synthetic fuel facilities, one month in arrears. As a result, earnings for the year ended December 31, 2003 included 13 months of operations, resulting in a net income increase of $2 million for the year. The Company restated previously reported consolidated quarterly earnings to reflect the new reporting periods, resulting in four months of earnings in the restated first quarter 2003 net income which increased $11 million from the amount previously reported. The Company's segments contributed the following profits or losses for the three months ended March 31, 2004 and 2003: - ------------------------------------------------------------------------------ (in millions) Three Months Ended March 31, - ------------------------------------------------------------------------------ Business Segment 2004 2003 - ------------------------------------------------------------------------------ PEC Electric $ 116 $ 135 PEF 49 71 Fuels 48 38 CCO (8) 9 Rail 6 (3) Other (2) - ---------------------------------- Total Segment Profit 209 250 Corporate (101) (43) ---------------------------------- Income from continuing operations 108 207 NCNG discontinued operations - 11 Cumulative effect of change in accounting principle, net of tax - 1 ---------------------------------- Net income $ 108 $ 219 - ------------------------------------------------------------------------------ In March 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 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. The impact on the individual lines of business is included in the following discussions. PROGRESS ENERGY CAROLINAS ELECTRIC PEC Electric contributed segment profits of $116 million and $135 million for the three months ended March 31, 2004 and 2003, respectively. The decrease in profits for the three months ended March 31, 2004 as compared to the same period in 2003 is primarily due to lower off-system sales and higher O&M charges, partially offset by the favorable impact of colder weather, increased revenues from customer growth and lower depreciation and amortization charges. Revenues PEC Electric's revenues for the three months ended March 31, 2004 and 2003, and the percentage change by customer class are as follows: 42 - ------------------------------------------------------------------------ (in millions of $) Three Months Ended March 31, - ------------------------------------------------------------------------ Customer Class 2004 Change % Change 2003 - ------------------------------------------------------------------------ Residential $ 371 $ 14 3.9% $ 357 Commercial 208 7 3.5% 201 Industrial 147 - - 147 Governmental 19 - - 19 ---------------------- ---------- Total retail revenues 745 21 2.9% 724 Wholesale 156 (53) (25.4%) 209 Unbilled (23) 8 - (31) Miscellaneous 23 (1) (4.2%) 24 ---------------------- ---------- Total electric revenues $ 901 $ (25) (2.7%) $ 926 - ------------------------------------------------------------------------ PEC Electric's energy sales for the three months ended March 31, 2004 and 2003, and the amount and percentage change by customer class are as follows: - ------------------------------------------------------------------------ (in millions of kWh) Three Months Ended March 31, - ------------------------------------------------------------------------ Customer Class 2004 Change % Change 2003 - ------------------------------------------------------------------------ Residential 4,741 154 3.4% 4,587 Commercial 3,058 75 2.5% 2,983 Industrial 2,993 (12) (0.4%) 3,005 Governmental 345 2 0.6% 343 ---------------------- ---------- Total retail energy 11,137 219 2.0% 10,918 sales Wholesale 3,791 (828) (17.9%) 4,619 Unbilled (385) 95 - (480) ---------------------- ---------- Total kWh sales 14,543 (514) (3.4%) 15,057 - ------------------------------------------------------------------------ PEC Electric's revenues, excluding recoverable fuel revenues of $239 million and $251 million for the three months ended March 31, 2004 and 2003, respectively, decreased $13 million. The decrease in revenues was due primarily to lower wholesale sales. Revenues for the quarter ended March 31, 2003 included strong sales to the Northeastern United States as a result of favorable market conditions. The decline in wholesale revenues was partially offset by increased retail revenues as a result of favorable weather, with heating degree days 3.8% above prior year. In addition, favorable customer growth partially offset the decrease in wholesale sales. PEC Electric has approximately 24,000 additional customers as of March 31, 2004 compared to March 31, 2003. Expenses Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, changes in expense have no material impact on operating results. O&M costs were $209 million for the three months ended March 31, 2004, which represents a $19 million increase compared to the same period in 2003. O&M expenses increased in the current year due primarily to the Service Company reallocation in 2003. O&M charges were favorably impacted by $16 million related to the retroactive reallocation of Service Company costs in the prior year. In addition, O&M costs increased $5 million related to a planned outage at the Brunswick Nuclear Plant and another $5 million related to right-of-way maintenance costs. These increases were partially offset by lower storm costs of $4 million compared to the prior year. PEC Electric incurred severe storm costs of $16 million during the quarter, of which approximately $10 million related to costs in the South Carolina service territory was deferred. Storm costs for the quarter ended March 31, 2003 were approximately $10 million and while these costs were also deferred, the deferral was not received until the fourth quarter of 2003; therefore, the effects of the reversal were recorded in the fourth quarter. Depreciation and amortization expense decreased $12 million from $139 million for the quarter ended March 31, 2003 to $127 million for the quarter ended March 31, 2004. During the first quarter of 2004, PEC Electric filed with the North Carolina Utilities Commission (NCUC) and obtained approval from the South Carolina Public Service Commission (SCPSC) for a depreciation study which allowed the utility to reduce the rates used to calculate depreciation expense. As a result depreciation expense decreased $7 million compared to the prior year quarter. The new depreciation study provides support for reducing depreciation expense on an annual basis by approximately $45 million. The reduction in depreciation expense is primarily attributable to assumption changes for nuclear generation, offset by increases for distribution assets. In addition, clean air amortization decreased $5 million compared to the prior year. 43 Other expenses have increased $10 million for the period ending March 31, 2004 as compared to the same period in the prior year. This increase is due primarily to the write-off of $7 million of non-trade receivables. PROGRESS ENERGY FLORIDA PEF contributed segment profits of $49 million and $71 million in the three months ended March 31, 2004 and 2003, respectively. The decrease in profits for the three months ended March 31, 2004 when compared to 2003 is primarily due to the impact of milder weather and higher O&M costs, partially offset by the additional return on investment on the Hines 2 plant. PEF's electric revenues for the three months ended March 31, 2004 and 2003, and the amount and percentage change by customer class are as follows: - ------------------------------------------------------------------------ (in millions of $) Three Months Ended March 31, - ------------------------------------------------------------------------ Customer Class 2004 Change % Change 2003 - ------------------------------------------------------------------------ Residential $ 402 $ 17 4.4% $ 385 Commercial 181 31 20.7% 150 Industrial 63 15 31.3% 48 Governmental 46 8 21.1% 38 Retroactive rate refund - - - - Retail revenue sharing (4) (4) - - ---------------------- ---------- Total retail revenues 688 67 10.8% 621 Wholesale 67 (4) (5.6%) 71 Unbilled (6) (5) - (1) Miscellaneous 35 (2) (5.4%) 37 ---------------------- ---------- Total electric revenues $ 784 $ 56 7.7% $ 728 - ------------------------------------------------------------------------ PEF's electric energy sales for the three months ended March 31, 2004 and 2003, and the amount and percentage change by customer class are as follows: - ------------------------------------------------------------------------ (in millions of kWh) Three Months Ended March 31, - ------------------------------------------------------------------------ Customer Class 2004 Change % Change 2003 - ------------------------------------------------------------------------ Residential 4,291 (262) (5.8%) 4,553 Commercial 2,491 49 2.0% 2,442 Industrial 1,023 107 11.7% 916 Governmental 672 16 2.4% 656 ---------------------- ---------- Total retail energy 8,477 (90) (1.1%) 8,567 sales Wholesale 1,323 46 3.6% 1,277 Unbilled (135) (190) - 55 ---------------------- ---------- Total kWh sales 9,665 (234) (2.4%) 9,899 - ------------------------------------------------------------------------ Revenues PEF's revenues, excluding recoverable fuel and other pass-through revenues of $448 million and $372 million for the three months ended March 31, 2004 and 2003, respectively, decreased $20 million. This decrease was due primarily to the impact of milder weather which was offset partially by the $7 million return on Hines 2 which was placed in service in December 2003. Expenses Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, changes in expense have no material impact on operating results. O&M costs increased $19 million, when compared to the $141 million incurred during the three months ended March 31, 2003. This increase is primarily related to higher costs associated with scheduled plant outages and planned reliability improvements of approximately $6 million each. Depreciation and amortization decreased $10 million when compared to the $79 million incurred during the three months ended March 31, 2003, primarily due to the amortization of the Tiger Bay regulatory asset in the prior year. During the first quarter of 2003, Tiger Bay amortization was $15 million. The Tiger Bay asset was fully amortized in September 2003. The decrease in Tiger Bay amortization was partially offset by additional depreciation for assets placed in service. 44 DIVERSIFIED BUSINESSES The Company's diversified businesses consist of the Fuels segment, the CCO segment, the Rail segment and the Other segment. These businesses are explained in more detail below. Fuels The Fuels' segment operations include synthetic fuels production, natural gas production, coal extraction and terminal operations. Fuels' results for the three months ended March 31, 2003 were restated to reflect four months of earnings for certain operations, primarily synthetic fuel facilities. Fuels' segment profits increased $10 million as compared to $38 million for the same period prior year due primarily to increased earnings from gas operations with a full quarter of North Texas Gas volumes in the current year (acquired late February 2003) and higher gas prices in 2004. The following summarizes Fuels' segment profits for the three months ended March 31, 2004 and 2003: - ----------------------------------------------------------------- (in millions) 2004 2003 - ----------------------------------------------------------------- Synthetic fuel operations $ 36 $ 34 Gas production 13 7 Coal fuel and other operations (1) (3) ------------------------------ Segment Profits $ 48 $ 38 - ----------------------------------------------------------------- Synthetic Fuel Operations The synthetic fuel operations generated net profits of $36 million and $34 million for the three months ended March 31, 2004 and 2003, 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. See Note 12 to the Progress Energy Notes to the Consolidated Interim Financial Statements. The operations resulted in the following for the three months ended March 31, 2004 and 2003: - --------------------------------------------------------------------- (in millions) 2004 2003 - --------------------------------------------------------------------- Tons sold 2.9 2.5 - --------------------------------------------------------------------- Operating losses, excluding tax credits $ (42) $ (32) Tax credits generated 78 66 --------------------------- Net profits $ 36 $ 34 - --------------------------------------------------------------------- Synthetic fuels' tons sold and net profits increased as compared to the same period in 2003 due primarily to a change in internal production schedule in 2004 compared to 2003. The Company anticipates total synthetic fuel production of approximately 11 to 12 million tons for 2004 which is comparable to 2003 production levels. Natural Gas Operations Natural gas operations generated profits of $13 million and $7 million for the three months ended March 31, 2004 and 2003, respectively. The increase in production resulted from the acquisition of North Texas Gas in late February 2003 and higher gas prices in 2004 contributed to increased earnings in 2004 as compared to 2003. In October 2003, the Company completed the sale of certain gas producing properties owned by Mesa Hydrocarbons, LLC. The following summarizes the gas production, revenues and gross margins for the three months ended March 31, 2004 and 2003 by production facility: 45 - ----------------------------------------------------------------------------- 2004 2003 - ----------------------------------------------------------------------------- Production in Bcf equivalent Mesa - 1.7 Westchester 4.0 3.2 North Texas Gas 2.7 0.5 ------------------------------------ Total Production 6.7 5.4 ------------------------------------ Revenues in millions Mesa $ - $ 5 Westchester 22 15 North Texas Gas 13 4 ------------------------------------ Total Revenues $35 $ 24 ------------------------------------ Gross Margin in millions of $ $ 27 $ 19 As a % of revenues 77% 79% - ----------------------------------------------------------------------------- Coal Fuel and Other Operations Coal fuel and other operations generated segment losses of $1 million for the three months ended March 31, 2004 compared to losses of $3 million for the three months ended March 31, 2003. The decrease in losses of $2 million is due primarily to the impact of the retroactive Service Company allocation in the prior year. Results in the same period for the prior year were negatively impacted by the retroactive reallocation of Service Company costs of $4 million after-tax. COMPETiTIVE COMMERCIAL OPERATIONS CCO's operations generated segment losses of $8 million for the three months ended March 31, 2004 compared to $9 million of net income for the comparable period in the prior year. Segment results for the three months ended March 31, 2003 include a contract termination payment received on a tolling agreement. Results for the quarter ended March 31, 2004 were also unfavorably impacted by mark-to-market losses of $9 million and higher fixed costs. Fixed costs increased $9 million from additional depreciation and amortization on plants placed into service in 2003 and from an increase in interest expense of $5 million due primarily to interest no longer being capitalized due to the completion of construction in the prior year. These items were partially offset by favorable margins on tolling and new marketing contracts of $16 million and the fact that results in the prior year quarter were negatively impacted by the retroactive reallocation of Service Company costs of $3 million ($2 million after-tax). - ------------------------------------------------------------ (in millions) 2004 2003 - ------------------------------------------------------------ Total revenues $ 33 $ 37 Gross margin In millions of $ $ 23 $ 34 As a % of revenues 70% 92% Segment profits $ (8) $ 9 - ------------------------------------------------------------ The Company has contracts for 90% of planned production capacity for 2004 and 55% in both 2005 and 2006. 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. Rail Rail's operations include railcar and locomotive repair, trackwork, rail parts reconditioning and sales, scrap metal recycling and other rail related services. The Company sold the majority of the assets of Railcar Ltd., a leasing subsidiary, in 2004. See Note 3A of the Progress Energy Notes to the Consolidated Interim Financial Statements. Rail contributed segment profit of $6 million for the quarter ended March 31, 2004 compared with a net loss of $3 million for the same period in the prior year. Rail's earnings were positively impacted by higher prices and margins on recycling operations. In addition, results for the same period in the prior year were negatively impacted by the retroactive reallocation of Service Company costs of $3 million after-tax. 46 Other Businesses Segment Progress Energy's Other segment primarily includes the operations of SRS and the telecommunications operations of PTC LLC. 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. PTC LLC operations provide broadband capacity services, dark fiber and wireless services in Florida and the eastern United States. PTC LLC recorded a segment net loss of $1 million net of minority interest for the quarter ended March 31, 2004 compared with segment net income of less than $1 million for the same period last year. PTC LLC's results were negatively impacted by integration costs associated with its combination with EPIK in December 2003. In addition, results in the prior quarter were favorably impacted by the retroactive reallocation of Service Company costs of $1 million after-tax. CORPORATE SERVICES Corporate Services includes the operations of the Holding Company, the Service Company and consolidation entities, as summarized below: - ----------------------------------------------------------------- Three Months Ended March 31, - ----------------------------------------------------------------- Income (expense) in millions 2004 2003 - ----------------------------------------------------------------- Other interest expense $ (76) $ (71) Contingent value obligations (7) 2 Tax levelization (39) 10 Tax reallocation (9) (9) Other income taxes 30 31 Other - (6) ------------------------- Segment profit (loss) $ (101) $ (43) - ----------------------------------------------------------------- Other interest expense has increased $5 million compared to $71 million for the quarter ended March 31, 2003. Interest expense increased during the current quarter from interest no longer being capitalized due to the completion of construction in the prior year. Approximately $5 million ($3 million after-tax) was capitalized in the first quarter of 2003. 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 March 31, 2004 and 2003, the CVOs had fair market values of approximately $30 million and $12 million, respectively. Progress Energy recorded an unrealized loss of $7 million and unrealized gain of $2 million for the three months ended March 31, 2004 and 2003, respectively, to record the changes in fair value of the CVOs, which had average unit prices of $0.31 and $0.12 at March 31, 2004 and 2003, 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 increased by $39 million and decreased by $10 million for the three months ended March 31, 2004 and 2003, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. 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. Other expenses decreased $6 million compared to prior year. This decrease is due primarily to the impact of retroactive reallocation of Service Company costs in the prior year. Other expenses for the quarter ended March 31, 2003 included $5 million in expenses ($3 million after-tax) based on the reallocation. 47 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. The sale closed on September 30, 2003. Net proceeds of approximately $450 million from the sale of NCNG and ENCNG were used to reduce outstanding short-term debt. NCNG contributed $11 million of net income to the Company in the first quarter of 2003. LIQUIDITY AND CAPITAL RESOURCES Progress Energy, Inc. Progress Energy is a registered holding company and, as such, has no operations of its own. As a holding company, Progress Energy's primary cash obligations are its common dividend and interest expense. The ability to meet its obligations is primarily dependent on the earnings and cash flows of its two electric utilities and nonregulated subsidiaries, and the ability of those subsidiaries to pay dividends or repay funds to Progress Energy. Net cash provided by operating activities decreased $57 million for the three months ended March 31, 2004, when compared to the corresponding period in the prior year. The decrease in cash from operating activities for the 2004 period is primarily due to lower operating results at the Company's two electric utilities and changes in working capital. Net cash used in investing activities decreased $332 million for the three months ended March 31, 2004, when compared to the corresponding period in the prior year. The decrease in cash used in investing activities is primarily due to reduced nonregulated capital expenditures, primarily the purchase of North Texas Gas assets in the first quarter of 2003 and proceeds from the sale of Railcar Ltd. assets during the first quarter of 2004. Net cash used in financing activities was $346 million for the three months ended March 31, 2004. On March 1, 2004, Progress Energy used available cash and proceeds from the issuance of commercial paper to retire $500 million 6.55% senior unsecured notes. Cash and commercial paper capacity were created primarily from the sale of assets in 2003. For the three months ended March 31, 2004, the Company issued approximately 0.7 million shares representing approximately $29 million in proceeds from its Investor Plus Stock Purchase Plan and its employee benefit plans. The Company expects to realize between $50 and $75 million of cash from the sale of stock through these plans during 2004. 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 March 31, 2004, the current portion of long-term debt of $232 million includes $150 million of secured debt issued by PEC which matured. This note was paid off through the issuance of commercial paper and with internally-generated funds. As of March 31, 2004, Progress Energy's guarantees issued on behalf of third parties were approximately $10 million. OTHER MATTERS PEF Rate Case Settlement In March 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 and is generally effective from May 1, 2002 through December 31, 2005; provided, however, that if PEF's base rate earnings fall below a 10% return on equity, PEF may petition the FPSC to amend its base rates. 48 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 and that the fuel was produced from a facility that was placed in service before July 1, 1998. 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 $1.3 billion, of which $585 million have been used and $736 million are being carried forward as deferred tax credits. The current Section 29 tax credit program expires at the end of 2007. In September 2002, all of the Company's majority-owned synthetic fuel entities were accepted into the IRS's Pre-filing Agreement (PFA) program. The PFA program allows taxpayers to voluntarily accelerate the IRS exam process in order to seek resolution of specific issues. Either the Company or the IRS can withdraw from the program, and issues not resolved through the program may proceed to the next level of the IRS exam process. In February 2004, subsidiaries of the Company finalized execution of the Colona Closing Agreement with the IRS concerning their Colona synthetic fuel facilities. The Colona Closing Agreement provided that the Colona facilities were placed in service before July 1, 1998, which is one of the qualification requirements for tax credits under Section 29. The Colona Closing Agreement further provides that the fuel produced by the Colona facilities in 2001 is a "qualified fuel" for purposes of the Section 29 tax credits. This action concludes the IRS PFA program with respect to Colona. Although the execution of the Colona Closing Agreement is a significant event, the PFA process continues with respect to the four synthetic fuel facilities owned by other affiliates of Progress Energy and FPC. Currently, the focus of that process is to determine that the facilities were placed in service before July 1, 1998. In management's opinion, Progress Energy is complying with all the necessary requirements to be allowed such credits under Section 29, although it cannot provide certainty, that it will prevail if challenged by the IRS on credits taken. Accordingly, the Company has no current plans to alter its synthetic fuel production schedule as a result of these matters. In October 2003, the United States Senate Permanent Subcommittee on Investigations began a general investigation concerning synthetic fuel tax credits claimed under Section 29. The investigation is examining the utilization of the credits, the nature of the technologies and fuels created, the use of the synthetic fuel and other aspects of Section 29 and is not specific to the Company's synthetic fuel operations. Progress Energy is providing information in connection with this investigation. The Company cannot predict the outcome of this matter. 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 The United States Nuclear Regulatory Commission (NRC) on April 19, 2004, announced that it has renewed the operating license for PEC's Robinson Nuclear Plant for an additional 20 years through July 2030. The original operating license of 40 years was set to expire in 2010. During the first quarter of 2004, PEC filed with the NCUC and obtained approval from the SCPSC for a depreciation study which allowed the utility to reduce the rates used to calculate depreciation expense. The reduction in depreciation expense is primarily attributable to assumption changes for nuclear generation. 49 In February 2004, the NRC issued a revised Order for inspection requirements for reactor pressure vessel heads at PWRs. The Company is in the process of complying with the Order. No adverse impact is anticipated. The NRC has issued various orders since September 2001 with regard to security at nuclear plants. These orders include additional restrictions on access, increased security measures at nuclear facilities and closer coordination with the Company's partners in intelligence, military, law enforcement and emergency response at the federal, state and local levels. The Company is completing the requirements as outlined in the orders by the established deadlines. 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 Three cities, with a total of approximately 18,000 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 in July 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 in May 2003 setting the value of PEF's distribution system within the City of Winter Park at approximately $32 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 $11 million in stranded costs, which according to the award decreases over time. In September 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. While the City has not yet definitively decided whether it will acquire the system, on April 26, 2004, the City Commission voted to enter into a hedge agreement to lock into interest rates for the acquisition of the system. The City has sought and received wholesale power supply bids and has indicated that it will seek 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 in June 2003. In September 2003, the arbitration panel issued an award in that case setting the value of the electric distribution system within the Town at approximately $6 million. The panel further required the Town to pay to PEF its requested $1 million in separation and reintegration costs and approximately $2 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) had been scheduled for January 2004. In December 2003, the Apopka City Commission voted on first reading to approve a settlement agreement and a 30-year franchise with PEF. The settlement and franchise became effective upon approval by the Commission at a second reading of the franchise in January 2004. The settlement resolves all outstanding litigation between the parties. 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 in August 2003. Subsequently, the Court requested briefing from the parties in the other appeal, which was completed in November 2003. The Company cannot predict the outcome of these matters at this time. 50 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 three months ended March 31, 2004 and 2003 are not material to PEC's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities decreased $107 million for the three months ended March 31, 2004, when compared to the corresponding period in the prior year. The decrease was caused primarily by a $112 million increase in working capital requirements. Cash used in investing activities decreased $25 million for the three months ended March 31, 2004, when compared to the corresponding period in the prior year primarily due to lower construction spending. The current portion of long-term debt includes $150 million of 7.875% First Mortgage Bonds which matured on April 15, 2004. In addition, $150 million of First Mortgage Bonds matured on January 15, 2004. The remaining current portion of long-term debt will be refinanced or retired through commercial paper, capital market transactions and internally generated funds. 51 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, 2003. The Company's exposure to market value risk with respect to the CVOs has also not changed materially since December 31, 2003. On March 1, 2004, Progress Energy used available cash and proceeds from the issuance of commercial paper to retire $500 million 6.55% senior unsecured notes. The exposure to changes in interest rates from the Company's fixed rate and variable rate long-term debt at March 31, 2004 has changed from December 31, 2003. The total fixed rate long-term debt at March 31, 2004 was $9.1 billion, with an average interest rate of 6.58% and fair market value of $10.0 billion. The total variable rate long-term debt at March 31, 2004, was $1.1 billion, with an average interest rate of 1.35% and fair market value of $1.1 billion. In March 2004, two interest rate swap agreements totaling $200 million were terminated. These swaps were associated with Progress Energy 5.85% Notes due in 2008. These loss on the agreements was deferred and is being amortized over the life of the bonds as these agreements had been designated as fair value hedges for accounting purposes. The exposure to changes in interest rates from the Company's commercial paper was not materially different than at December 31, 2003. 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, 2003. 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 March 31, 2004 was not materially different than at December 31, 2003. 52 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 President 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 President 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. These officers noted that after the end of the period covered by the report, Progress Energy was late in filing a Form 8-K pursuant to Item 11 of that Form (Temporary Suspension of Trading Under Registrant's Employee Benefit Plans). The filing relates to notice to Section 16 insiders informing them of the prohibition of trading in the Company's securities during an upcoming 401(k) blackout period. Notice was given to all Section 16 insiders regarding these trading restrictions well before the blackout period commenced. The President and Chief Executive Officer, and Chief Financial Officer have confirmed that procedures were in place identifying this filing requirement and allocating responsibility for notification to the appropriate personnel, and that this late filing was the result of a human performance error, not a process deficiency. There has been no change in Progress Energy's internal control over financial reporting during the quarter ended March 31, 2004 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 President 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 President 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 March 31, 2004 that has materially affected, or is reasonably likely to materially affect, PEC's internal control over financial reporting. 53 PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal aspects of certain matters are set forth in Part I, Item 1. See Note 12 to the Progress Energy, Inc. Consolidated Interim Financial Statements and Note 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 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. In March 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." PEC was added as a cross-defendant. The Company, SRS, Progress Energy Solutions, Inc. and PEC all have denied the District's allegations and cross-claims. Discovery is in progress in the matter. The case has been assigned to a judge under the Sacramento County superior court's case management rules, and the judge and the parties have been conferring on scheduling and process to narrow or resolve issues, if possible, and to prepare the case for trial. No trial date has been set. SRS and the Company cannot predict the outcome of this matter, but will vigorously defend against the allegations. 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. On March 16, 2004, the plaintiffs in this case filed a notice of dismissal without prejudice of their claims against PEC and Duke Energy Corporation. 3. U.S. Global, LLC v. Progress Energy, Inc. et al, Case No. 03004028-03 and Progress Synfuel Holdings, Inc. et al, v. U.S. Global, LLC, Case No. 03004028-03 A number of Progress Energy, Inc. subsidiaries and affiliates are parties to two lawsuits arising out of an Asset Purchase Agreement dated as of October 19, 1999, by and among U.S. Global LLC (Global), EARTHCO, certain affiliates of EARTHCO (collectively the EARTHCO Sellers), EFC Synfuel LLC (which is owned indirectly be Progress Energy, Inc.) and certain of its affiliates, including Solid Energy LLC, Solid Fuel LLC, Ceredo Synfuel LLC, Gulf Coast Synfuel LLC (currently named Sandy River Synfuel LLC) (Collectively the Progress Affiliates), as amended by an amendment to Purchase Agreement as of August 23, 2000 (the Asset Purchase Agreement). Global has asserted that pursuant to the Asset Purchase Agreement it is entitled to (1) interest in two synthetic fuel facilities currently owned by the Progress Affiliates, and (2) an option to purchase additional interests in the two synthetic fuel facilities. 54 The first suit, U.S. Global, LLC v. Progress Energy, Inc. et al, was filed in the Circuit Court for Broward County, Florida in March 2003 (the Florida Global Case). The Florida Global Case asserts claims for breach of the Asset Purchase Agreement and other contract and tort claims related to the Progress Affiliates' alleged interference with Global's rights under the Asset Purchase Agreement. The Florida Global Case requests an unspecified amount of compensatory damages, as well as declaratory relief. On December 15, 2003, the Progress Affiliates filed a motion to dismiss the Third Amended Complaint in the Florida Global Case. The motion to dismiss filed on behalf of the Progress Energy, Inc. subsidiaries and affiliates that are parties to the case will be heard by the Circuit Court of Broward County, Florida on June 7, 2004. The second suit, Progress Synfuel Holdings, Inc. et al. v. U.S. Global, LLC, was filed by the Progress Affiliates in the Superior Court for Wake County, North Carolina seeking declaratory relief consistent with the Company's interpretation of the asset Purchase Agreement (the North Carolina Global Case). Global was served with the North Carolina Global Case on April 17, 2003. On May 15, 2003, Global moved to dismiss the North Carolina Global Case for lack of personal jurisdiction over Global. In the alternative, Global requested that the court decline to exercise its discretion to hear the Progress Affiliates' declaratory judgment action. On August 7, 2003, the Wake County Superior court denied Global's motion to dismiss and entered an order staying the North Carolina Global Case, pending the outcome of the Florida Global Case. The Progress Affiliates have appealed the Superior court's order staying the case; Global has cross appealed the denial of its motion to dismiss for lack of personal jurisdiction. The North Carolina Court of Appeals has not set a hearing date for the Progress Affiliates' Appeal or Global's cross appeal. The Company cannot predict the outcome of these matters, but will vigorously defend against the allegations. 4. Gerber Asset Management LLC v. William Cavanaugh III and Progress Energy, Inc. et al, Case No. 04 CV 636 Stanley Fried, Raymond X. Talamantes and Jacquelin Talamantes v. William Cavanaugh III and Progress Energy, Inc. Case No. 04 CV 2494 On February 3, 2004, Progress Energy, Inc. was served with a class action complaint alleging violations of federal security laws in connection with the Company's issuance of Contingent Value Obligations (CVOs). The action was filed by Gerber Asset Management LLC in the United States District Court for the Southern District of New York and names Progress Energy, Inc. Chairman William Cavanaugh III and Progress Energy, Inc. as defendants. The Complaint alleges that Progress Energy failed to timely disclose the impact of the Alternative Minimum Tax required under Sections 55-59 of the Internal Revenue Code (Code) on the value of certain CVOs issued in connection with the Florida Progress Corporation merger. The suit seeks unspecified compensatory damages, as well as attorneys' fees and litigation costs. On March 31, 2004, a second class action complaint was filed by Stanley Fried, Raymond X. Talamantes and Jacquelin Talamantes against William Cavanaugh III and Progress Energy, Inc. in the United States District Court for the Southern District of New York alleging violations of federal security laws arising out of the Company's issuance of CVOs nearly identical to those alleged in the February 3, 2004 complaint. On April 29, 2004, the Honorable John E. Sprizzo ordered that (1) the two class action cases be consolidated, (2) Peak6 Capital Management LLC shall serve as the lead plaintiff in the consolidated action, (3) the law firm of Goodkind, Labaton Rudoff & Sucharow LLP shall serve as class counsel, and (4) the lead plaintiff shall file a consolidated amended complaint on or before June 14, 2004. The Company cannot predict the outcome of this matter, but will vigorously defend against the allegations. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities RESTRICTED STOCK AWARDS: (a) Securities Delivered. On March 16, 2004, 131,200 restricted shares 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. 56 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Progress Progress Energy Number Description Energy, Inc. Carolinas, Inc. ------ ----------- ------------ --------------- 3(ii)(a) By-Laws of Progress Energy, Inc., as amended on X X March 17, 2004 3(ii)(b) By-Laws of Carolina Power & Light Company, as X amended on March 17, 2004 31(a) Certifications pursuant to Section 302 of the X X Sarbanes-Oxley Act of 2002 - Chairman and Chief Executive Officer 31(b) Certifications pursuant to Section 302 of the X X Sarbanes-Oxley Act of 2002 - Executive Vice President and Chief Financial Officer 32(a) Certifications pursuant to Section 906 of the X X Sarbanes-Oxley Act of 2002 - Chairman and Chief Executive Officer 32(b) Certifications pursuant to Section 906 of the X X Sarbanes-Oxley Act of 2002 - Executive Vice President and Chief Financial Officer
(b) Reports 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 -------- -------- ------------- ----------------------- 7, 9 No April 28, 2004 April 28, 2004 7, 11 No April 5, 2004 April 23, 2004 9, 12 Yes April 21, 2004 April 21, 2004 12 Yes February 26, 2004 February 26, 2004 5 No February 24, 2004 February 24, 2004 5 No January 23, 2004 January 23, 2004 9, 12 Yes January 21, 2004 January 21, 2004 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 April 21, 2004 April 21, 2004 12 Yes February 26, 2004 February 26, 2004 5 No January 23, 2004 January 23, 2004 9, 12 Yes January 21, 2004 January 21, 2004
57 SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROGRESS ENERGY, INC. CAROLINA POWER & LIGHT COMPANY Date: May 6, 2004 (Registrants) By: /s/Geoffrey S. Chatas Geoffrey S. Chatas Executive Vice President and Chief Financial Officer By: /s/Robert H. Bazemore, Jr. Robert H. Bazemore, Jr. Vice President and Controller Chief Accounting Officer 58 EX-3 2 pei_1qexhibit3iia-.txt EXHIBIT 3(II)A BY-LAWS OF PGN B Y - L A W S of PROGRESS ENERGY, INC. Raleigh, North Carolina (As Amended March 17, 2004) TABLE OF CONTENTS ARTICLE I Meetings of Shareholders Section 1. Place of Meetings..........................................1 Section 2. Annual Meetings............................................1 Section 3. Special Meetings...........................................1 Section 4. Notice of Meetings.........................................1 Section 5. List of Shareholders.......................................2 Section 6. Quorum; Proxies............................................2 Section 7. Voting of Shares...........................................2 Section 8. Inspectors.................................................2 Section 9. Conduct of Meetings........................................3 Section 10. Business Proposed by a Shareholder.........................3 Section 11. Nominations by Shareholders................................4 ARTICLE II Directors and Meetings of Directors Section 12. Number and Election of Directors...........................5 Section 13. Vacancies..................................................6 Section 14. Meetings...................................................6 Section 15. Telephone Meetings.........................................6 Section 16. Actions Without Meetings...................................6 Section 17. General Powers.............................................7 Section 18. Committees.................................................7 ARTICLE III Notices Section 19. Notice Requirements........................................8 Section 20. Waiver of Notice...........................................9 ARTICLE IV Officers, Their Authority, and Their Terms of Office Section 21. Officers of the Corporation................................9 Section 22. Chief Executive Officer....................................9 Section 23. Removal and Resignation of Officers.......................10 Section 24. Bond......................................................10 (i) ARTICLE V Capital Stock Section 25. Certificated and Uncertificated Shares....................10 Section 26. Stock Transfer Books and Transfer of Shares...............11 Section 27. Holder of Record..........................................11 Section 28. Record Date...............................................12 Section 29. Lost, Destroyed or Mutilated Certificates.................12 Section 30. Transfer Agent and Registrar; Regulations.................12 ARTICLE VI General Section 31. Distributions.............................................13 Section 32. Deeds, Bonds, and Contracts...............................13 Section 33. Deposits..................................................13 Section 34. Interpretation............................................13 ARTICLE VII Indemnity of Officers and Directors Section 35. Indemnification and Advancement of Expenses...............13 ARTICLE VIII Emergency By-Laws Section 36. Definitions...............................................15 Section 37. Applicability.............................................15 Section 38. Board of Directors........................................16 Section 39. Appointment of Officers...................................16 Section 40. Amendments................................................16 (ii) B Y - L A W S of PROGRESS ENERGY, INC. Raleigh, North Carolina As Amended March 17, 2004 ARTICLE I Meetings of Shareholders Section 1. Place of Meetings. All meetings of the shareholders of Progress Energy, Inc. (the "Corporation"), shall be held at such place, either within or without the State of North Carolina, as may from time to time be fixed by the Board of Directors of the Corporation (the "Board"). Section 2. Annual Meetings. Beginning in the year 2000, the annual meeting of the shareholders of the Corporation shall be held on the second Wednesday of May in each year, if not a legal holiday, and if a legal holiday, then on the next day not a legal holiday, at ten o'clock A.M., or at such other date, or hour, and at such place as stated in the notice of the meeting as the Board of Directors may determine. The annual meeting of shareholders for 1999 shall be held on the date and time specified by the Board of Directors. Section 3. Special Meetings. Special meetings of the shareholders of the Corporation may be held upon call by a majority of the Board of Directors or of the Executive Committee, or by the Chairman of the Board, or by the President of the Corporation, at such time as may be stated in the call and notice. Section 4. Notice of Meetings. Written notice of the time and place of every meeting of shareholders may be given, and shall be deemed to have been duly given, by mailing the same at least ten, but not more than sixty, days prior to the meeting, to each shareholder of record entitled to vote at such meeting, and addressed to him at his address as it appears on the records of the Corporation, with postage thereon prepaid. Notice may also be given by any other lawful means. Section 5. List of Shareholders. In accordance with Section 55-7-20 of the General Statutes of North Carolina, the Corporation, or an officer having charge of the record of shareholders of the Corporation, shall prepare a list of shareholders which shall be available for inspection by shareholders, or their agents or attorneys. Section 6. Quorum; Proxies. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of that voting group exists. A majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of the voting group on that matter. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. In the absence of a quorum at the opening of any meeting of shareholders, the meeting may be adjourned by a majority of shares voting on a motion to adjourn. Notice of adjournment other than announcement at the meeting need not be given unless a new record date is or must be set for that adjourned meeting. At any adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. Section 7. Voting of Shares. (a) When a quorum is present at any meeting, the vote of the holders of a majority of the outstanding stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of any applicable statute or of the Articles of Incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. (b) Unless otherwise provided by law or the Articles of Incorporation, at every meeting of the shareholders each shareholder shall be entitled to one vote in person or by proxy for each share of such stock held of record by such shareholder. Except where the transfer books of the Corporation have been closed or a date has been fixed as a record date for the determination of its shareholders entitled to vote, no share of stock shall be voted at any election for directors which has been transferred on the books of the Corporation within twenty days next preceding such election of directors. 2 Section 8. Inspectors. The Board of Directors in advance of any meeting of shareholders may appoint two voting inspectors to act at any such meeting or adjournment thereof. If they fail to make such appointment, or if their appointees or any of them fail to appear at the meeting of shareholders, the chairman of the meeting may appoint such inspectors or any inspector to act at that meeting. Section 9. Conduct of Meetings. Meetings of the shareholders shall be presided over by the Chairman of the Board of Directors, or, if he is not present, the President, or, if the President is not present, a Vice President, or if neither of said officers is present, by a chairman pro tem to be elected at the meeting. The Secretary of the Corporation shall act as secretary of such meetings, if present, but if not present, some person shall be appointed by the presiding officer to act during the meeting. The officer of the Corporation presiding over the meeting of shareholders shall have all the powers and authority vested in presiding officers by law or practice, without restriction, as well as the authority to conduct an orderly meeting and to impose reasonable limits on the amount of time taken up in remarks by any one shareholder. Section 10. Business Proposed by a Shareholder. To be properly brought before a meeting of shareholders, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before an annual meeting by a shareholder of the Corporation who was a shareholder of record at the time of the giving of notice provided for in Section 4 of these By-Laws and who is entitled to vote at the meeting. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must give timely notice of the proposal in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be received by the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the 60th day prior to the first anniversary of the immediately preceding year's annual meeting; provided, however, that with respect to the annual meeting to be held in 2000, a shareholder's notice must be received by the Secretary of the Corporation at the principal executive offices of the Corporation no later than December 3, 1999. In no event shall the public announcement of an adjournment or postponement of an annual meeting or the fact that an annual meeting is held after the anniversary of the preceding annual meeting commence a new time period for the giving of a shareholder notice as described above. A shareholder's notice shall set forth as to each matter the shareholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the annual meeting, including the complete text of any resolutions to be presented at the annual meeting with respect to such business, (ii) the reasons for conducting such business at the annual meeting, (iii) the name and address of record of the shareholder and the beneficial owner, if any, on whose behalf the proposal is made, (iv) the class and number of shares of the Corporation which are owned by the shareholder and such beneficial owner, (v) a representation that the shareholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business, and (vi) any material interest of the shareholder and such beneficial owner in such business. 3 In the event that a shareholder attempts to bring business before a meeting without complying with the procedures set forth in this Section 10, such business shall not be transacted at such meeting. The Chairman of the Board of Directors, or any other individual presiding over the meeting pursuant to Section 9 of these By-Laws, shall have the power and duty to determine whether any proposal to bring business before the meeting was made in accordance with the procedures set forth in this Section 10, and, if any business is not proposed in compliance with this Section, to declare that such defective proposal shall be disregarded and that such proposed business shall not be transacted at such meeting. Section 11. Nominations by Shareholders. Subject to the rights of holders of any securities or obligations of the Corporation conferring special rights regarding election of directors, nominations for the election of directors shall be made by the Board of Directors or by any shareholder entitled to vote in elections of directors; provided however, that any shareholder entitled to vote in the election of directors may nominate one or more persons for election as directors only at an annual meeting and if written notice of such shareholder's intent to make such nomination or nominations has been received, either by personal delivery or by United States registered or certified mail, postage prepaid, by the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the 120th calendar day before the date of the Company's proxy statement released to shareholders in connection with the previous year's annual meeting. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Each notice shall set forth (i) the name and address of record of the shareholder who intends to make the nomination, the beneficial owner, if any, on whose behalf the nomination is made and of the person or persons to be nominated, (ii) the class and number of shares of the Corporation that are owned by the shareholder and such beneficial owner, (iii) a representation that the shareholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iv) a description of all arrangements, understandings or relationships between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder, and (v) such other information regarding each nominee proposed by such shareholder as would be required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required to be disclosed, pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors, and shall include a consent signed by each such nominee to serve as a director of the Corporation if so elected. In the event that a shareholder attempts to nominate any person without complying with the procedures set forth in this Section 11, such person shall not be nominated and shall not stand for election at such meeting. The Chairman of the Board of Directors, or any other individual presiding over the meeting pursuant to Section 9 of these By-Laws, shall have the power and duty to determine whether a nomination proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 11 and, if any proposed nomination is not in compliance with this Section 11, to declare that such defective proposal shall be disregarded. 4 ARTICLE II Directors and Meetings of Directors Section 12. Number and Election of Directors. (a) The number of directors of the Corporation shall not be less than eleven (11) nor more than fifteen (15). The authorized number of directors, within the limits above specified, shall be determined by the affirmative vote of a majority of the whole board given at any regular or special meeting of the Board of Directors, provided that, the number of directors shall not be reduced to a number less than the number of directors then in office unless such reduction shall become effective only at and after the next ensuing meeting of the shareholders for the election of directors. (b) The directors shall appoint from among their number a Chairman, who shall serve at the pleasure of the Board. Members of the Board of Directors of the Corporation who are full-time employees of the Corporation shall retire from the Board upon their retirement from employment or upon attaining the age of 65 years, whichever occurs first; provided, however, that the Chairman of the Board, if then a full-time employee of the Corporation, shall be eligible to continue as a member of the Board until the first Annual Meeting of Shareholders occurring at least one year after retirement from employment or after attaining the age of 65 years, whichever occurs first, if so requested to remain by the Board. Those persons who are not employed full-time by the Corporation shall not be eligible for election as a Director in any calendar year (or subsequent year) in which he or she has reached or will reach the age of 73 years, unless requested by the Chairman of the Board and approved on an annual basis by the full Board. Otherwise, any Director who reaches the age of 73 during a term of office shall resign as of the first day of the month so following unless otherwise determined by the Board. (c) Except for the election of the initial directors whose terms are classified pursuant to this By-Law, the election of directors shall be held at the annual meeting of shareholders. The directors, other than those who may be elected under circumstances specified in the Articles of Incorporation by the holders of any class of stock having a preference over the Common Stock as to dividends or in liquidation, shall be classified into three classes, Class I, Class II and Class III, as nearly equal in number as possible. The directors of Class I shall originally be elected for a term expiring at the annual meeting of shareholders of the Corporation to be held in 2002; the directors of Class II shall originally be elected for a term expiring at the annual meeting of shareholders of the Corporation to be held in 2000; and the directors of Class III shall originally be elected for a term expiring at the annual meeting of shareholders of the Corporation to be held in 2001. The directors of each class shall hold office until their respective successors are elected and qualified, or until their earlier resignation or removal. At each annual meeting of shareholders of the Corporation beginning in 2000, the successors to the class of directors whose term expires at such meeting shall be identified as being of the same class of directors they succeed and shall be elected to hold office for a term expiring at the third succeeding annual meeting of shareholders. When the number of directors is changed, any newly-created directorships or any decrease in directorships shall be so apportioned among the classes by the Board of Directors as to make all classes as nearly equal in number as possible; provided, however, that no decrease in the number of directors shall shorten or terminate the term of any incumbent director. 5 Section 13. Vacancies. Subject to contrary provisions in the Articles of Incorporation or elsewhere in these By-Laws, in case of any vacancy in the number of directors through death, resignation, disqualification, increase in the number of directors or other cause, the remaining directors present at the meeting, by affirmative vote of a majority thereof, though less than a quorum, may elect a successor to hold office until the next shareholders' meeting at which directors are elected and until the election of his successor. Section 14. Meetings. Regular meetings of the Board of Directors shall be held at times fixed by resolution of the Board, and special meetings may be held upon the written call of the Executive Committee, or by the Chairman of the Board, or by the President or by any two directors; and the Secretary or officer performing his duties shall give reasonable notice of all meetings of directors; provided, that a meeting may be held without notice immediately after the annual election, and notice need not be given of regular meetings held at times fixed by resolution of the Board. Meetings may be held at any time without notice if all the directors are present, or if those not present waive notice either before or after the meeting. All regular and special meetings shall be held at the principal offices of the Corporation, provided that the Board, from time to time, may order that any meeting be held elsewhere within or without the State of North Carolina. A majority of the whole Board of Directors shall constitute a quorum, and the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a greater proportion is required by the Articles of Incorporation. Section 15. Telephone Meetings. Members of the Board or any committee may participate in a meeting of the Board or such committee by means of a conference telephone or other means of communications whereby all directors participating may simultaneously hear each other during the meeting, and participation by such means shall constitute presence in person at such meeting. Section 16. Actions Without Meetings. Any action that may be taken at a meeting of the Board or of a committee may be taken without a meeting if a consent in writing, setting forth the action, shall be signed, either before or after such action, by all of the directors or all of the members of the committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote. 6 Section 17. General Powers. The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things which are not by law or by the Articles of Incorporation directed or required to be exercised or done by the shareholders; provided, however, that the officers of the Corporation shall, without prior action of the Board of Directors, perform all acts and things incidental to the usual and ordinary course of the business in which the Corporation is engaged as hereinafter provided by the By-Laws or as may hereafter be delegated by the Board of Directors. Section 18. Committees. (a) A majority of the Board of Directors may create one or more committees and appoint other members of the Board of Directors to serve on such Committees. Each such committee shall have two or more members, who serve at the pleasure of the Board of Directors. Any such committee may exercise authority over any matters except those matters described in Section 55-8-25(e) of the General Statutes of North Carolina. Each committee may make rules for the conduct of its business. A majority of the members of such committee shall constitute a quorum. (b) A majority of the whole Board of Directors, present at any meeting held after their election in each year, may appoint an Executive Committee, to consist of three or more directors, which Committee shall have and may exercise, during the intervals between meetings of the Board, by a majority vote of those present at a meeting, all the powers vested in the Board, except the following matters as more fully described in Section 55-8-25(e) of the General Statutes of North Carolina: - Authorize distributions; - Approve or propose to shareholders action that is by law required to be approved by the shareholders; - Fill vacancies on the Board of Directors or on any of its Committees; - Amend the Corporation's Articles of Incorporation pursuant to N.C.G.S.ss.55-10-02; - Adopt, amend or repeal the Corporation's By-Laws; - Approve a plan of merger not requiring shareholder approval; - Authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; or - Authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the Board of Directors may authorize a committee (or a senior executive officer of the Corporation) to do so within limits specifically prescribed by the Board of Directors. (c) A majority of the whole Board of Directors present at any meeting shall have the power at any time to change the membership of such committee and to fill vacancies in it. The Chairman of the Executive Committee shall be appointed by the Board of Directors from the membership of the Executive Committee. 7 ARTICLE III Notices Section 19. Notice Requirements. (a) Notice may be communicated: in person; by telephone, telegraph, teletype, or other form of wire or wireless communication, by facsimile transmission; or by mail or private carrier. If these forms of personal notice are impracticable as to one or more persons, notice may be communicated to such persons by publishing notice in a newspaper in the county wherein the Corporation has its principal place of business in North Carolina, or if it has no principal place of business in North Carolina, the county wherein it has its registered office in North Carolina; or by radio, television, or other form of public broadcast communication. (b) Written notice is effective at the earliest of the following: (i) When received; (ii) Five days after its deposit in the United States mail, as evidenced by the postmark or based on the affidavit of the person depositing the notice, if mailed with postage thereon prepaid and correctly addressed; (iii)On the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, signed by or on behalf of the addressee. Anyone accepting the mail at the stated address and signing the receipt shall be conclusively presumed to have acted on behalf of the addressee. (c) Oral notice is effective when actually communicated to the person to whom given. (d) If these By-Laws prescribe notice requirements for particular circumstances, those requirements govern. (e) No notice need be given any shareholder or director whose address is outside of the United States and each shareholder located outside of the United States must provide to the Corporation a mailing address in the United States to which notices from the Corporation may be addressed. The Corporation shall not be obligated to recognize any such address (or change of address) received less than thirty days before the date on which the Corporation's notice is sent. Any notice given by telegram or cable shall be deemed to be given when delivered to and accepted for transmittal by an office of the transmitting corporation. 8 Section 20. Waiver of Notice. Whenever any notice is required to be given under the provisions of applicable statutes or of the Articles of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice in apt time. ARTICLE IV Officers, Their Authority, and Their Terms of Office Section 21. Officers of the Corporation. The Board of Directors shall annually at its first meeting held after the annual meeting of shareholders, or as soon thereafter as may be practical, elect the officers of the Corporation, who shall consist of a President, one or more Senior Executive Vice Presidents and Executive Vice Presidents, two or more Senior Vice Presidents, three or more Vice Presidents, a Secretary, a Treasurer, a Controller and such other officers or assistant officers and agents as may be appointed by the Board of Directors. At other times, the Board of Directors or any Committee to which it delegates the authority to do so may elect officers to fill any new office or a vacancy in any office occurring by virtue of the incumbent's death, resignation, removal or otherwise at any duly convened meeting of the Board or of the Committee. The officer shall serve for the period specified or until a successor is chosen. From time to time the Board of Directors may also elect a Vice Chairman who shall have such duties as described herein and as may from time to time be directed. Any two offices may be held by the same person, but no officer may act in more than one capacity where action of two or more officers is required. The Vice Chairman, if any, of the Board of Directors shall be chosen from among the Directors, but the other officers need not be directors of the Corporation. Section 22. Chief Executive Officer. (a) The Board of Directors shall appoint the Chief Executive Officer, who shall be either the Chairman, the Vice Chairman or the President of the Corporation. In the event the Chief Executive Officer is unavailable at the time for needed action, or in other circumstances as directed by the Chief Executive Officer, then the Chairman, the Vice Chairman, if any, or the President if there is no Vice Chairman, who is not then serving as Chief Executive Officer, shall be the next officer in line of authority to perform the duties of Chief Executive Officer. If the Chairman, the Vice Chairman and the President should be unavailable at the time for needed action, or in other circumstances as directed by the Chief Executive Officer, then the next officer in line of authority to perform the duties of the Chief Executive Officer shall be a Senior Executive Vice President or Executive Vice President as designated by the Chief Executive Officer. 9 (b) Unless otherwise provided by the Board of Directors, the Corporation's Chief Executive Officer is vested with full power, authority, and the duty, to perform in person, and by delegation of authority to subordinate officers and employees of the Corporation, all acts and things deemed by him to be reasonably necessary or desirable to direct, handle, and manage, and in general carry on the Corporation's business transactions authorized by its Articles of Incorporation, in respect to all matters except those which by law must be performed by the directors. Section 23. Removal and Resignation of Officers. Any officer may be reassigned duties by appropriate members of senior management at any time. Any officer may be removed from office at any time by the Board of Directors, or by any Committee to which it delegates the authority to remove officers from office, without prejudice to the rights of the officer removed under an employment agreement in writing previously duly authorized by the Board of Directors or the Executive Committee of the Board of Directors. Any officer may resign at any time by giving written notice to the Board of Directors, the President or any other officer of the Corporation. Such resignation shall take effect at the time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 24. Bond. The Board of Directors or the Chief Executive Officer of the Corporation may require the Treasurer and any other officer, employee or agent of the Corporation to give bond, in such sum and with such surety or sureties as either shall determine, for the faithful discharge of their duties. ARTICLE V Capital Stock Section 25. Certificated and Uncertificated Shares. (a) The Board of Directors may authorize the issuance of some or all of the shares of the Corporation's classes or series of capital stock without issuing certificates to represent such shares. If shares are represented by certificates, the certificates shall be in such form as required by law and as determined by the Board of Directors. Certificates shall be signed by the Chairman of the Board or the President and by the Secretary or Treasurer. The signatures of any such officers upon a certificate may be facsimiles or may be engraved or printed or omitted if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. If an officer who has signed or whose facsimile or other signature has been placed upon a certificate ceases to hold the office before the certificate is issued, the certificate may be issued by the Corporation with the same effect as if he held the office on the date of issuance. 10 (b) All certificates for shares shall be consecutively numbered (within class or series designations, if desired) or otherwise identified and entered into the stock transfer records of the Corporation. When shares are represented by certificates, the Corporation shall issue and deliver to each shareholder to whom such shares have been issued or transferred certificates representing the shares owned of record by him. Upon a transfer of certificated shares, a new certificate shall be issued only upon surrender of a certificate representing such shares for cancellation, subject to the provisions for issuance of a new certificate set forth in Section 26 of these By-Laws. When shares are not represented by certificates, then within a reasonable time after the issuance or transfer of such shares, the Corporation shall send the shareholder to whom such shares have been issued or transferred a written statement of the information required by law to be on certificates. (c) If uncertificated shares are issued, the Corporation shall send each holder of such shares a written statement containing the information required by law. (d) Transfer agents or registrars, or both, for one or more classes of the stock of the Corporation may be appointed by the Board of Directors and may be required to countersign certificates representing shares of such class or classes. Section 26. Stock Transfer Books and Transfer of Shares. The Corporation or its designated transfer agent or other agent, shall keep a book or set of books to be known as the stock transfer books of the Corporation, containing the name of each shareholder of record, together with such shareholder's address and the number and class or series of shares held by such shareholder. Shares of stock of the Corporation shall be transferable on the stock books of the Corporation by the holder in person or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or the transfer agent, but, except as hereinafter provided in the case of loss, destruction or mutilation of certificates, no transfer of stock shall be entered until the previous certificate, if any, given for the same shall have been surrendered and canceled. Transfer of shares of the Corporation represented by certificates shall be made on the stock transfer books of the Corporation only upon surrender of the certificates for the shares sought to be transferred by the holder of record thereof or by such holder's duly authorized agent, transferee or legal representative, who shall furnish proper evidence of authority to transfer with the Secretary of the Corporation or its designated transfer agent or other agent. All certificates surrendered for transfer shall be canceled before new certificates for the transferred shares shall be issued. Except as otherwise provided by law, no transfer of shares shall be valid as against the Corporation, its shareholders or creditors, for any purpose, until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. 11 Section 27. Holder of Record. Except as otherwise required by the NCBCA, the Corporation may treat the person in whose name shares of stock of the Corporation (whether or not represented by a certificate) stand of record on its books or the books of any transfer agent or other agent designated by the Board of Directors as the absolute owner of the shares and the person exclusively entitled to receive notification and distributions, to vote, and otherwise to exercise the rights, powers and privileges of ownership of such shares. The Corporation may assume that the holder of record had full competency, capacity and authority to exercise all rights of ownership, irrespective of any knowledge or notice to the contrary or any description indicating a representative, pledge or other fiduciary relation or any reference to any other instrument or to the rights of any other person appearing upon the records of the Corporation or upon the share certificate. Section 28. Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than seventy days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the Board fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. Section 29. Lost, Destroyed or Mutilated Certificates. In case of loss, destruction or mutilation of any certificate of stock, another may be issued in its place upon proof of such loss, destruction or mutilation and upon the giving of a bond of indemnity to the Corporation in such form and in such sum as the Board may direct, provided that a new certificate may be issued without requiring any bond when, in the judgment of the Board, it is proper so to do. The Board of Directors may delegate to the Corporation's Transfer Agent and Registrar authority to issue and register, respectively, from time to time without further action or approval of the Board of Directors, new certificates of stock to replace certificates reported lost, stolen or destroyed upon receipt of an affidavit of loss and bond of indemnity in form and amount and with corporate surety satisfactory to them in each instance protecting the Corporation and them against loss. Such legal evidence of such loss or theft or destruction shall be furnished to the Board of Directors as may be required by them. Section 30. Transfer Agent and Registrar; Regulations. The Corporation may, if and whenever the Board of Directors so determines, maintain in the State of North Carolina or any other state of the United States, one or more transfer offices or agencies and also one or more registry offices which offices and agencies may establish rules and regulations for the issue, transfer and registration of certificates. No certificates for shares of stock of the Corporation in respect of which a transfer agent and registrar shall have been designated shall be valid unless countersigned by such transfer agent and registered by such registrar. The Board of Directors may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of shares represented by certificates and shares without certificates. 12 ARTICLE VI General Section 31. Distributions. Subject to the provisions of the applicable statutes and the Articles of Incorporation of the Corporation, dividends, either cash or stock, upon the capital stock of the Corporation may be declared by the Board of Directors at any meeting thereof. Section 32. Deeds, Bonds, and Contracts. Deeds, bonds, notes, mortgages and contracts of the Corporation may be executed on behalf of the Corporation by the President, a Senior Executive Vice President, an Executive Vice President, or a Vice President, or any one of such other persons as shall from time to time be authorized by the Board of Directors, and when necessary or appropriate may be attested or countersigned by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer. The corporate seal of the Corporation may be affixed to deeds, bonds, notes, mortgages, contracts or stock certificates by an appropriate officer of the Corporation by impression thereon, or, by order of an appropriate officer of the Corporation, a facsimile of said seal may be affixed thereto by engraving, printing, lithograph or other method. Section 33. Deposits. The monies of the Corporation shall be deposited in the name of the Corporation in such bank or banks or trust Corporation or trust companies as the Treasurer, with approval of the Chief Executive Officer, shall from time to time select, and shall be drawn out only by checks or other orders signed by persons designated by resolution by the Board of Directors. Section 34. Interpretation. As and when used in any of the foregoing By-Laws the words "stockholder" and "stockholders" shall be deemed and held to be synonymous with the words "shareholder" and "shareholders," and the word "stock" shall be deemed and held to be synonymous with the words "share" or "shares," respectively, as used in Chapter 55 of the General Statutes of North Carolina. 13 ARTICLE VII Indemnity of Officers and Directors Section 35. Indemnification and Advancement of Expenses. (a) The Corporation shall reimburse or indemnify any past, present or future officer or director of the Corporation for and against such liabilities and expenses as are authorized by Sections 55-8-54, 55-8-55, 55-8-56 and 55-8-57 of the General Statutes of North Carolina. Persons serving as officers or directors of the Corporation or serving in any such capacity at the request of the Corporation in any other Corporation, partnership, joint venture, trust or other enterprise shall be provided reimbursement and indemnification by the Corporation to the maximum extent allowed hereunder or under applicable law, including without limitation Sections 55-8-54, 55-8-55, 55-8-56 and 55-8-57 of the General Statutes of North Carolina. (b) In addition to the reimbursement and indemnification provisions set forth above, any person who at any time serves or has served (1) as an officer or director of the Corporation, or (2) at the request of the Corporation as an officer or director (or in any position of similar authority, by whatever title known) of any other Corporation, partnership, joint venture, trust or other enterprise or (3) as an individual trustee or administrator under any employee benefit plan, shall have a right to be indemnified by the Corporation to the fullest extent permitted by law against (i) all reasonable expenses, including attorney's fees, actually and necessarily incurred by him in connection with any pending, threatened or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether or not brought by the Corporation or on behalf of the Corporation in a derivative action, seeking to hold him liable by reason of or arising out of his status as such or his activities in any of the foregoing capacities, and (ii) payments made by him in satisfaction of any judgment, money decree, fine, penalty or settlement for which he may have become liable in any such action, suit or proceeding; provided, however, that the Corporation shall not indemnify any person against liability or litigation expense he may incur on account of his activities which were at the time taken known or believed by him to be clearly in conflict with the best interests of the Corporation. (c) No past, present or future director or officer of the Corporation (or his heirs, executors, and administrators) shall be liable for any act, omission, step or conduct taken or had in good faith that (whether by condition or otherwise) is required, authorized or approved by any order or orders issued pursuant to: the Public Utility Holding Company Act of 1935; the Federal Power Act; or any state statute regulating the Corporation or its subsidiaries by reason of their being public utility companies or subsidiaries of public utility holding companies; or any amendments to the foregoing laws. If this provision is found by a court not to constitute a valid defense to any claim against such director or officer, each director and officer (and his heirs, executors and administrators) shall be reimbursed for, or indemnified against, all expenses and liabilities received by him in connection with, or arising from, any such action, suit or proceeding based on any act, omission, step or conduct described above. Such expenses and liabilities include, but are not limited to, judgments, court costs and attorneys' fees. The foregoing rights shall not be exclusive of other rights to which any director or officer may otherwise be entitled and shall be available whether or not the director or officer continues to be a director or officer at the time of incurring such expenses and liabilities. 14 (d) The Board of Directors shall take all actions as may be necessary or appropriate to authorize the Corporation to pay all amounts required under this Section 35 of the By-Laws including, without limitation and to the extent deemed to be appropriate, necessary, or required by law (1) making a good faith evaluation of the manner in which the claimant for indemnity acted and of the reasonable amount of indemnity due such individual, or (2) making advances of costs and expenses, or (3) giving notice to, or obtaining approval by, the shareholders of the Corporation. (e) Any person who serves or has served in any of the aforesaid capacities for or on behalf of the Corporation shall be deemed to be doing or have done so in reliance upon, and as consideration for, the rights of reimbursement and indemnification provided for herein. Such rights of reimbursement and indemnification shall inure to the benefit of the legal representatives of such individuals, shall include amounts paid in settlement and shall not be exclusive of any other rights to which such individuals shall be entitled apart from the provisions of this Section. No amendment to or repeal of any provision of this Section 35 shall impair any right of a director or officer based on service in such capacity up to the effective time of such amendment or repeal. (f) The Corporation may, in its sole discretion, wholly or partially indemnify and advance expenses to any employee or agent of the Corporation to the same extent as provided herein for officers and directors. (g) The provisions of this Section shall not limit the power of the Corporation to agree to indemnify its directors, officers, employees or agents, by contract or resolution to the fullest extent allowed by applicable law. ARTICLE VIII Emergency By-Laws Section 36. Definitions. As used in these Emergency By-Laws. (a) the term "period of emergency" shall mean any period during which a quorum of the Board cannot readily be assembled because of some catastrophic event. (b) the term "incapacitated" shall mean that the individual to whom such term is applied shall not have been determined to be dead but shall be missing or unable to discharge the responsibilities of his office; and (c) the term "senior officer" shall mean the Chairman of the Board, the Chief Executive Officer, the President, any Senior Executive Vice President, Executive Vice President, Senior Vice President or Vice President, the Treasurer, the Controller and the Secretary, and any other person who may have been so designated by the Board before the emergency. Section 37. Applicability. These Emergency By-Laws, as from time to time amended, shall be operative only during any period of emergency. To the extent not inconsistent with these Emergency By-Laws, all provisions of the regular By-Laws of the Corporation shall remain in effect during any period of emergency. 15 No officer, director or employee shall be liable for actions taken in good faith in accordance with these Emergency By-Laws. Section 38. Board of Directors. (a) A meeting of the Board may be called by any director or senior officer of the Corporation. Notice of any meeting of the Board need be given only to such of the directors as it may be feasible to reach at the time and by such means as may be feasible at the time, including publication or radio, and at a time less than twenty-four hours before the meeting if deemed necessary by the person giving notice. (b) At any meeting of the Board, three directors in attendance shall constitute a quorum. Any act of a majority of the directors present at a meeting at which a quorum shall be present shall be the act of the Board. If less than three directors should be present at a meeting of the Board, any senior officer of the Corporation in attendance at such meeting shall serve as a director for such meeting, selected in order of rank and within the same rank in order of seniority. (c) In addition to the Board's powers under the regular By-Laws of the Corporation to fill vacancies on the Board, the Board may elect any individual as a director to replace any director who may be incapacitated and to serve until the latter ceases to be incapacitated or until the termination of the period of emergency, whichever first occurs. In considering officers of the Corporation for election to the Board, the rank and seniority of individual officers shall not be pertinent. (d) The Board, during as well as before any such emergency, may change the principal office or designate several alternative offices or authorize the officers to do so. Section 39. Appointment of Officers. In addition to the Board's powers under the regular By-Laws of the Corporation with respect to the election of officers, the Board may elect any individual as an officer to replace any officer who may be incapacitated and to serve until the latter ceases to be incapacitated. Section 40. Amendments. These Emergency By-Laws shall be subject to repeal or change by further action of the Board of Directors or by action of the shareholders, except that no such repeal or change shall modify the provisions of the second paragraph of Section 37 with regard to action or inaction prior to the time of such repeal or change. Any such amendment of these Emergency By-Laws may make any further or different provision that may be practical and necessary for the circumstances of the emergency. 16 EX-3 3 pei_1qexhibit3iib-.txt EXHIBIT 3(II)B BY-LAWS OF CP&L B Y - L A W S of CAROLINA POWER & LIGHT COMPANY Raleigh, North Carolina (As Amended March 17, 2004) Meetings of Stockholders Section 1. The annual meeting of the stockholders of the Company shall be held at the principal office of the Company, on the second Wednesday of May in each year, if not a legal holiday, and if a legal holiday, then on the next day not a legal holiday, at ten o'clock A.M., or at such other date, or hour, or at such other place within or without the State of North Carolina as stated in the notice of the meeting as the Board of Directors may determine. Section 2. Special meetings of the stockholders of the Company may be held upon call by a majority of the Board of Directors or of the Executive Committee, or by the Chairman of the Board, or by the President of the Company, at the principal office of the Company or at such other place within or without the State of North Carolina, and at such time, as may be stated in the call and notice. Section 3. Written notice of the time and place of every meeting of stockholders may be given, and shall be deemed to have been duly given, by mailing the same at least ten, but not more than sixty, days prior to the meeting, to each stockholder of record, entitled to vote at such meeting, and addressed to him at his address as it appears on the records of the Company, with postage thereon prepaid. Notice may also be given by any other lawful means. Section 4. In accordance with Section 55-7-20 of the General Statutes of North Carolina, the Company, or an officer having charge of the record of stockholders of the Company, shall prepare a list of stockholders which shall be available for inspection by stockholders, or their agents or attorneys. Section 5. The holders of a majority of the stock of the Company having voting powers must be present in person or represented by proxy at each meeting of the stockholders to constitute a quorum; absent such quorum, the meeting may be adjourned by a majority of shares voting on a motion to adjourn. If such adjournment is for less than thirty days, notice other than announcement at the meeting need not be given. At any adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. Section 6. (a) When a quorum is present at any meeting, the vote of the holders of a majority of the outstanding stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of any applicable statute or of the Charter a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 6. (b) To be properly brought before a meeting of shareholders, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before an annual meeting by a shareholder of the Company who was a shareholder of record at the time of the giving of notice provided for in Section 3 of these By-Laws and who is entitled to vote at the meeting. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must give timely notice of the proposal in writing to the Secretary of the Company. To be timely, a shareholder's notice must be received by the Secretary of the Company at the principal executive offices of the Company not later than the close of business on the 60th day prior to the first anniversary of the immediately preceding year's annual meeting. In no event shall the public announcement of an adjournment or postponement of an annual meeting or the fact that an annual meeting is held after the anniversary of the preceding annual meeting commence a new time period for the giving of a shareholder notice as described above. A shareholder's notice shall set forth as to each matter the shareholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the annual meeting, including the complete text of any resolutions to be presented at the annual meeting with respect to such business, (ii) the reasons for conducting such business at the annual meeting, (iii) the name and address of record of the shareholder and the beneficial owner, if any, on whose behalf the proposal is made, (iv) the class and number of shares of the Company which are owned by the shareholder and such beneficial owner, (v) a representation that the shareholder is a holder of record of shares of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business, and (vi) any material interest of the shareholder and such beneficial owner in such business. In the event that a shareholder attempts to bring business before a meeting without complying with the procedures set forth in this Section 6(b), such business shall not be transacted at such meeting. The Chairman of the Board of Directors, or any other individual presiding over the meeting pursuant to Section 8 of these By-Laws, shall have the power and duty to determine whether any proposal to bring business before the meeting was made in accordance with the procedures set forth in this Section 6(b), and, if any business is not proposed in compliance with this Section, to declare that such defective proposal shall be disregarded and that such proposed business shall not be transacted at such meeting. Section 7. The Board of Directors in advance of any meeting of stockholders may appoint two voting inspectors to act at any such meeting or adjournment thereof. If they fail to make such appointment, or if their appointees or any of them fail to appear at the meeting of stockholders, the chairman of the meeting may appoint such inspectors or any inspector to act at that meeting. 2 Section 8. Meetings of the stockholders shall be presided over by the Chairman of the Board of Directors, or, if he is not present, the President, or, if the President is not present, a Vice President, or if neither of said officers is present, by a chairman pro tem to be elected at the meeting. The Secretary of the Company shall act as secretary of such meetings, if present, but if not present, some person shall be appointed by the presiding officer to act during the meeting. Section 9. Each holder of Preferred Stock and/or Common Stock shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of such stock held by such stockholder. Except where the transfer books of the Company have been closed or a date has been fixed as a record date for the determination of its stockholders entitled to vote, no share of stock shall be voted at any election for directors which has been transferred on the books of the Company within twenty days next preceding such election of directors. Directors and Meetings of Directors Section 10. (a) The number of directors of the Company shall not be less than eleven (11) nor more than fifteen (15). The authorized number of directors, within the limits above specified, shall be determined by the affirmative vote of a majority of the whole board given at any regular or special meeting of the Board of Directors, provided that, the number of directors shall not be reduced to a number less than the number of directors then in office unless such reduction shall become effective only at and after the next ensuing meeting of the shareholders for the election of directors. This subsection (a) was adopted by the stockholders of the Company. (b) The directors shall appoint from among their number a Chairman, who shall serve at the pleasure of the Board. Members of the Board of Directors of the Company who are full-time employees of the Company shall retire from the Board upon their retirement from employment or upon attaining the age of 65 years, whichever occurs first; provided, however, that the Chairman of the Board, if then a full-time employee of the Company, shall be eligible to continue as a member of the Board until the first Annual Meeting of Shareholders occurring at least one year after retirement from employment or after attaining the age of 65 years, whichever occurs first, if so requested to remain by the Board. Those persons who are not employed full-time by the Company shall not be eligible for election as a Director in any calendar year (or subsequent year) in which he or she has reached or will reach the age of 73 years, unless requested by the Chairman of the Board and approved on an annual basis by the full Board. Otherwise, any Director who reaches the age of 73 during a term of office shall resign as of the first day of the month so following unless otherwise determined by the Board. (c) The election of directors shall be held at the annual meeting of stockholders. The directors, other than those who may be elected under circumstances specified in the Company's Restated Charter, as it may be amended, by the holders of any class of stock having a preference over the Common Stock as to dividends or in liquidation, shall be classified into three classes, as nearly equal in number as possible. The initial terms of directors first elected or re-elected by the stockholders on the date this amendment to the By-Laws is adopted shall be for the following terms of office: Class I: One year Class II: Two years Class III: Three years 3 and until their successors shall be elected and shall qualify. Upon the expiration of the initial term specified for each class of directors their successors shall be elected for three-year terms or until such time as their successors shall be elected and qualified. In the event of any increase or decrease in the number of directors, the additional or eliminated directorships, shall be classified or chosen so that all classes of directors shall remain or become equal in number, as nearly as possible. This subsection (c) was adopted by the stockholders of the Company. (d) Subject to the rights of holders of any securities or obligations of the Company conferring special rights regarding election of directors, nominations for the election of directors shall be made by the Board of Directors or by any shareholder entitled to vote in elections of directors; provided however, that any shareholder entitled to vote in the election of directors may nominate one or more persons for election as directors only at an annual meeting and if written notice of such shareholder's intent to make such nomination or nominations has been received, either by personal delivery or by United States registered or certified mail, postage prepaid, by the Secretary of the Company at the principal executive offices of the Company not later than the close of business on the 120th calendar day before the date of the Company's proxy statement released to shareholders in connection with the previous year's annual meeting. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Each notice shall set forth (i) the name and address of record of the shareholder who intends to make the nomination, the beneficial owner, if any, on whose behalf the nomination is made and of the person or persons to be nominated, (ii) the class and number of shares of the Company that are owned by the shareholder and such beneficial owner, (iii) a representation that the shareholder is a holder of record of shares of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iv) a description of all arrangements, understandings or relationships between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder, and (v) such other information regarding each nominee proposed by such shareholder as would be required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required to be disclosed, pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors, and shall include a consent signed by each such nominee to serve as a director of the Company if so elected. In the event that a shareholder attempts to nominate any person without complying with the procedures set forth in this Section 10.(d), such person shall not be nominated and shall not stand for election at such meeting. The Chairman of the Board of Directors, or any other individual presiding over the meeting pursuant to Section 8 of these By-Laws, shall have the power and duty to determine whether a nomination proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 10.(d) and, if any proposed nomination is not in compliance with this Section 10.(d), to declare that such defective proposal shall be disregarded. 4 Section 11. In case of any vacancy in the number of directors through death, resignation, disqualification, increase in the number of directors or other cause, the remaining directors present at the meeting, by affirmative vote of a majority thereof, though less than a quorum, may elect a successor to hold office until the next shareholders' meeting at which directors are elected and until the election of his successor. Section 12. Regular meetings of the Board of Directors shall be held at times fixed by resolution of the Board, and special meetings may be held upon the written call of the Executive Committee, or by the Chairman of the Board, or by the President or by any two directors; and the Secretary or officer performing his duties shall give reasonable notice of all meetings of directors; provided, that a meeting may be held without notice immediately after the annual election, and notice need not be given of regular meetings held at times fixed by resolution of the Board. Meetings may be held at any time without notice if all the directors are present, or if those not present waive notice either before or after the meeting. All regular and special meetings shall be held at the principal offices of the Company, provided that the Board, from time to time, may order that any meeting be held elsewhere within or without the State of North Carolina. A majority of the whole Board of Directors shall constitute a quorum, and the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a greater proportion is required by the Charter. Section 13. The business and affairs of the Company shall be managed by its Board of Directors, which may exercise all such powers of the Company and do all such lawful acts and things which are not by law or by the Charter directed or required to be exercised or done by the stockholders; provided, however, that the officers of the Company shall, without prior action of the Board of Directors, perform all acts and things incidental to the usual and ordinary course of the business in which the Company is engaged as hereinafter provided by the By-Laws or as may hereafter be delegated by the Board of Directors. A majority of the Board of Directors may create one or more Committees and appoint other members of the Board of Directors to serve on such Committees. Each such Committee shall have two or more members, who serve at the pleasure of the Board of Directors. Any such Committee may exercise authority over any matters except those matters described in Section 55-8-25(e) of the General Statutes of North Carolina. Section 14. A majority of the whole Board of Directors, present at any meeting held after their election in each year, may appoint an Executive Committee, to consist of three or more directors, which Committee shall have and may exercise, during the intervals between meetings of the Board, by a majority vote of those present at a meeting, all the powers vested in the Board, except the following matters as more fully described in Section 55-8-25(e) of the General Statutes of North Carolina: - Authorize distributions; - Approve or propose to shareholders action that is by law required to be approved by the shareholders; - Fill vacancies on the Board of Directors or on any of its Committees; - Amend the Company's Articles of Incorporation pursuant to N.C.G.S.ss.55-10-102; - Adopt, amend or repeal the Company's By-Laws; - Approve a plan of merger not requiring shareholder approval; - Authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; or - Authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares. 5 A majority of the whole Board of Directors present at any meeting shall have the power at any time to change the membership of such Committee and to fill vacancies in it. The Executive Committee may make rules for the conduct of its business. A majority of the members of said Committee shall constitute a quorum. The Chairman of the Executive Committee shall be appointed by the Board of Directors from the membership of the Executive Committee. Notices Section 15. Notices to directors or stockholders shall be in writing and given personally or by mail to the directors and by mail to the stockholders at their addresses appearing on the books of the Company; provided, however, that no notice need be given any stockholder or director whose address is outside of the United States. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given verbally, or by telegram, or cable, and any such notice shall be deemed to be given when delivered to and accepted for transmittal by an office of the transmitting company. Section 16. Whenever any notice is required to be given under the provisions of applicable statutes or of the Charter or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice in apt time. Officers, Their Authority, and Their Terms of Office Section 17. The Board of Directors shall annually at its first meeting held after the Annual Meeting of Stockholders, or as soon thereafter as may be practical, elect the officers of the Company, who shall consist of a President, one or more Senior Executive Vice Presidents and Executive Vice Presidents, two or more Senior Vice Presidents, three or more Vice Presidents, a Secretary, a Treasurer, a Controller and such other officers or assistant officers and agents as may be appointed by the Board of Directors. At other times, the Board of Directors or any Committee to which it delegates the authority to do so may elect officers to fill any new office or a vacancy in any office occurring by virtue of the incumbent's death, resignation, removal or otherwise at any duly convened meeting of the Board or of the Committee. The officer shall serve for the period specified or until a successor is chosen. From time to time the Board of Directors may also elect a Vice Chairman who shall have such duties as described herein and as may from time to time be directed. Any two offices may be held by the same person, but no officer may act in more than one capacity where action of two or more officers is required. The Vice Chairman, if any, of the Board of Directors shall be chosen from among the Directors, but the other officers need not be Directors of the Company 6 Section 18. The Board of Directors shall appoint the Chief Executive Officer who shall be either the Chairman, the Vice Chairman or the President of the Company. In the event the Chief Executive Officer is unavailable at the time for needed action, or in other circumstances as directed by the Chief Executive Officer, then the Chairman, the Vice Chairman, if any, or the President if there is no Vice Chairman, who is not then serving as Chief Executive Officer, shall be the next officer in line of authority to perform the duties of Chief Executive Officer. If the Chairman, the Vice Chairman and the President should be unavailable at the time for needed action, or in other circumstances as directed by the Chief Executive Officer, then the next officer in line of authority to perform the duties of the Chief Executive Officer shall be a Senior Executive Vice President or Executive Vice President as designated by the Chief Executive Officer. Section 19. Any officer may be reassigned duties by appropriate members of Senior Management at any time. Any officer may be removed from office at any time by the Board of Directors, or by any Committee to which it delegates the authority to remove officers from office, without prejudice to the rights of the officer removed under an employment agreement in writing previously duly authorized by the Board of Directors or an Executive Committee of the Board of Directors. Any officer may resign at any time by giving written notice to the Board of Directors, the President or any other officer of the Company. Such resignation shall take effect at the time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 20. The Board of Directors or the Chief Executive Officer of the Company may require the Treasurer and any other officer, employee or agent of the Company to give bond, in such sum and with such surety or sureties as either shall determine, for the faithful discharge of their duties. Section 21. Unless otherwise provided by the Board of Directors, the Company's Chief Executive Officer is vested with full power, authority, and the duty, to perform in person, and by delegation of authority to subordinate officers and employees of the Company, all acts and things deemed by him to be reasonably necessary or desirable to direct, handle, and manage, and in general carry on the Company's business transactions authorized by its Charter, in respect to all matters except those which by law must be performed by the Directors, including but not limited to the following: (a) constructing and contracting for the construction of generating plants authorized by the Directors; (b) operating and maintaining generating plants and appurtenant works; (c) constructing, maintaining, and operating substations, lines and all other facilities, appurtenant to the transmission, distribution and delivery of electricity; (d) acquiring by direct purchase, gift, exchange, or by condemnation, all rights of way, easements, lands, and estates in lands, flowage and water rights; (e) acquiring, maintaining and disposing of tools, machinery, appliances, materials, vehicles, and other appurtenant facilities; (f) employing, and fixing compensation of, Company personnel (except that the compensation of the Chief Executive Officer and the other Company employees who are members of the Board shall be fixed by the Board of Directors) in compliance with any procedures established by the Board; (g) borrowing money from time to time for terms not exceeding three years, and in connection therewith pledging the credit of the Company and executing unsecured loan agreements, promissory notes, and other desirable instruments evidencing obligations to the lender; (h) fixing the rates and conditions of service and dealing with regulatory bodies in respect thereto, and promoting the use of electricity by means of sales representatives, advertising and otherwise; (i) collecting and keeping accounts of all monies due the Company and making and preserving records of the Company's properties and accounts and fiscal affairs; and (j) possessing, preserving, and protecting all property, assets, and interests of the Company and instituting, prosecuting, intervening in, and defending actions and proceedings in any court or before any administrative agency or tribunal affecting the Company's interests and welfare. 7 Certificates of Stock Section 22. Every holder of stock in the Company shall be entitled to have a certificate or certificates certifying the number of fully paid shares owned by him in the Company which shall be in form consistent with law and with the Charter of the Company and as shall be approved by the Board of Directors. The stock certificates shall be signed by: 1) either the Chairman of the Board of Directors or the President, and 2) either the Secretary or Treasurer. Such signatures may be facsimile or other similar method. Section 23. All transfers of stock of the Company shall be made upon its books by authority of the holder of the shares or of his legal representative, and before a new certificate is issued the old certificate shall be surrendered for cancellation, provided that in case any certificate is lost, stolen or destroyed, a new certificate therefor may be issued pursuant to the provisions of Section 24 hereof. Section 24. No certificate of shares of stock of the Company shall be issued in place of any certificate alleged to have been lost or stolen or destroyed, except upon the approval of the Board of Directors who may require delivery to the Company of a bond in such sum as it may direct and subject to its approval as indemnity against any claim in respect to such lost or stolen or destroyed certificate; provided that the Board of Directors may delegate to the Company's Transfer Agent and Registrar authority to issue and register, respectively, from time to time without further action or approval of the Board of Directors, new certificates of stock to replace certificates reported lost, stolen or destroyed upon receipt of an affidavit of loss and bond of indemnity in form and amount and with corporate surety satisfactory to them in each instance protecting the Company and them against loss. Such legal evidence of such loss or theft or destruction shall be furnished to the Board of Directors as may be required by them. Section 25. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, conversion and registration of certificates for shares of the capital stock of the Company, not inconsistent with the laws of North Carolina, the Charter of the Company and these By-Laws. The Board of Directors is authorized to appoint one or more transfer agents and registrars for the capital stock of the Company. Section 26. The Board of Directors shall have power to close the stock transfer books or in lieu thereof to fix record dates as authorized by law. General Section 27. Subject to the provisions of the applicable statutes and the Charter of the Company, dividends, either cash or stock, upon the capital stock of the Company may be declared by the Board of Directors at any meeting thereof. 8 Section 28. Deeds, bonds, notes, mortgages and contracts of the Company may be executed on behalf of the Company by the President, or a Vice President, or any one of such other persons as shall from time to time be authorized by the Board of Directors, and when necessary or appropriate may be attested or countersigned by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer. The corporate seal of the Company may be affixed to deeds, bonds, notes, mortgages, contracts or stock certificates by an appropriate officer of the Company by impression thereon, or, by order of an appropriate officer of the Company, a facsimile of said seal may be affixed thereto by engraving, printing, lithograph or other method. Section 29. The monies of the Company shall be deposited in the name of the Company in such bank or banks or trust company or trust companies as the Treasurer, with approval of the Chief Executive Officer, shall from time to time select, and shall be drawn out only by checks or other orders signed by persons designated by resolution by the Board of Directors. Section 30. As and when used in any of the foregoing By-Laws the words "stockholder" and "stockholders" shall be deemed and held to be synonymous with the words "shareholder" and "shareholders", and the word "stock" shall be deemed and held to be synonymous with the words "share" or "shares", respectively, as used in Chapter 55 of the General Statutes of North Carolina. Amendment of By-Laws Section 31. The Board of Directors shall have power from time to time to adopt, amend, alter, add to, and repeal By-Laws for the Company by affirmative vote of a majority of the directors then holding office, provided, however, that the By-Laws may not be amended by the Board of Directors to require more than a majority of the voting shares for a quorum at a stockholder's meeting, or more than a majority vote at such meeting, except where higher percentages are required by law. Any By-Laws so made or any provisions thereof may be altered or repealed by vote of the holders of a majority of the total number of shares of the Company then issued and outstanding and entitled to vote thereon at any annual stockholders' meeting. Additionally, any By-Law adopted, amended or repealed by the stockholders may not be readopted, amended or repealed by the Board of Directors unless the Charter or a By-Law adopted by the stockholders authorizes the Board of Directors to adopt, amend or repeal that particular By-Law or the By-Laws generally. Indemnity of Officers and Directors Section 32. (a) The Company shall reimburse or indemnify any past, present or future officer or director of the Company for and against such liabilities and expenses as are authorized by (1) a resolution adopted by the Company's stockholders at a special meeting held on December 31, 1943, which is made a part hereof as though incorporated herein, or (2) by Sections 55-8-54, 55-8-55, 55-8-56 and 55-8-57 of the General Statutes of North Carolina. Persons serving as officers or directors of the Company or serving in any such capacity at the request of the Company in any other corporation, partnership, joint venture, trust or other enterprise shall be provided reimbursement and indemnification by the Company to the maximum extent allowed hereunder or under applicable law, including without limitation Sections 55-8-54, 55-8-55, 55-8-56 and 55-8-57 of the General Statutes of North Carolina. 9 (b) In addition to the reimbursement and indemnification provisions set forth above, any person who at any time serves or has served (1) as an officer or director of the Company, or (2) at the request of the Company as an officer of director (or in any position of similar authority, by whatever title known) of any other corporation, partnership, joint venture, trust or other enterprise, or (3) as an individual trustee or administrator under any employee benefit plan, shall have a right to be indemnified by the Company to the fullest extent permitted by law against (i) all reasonable expenses, including attorney's fees, actually and necessarily incurred by him in connection with any pending, threatened or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether or not brought by the Company or on behalf of the Company in a derivative action, seeking to hold him liable by reason of or arising out of his status as such or his activities in any of the foregoing capacities, and (ii) payments made by him in satisfaction of any judgement, money decree, fine, penalty or settlement for which he may have become liable in any such action, suit or proceeding; provided, however, that the Company shall not indemnify any person against liability or litigation expense he may incur on account of his activities which were at the time taken known or believed by him to be clearly in conflict with the best interests of the Company. (c) The Board of Directors shall take all action as may be necessary or appropriate to authorize the Company to pay all amounts required under these Sections 32(a),(b) and (c) of the By-Laws including, without limitation and to the extent deemed to be appropriate, necessary, or required by law (1) making a good faith evaluation of the manner in which the claimant for indemnity acted and of the reasonable amount of indemnity due such individual, or (2) making advances of costs and expenses, or (3) giving notice to, or obtaining approval by, the shareholders of the Company. (d) Any person who serves or has served in any of the aforesaid capacities for or on behalf of the Company shall be deemed to be doing or to have done so in reliance upon, and as consideration for, the rights of reimbursement and indemnification provided for herein. Such rights of reimbursement and indemnification shall inure to the benefit of the legal representatives of such individuals, shall include amounts paid in settlement and shall not be exclusive of any other rights to which such individuals shall be entitled apart from the provisions of this Section. (e) The Company may, in its sole discretion, wholly or partially indemnify and advance expenses to any employee or agent of the Company to the same extent as provided herein for officers and directors. 10 EX-31 4 pei_10qexhibit31-.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, Robert B. McGehee, 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 quarterly 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: May 6, 2004 /s/ Robert B. McGehee --------------------- Robert B. McGehee 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, Geoffrey S. Chatas, 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 quarterly 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: May 6, 2004 /s/ Geoffrey S. Chatas ---------------------- Geoffrey S. Chatas 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 quarterly 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: May 6, 2004 /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, Geoffrey S. Chatas, 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 quarterly 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: May 6, 2004 /s/ Geoffrey S. Chatas ---------------------- Geoffrey S. Chatas Executive Vice President and Chief Financial Officer EX-32 5 pei_10qexhibit32-.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 March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert B. McGehee, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 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/ Robert B. McGehee Robert B. McGehee President and Chief Executive Officer May 6, 2004 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 March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey S. Chatas, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 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/ Geoffrey S. Chatas Geoffrey S. Chatas Executive Vice President and Chief Financial Officer May 6, 2004 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 March 31, 2004 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. Section 1350, as adopted pursuant to Section 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 May 6, 2004 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 March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey S. Chatas, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 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/ Geoffrey S. Chatas Geoffrey S. Chatas Executive Vice President and Chief Financial Officer May 6, 2004 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-----