-----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, JLB3psFoaUeo+pjd9wJZ9IBpGVWagLYTxyVJKS5ccube9COTyK7G2waZ18bRb6Fm kpRqUzIoB0gRWEjSmq4l+g== 0001094093-04-000256.txt : 20040806 0001094093-04-000256.hdr.sgml : 20040806 20040806150413 ACCESSION NUMBER: 0001094093-04-000256 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 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: 04957710 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: 04957709 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_2q0410q-.txt PGN/PEC 2004 2ND QTR FORM 10-Q 7 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 July 31, 2004, each registrant had the following shares of common stock outstanding: Registrant Description Shares ---------- ----------- ------ Progress Energy Common Stock (Without Par Value) 246,793,015 PEC Common Stock (Without Par Value) 159,608,055 (all of which were held by Progress Energy, Inc.)
PROGRESS ENERGY, INC. AND PROGRESS ENERGY CAROLINAS, INC. FORM 10-Q - For the Quarter Ended June 30, 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. -------------------------------------------------------------- Unaudited Consolidated Statements of Income Unaudited Consolidated Balance Sheets Unaudited Consolidated Statements of Cash Flows Notes to Consolidated Interim Financial Statements Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. --------------------------------------------------------------- Unaudited Consolidated Statements of Income Unaudited Consolidated Balance Sheets Unaudited 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 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information 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, LLLP 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-headings "Liquidity and Capital Resources" and "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 its subsidiaries' 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 fuel businesses; the impact to our financial condition and performance in the event it is determined the Company is not entitled to previously taken Section 29 tax credits; 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; the outcome of any ongoing or future litigation or similar disputes and the impact of any such outcome or related settlements; 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. These reports should be carefully read. All such factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond the control of Progress Energy and PEC. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the effect of each such factor on Progress Energy and PEC. 5 PART I. FINANCIAL INFORMATION Item 1. Financial Statements PROGRESS ENERGY, INC. CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2004 UNAUDITED CONSOLIDATED STATEMENTS of INCOME Three Months Ended Six Months Ended June 30 June 30 - ---------------------------------------------------------------------------------------------------------- (in millions except per share data) 2004 2003 2004 2003 - ---------------------------------------------------------------------------------------------------------- Operating Revenues Utility $ 1,721 $ 1,583 $ 3,406 $ 3,237 Diversified business 704 467 1,270 1,000 - ---------------------------------------------------------------------------------------------------------- Total Operating Revenues 2,425 2,050 4,676 4,237 - ---------------------------------------------------------------------------------------------------------- Operating Expenses Utility Fuel used in electric generation 468 394 961 805 Purchased power 219 210 402 413 Operation and maintenance 372 364 735 699 Depreciation and amortization 207 224 409 444 Taxes other than on income 109 94 214 197 Diversified business Cost of sales 656 416 1,177 891 Depreciation and amortization 46 36 91 69 Other 45 38 88 88 - ---------------------------------------------------------------------------------------------------------- Total Operating Expenses 2,122 1,776 4,077 3,606 - ---------------------------------------------------------------------------------------------------------- Operating Income 303 274 599 631 - ---------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 4 3 7 6 Other, net - (9) (25) (15) - ---------------------------------------------------------------------------------------------------------- Total Other Income (Expense) 4 (6) (18) (9) - ---------------------------------------------------------------------------------------------------------- Interest Charges Net interest charges 160 159 326 315 Allowance for borrowed funds used during construction (2) (2) (3) (5) - ---------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 158 157 323 310 - ---------------------------------------------------------------------------------------------------------- Income from Continuing Operations before Income Tax and 149 111 258 312 Cumulative Effect of Change in Accounting Principle Income Tax Benefit (4) (43) (3) (49) - ---------------------------------------------------------------------------------------------------------- Income from Continuing Operations before Cumulative Effect of 153 154 261 361 Change in Accounting Principle Discontinued Operations, Net of Tax 1 3 1 14 - ---------------------------------------------------------------------------------------------------------- Income before Cumulative Effect of Change in Accounting 154 157 262 375 Principle Cumulative Effect of Change in Accounting Principle, Net of Tax - - - 1 - ---------------------------------------------------------------------------------------------------------- Net Income $ 154 $ 157 $ 262 $ 376 - ---------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 242 236 242 235 - ---------------------------------------------------------------------------------------------------------- Basic Earnings per Common Share Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle $ 0.63 $ 0.65 $ 1.08 $ 1.54 Discontinued Operations, Net of Tax - 0.01 - 0.06 Net Income $ 0.63 $ 0.66 $ 1.08 $ 1.60 - ---------------------------------------------------------------------------------------------------------- Diluted Earnings per Common Share Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle $ 0.63 $ 0.65 $ 1.08 $ 1.53 Discontinued Operations, Net of Tax - 0.01 - 0.06 Net Income $ 0.63 $ 0.66 $ 1.08 $ 1.59 - ---------------------------------------------------------------------------------------------------------- Dividends Declared per Common Share $ 0.575 $ 0.560 $ 1.150 $ 1.120 - ----------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 6 PROGRESS ENERGY, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS (in millions) June 30 December 31 ASSETS 2004 2003 - ------------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 21,991 $ 21,675 Accumulated depreciation (8,240) (8,077) Utility plant in service, net 13,751 13,598 Held for future use 13 13 Construction work in progress 643 634 Nuclear fuel, net of amortization 218 228 - ------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 14,625 14,473 - ------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 78 273 Accounts receivable 854 798 Unbilled accounts receivable 245 217 Inventory 775 795 Deferred fuel cost 304 317 Prepayments and other current assets 352 375 - ------------------------------------------------------------------------------------------------------- Total Current Assets 2,608 2,775 - ------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 645 612 Nuclear decommissioning trust funds 978 938 Diversified business property, net 2,197 2,158 Miscellaneous other property and investments 458 464 Goodwill 3,730 3,726 Prepaid pension costs 449 462 Intangibles, net 306 327 Other assets and deferred debits 239 253 - ------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 9,002 8,940 - ------------------------------------------------------------------------------------------------------- Total Assets $ 26,235 $ 26,188 - ------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ------------------------------------------------------------------------------------------------------- Common Stock Equity Common stock without par value, 500 million shares authorized, 247 and 246 million shares issued and outstanding, respectively $ 5,339 $ 5,270 Unearned restricted shares (17) (17) Unearned ESOP shares (76) (89) Accumulated other comprehensive loss (56) (50) Retained earnings 2,313 2,330 - ------------------------------------------------------------------------------------------------------- Total Common Stock Equity 7,503 7,444 - ------------------------------------------------------------------------------------------------------- Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption 93 93 Long-Term Debt, Affiliate 309 309 Long-Term Debt , Net 9,282 9,625 - ------------------------------------------------------------------------------------------------------- Total Capitalization 17,187 17,471 - ------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 343 868 Accounts payable 684 643 Interest accrued 189 209 Dividends declared 141 140 Short-term obligations 628 4 Customer deposits 172 167 Other current liabilities 836 580 - ------------------------------------------------------------------------------------------------------- Total Current Liabilities 2,993 2,611 - ------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 525 737 Accumulated deferred investment tax credits 184 190 Regulatory liabilities 3,053 2,977 Asset retirement obligations 1,306 1,271 Other liabilities and deferred credits 987 931 - ------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 6,055 6,106 - ------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 12) - ------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 26,235 $ 26,188 - -------------------------------------------------------------------------------------------------------
See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements. 7 PROGRESS ENERGY, INC. UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS Six Months Ended June 30 (in millions) 2004 2003 - -------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 262 $ 376 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations (1) (14) Cumulative effect of change in accounting principle - (1) Depreciation and amortization 557 572 Deferred income taxes (210) (118) Investment tax credit (6) (8) Deferred fuel cost (credit) 13 (94) Cash provided (used) by changes in operating assets and liabilities: Accounts receivable (101) (80) Inventories 13 31 Prepayments and other current assets (53) 15 Accounts payable 72 (5) Income taxes, net 207 105 Other current liabilities 47 35 Other 115 93 - -------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 915 907 - -------------------------------------------------------------------------------------------------------- Investing Activities Gross utility property additions (483) (541) Diversified business property additions (122) (367) Nuclear fuel additions (47) (84) Contributions to nuclear decommissioning trust (18) (18) Investments in non-utility activities (7) (8) Acquisition of intangibles - (191) Proceeds from sales of investments and assets 92 1 Net decrease in restricted cash 5 17 Other (11) (4) - -------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (591) (1,195) - -------------------------------------------------------------------------------------------------------- Financing Activities Issuance of common stock 58 172 Purchase of restricted shares (7) (7) Issuance of long-term debt 1 655 Net increase in short-term indebtedness 624 163 Net decrease in cash provided by checks drawn in excess of bank balances (58) (44) Retirement of long-term debt (865) (392) Dividends paid on common stock (280) (268) Other 8 (5) - -------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Financing Activities (519) 274 - -------------------------------------------------------------------------------------------------------- Cash Used in Discontinued Operations - (1) - -------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents (195) (15) Cash and Cash Equivalents at Beginning of Period 273 61 - -------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 78 $ 46 ======================================================================================================== Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 341 $ 305 income taxes (net of refunds) $ 43 $ 22
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 $5 million for both the three months ended June 30, 2004 and 2003, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was increased by $43 million and decreased by $5 million for the six months ended June 30, 2004 and 2003, respectively. 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. PEC and PEF collect from customers certain excise taxes, which include gross receipts tax, franchise taxes, and other excise taxes, levied by the state or local government upon the customers. PEC and PEF account for excise taxes on a gross basis. For the three months ended June 30, 2004 and 2003, excise taxes of approximately $61 million and $51 million, respectively, are included in taxes other than on income in the accompanying Consolidated Statements of Income. For the six months ended June 30, 2004 and 2003, excise taxes of approximately $114 million and $102 million, respectively, are included in taxes other than on income in the accompanying Consolidated Statements of Income. These approximate amounts are also included in utility revenues. 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. 9 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. The results of operations of the Rail Services segment are reported one month in arrears. 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 of 2003. The impact of the reclassification of earnings between quarters is outlined for the first two quarters of 2003 in the table below: Three Months Ended June 30, 2003 As Previously Quarter As (in millions, except per share data) Reported Reclassification Restated --------------------------------------------------------------------------------------------------------- Income from Continuing Operations before Cumulative Effect $ 150 $ 4 $ 154 of Change in Accounting Principle Net Income $ 153 $ 4 $ 157 Basic earnings per common share Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle $ 0.64 $ 0.01 $ 0.65 Net Income $ 0.65 $ 0.01 $ 0.66 Diluted earnings per common share Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle $ 0.63 $ 0.02 $ 0.65 Net Income $ 0.64 $ 0.02 $ 0.66 Six Months Ended June 30, 2003 As Previously Quarter As (in millionas, except per share data) Reported Reclassification Restated --------------------------------------------------------------------------------------------------------- Income from Continuing Operations before Cumulative Effect $ 346 $ 15 $ 361 of Change in Accounting Principle Net Income $ 361 $ 15 $ 376 Basic earnings per common share Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle $ 1.48 $ 0.06 $ 1.54 Net Income $ 1.54 $ 0.06 $ 1.60 Diluted earnings per common share Income from Continuing Operations before Cumulative Effect of Change in Accounting Principle $ 1.47 $ 0.06 $ 1.53 Net Income $ 1.53 $ 0.06 $ 1.59
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" 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: 10 Three Months Ended Six Months Ended June 30 June 30 ----------------------- --------------------- (in millions except per share data) 2004 2003 2004 2003 ---------- ----------- --------- ---------- Net Income, as reported $ 154 $ 157 $ 262 $ 376 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects 3 2 6 4 ---------- ----------- --------- ---------- Pro forma net income $ 151 $ 155 $ 256 $ 372 ========== =========== ========= ========== Basic earnings per share As reported $ 0.63 $ 0.66 $ 1.08 $ 1.60 Pro forma $ 0.62 $ 0.65 $ 1.06 $ 1.58 Fully diluted earnings per share As reported $ 0.63 $ 0.66 $ 1.08 $ 1.59 Pro forma $ 0.62 $ 0.65 $ 1.05 $ 1.57
E. Consolidation of Variable Interest Entities The Company consolidates all voting interest entities in which it owns a majority voting interest and all variable interest entities for which it is the primary beneficiary in accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46R). During the first six months of 2004 and 2003, the Company did not participate in the creation of, or obtain a significant new variable interest in, any variable interest entity. The Company 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 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 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 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 the necessary information to determine if the counterparties are variable interest entities or to identify the primary beneficiaries. Both entities declined to provide the Company with the necessary financial information, and the Company has applied the information scope exception in FIN No. 46R, paragraph 4(g). The Company's only significant exposure to variability from these contracts results from fluctuations in the market price of fuel used by the two entities' plants to produce the power purchased by the Company. The Company is able to recover these fuel costs under PEC's fuel clause. Total purchases from these counterparties were approximately $21 million and $19 million in the first six months of 2004 and 2003, respectively. The Company will continue its efforts to obtain the necessary information to fully apply FIN No. 46R to these contracts. The combined generation capacity of the two entities' power plants is approximately 880 MW. The Company believes that if it is determined to be the primary beneficiary of these two entities, the effect of consolidating the entities would result in increases to total assets, long-term debt and other liabilities, but would have an insignificant or no impact on the Company's common stock equity, net earnings, or cash flows. However, as the Company has not received any financial information from these two counterparties, the impact cannot be determined at this time. The Company also has interests in several other variable interest entities for which the Company is not the primary beneficiary. These arrangements include investments in approximately 28 limited partnerships, limited liability corporations and venture capital funds and two building leases with special-purpose entities. The aggregate maximum loss exposure at June 30, 2004, that the Company could be required to record in its income statement as a result of these arrangements totals approximately $38 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. 11 2. NEW ACCOUNTING STANDARDS 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. The FASB recently issued definitive accounting guidance for the Act in FASB Staff Position 106-2, which is effective for the Company in the third quarter of 2004. FASB Staff Position 106-2 will result in the recognition of lower OPEB costs to reflect prescription drug-related federal subsidies to be received under the Act. The Company is in the process of quantifying the impact of the Act on OPEB costs. 3. DIVESTITURES A. Divestiture of Synthetic Fuel Partnership Interests In June 2004, the Company through its subsidiary, Progress Fuels sold, in two transactions, a combined 49.8 percent partnership interest in Colona Synfuel Limited Partnership, LLLP, one of its synthetic fuel facilities. Substantially all proceeds from the sales will be received over time, which is typical of such sales in the industry. Gain from the sales will be recognized on a cost recovery basis. The Company's book value of the interests sold totaled approximately $5 million. Based on projected production levels, the Company anticipates receiving total gross proceeds of approximately $30 million per year, on an annualized basis. Under the agreements, the buyers have a right to unwind the transactions if an IRS reconfirmation private letter ruling (PLR) is not received by October 15, 2004. Therefore, no gain would be recognized prior to the expiration of that right. B. 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 June 30, 2004 and December 31, 2003. The assets were recorded at approximately $6 million and $75 million at June 30, 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. In July 2004, the Company sold the remaining assets classified as held for sale to a third-party for net proceeds of $6 million. C. 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 $3 million and $7 million for the three and six months ended June 30, 2003, respectively, 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) Three Months Ended Six Months Ended June 30, 2003 June 30, 2003 ------------------------------------------- Revenues $ 71 $ 225 ===================== ==================== Earnings before income taxes $ 4 $ 23 Income tax expense 1 9 --------------------- -------------------- Net earnings from discontinued operations $ 3 $ 14 ===================== ====================
12 During the three months ended June 30, 2004, the Company recorded an additional gain after taxes of approximately $1 million related to deferred taxes on the loss from the NCNG sale. 4. 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. A 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 ratably over five years beginning in January 2005. Approximately $10 million related to storm costs incurred during the first quarter of 2004 was deferred in that quarter. During the first quarter of 2004, PEC met the requirements of both the NCUC and the SCPSC for the implementation of a depreciation study which allowed the utility to reduce the rates used to calculate depreciation expense. As a result, depreciation expense decreased $10 million for the three months ended June 30, 2004 compared to the prior year quarter and decreased $18 million for the six months ended June 30, 2004 compared to the prior year six month period. On June 29, 2004, the FPSC approved a Stipulation and Settlement Agreement, executed on April 29, 2004, by PEF, the Office of Public Counsel and the Florida Industrial Power Users Group. The stipulation and settlement resolved the issue 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 reduces 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. This concludes the FPSC's investigation of PEF's recoverable waterborne coal transportation costs. 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 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 $33 million and $4 million invested in GridSouth and GridFlorida, respectively, related to startup costs at June 30, 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. 13 C. Implementation of SFAS No. 143 In connection with the implementation of SFAS No. 143 in 2003, PEC filed a request with the NCUC requesting deferral of the difference between expense pursuant to SFAS No. 143 and expense as previously determined by the NCUC. The NCUC granted the deferral of the January 1, 2003 cumulative adjustment. Because the clean air legislation discussed in Note 10 under "Air Quality" contained a prohibition against cost deferrals unless certain criteria are met, the NCUC denied the deferral of the ongoing effects. Since the NCUC order denied deferral of the ongoing effects, PEC ceased deferral of the ongoing effects during the second quarter for the six months ended June 30, 2003 related to its North Carolina retail jurisdiction. Pre-tax income for the three and six months ended June 30, 2003 increased by approximately $14 million, which represents a decrease in non-ARO cost of removal expense, partially offset by an increase in decommissioning expense. The Company provided additional information to the NCUC that demonstrated that deferral of the ongoing effects should also be allowed. In August of 2003, the NCUC revised its decision and approved the deferral of the ongoing effects of SFAS No. 143 at which time the $14 million was reversed. D. FERC Market Power Mitigation A FERC order issued in November 2001 on certain unaffiliated utilities' triennial market based wholesale power rate authorization updates required certain mitigation actions that those utilities would need to take for sales/purchases within their control areas and required those utilities to post information on their websites regarding their power systems' status. As a result of a request for rehearing filed by certain market participants, FERC issued an order delaying the effective date of the mitigation plan until after a planned technical conference on market power determination. In December 2003, the FERC issued a staff paper discussing alternatives and held a technical conference in January 2004. In April 2004, the FERC issued two orders concerning utilities' ability to sell wholesale electricity at market based rates. In the first order, the FERC adopted two new interim screens for assessing potential generation market power of applicants for wholesale market based rates, and described additional analyses and mitigation measures that could be presented if an applicant does not pass one of these interim screens. In July 2004, the FERC issued an order on rehearing affirming its conclusions in the April order. In the second order, the FERC initiated a rulemaking to consider whether the FERC's current methodology for determining whether a public utility should be allowed to sell wholesale electricity at market-based rates should be modified in any way. Management is unable to predict the outcome of these actions by the FERC or their effect on future results of operations and cash flows. However, the Company does not anticipate that the current operations of PEC or PEF would be impacted materially if they were unable to sell power at market-based rates in their respective control areas. 5. GOODWILL AND OTHER INTANGIBLE ASSETS The Company performed the annual goodwill impairment test in accordance with FASB Statement 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 2004, each of which indicated no impairment. The first annual impairment test for the Other segment will be performed in the fourth quarter 2004, since the goodwill was acquired in 2003. The changes in the carrying amount of goodwill for the periods ended June 30, 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 accounting adjustment - - - 4 4 ----------------------------------------------------------- Balance as of June 30, 2004 $ 1,922 $ 1,733 $ 64 $ 11 $ 3,730 ===========================================================
14 The gross carrying amount and accumulated amortization of the Company's intangible assets at June 30, 2004 and December 31, 2003, are as follows: June 30, 2004 December 31, 2003 ----------------------------------- ------------------------------- (in millions) Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization --------------- ----------------- -------------- ---------------- Synthetic fuel intangibles $ 134 $ (71) $ 140 $ (64) Power agreements acquired 221 (29) 221 (20) Other 64 (13) 62 (12) --------------- ----------------- -------------- ---------------- Total $ 419 $ (113) $ 423 $ (96) =============== ================= ============== ================
In June 2004, the Company sold, in two transactions, a combined 49.8 percent partnership interest in Colona Synfuel Limited Partnership, LLLP, one of its synthetic fuel operations. Approximately $6 million in synthetic fuel intangibles and $4 million in related accumulated amortization were included in the sale of the partnership interest. 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 June 30, 2004 and 2003 was $12 million and $9 million, respectively. Amortization expense recorded on intangible assets for the six months ended June 30, 2004 and 2003 was $21 million and $16 million, respectively. The estimated annual amortization expense for intangible assets for 2004 through 2008, in millions, is approximately $41, $34, $35, $35 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 Six Months Ended June 30 June 30 ------------------------- ----------------------- 2004 2003 2004 2003 ----------- ---------- ---------- -------- Weighted-average common shares - basic 242 236 242 235 Restricted stock awards 1 1 1 1 ----------- ---------- ---------- -------- Weighted-average shares - fully dilutive 243 237 243 236 ----------- ---------- ---------- --------
B. Comprehensive Income Comprehensive income for the three months ended June 30, 2004 and 2003 was $159 million and $154 million, respectively. Comprehensive income for the six months ended June 30, 2004 and 2003 was $256 million and $373 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 Progress Energy took advantage of favorable market conditions and entered into a new $1.1 billion five year line of credit, effective August 5, 2004, and expiring August 4, 2009. This facility replaces Progress Energy's $250 million 364 day line of credit and its three year $450 million line of credit, which were set to expire in November 2004. 15 On July 28, 2004, PEC extended its $165 million 364-day line of credit, which was to expire on July 29, 2004. The line of credit will expire on July 27, 2005. On April 30, 2004, PEC redeemed $34.7 million of Darlington County 6.6% Series Pollution Control Bonds at 102.5% of par, $1.795 million of New Hanover County 6.3% Series Pollution Control Bonds at 101.5% of par, and $2.58 million of Chatham County 6.3% Series Pollution Control Bonds at 101.5% of par with cash from operations. On March 1, 2004, Progress Energy used available cash and proceeds from the issuance of commercial paper to pay at maturity $500 million 6.55% senior unsecured notes. Cash and commercial paper capacity for this retirement was created primarily from proceeds of the sale of assets and early long-term debt financings in 2003. On February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25 million 6.48% medium term notes with excess cash. 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 cash from operations. For the three months ended June 30, 2004, the Company issued approximately 0.6 million shares of its common stock for approximately $29 million in proceeds from its Investor Plus Stock Purchase Plan and its employee benefit plans. For the six months ended June 30, 2004, the Company issued approximately 1.3 million shares of its common stock for approximately $58 million in proceeds from its Investor Plus Stock Purchase Plan and its employee benefit plans. For the six months ended June 30, 2004 and 2003, the dividends paid on common stock were approximately $280 million and $268 million, respectively. 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 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 and six months ended June 30 are: Three Months Ended June 30 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 recognized $ 5 $ 5 $ 14 $ 13 ===================== ======================
16 Six Months Ended June 30 Other Postretirement Pension Benefits Benefits ---------------------- ----------------------- (in millions) 2004 2003 2004 2003 ---------------------- ----------------------- Service cost $ 27 $ 26 $ 8 $ 7 Interest cost 55 54 17 15 Expected return on plan assets (75) (72) (2) (2) Amortization of actuarial (gain) loss 11 9 2 2 Other amortization, net - - 1 2 ---------------------- ----------------------- Net periodic cost $ 18 $ 17 $ 26 $ 24 Additional cost / (benefit) recognition (a) (8) (7) 1 1 ---------------------- ----------------------- Net periodic cost recognized $ 10 $ 10 $ 27 $ 25 ====================== =======================
(a) Due to the acquisition of FPC. See Note 16B of Progress Energy's Form 10-K for year ended December 31, 2003. 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. As of June 30, 2004, Progress Energy had $1 billion 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 between March 2006 and March 2011. During the year, Progress Energy has entered into $350 million notional of open interest rate fair value hedges. 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 June 30, 2004, PEC had $70 million notional of pay fixed forward starting swaps, entered into in March 2004, to hedge its exposure to interest rates with regard to a future issuance of debt and $26 million notional of pay fixed forward starting swaps, entered into in April 2004, to hedge its exposure to interest rates with regard to an upcoming railcar lease. In July 2004, PEC entered into an additional $30 million notional pay fixed forward swap related the future issuance of debt, increasing the total notional of pay fixed forward starting swaps to $126 million. These agreements have a computational period of ten years. In May 2004, the Company terminated interest rate cash flow hedges, with a total notional amount of $400 million, related to projected outstanding balances of commercial paper. Amounts in accumulated other comprehensive income related to these terminated hedges will be reclassified to earnings as the hedged interest payments occur. The Company holds interest rate collars with a varying notional amount (currently at the maximum of $195 million) to hedge floating rate exposure associated with variable rate long-term debt at Progress Ventures. The Company is required to hedge 50% of the amount outstanding under its bank facility through March 2007. 17 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. PEF has entered into derivative instruments to hedge its exposure to price fluctuations on fuel oil purchases. These instruments did not have a material impact on the Company's consolidated financial position or results of operations. 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 June 30, 2004, Progress Fuels Corporation is hedging exposures to the price variability of portions 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 's July 2004 forward mark-to-market losses were $7 million for the first quarter of 2004 and $3 million for the second quarter of 2004 . These mark-to-market losses are reflected in diversified business revenues and were related to an agreement to provide energy needed to fulfill a contract obligation and economic hedges used to mitigate exposures to fluctuations in commodity prices. 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. 18 Revenues --------------------------------------- Income from Continuing (in millions) Unaffiliated Intersegment Total Operations Assets ------------ ------------ ---------- ------------- ----------- FOR THE THREE MONTHS ENDED JUNE 30, 2004 PEC Electric $ 861 $ - $ 861 $ 97 $ 10,711 PEF 860 - 860 84 7,457 Fuels 325 68 393 56 1,156 CCO 72 - 72 5 1,784 Rail Services 285 - 285 4 532 Other 22 1 23 (30) 312 Corporate - (69) (69) (63) 4,283 ------------ ------------ ---------- ------------- ----------- Consolidated totals $ 2,425 $ - $ 2,425 $ 153 $ 26,235 ------------ ------------ ---------- ------------- ----------- FOR THE THREE MONTHS ENDED JUNE 30, 2003 PEC Electric $ 816 $ - $ 816 $ 89 PEF 767 - 767 61 Fuels 206 88 294 58 CCO 33 - 33 2 Rail Services 214 - 214 2 Other 14 3 17 - Corporate - (91) (91) (58) ------------ ------------ ---------- ------------- Consolidated totals $ 2,050 $ - $ 2,050 $ 154 ------------ ------------ ---------- ------------- Revenues --------------------------------------- Income from Continuing (in millions) Unaffiliated Intersegment Total Operations ------------ ------------ ---------- ------------- FOR THE SIX MONTHS ENDED JUNE 30, 2004 PEC Electric $ 1,762 $ - $ 1,762 $ 213 PEF 1,644 - 1,644 133 Fuels 598 151 749 104 CCO 105 - 105 (3) Rail Services 523 - 523 9 Other 44 1 45 (31) Corporate - (152) (152) (164) ------------ ------------ ---------- ------------- Consolidated totals $ 4,676 $ - $ 4,676 $ 261 ------------ ------------ ---------- ------------- FOR THE SIX MONTHS ENDED JUNE 30, 2003 PEC Electric $ 1,742 $ - $ 1,742 $ 223 PEF 1,495 - 1,495 132 Fuels 510 169 679 97 CCO 71 - 71 11 Rail Services 392 - 392 (1) Other 27 8 35 1 Corporate - (177) (177) (102) ------------ ------------ ---------- ------------- Consolidated totals $ 4,237 $ - $ 4,237 $ 361 ------------ ------------ ---------- -------------
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: 19 Three Months Ended Six Months Ended June 30 June 30 (in millions) 2004 2003 2004 2003 Other income Net financial trading gain (loss) $ 4 $ (1) $ 5 $ (1) Nonregulated energy and delivery services income 5 5 11 11 Investment gains 3 - - - AFUDC equity 2 4 4 6 Other 3 9 8 9 ---------- ---------- ---------- ---------- Total other income $ 17 $ 17 $ 28 $ 25 ---------- ---------- ---------- ---------- Other expense Nonregulated energy and delivery services expenses $ 5 $ 5 $ 9 $ 10 Donations 2 3 10 7 Investment losses - 9 - 8 Contingent value obligations unrealized loss 5 2 13 - Loss from equity investments 1 - 2 3 Write-off of non-trade receivable - - 7 - Other 4 7 12 12 ---------- ---------- ---------- ---------- Total other expense $ 17 $ 26 $ 53 $ 40 ---------- ---------- ---------- ---------- Other, net $ - $ (9) $ (25) $ (15) --------------------------------------------------------------------------------------------------------
Net financial trading gains and losses represent non-asset-backed trades of electricity and gas. 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. 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 Progress Energy and subsidiaries on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended commercial purposes. At June 30, 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 June 30, 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 $ 405 Guarantees supporting nuclear decommissioning 181 Guarantee supporting power supply agreements 457 Standby letters of credit 54 Surety bonds 132 Guarantees supporting nonregulated portfolio and energy marketing activities issued by subsidiaries of Progress Energy 82 Guarantees issued on behalf of third parties Other guarantees 24 ----------- Total $ 1,335 ===========
20 Guarantees Supporting Nonregulated Portfolio and Energy Marketing Activities Issued by Progress Energy Progress Energy has issued approximately $404 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 $19 million and $57 million of these guarantees were issued during the second three and six months ended June 30, 2004, respectively, to support Fuels and energy-marketing activities. The majority of the marketing contracts supported by the guarantees contain provisions that trigger guarantee obligations based on 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 June 30, 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. The remaining $1 million in guarantees issued by Progress Energy on behalf of affiliates is primarily related to performance and payments subject to other contingencies. 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. On May 12, 2004, PEC sent notice to the NRC informing them that due to the Renewed Facility Operating License for Robinson 2, the parent guarantee related to Robinson, would be cancelled as of June 30, 2004. As a result, the total parent guarantees for decommissioning decreased from $276 million to $181 million during the second quarter. 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 $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 as of June 30, 2004. In June 2004, PVI entered into a definitive agreement with five electric cooperatives in Georgia to provide long term full requirements power. The transaction closed during the second quarter of 2004. The Company issued a payment and performance guarantee to the cooperatives related to the power supply agreement totaling $150 million. In the event that Progress Energy's credit ratings fall below investment grade, Progress Energy would be required to provide additional security for this guarantee in form and amount acceptable to the cooperatives. The Company would immediately be required to deposit cash or provide letters of credit or other cash collateral up to 50% of the coverage amount of the guarantees issued (for a maximum of $75 million) in the event of a downgrade. Beyond that requirement, additional security requirements would be determined based upon a calculation of mark-to-market exposure, not to exceed $150 million. 21 Standby Letters of Credit As of June 30, 2004, financial institutions have issued $54 million of standby letters of credit to financial institutions for the Company for the benefit of third parties that have extended credit to the Company and certain subsidiaries. These letters of credit have been issued primarily for the purpose of supporting payments of trade payables, securing performance under contracts and lease obligations and self-insurance for workers' compensation. If a subsidiary does not pay amounts when due under a covered contract, the counterparty may present its claim for payment to the financial institution, which will in turn request payment from the Company. Any amounts owed by the Company's subsidiaries are reflected in the accompanying Consolidated Balance Sheets. Surety Bonds At June 30, 2004, the Company had $132 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. Guarantees Supporting Nonregulated Portfolio and Energy Marketing Activities Issued by Subsidiaries of Progress Energy Subsidiaries of Progress Energy have issued approximately $82 million of guarantees for obligations under tolling agreements, transmission agreements, gas agreements, construction agreements, fuel procurement agreements and trading operations. Other Guarantees The Company has other guarantees outstanding of approximately $24 million. Included in the $24 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 $14 million in affiliate guarantees is related primarily to prompt performance payments and other payments subject to contingencies. In connection with the sale of partnership interests in Colona (see Note 3.A), Progress Fuels indemnified the buyers against any claims related to Colona resulting from violations of any environmental laws. Although the terms of the agreement provide for no limitation to the maximum potential future payments under the indemnification, the Company has estimated that the maximum total of such payments would be insignificant. B. Insurance Both PEC and PEF are insured against public liability for a nuclear incident up to $10.76 billion 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 considering 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. PEC and PEF self-insure their transmission and distribution lines against loss due to storm damage and other natural disasters. PEF accrues $6 million annually to a storm damage reserve pursuant to a regulatory order and may defer losses in excess of the reserve. 22 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. 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 June 30, 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 is unable to 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. 23 PEF At June 30, 2004, PEF has accrued $27 million for probable and estimable costs related to various environmental sites. Of this accrual, $17 million is for costs associated with the remediation of distribution and substation transformers for which PEF has received approval from the FPSC for recovery through the Environmental Cost Recovery Clause (ECRC). For the six months ended June 30, 2004, PEF accrued an additional $8 million related to the remediation of transformers and a regulatory asset for the probable recovery through the ECRC. 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 is unable to provide an estimate of the reasonably possible total remediation costs beyond what is currently accrued. 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. As more activity occurs at these sites, PEF will assess the need to adjust the accruals. Florida Progress Corporation (FPC) 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 June 30, 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. 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 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. 24 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. In July 2004, the EPA announced it will reconsider certain issues arising from the final routine equipment replacement rule. Reconsideration does not impact the court-approved stay. The agency plans to issue a final decision on these reconsidered issues by year end. 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. The EPA rule allows credit to companies taking early action to meet the May 31, 2004 deadline. PEC is currently installing controls necessary to comply with the rule and, with the use of early action credits, 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. 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. 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 $45 million of these capital costs through June 30, 2004. PEC currently has approximately 5,100 MW of coal-fired generation capacity in North Carolina that is affected by this legislation. The law 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 law 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 law 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 $34 million in the quarters ended June 30, 2004 and 2003, respectively. PEC recognized amortization of $31 million and $54 million in the six months ended June 30, 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. 25 In 1997, the EPA's Mercury Study Report and Utility Report to Congress conveyed that mercury is not a risk to the average American and expressed uncertainty about whether reductions in mercury emissions from coal-fired power plants would reduce human exposure. Nevertheless, the EPA determined in 2000 that regulation of mercury emissions from coal-fired power plants was appropriate. 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, which the EPA has stated it prefers, is a mercury cap and trade program that would require limits to be met in two phases, 2010 and 2018. The EPA expects to finalize the mercury rule in March 2005. Achieving compliance with the proposal could involve significant capital costs which could be material and adverse 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 EPA expects to finalize the nickel rule in March 2005. The Company cannot predict the outcome of this matter. In December 2003, the EPA released its proposed Interstate Air Quality Rule, currently referred to as the Clean Air Interstate Rule (CAIR). 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. 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 law will reduce the costs required to meet the CAIR requirements for the Company's North Carolina units. Additional compliance costs will be determined later this year once the rule is finalized. 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 requirements imposed on PEC and PEF in the immediate and extended future. After many years of litigation and settlement negotiations the EPA adopted regulations in February 2004 for the implementation of Section 316(b) of the Clean Water Act. These regulations become effective September 7, 2004. 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 mining operations 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. 26 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 has stated it 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. In January 2003, the State of Nevada, Clark County, Nevada, and the City of Las Vegas petitioned the U.S. Court of Appeals for the District of Columbia Circuit for review of the Congressional override resolution. On July 9, 2004, the Court rejected the challenge to the constitutionality of the resolution approving Yucca Mountain, but ruled that the EPA was wrong to set a 10,000-year compliance period. The DOE continues to state it plans to begin operation of the repository at Yucca Mountain in 2010. PEC and PEF cannot predict the outcome of this matter. 27 With certain modifications and additional approval by the NRC including the installation of onsite dry storage facilities at Robinson (2005) and Brunswick (2010), 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 asserted defenses to the District's claims. SRS 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 stated that the City and the District seek "more than $300 million in damages and penalties." PEC was later added as a cross-defendant. In November 2003, PEC filed a motion to dismiss the plaintiffs' first amended complaint. In June 2004, the Company reached a settlement agreement with the District in this matter. The settlement totaled approximately $43.1 million and is included in diversified business cost of sales in the accompanying Consolidated Statement of Income for the three-months and six-months ended June 30, 2004. The accrual of the settlement was recorded on an undiscounted basis. The terms of the settlement require SRS to pay the District $10.1 million upon approval, and an additional $16 million in 2005 and $17 million 2006. In addition, during a transition period ending September 10, 2004, SRS will provide maintenance and training on the equipment and software it installed and maintained for the District. The agreement, upon approval, settles all claims and cross-claims related to SRS, Progress Energy, Progress Energy Solutions and PEC. 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. 28 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. On April 6, 2004, the Court entered a judgment against PEC in the amount of approximately $10 million. The Court did not rule on DMT's pending motion for attorneys' fees. On May 4, 2004, PEC authorized its outside counsel to file a notice of appeal of the April 6, 2004, judgment and on May 7, 2004, the notice of appeal was filed with the United States Court of Appeals for the Fourth Circuit. On June 8, 2004, DMT filed a motion to dismiss the appeal in the appeals court on the ground that PEC's notice of appeal should have been filed on or before May 6, 2004. On June 16, 2004, PEC filed a motion with the trial court requesting an extension of the deadline for the filing of the notice of appeal. On July 7, 2004, the parties agreed to postpone the appellate proceedings to allow the trial court to resolve PEC's motion for an extension of the notice of appeal deadline. PEC recorded a liability for the judgment of approximately $10 million and a regulatory asset for the probable recovery through its fuel adjustment clause in the first quarter of 2004. The Company cannot predict the outcome of this matter. 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. Synthetic fuel tax credit amounts not utilized are carried forward indefinitely as alternative minimum tax credits. 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. Total Section 29 credits generated to date (including those generated by FPC prior to its acquisition by the Company) are approximately $1.4 billion, of which $584 million have been used and $807 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 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 July 2004, Progress Energy was notified that the Internal Revenue Service (IRS) field auditors anticipate taking an adverse position regarding the placed-in-service date of the Company's four Earthco synthetic fuel facilities. Due to the auditors' position, the IRS has decided to exercise its right to withdraw from the Pre-Filing Agreement (PFA) program with Progress Energy. With the IRS's withdrawal from the PFA program, the review of Progress Energy's Earthco facilities is back on the normal procedural audit path of the Company's tax returns. The IRS has indicated that the field audit team will provide its written recommendation later this year. After the field audit team's written recommendation is received, the Company will begin the Appeals process within the IRS. Through June 30, 2004 the Company, on a consolidated basis, has claimed $1 billion of tax credits generated by Earthco facilities. If these credits were disallowed, the Company's one time exposure for cash tax payments would be $229 million (excluding interest), and earnings and equity would be reduced by $1 billion, excluding interest. The Company believes that the appeals process could take up to two years to complete, however, it cannot control the actual timing of resolution and cannot predict the outcome of this matter. 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 concluded the IRS PFA program with respect to Colona. 29 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 management's opinion, the Company is complying with all the necessary requirements to be allowed such credits under Section 29, and, although it cannot provide certainty, it believes that it will prevail in these matters. Accordingly, the Company has no current plans to alter its synthetic fuel production schedule as a result of these matters. However, should the Company fail to prevail in these matters, there could be material liability for previously taken Section 29 credits, with a material adverse impact on earnings and cash flows. 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 and disclosures 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. 30 CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC. CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2004 UNAUDITED CONSOLIDATED STATEMENTS of INCOME Three Months Ended June 30 Six Months Ended June 30 (in millions) 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------------- Operating Revenues Electric $ 861 $ 816 $ 1,762 $ 1,742 Diversified business 1 3 1 6 - ------------------------------------------------------------------------------------------------------- Total Operating Revenues 862 819 1,763 1,748 - ------------------------------------------------------------------------------------------------------- Operating Expenses Fuel used in electric generation 193 177 417 403 Purchased power 80 69 142 142 Operation and maintenance 226 210 435 400 Depreciation and amortization 127 142 254 281 Taxes other than on income 45 35 88 79 Diversified business - 2 - 3 - ------------------------------------------------------------------------------------------------------- Total Operating Expenses 671 635 1,336 1,308 - ------------------------------------------------------------------------------------------------------- Operating Income 191 184 427 440 - ------------------------------------------------------------------------------------------------------- Other Income (Expense) Interest income 1 2 2 3 Other, net 4 (8) (8) (10) - ------------------------------------------------------------------------------------------------------- Total Other Income (Expense) 5 (6) (6) (7) - ------------------------------------------------------------------------------------------------------- Interest Charges Interest charges 47 49 96 98 Allowance for borrowed funds used during construction - (1) (1) (2) - ------------------------------------------------------------------------------------------------------- Total Interest Charges, Net 47 48 95 96 - ------------------------------------------------------------------------------------------------------- Income before Income Tax 149 130 326 337 Income Tax Expense 53 41 115 113 - ------------------------------------------------------------------------------------------------------- Net Income 96 89 211 224 Preferred Stock Dividend Requirement - - 1 1 - ------------------------------------------------------------------------------------------------------- Earnings for Common Stock $ 96 $ 89 $ 210 $ 223 - -------------------------------------------------------------------------------------------------------
See Notes to Consolidated Interim Financial Statements. 31 CAROLINA POWER & Light Company d/b/a PROGRESS ENERGY CAROLINAS, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS (in millions) June 30 December 31 ASSETS 2004 2003 - ------------------------------------------------------------------------------------------------------- Utility Plant Utility plant in service $ 13,516 $ 13,331 Accumulated depreciation (5,390) (5,258) - ------------------------------------------------------------------------------------------------------- Utility plant in service, net 8,126 8,073 Held for future use 5 5 Construction work in progress 294 306 Nuclear fuel, net of amortization 161 159 - ------------------------------------------------------------------------------------------------------- Total Utility Plant, Net 8,586 8,543 - ------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents 44 238 Accounts receivable 253 265 Unbilled accounts receivable 146 145 Receivables from affiliated companies 11 27 Inventory 307 348 Deferred fuel cost 126 113 Prepayments and other current assets 57 82 - ------------------------------------------------------------------------------------------------------- Total Current Assets 944 1,218 - ------------------------------------------------------------------------------------------------------- Deferred Debits and Other Assets Regulatory assets 506 477 Nuclear decommissioning trust funds 542 505 Miscellaneous other property and investments 169 169 Other assets and deferred debits 115 118 - ------------------------------------------------------------------------------------------------------- Total Deferred Debits and Other Assets 1,332 1,269 - ------------------------------------------------------------------------------------------------------- Total Assets $ 10,862 $ 11,030 - ------------------------------------------------------------------------------------------------------- Capitalization and Liabilities - ------------------------------------------------------------------------------------------------------- Common Stock Equity Common stock without par value, authorized 200 million shares, 160 million shares issued and outstanding $ 1,971 $ 1,953 Unearned ESOP common stock (76) (89) Accumulated other comprehensive loss (4) (7) Retained earnings 1,361 1,380 - ------------------------------------------------------------------------------------------------------- Total Common Stock Equity 3,252 3,237 - ------------------------------------------------------------------------------------------------------- Preferred Stock - Not Subject to Mandatory Redemption 59 59 Long-Term Debt, Net 2,748 3,086 - ------------------------------------------------------------------------------------------------------- Total Capitalization 6,059 6,382 - ------------------------------------------------------------------------------------------------------- Current Liabilities Current portion of long-term debt 300 300 Accounts payable 181 188 Payables to affiliated companies 77 136 Notes payable to affiliated companies 26 25 Interest accrued 57 64 Short-term obligations 68 4 Other current liabilities 229 166 - ------------------------------------------------------------------------------------------------------- Total Current Liabilities 938 883 - ------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Accumulated deferred income taxes 1,132 1,125 Accumulated deferred investment tax credits 145 148 Regulatory liabilities 1,262 1,197 Asset retirement obligations 959 932 Other liabilities and deferred credits 367 363 - ------------------------------------------------------------------------------------------------------- Total Deferred Credits and Other Liabilities 3,865 3,765 - ------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 10) - ------------------------------------------------------------------------------------------------------- Total Capitalization and Liabilities $ 10,862 $ 11,030 - -------------------------------------------------------------------------------------------------------
See Notes to Consolidated Interim Financial Statements. 32 CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC. UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS Six Months Ended June 30 (in millions) 2004 2003 - --------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 211 $ 224 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 297 326 Deferred income taxes 4 (38) Investment tax credit (4) (5) Deferred fuel cost (13) 9 Cash provided (used) by changes in operating assets and liabilities: Accounts receivable 23 35 Inventories 32 (1) Prepayments and other current assets 8 14 Accounts payable (50) 2 Other current liabilities 61 58 Other 53 42 - --------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 622 666 - --------------------------------------------------------------------------------------------------------------- Investing Activities Gross property additions (248) (259) Nuclear fuel additions (47) (46) Contributions to nuclear decommissioning trust (18) (18) Other investing activities - (4) - --------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (313) (327) - --------------------------------------------------------------------------------------------------------------- Financing Activities Net increase (decrease) in short-term obligations 64 (74) Net change in intercompany notes 1 99 Retirement of long-term debt (339) (165) Dividends paid to parent (228) (203) Dividends paid on preferred stock (1) (1) - --------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (503) (344) - --------------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents (194) (5) Cash and Cash Equivalents at Beginning of Period 238 18 - ---------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 44 $ 13 - --------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash paid during the year - interest (net of amount capitalized) $ 100 $ 95 income taxes (net of refunds) $ 82 $ 120 - ----------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Interim Financial Statements. 33 CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION A. Organization Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. (PEC) 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, PEC is also involved in 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. PEC collects from customers certain excise taxes, which include gross receipts tax, franchise taxes, and other excise taxes, levied by the state or local government upon the customers. PEC accounts for excise taxes on a gross basis. For the three months ended June 30, 2004 and 2003, excise taxes of approximately $23 million and $18 million, respectively, are included in taxes other than income in the accompanying Consolidated Statements of Income. For the six months ended June 30, 2004 and 2003, excise taxes of approximately $45 million and $40 million, respectively, are included in taxes other than income in the accompanying Consolidated Statements of Income. These approximate amounts are also included in utility revenues. 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: 34 Three Months Ended Six Months Ended June 30 June 30 -------------------- --------------------- (in millions) 2004 2003 2004 2003 ---------- --------- --------- ----------- Net Income, as reported $ 96 $ 89 $ 211 $ 224 Deduct: Total stock option expense determined under fair value method for all awards, net of related tax 2 1 4 2 effects ---------- --------- --------- ----------- Pro forma net income $ 94 $ 88 $ 207 $ 222 ========== ========= ========= ===========
D. Consolidation of Variable Interest Entities PEC consolidates all voting interest entities in which it owns a majority voting interest and all variable interest entities for which it is the primary beneficiary in accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46R). During the first six months of 2004 and 2003, PEC did not participate in the creation of, or obtain a significant new variable interest in, any variable interest entity. PEC 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 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 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 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 PEC's Consolidated Balance Sheets. PEC has variable interests in two power plants resulting from long-term power purchase contracts. PEC has requested the necessary information to determine if the counterparties are variable interest entities or to identify the primary beneficiaries. Both entities declined to provide PEC with the necessary financial information, and PEC has applied the information scope exception in FIN No. 46R, paragraph 4(g). PEC's only significant exposure to variability from these contracts results from fluctuations in the market price of fuel used by the two entities' plants to produce the power purchased by PEC. PEC is able to recover these fuel costs under its fuel clause. Total purchases from these counterparties were approximately $21 million and $19 million in the first six months of 2004 and 2003, respectively. PEC will continue its efforts to obtain the necessary information to fully apply FIN No. 46R to these contracts. The combined generation capacity of the two entities' power plants is approximately 880 MW. PEC believes that if it is determined to be the primary beneficiary of these two entities, the effect of consolidating the entities would result in increases to total assets, long-term debt and other liabilities, but would have an insignificant or no impact on PEC's common stock equity, net earnings, or cash flows. However, as PEC has not received any financial information from these two counterparties, the impact cannot be determined at this time. PEC also has interests in several other variable interest entities for which PEC is not the primary beneficiary. These arrangements include investments in approximately 22 limited partnerships, limited liability corporations and venture capital funds and two building leases with special-purpose entities. The aggregate maximum loss exposure at June 30, 2004, that PEC could be required to record in its income statement as a result of these arrangements totals approximately $23 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. 35 2. NEW ACCOUNTING STANDARDS 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 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. The FASB recently issued definitive accounting guidance for the Act in FASB Staff Position 106-2, which is effective for PEC in the third quarter of 2004. FASB Staff Position 106-2 will result in the recognition of lower OPEB costs to reflect prescription drug-related federal subsidies to be received under the Act. PEC is in the process of quantifying the impact of the Act on OPEB costs. 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 ratably over five years beginning in January 2005. Approximately $10 million related to storm costs incurred during the first quarter of 2004 was deferred in that quarter. During the first quarter of 2004, PEC met the requirements of both the NCUC and the SCPSC for the implementation of a depreciation study which allowed the utility to reduce the rates used to calculate depreciation expense. As a result, depreciation expense decreased $10 million for the three months ended June 30, 2004 compared to the prior year quarter and decreased $18 million for the six months ended June 30, 2004 compared to the prior year six month period. 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 $33 million invested in GridSouth related to startup costs at June 30, 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. C. Implementation of SFAS No. 143 In connection with the implementation of SFAS No. 143 in 2003, PEC filed a request with the NCUC requesting deferral of the difference between expense pursuant to SFAS No. 143 and expense as previously determined by the NCUC. The NCUC granted the deferral of the January 1, 2003 cumulative adjustment. Because the clean air legislation discussed in Note 12 under "Air Quality" contained a prohibition against cost deferrals unless certain criteria are met, the NCUC denied the deferral of the ongoing effects. Since the NCUC 36 order denied deferral of the ongoing effects, PEC ceased deferral of the ongoing effects during the second quarter for the six months ended June 30, 2003 related to its North Carolina retail jurisdiction. Pre-tax income for the three and six months ended June 30, 2003 increased by approximately $14 million, which represents a decrease in non-ARO cost of removal expense, partially offset by an increase in decommissioning expense. The Company provided additional information to the NCUC that demonstrated that deferral of the ongoing effects should also be allowed. In August of 2003, the NCUC revised its decision and approved the deferral of the ongoing effects of SFAS No. 143 at which time the $14 million was reversed. D. FERC Market Power Mitigation A FERC order issued in November 2001 on certain unaffiliated utilities' triennial market based wholesale power rate authorization updates required certain mitigation actions that those utilities would need to take for sales/purchases within their control areas and required those utilities to post information on their websites regarding their power systems' status. As a result of a request for rehearing filed by certain market participants, FERC issued an order delaying the effective date of the mitigation plan until after a planned technical conference on market power determination. In December 2003, the FERC issued a staff paper discussing alternatives and held a technical conference in January 2004. In April 2004, the FERC issued two orders concerning utilities' ability to sell wholesale electricity at market based rates. In the first order, the FERC adopted two new interim screens for assessing potential generation market power of applicants for wholesale market based rates, and described additional analyses and mitigation measures that could be presented if an applicant does not pass one of these interim screens. In July 2004, the FERC issued an order on rehearing affirming its conclusions in the April order. In the second order, the FERC initiated a rulemaking to consider whether the FERC's current methodology for determining whether a public utility should be allowed to sell wholesale electricity at market-based rates should be modified in any way. Management is unable to predict the outcome of these actions by the FERC or their effect on future results of operations and cash flows. However, PEC does not anticipate that its current operations would be impacted materially if they were unable to sell power at market-based rates in their respective control areas. 4. COMPREHENSIVE INCOME Comprehensive income for the three months ended June 30, 2004 and 2003 was $98 million and $88 million, respectively. Comprehensive income for the six months ended June 30, 2004 and 2003 was $214 million and $223 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 July 28, 2004, PEC extended its $165 million 364-day line of credit, which was to expire on July 29, 2004. The line of credit will expire on July 27, 2005. On April 30, 2004, PEC redeemed $34.7 million of Darlington County 6.6% Series Pollution Control Bonds at 102.5% of par, $1.795 million of New Hanover County 6.3% Series Pollution Control Bonds at 101.5% of par, and $2.58 million of Chatham County 6.3% Series Pollution Control Bonds at 101.5% of par with cash from operations. 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 cash from operations. 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 and six months ended June 30 are: 37 Three Months Ended June 30 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 $ 2 $ 1 $ 6 $ 5 ======================= ===================== Six Months Ended June 30 Other Postretirement Pension Benefits Benefits ----------------------- --------------------- (in millions) 2004 2003 2004 2003 ----------------------- --------------------- Service cost $ 12 $ 11 $ 4 $ 3 Interest cost 26 24 8 7 Expected return on plan assets (34) (33) (2) (1) Amortization, net 1 - 2 2 ----------------------- --------------------- Net periodic cost $ 5 $ 2 $ 12 $ 11 ======================= =====================
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. As of June 30, 2004, PEC had $70 million notional of pay fixed forward starting swaps, entered into in March 2004, to hedge its exposure to interest rates with regard to a future issuance of debt and $26 million notional of pay fixed forward starting swaps, entered into in April 2004, to hedge its exposure to interest rates with regard to an upcoming railcar lease. In July 2004, PEC entered into an additional $30 million notional pay fixed forward swap, increasing the total notional of pay fixed forward starting swaps to $126 million. These agreements have a computational period of ten years. 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. The financial information for PEC segments for the three and six months ended June 30, 2004 and 2003 is as follows: Three Months Ended June 30 2004 2003 ---------------------------------- --------------------------------- PEC PEC (in millions) Electric Other Total Electric Other Total ---------------------------------- --------------------------------- Total revenues $ 861 $ 1 $ 862 $ 816 $ 3 $ 819 Earnings available for common 97 (1) 96 89 - 89
38 Six Months Ended June 30 2004 2003 ---------------------------------- --------------------------------- PEC PEC (in millions) Electric Other Total Electric Other Total ----------- ---------- ----------- ----------- ---------- ---------- Total revenues $ 1,762 $ 1 $ 1,763 $ 1,742 $ 6 $ 1,748 Earnings available for common 213 (3) 210 223 - 223
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 and six months ended June 30 are as follows: Three Months Ended Six Months Ended June 30 June 30 -------------------------- ------------------------- (in millions) 2004 2003 2004 2003 ---------- ----------- ---------- ----------- Other income Net financial trading gain (loss) $ 4 $ - $ 5 $ (1) Nonregulated energy and delivery services income 2 2 4 4 Investment gains 2 - - - AFUDC equity 1 1 2 2 Other - 4 3 4 ---------- ----------- ---------- ----------- Total other income $ 9 $ 7 $ 14 $ 9 ---------- ----------- ---------- ----------- Other expense Nonregulated energy and delivery services expenses $ 2 $ 2 $ 4 $ 4 Donations 1 1 5 3 Investment losses - 9 - 8 Write-off of non-trade receivable - - 7 - Other 2 3 6 4 ---------- ----------- ---------- ----------- Total other expense $ 5 $ 15 $ 22 $ 19 ---------- ----------- ---------- ----------- Other, net $ 4 $ (8) $ (8) $ (10) ========== =========== ========== ===========
Net financial trading gains and losses represent non-asset-backed trades of electricity and gas. 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 and significant changes to the commitments discussed in Note 16 of the Company's 2003 Annual Report on Form 10-K are described below. A. Guarantees As a part of normal business, PEC enters 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 PEC and subsidiaries on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish PEC and the subsidiaries' intended commercial purposes. Guarantees at June 30, 2004, are summarized in the table and discussed in the subsequent paragraphs. At June 30, 2004, outstanding guarantees consisted of the following: (in millions) Standby letters of credit $ 3 Surety bonds 18 ------------ Total $ 21 ============ 39 Standby Letters of Credit Financial institutions have issued standby letters of credit to financial institutions for PEC and certain subsidiaries for the benefit of third parties that have extended credit to PEC and certain subsidiaries. As of June 30, 2004, PEC and certain subsidiaries have outstanding letters of credit totaling $3 million. These letters of credit have been issued primarily for the purpose of securing performance under contracts and supporting payments on interest payments on outstanding debt obligations and self insurance for workers compensation. If PEC or 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 PEC Consolidated Balance Sheets. Surety Bonds At June 30, 2004, PEC had $18 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. On May 12, 2004 PEC sent notice to the NRC that due to the Renewed Facility Operating License for Robinson 2, the parent guarantee related to Robinson, would be cancelled as of June 30, 2004. As a result, the total parent guarantees for decommissioning decreased from $276 million to $181 million during the second quarter. B. Insurance PEC is insured against public liability for a nuclear incident up to $10.76 billion 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 considering 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. PEC self-insures its transmission and distribution lines against loss due to storm damage and other natural disasters. 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. 40 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. PEC has filed claims with its general liability insurance carriers to recover costs arising out of actual or potential environmental liabilities. All claims have been 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 June 30, 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 is unable to 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 41 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. 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. In July 2004, the EPA announced it will reconsider certain issues arising from the final routine equipment replacement rule. Reconsideration does not impact the court-approved stay. The agency plans to issue a final decision on these reconsidered issues by year's end. PEC 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 and South Carolina, 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, with the use of early action credits, 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. 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 $45 million of these capital costs through June 30, 2004. PEC currently has approximately 5,100 MW of coal-fired generation capacity in North Carolina that is affected by this legislation. The law 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 law 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 law 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 $34 million in the quarters ended June 30, 2004 and 2003, respectively. PEC recognized amortization of $31 million and $54 million in the six months ended June 30, 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. PEC cannot predict the future regulatory interpretation, implementation or impact of this law. 42 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, which the EPA has stated it prefers, is a mercury cap and trade program that would require limits to be met in two phases, 2010 and 2018. The EPA expects to finalize the mercury rule in March 2005. Achieving compliance with the 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 EPA expects to finalize the nickel rule in March 2005. PEC cannot predict the outcome of this matter. In December 2003, the EPA released its proposed Interstate Air Quality Rule, currently referred to as the Clean Air Interstate Rule (CAIR). 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. 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 law will reduce the costs required to meet the CAIR requirements for PEC's North Carolina units. Additional compliance costs will be determined later this year once the rule is finalized. 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 requirements imposed on PEC in the immediate and extended future. After many years of litigation and settlement negotiations the EPA adopted regulations in February 2004 for the implementation of Section 316(b) of the Clean Water Act. These regulations will become effective September 7, 2004. 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 has stated it 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. 43 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. In January 2003, the State of Nevada, Clark County, Nevada, and the City of Las Vegas petitioned the U.S. Court of Appeals for the District of Columbia Circuit for review of the Congressional override resolution. On July 9, 2004, the Court rejected the challenge to the constitutionality of the resolution approving Yucca Mountain, but ruled that the EPA was wrong to set a 10,000-year compliance period. The DOE continues to state it plans to begin operation of the repository at Yucca Mountain in 2010. 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 (2010), 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. 44 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. On April 6, 2004, the Court entered a judgment against PEC in the amount of approximately $10 million. The Court did not rule on DMT's pending motion for attorneys' fees. On May 4, 2004, PEC authorized its outside counsel to file a notice of appeal of the April 6, 2004 judgment and on May 7, 2004, the notice of appeal was filed with the United States Court of Appeals for the Fourth Circuit. On June 8, 2004 DMT filed a motion to dismiss the appeal in the appeals court on the ground that PEC's notice of appeal should have been filed on or before May 6, 2004. On June 16, 2004, PEC filed a motion with the trial court requesting an extension of the deadline for the filing of the notice of appeal. On July 7, 2004, the parties agreed to postpone the appellate proceedings to allow the trial court to resolve PEC's motion for an extension of the notice of appeal deadline. PEC recorded a liability of approximately $10 million for the judgment and a regulatory asset for the probable recovery through its fuel adjustment clause in the first quarter of 2004. PEC cannot predict the outcome of this matter. 4. PEC 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 PEC's consolidated results of operations or financial position. 45 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. 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. 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 , timing of maintenance on electric generating units and timing of synthetic fuel production, 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 drilling and production in Texas and Louisiana, coal terminal services, coal mining, the production of synthetic fuels and related services, and fuel transportation and delivery, all 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 service operations, which do not meet the requirements for separate segment reporting disclosure. In this section, earnings and the factors affecting earnings for the three and six months ended June 30, 2004 as compared to the same periods 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 June 30, 2004, Progress Energy's net income was $154 million or $0.63 per share compared to $157 million or $0.66 per share for the same period in 2003. For the six months ended June 30, 2004, Progress Energy's net income was $262 million or $1.08 per share compared to $376 million or $1.60 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 wholesale sales, primarily by PEC Electric. o Higher operations and maintenance (O&M) costs at the utilities due to increased spending for plant outages in both the Carolinas and Florida and planned reliability improvements in Florida. o Recording of litigation settlement reached in the civil suit by SRS. 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. 46 Partially offsetting these items were: o Favorable weather in the Carolinas. o Reduction in revenue sharing provisions in Florida o Utility customer growth in both the Carolinas and Florida. o Lower depreciation and amortization costs at the utilities. o Increased natural gas earnings. 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 for the second quarter of 2004 and $0.04 for the six months ended June 30, 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 which resulted in four months earnings in the first quarter of 2003 and changed reported net income for subsequent quarters. Earnings increased $4 million and $15 million, respectively, for the three and six months ended June 30, 2003 as compared to amounts originally reported. The Company's segments contributed the following profits or losses for the three and six months ended June 30, 2004 and 2003: - -------------------------------------------------------------------------------------- (in millions) Three Months Ended Six Months Ended June 30 June 30 - -------------------------------------------------------------------------------------- Business Segment 2004 2003 2004 2003 - ------------------------------------------------------------------------------------- PEC Electric $ 97 $ 89 $ 213 $ 223 PEF 84 61 133 132 Fuels 56 58 104 97 CCO 5 2 (3) 11 Rail 4 2 9 (1) Other (30) - (31) 1 ----------------------------------------- Total Segment Profit 216 212 425 463 Corporate (63) (58) (164) (102) ----------------------------------------- Income from continuing operations 153 154 261 361 NCNG discontinued operations 1 3 1 14 Cumulative effect of change in accounting principle, net of tax - - - 1 ----------------------------------------- Net income $ 154 $ 157 $ 262 $ 376 - -------------------------------------------------------------------------------------
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. 47 PROGRESS ENERGY CAROLINAS ELECTRIC PEC Electric contributed segment profits of $97 million and $89 million for the three months ended March 31, 2004 and 2003, respectively, and $213 million and $223 million for the six months ended June 30, 2004 and 2003, respectively. The increase in profits for the three months ended June 30, 2004 as compared to the same period in 2003 is due primarily to favorable weather, increased revenue from customer growth, lower depreciation and amortization charges and the impact of losses booked on investments in limited partnerships in 2003, partially offset by higher operations and maintenance charges and lower wholesale sales. The decrease in profits for the six months ended June 30, 2004 as compared to the same period in 2003 is primarily due to lower off-system wholesale sales and higher O&M charges, partially offset by the favorable impact of weather, increased revenues from customer growth and lower depreciation and amortization charges. PEC Electric's revenues for the three and six months ended June 30, 2004 and 2003, and the percentage change by customer class are as follows: - ----------------------------------------------------------------------------------------------------- (in millions of $) Three Months Ended June 30 Six Months Ended June 30 - ----------------------------------------------------------------------------------------------------- Customer Class 2004 Change % Change 2003 2004 Change % Change 2003 - ----------------------------------------------------------------------------------------------------- Residential $ 284 $ 36 14.5 $ 248 $ 655 $ 50 8.3 $ 605 Commercial 213 14 7.0 199 420 20 5.0 400 Industrial 161 5 3.2 156 308 6 2.0 302 Governmental 19 1 5.6 18 38 2 5.6 36 ------------------ -------------------------- --------- Total retail revenues 677 56 9.0 621 1,421 78 5.8 1,343 Wholesale 139 (15) (9.7) 154 295 (69) (19.0) 364 Unbilled 24 1 23 1 8 (7) Miscellaneous 21 3 16.7 18 45 3 7.1 42 ------------------ -------------------------- --------- Total electric revenues $ 861 $ 45 5.5 $ 816 $ 1,762 $ 20 1.1 $ 1,742 - -----------------------------------------------------------------------------------------------------
PEC Electric's energy sales for the three and six months ended June 30, 2004 and 2003, and the amount and percentage change by customer class are as follows: - ------------------------------------------------------------------------------------------------------- (in thousands of mWh) Three Months Ended June 30 Six Months Ended June 30 - ------------------------------------------------------------------------------------------------------- Customer Class 2004 Change % Change 2003 2004 Change % Change 2003 - ------------------------------------------------------------------------------------------------------- Residential 3,525 473 15.5 3,052 8,266 627 8.2 7,639 Commercial 3,172 226 7.7 2,946 6,230 300 5.1 5,930 Industrial 3,280 83 2.6 3,197 6,273 71 1.1 6,202 Governmental 337 20 6.3 317 682 22 3.3 660 ------------------ -------------------------- --------- Total retail revenues 10,314 802 8.4 9,512 21,451 1,020 5.0 20,431 Wholesale 3,114 (187) (5.7) 3,301 6,904 (1,016) (12.8) 7,920 Unbilled 404 8 396 20 104 (84) ------------------ -------------------------- --------- Total mWh sales 13,832 623 4.7 13,209 28,375 108 0.4 28,267 - -------------------------------------------------------------------------------------------------------
Three months ended June 30, 2004 compared to the three months ended June 30, 2003 PEC Electric's revenues, excluding recoverable fuel revenues of $156 million and $137 million for the three months ended June 30, 2004 and 2003, respectively, increased $26 million. The increase in revenues was due primarily to favorable weather, with cooling degree days 59% above prior year. In addition, customer growth was favorable compared to prior year. PEC Electric has approximately 26,000 additional customers as of June 30, 2004 compared to June 30, 2003. The increase in retail revenues was offset partially by a reduction in wholesale revenues. Revenues for the quarter ended June 30, 2003 included strong off-system wholesale sales to the Northeastern United States in the month of April as a result of favorable market conditions. Fuel and purchased power costs represent the costs of generation, which includes fuel purchases for generation, as well as energy purchased in the market to meet customer load. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, changes in these expenses do not have a material impact on earnings. The difference between fuel and purchased power costs incurred and associated fuel revenues that is subject to recovery is deferred for future collection or refund to customers. 48 Fuel and purchased power expenses increased $27 million from $246 million for the three months ended June 30, 2003 to $273 million for the three months ended June 30, 2004. Fuel used in electric generation increased $16 million to $193 compared to the same period in the prior year. This increase is primarily due to higher system requirements caused by favorable weather and customer growth. Purchased power expenses increased $11 million to $80 million compared to prior year due primarily to an increase in price. O&M costs were $226 million for the three months ended June 30, 2004, which represents a $16 million increase compared to the same period in 2003. O&M costs increased $13 million primarily due to an increase in outage scope and duration at the nuclear plants. Depreciation and amortization expense decreased $15 million from $142 million for the quarter ended June 30, 2003 to $127 million for the quarter ended June 30, 2004. During the first half 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. The new depreciation study provides support for reducing depreciation expense on an annual basis by approximately $40 million for 2004. The reduction in depreciation expense is primarily attributable to extended lives of nuclear generation, offset by increases for distribution assets. As a result depreciation expense decreased $10 million compared to the prior year quarter. In addition, clean air amortization decreased $18 million compared to the prior year. These items were partially offset by higher depreciation expense due to assets placed in service of $4 million and the impact of a $14 million adjustment booked in 2003 related to the implementation of SFAS No. 143. In the prior year, PEC filed a request with the NCUC requesting deferral of the difference between expense pursuant to SFAS No. 143 and expense as previously determined by the NCUC. The NCUC granted deferral of the cumulative adjustment but denied deferral of the ongoing effects. As a result, PEC ceased deferral of the ongoing effects during the second quarter of 2003 related to its North Carolina retail rate jurisdictions. This resulted in a reduction of depreciation and amortization expense for the quarter ended June 30, 2003 of $14 million which represented a decrease in non-ARO cost of removal expense partially offset by an increase in decommissioning expense. In August of 2003, the NCUC revised its decision and approved deferral of the ongoing effects of SFAS No. 143 at which time the $14 million reduction was reversed. Other expenses have decreased $12 million for the three months ended June 30, 2004 as compared to the same period in the prior year. This decrease is primarily due to losses on limited investment partnerships recorded in 2003. Taxes other than on income have increased $10 million from $35 million for the three months ended June 30, 2003 to $45 million for the three months ended June 30, 2004. This increase is due to an increase in gross receipts taxes of $5 million related to an increase in revenues and a 2004 adjustment related to the prior year, and an increase in payroll taxes of $3 million. Six months ended June 30, 2004 compared to the six months ended June 30, 2003 PEC Electric's revenues, excluding recoverable fuel revenues of $322 million and $293 million for the six months ended June 30, 2004 and 2003, respectively, decreased $9 million. The decrease in revenues was due primarily to lower wholesale sales. Revenues for the six months ended June 30, 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 cooling degree days 58% above prior year. In addition, favorable customer growth partially offset the decrease in wholesale sales. Fuel and purchased power costs represent the costs of generation, which includes fuel purchases for generation, as well as energy purchased in the market to meet customer load. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, changes in these expenses do not have a material impact on earnings. The difference between fuel and purchased power costs incurred and associated fuel revenues that is subject to recovery is deferred for future collection or refund to customers. Fuel and purchased power expenses were $559 million for the six months ended June 30, 2004, which represents a $14 million increase compared to the same period in the prior year. This increase is primarily due to higher system requirements caused by favorable weather and customer growth. 49 O&M costs were $435 million for the six months ended June 30, 2004, which represents a $35 million increase compared to the same period 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 $18 million primarily due to an increase in outage scope and duration at the nuclear plants. Depreciation and amortization expense decreased $27 million from $281 million for the six months ended June 30, 2003 to $254 million for the six months ended June 30, 2004. As previously discussed, PEC filed a depreciation study which allowed the utility to reduce the rates used to calculate depreciation expense. The impact of the study for the six months ended June 30, 2004 was a reduction of depreciation of $18 million compared to the same prior year period. In addition, clean air amortization for the six months ended June 30, 2004 decreased $23 million compared to the same prior year period. These items were partially offset by higher depreciation expense due to assets placed in service of $8 million and the $14 million impact of the adjustment booked in 2003 related to the implementation of SFAS No. 143 as previously discussed. Taxes other than on income have increased $9 million from $79 million for the six months ended June 30, 2003 to $88 million for the six months ended June 30, 2004. This increase is due to an increase in gross receipts taxes of $5 million related to an increase in revenues and a 2004 adjustment related to the prior year, and an increase in property taxes of $2 million. PROGRESS ENERGY FLORIDA PEF contributed segment profits of $84 million and $61 million for the three months ended June 30, 2004 and 2003, respectively, and $133 million and $132 million for the six months ended June 30, 2004 and 2003, respectively. The increase in profits for the three months ended June 30, 2004 when compared to 2003 is primarily due to a reduction in the provision for revenue sharing, the additional return on investment for the Hines 2 plant and favorable customer growth. Profits for the six months ended June 30, 2004 increased slightly due to a reduction in the provision for revenue sharing, favorable customer growth, and the additional return on investment on the Hines 2 plant, partially offset by higher O&M charges and increased depreciation expense from assets placed in service. PEF's electric revenues for the three and six months ended June 30, 2004 and 2003, and the amount and percentage change by customer class are as follows: - -------------------------------------------------------------------------------------------------------- (in millions of $) Three Months Ended June 30 Six Months Ended June 30 - -------------------------------------------------------------------------------------------------------- Customer Class 2004 Change % Change 2003 2004 Change % Change 2003 - -------------------------------------------------------------------------------------------------------- Residential $ 422 $ 8 1.9 $ 414 $ 824 $ 26 3.3 $ 798 Commercial 214 22 11.5 192 395 53 15.5 342 Industrial 66 10 17.9 56 128 24 23.1 104 Governmental 52 6 13.0 46 99 15 17.9 84 Retail revenue sharing (3) 25 (28) (7) 21 (28) ----------------- --------------------------- ---------- Total retail revenues 751 71 10.4 680 1,439 139 10.7 1,300 Wholesale 53 3 6.0 50 120 (1) (0.8) 121 Unbilled 24 17 7 18 11 7 Miscellaneous 32 2 6.7 30 67 - - 67 ----------------- --------------------------- ---------- Total electric revenues $ 860 $ 93 12.1 $ 767 $ 1,644 $ 149 10.0 $ 1,495 - --------------------------------------------------------------------------------------------------------
PEF's electric energy sales for the three and six months ended June 30, 2004 and 2003, and the amount and percentage change by customer class are as follows: - -------------------------------------------------------------------------------------------------------- (in thousands of mWh) Three Months Ended June 30 Six Months Ended June 30 - -------------------------------------------------------------------------------------------------------- Customer Class 2004 Change % Change 2003 2004 Change % Change 2003 - -------------------------------------------------------------------------------------------------------- Residential 4,505 (198) (4.2) 4,703 8,797 (459) (5.0) 9,256 Commercial 2,941 (10) (0.3) 2,951 5,431 38 0.7 5,393 Industrial 1,051 43 4.3 1,008 2,074 150 7.8 1,924 Governmental 751 9 1.2 742 1,423 25 1.8 1,398 ----------------- --------------------------- ---------- Total retail energy sales 9,248 (156) (1.7) 9,404 17,725 (246) (1.4) 17,971 Wholesale 1,093 203 22.8 890 2,415 249 11.5 2,166 Unbilled 790 292 498 655 101 554 ----------------- --------------------------- ---------- Total mWh sales 11,131 339 3.1 10,792 20,795 104 0.5 20,691 - --------------------------------------------------------------------------------------------------------
50 Three months ended June 30, 2004 compared to the three months ended June 30, 2003 PEF's revenues, excluding recoverable fuel and other pass-through revenues of $479 million and $422 million for the three months ended June 30, 2004 and 2003, respectively, increased $36 million. This increase was due primarily to a reduction in the provision for revenue sharing of $25 million. The provision for revenue sharing in the prior year included an additional $18 million related to 2002 as ordered by the FPSC and the year to date accrual for 2003 which was $7 million higher than the provisions recorded during 2004. Revenues were also increased $11 million and $10 million, respectively, due to favorable customer growth and the return on investment on Hines Unit 2 which was placed in service December 2003. PEF has approximately 37,000 additional customers as of June 30, 2004 compared to June 30, 2003. Based on the Stipulation and Settlement Agreement reached with the FPSC in April 2002, beginning with the in-service date of PEF's Hines Unit 2 and continuing through December 2005, PEF will be allowed to recover through the fuel cost recovery clause a return on average investment and depreciation expense for Hines Unit 2, to the extent such costs do not exceed the Unit's cumulative fuel savings over the recovery period. These increases were partially offset by the impact of milder weather in the current year of approximately $5 million. Fuel and purchased power costs represent the costs of generation, which includes fuel purchases for generation, as well as energy purchased in the market to meet customer load. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, changes in these expenses do not have a material impact on earnings. The difference between fuel and purchased power costs incurred and associated fuel revenues that is subject to recovery is deferred for future collection or refund to customers. Fuel and purchased power expenses increased $57 million from $358 million for the three months ended June 30, 2003 to $415 million for the three months ended June 30, 2004. This increase is attributable primarily to an increase in fuel used in electric generation which increased $59 million. Higher system requirements and increased fuel costs in the current year account for $32 million of the increase in fuel used in electric generation. The remaining increase is due to the recovery of fuel expenses that were deferred in the prior year, as well as the deferral of current year expenses. O&M costs decreased $2 million, when compared to the $154 million incurred during the three months ended June 30, 2003. This decrease is primarily related to the timing of outages and maintenance at generation facilities of $3 million and a reduction in costs allocated from the Service Company of $1 million partially offset by higher costs associated with planned reliability improvements of approximately $2 million. Depreciation and amortization decreased $8 million when compared to the $80 million incurred during the three months ended June 30, 2003, primarily due to the amortization of the Tiger Bay regulatory asset in the prior year. The Tiger Bay regulatory asset, for contract termination costs, was recovered pursuant to an agreement between PEF which was approved by the FPSC in 1997 and as such fluctuations in this expense did not have an impact on earnings. During the second 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. Six months ended June 30, 2004 compared to the six months ended June 30, 2003 PEF's revenues, excluding recoverable fuel and other pass-through revenues of $926 million and $794 million for the six months ended June 30, 2004 and 2003, respectively, increased $17 million. This increase was due primarily to a reduction in the provision for revenue sharing of $21 million. Results for 2003 included the accrual of an additional $18 million related to the 2002 revenue sharing provision as ordered by the FPSC in June of 2003. In addition, the return on investment on Hines 2 and favorable customer growth increased revenues by $19 million and $9 million, respectively. These increases were partially offset by the impact of milder weather in the current year of approximately $17 million. Fuel and purchased power costs represent the costs of generation, which includes fuel purchases for generation, as well as energy purchased in the market to meet customer load. Fuel and purchased power expenses are recovered primarily through cost recovery clauses and, as such, changes in these expenses do not have a material impact on earnings. The difference between fuel and purchased power costs incurred and associated fuel revenues that is subject to recovery is deferred for future collection or refund to customers. 51 Fuel and purchased power expenses were $805 million for the six months ended June 30, 2004, which represents a $132 million increase compared to the same period in the prior year. This increase is due to an increase in fuel used in electric generation of $143 million offset by a reduction in purchased power costs. This increase in fuel used in electric generation is due to the recovery of fuel expenses that were deferred in the prior year, as well as the deferral of current year fuel expenses. In November 2003, the FPSC approved PEF's request for a cost adjustment in its annual fuel filing due to the rising costs of fuel. The new rates became effective January 2004. The decrease in purchased power expense of $11 million is attributable primarily to the Hines 2 Plant being placed in service in December of 2003, thereby reducing the need for purchased power. O&M costs increased $17 million, when compared to the $295 million incurred during the six months ended June 30, 2003. This increase is primarily related to higher costs associated with scheduled plant outages and planned reliability improvements of approximately $9 million each. Depreciation and amortization decreased $18 million when compared to the $159 million incurred during the six months ended June 30, 2003, primarily due to the amortization of the Tiger Bay regulatory asset in the prior year. The Tiger Bay regulatory asset, for contract termination costs, was recovered pursuant to an agreement between PEF which was approved by the FPSC in 1997, and as such fluctuations in this expense did not have an impact on earnings. During the six months ended June 30, 2003, Tiger Bay amortization was $30 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. 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 six months ended June 30, 2003 were restated to reflect seven months of earnings for certain operations, primarily synthetic fuel facilities. The following summarizes Fuels' segment profits for the three and six months ended June 30, 2004 and 2003: - ----------------------------------------------------------------------------------------- Three Months Ended June 30 Six Months Ended June 30 - ----------------------------------------------------------------------------------------- (in millions) 2004 2003 2004 2003 - ----------------------------------------------------------------------------------------- Synthetic fuel operations $ 36 $49 $ 72 $83 Gas production 12 9 25 16 Coal fuel and other operations 8 - 7 (2) --------------------------------------------------- Segments Profits $ 56 $58 $ 104 $97 - -----------------------------------------------------------------------------------------
Synthetic Fuel Operations The synthetic fuel operations generated net profits of $36 million and $49 million for the three months ended June 30, 2004 and 2003, respectively, and $72 million and $83 million for the six months ended June 30, 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 for further discussion of synthetic fuel tax credit matters. The operations resulted in the following for the three and six months ended June 30, 2004 and 2003: - -------------------------------------------------------------------------------------------------- Three Months Ended June 30 Six Months Ended June 30 - -------------------------------------------------------------------------------------------------- (in millions) 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------- Tons sold 2.7 3.0 5.7 5.5 ------------------------------------------------------- Operating losses, excluding tax credits $ (35) $ (33) $ (77) $ (65) Tax credits generated 71 82 149 148 ------------------------------------------------------- Net profits $ 36 $ 49 $ 72 $ 83 - --------------------------------------------------------------------------------------------------
52 Synthetic fuels' net profits decreased in the three months ended June 30, 2004 as compared to the same period in 2003 due primarily to a reduction in credits earned of $4 million as a result of a decrease in tons sold and an increase in operating cost of $4 million after-tax. Synthetic fuel profits decreased in the six months ended June 30, 2004 due primarily to increases in operating cost of $10 million. 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 $12 million and $9 million for the three months ended June 30, 2004 and 2003, respectively, and $25 million and $16 million for the six months ended June 30, 2004 and 2003. The increase in production resulting from the acquisition of North Texas Gas in late February 2003 and increased drilling 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 and six months ended June 30, 2004 and 2003 by production facility: - ----------------------------------------------------------------------------------------------------- Three Months Ended June 30 Six Months Ended June 30 - ----------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 - ----------------------------------------------------------------------------------------------------- Production in Bcf equivalent Mesa - 1.5 - 3.2 Westchester 4.9 3.1 9.0 6.3 North Texas Gas 2.7 1.8 5.3 2.4 -------------------------------------------------------- Total Production 7.6 6.4 14.3 11.9 -------------------------------------------------------- Revenues in millions Mesa $ - $ 3 $ - $ 8 Westchester 26 16 48 31 North Texas Gas 14 10 27 14 -------------------------------------------------------- Total Revenues $ 40 $ 29 $ 75 $ 53 -------------------------------------------------------- Gross Margin in millions of $ $ 33 $ 24 $ 60 $ 43 As a % of revenues 83% 83% 80% 81% - -----------------------------------------------------------------------------------------------------
Coal Fuel and Other Operations Coal fuel and other operations generated segment profits of $8 million for the three months ended June 30, 2004 compared to zero segment profits for the comparable period in the prior year. For the six months ended June 30, 2004, coal fuel and other operations generated segment profits of $7 million compared to a segment loss of $2 million for the comparable period in the prior year. This increase in profits for the quarter and year to date is due to higher volumes and margins for coal fuel operations of $9 million after-tax offset by a reduction in profits of $4 million after-tax for fuel transportation operations related to the waterborne transportation ruling by the FPSC. See Note 4A of the Progress Energy Consolidated Interim Financial Statements. The increase in profits is also due 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 profits of $5 million for the three months ended June 30, 2004 compared to $2 million of segment profits for the comparable period in the prior year. Results for the three months ended June 30, 2004 were favorably impacted by margins on new contracts and market sales of $15 million partially offset by an increase in fixed costs. Fixed costs increased $6 million from additional depreciation and amortization on plants placed in service and from an increase in interest expense of $4 million due primarily to interest no longer being capitalized due to the completion of construction in the prior year. CCO's operations generated segment losses of $3 million for the six months ended June 30, 2004 compared to $11 million of segment profits for the comparable period in the prior year. Results for the six months ended June 30, 2004 were favorably impacted by increased gross margin which was offset by higher fixed costs. Revenues increased a net of $34 million in the six months ended June 30, 2004 due to increased revenues from marketing and tolling contracts offset by a termination payment received on a marketing contract in 2003 and mark to market losses of $10 million. Expenses for the cost of fuel and purchased power to 53 supply our marketing contracts offset the increased revenues of $34M netting to an increase in gross margin of $4 million for the six months ended June 30, 2004 as compared to the same prior year period. Fixed costs increased $14 million from additional depreciation and amortization on plants placed into service in 2003 and from an increase in interest expense of $10 million due primarily to interest no longer being capitalized due to the completion of construction in the prior year. Expenses were favorably impacted by a reduction in Service Company allocations. Results for 2003 were negatively impacted by the retroactive reallocation of Service Company costs of $3 million ($2 million after-tax). - -------------------------------------------------------------------------------- Three Months Ended June 30 Six Months Ended June 30 - -------------------------------------------------------------------------------- (in millions) 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Total revenues $ 72 $ 33 $ 105 $ 71 ----------------------------------------------------- Gross margin In millions of $ $ 42 $ 27 $ 65 $ 61 As a % of revenues 58% 82% 62% 86% ----------------------------------------------------- Segment profits (losses) $ 5 $ 2 $ (3) $ 11 - -------------------------------------------------------------------------------- The Company has contracts for 93% of planned production capacity for 2004 and approximately 77% in both 2005 and 2006. The 2005 decline results from the expiration of three tolling contracts. The Company continues to pursue opportunities with both current and new 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 3B of the Progress Energy Notes to the Consolidated Interim Financial Statements. Rail contributed segment profits of $4 million and $2 million for the three months ended June 30, 2004 and 2003, respectively. Revenues have increased $71 million to $285 million for the three months ended June 30, 2004 compared to the same period in the prior year. This increase is due primarily to increased volumes and higher prices in recycling operations and in part to increased production and sales in locomotive and railcar services and engineering and track services. Cost of goods sold increased $62 million compared to $188 million in the prior year. The increase in costs of good sold is due to increased costs for inventory, labor and operations as a result of the increased volume in the recycling operations, locomotive and railcar services and engineering and track services. The increase in margins of $9 million was partially offset by an increase in general and administrative costs related primarily to higher professional fees. Rail contributed segment profit of $9 million for the six months ended June 30, 2004 compared with a segment loss of $1 million for the same period in the prior year. Revenues have increased $130 million to $523 million for the six months ended June 30, 2004 compared to the same period in the prior year. This increase is due primarily to increased volumes and higher prices in recycling operations and in part to increased production and sales in locomotive and railcar services and engineering and track services. Cost of goods sold increased $112 million compared to $455 million in the prior year. The increase in costs of good sold is due to increased costs for inventory, labor and operations as a result of the increased volume in the recycling operations, locomotive and railcar services and engineering and track services. Results in the prior year were negatively impacted by the retroactive reallocation of Service Company costs of $3 million after-tax. The favorability related to the reallocation was offset by an increase in general and administrative costs in the current year related primarily to higher professional fees. 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. SRS recorded a net loss of $29 million for the three months ended June 30, 2004 compared with profits of less than $1 million for the same period in the prior year. SRS recorded a net loss of $29 million for the six months ended June 30, 2004 compared to a net loss of less than $1 million for the six months ended June 30, 2004. The increased segment loss compared to the prior year is due primarily to the recording of the litigation settlement reached with San Francisco United School District related to civil proceedings. In June of 2004, SRS reached a settlement with the District which settled all outstanding claims for approximately $43 million pre-tax ($29 million after-tax). 54 CORPORATE SERVICES Corporate Services includes the operations of the Holding Company, the Service Company and consolidation entities, as summarized below: - ------------------------------------------------------------------------------------------ Three Months Ended June 30 Six Months Ended June 30 - ------------------------------------------------------------------------------------------ (in millions) 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------ Other interest expense $ (66) $ (70) $ (139) $ (141) Contingent value obligations (5) (2) (13) - Tax levelization (5) (5) (43) 5 Tax reallocation (9) (9) (18) (18) Other income taxes 28 31 65 62 Other (6) (3) (16) (10) ------------------------------------------------------- Segment profit (loss) $ (63) $ (58) $ (164) $ (102) - ------------------------------------------------------------------------------------------
Other interest expense decreased $4 million compared to $70 million for the three months ended June 30, 2003 and it decreased $2 million compared to $141 million for the six months ended June 30, 2003. Interest expense decreased during the current periods due to the repayment of a $500 million unsecured note by the Holding company on March 1, 2004 which reduced interest expense by $8 million pre-tax for the quarter and year to date. This reduction was offset by interest no longer being capitalized due to the completion of construction at the CCO segment in the prior year. Approximately $4 million ($2 million after-tax) and $10 million ($6 after-tax) was capitalized in the three and six months ended June 30, 2003, respectively. Progress Energy issued 98.6 million contingent value obligations (CVOs) in connection with the 2000 FPC acquisition. Each CVO represents the right to receive contingent payments based on the performance of four synthetic fuel facilities owned by Progress Energy. The payments, if any, are based on the net after-tax cash flows the facilities generate. At June 30, 2004 and 2003, the CVOs had fair market values of approximately $36 million and $14 million, respectively. Progress Energy recorded an unrealized loss of $5 million and $2 million for the three months ended June 30, 2004 and 2003, respectively, to record the changes in fair value of the CVOs, which had average unit prices of $0.36 and $0.14 at June 30, 2004 and 2003, respectively. Progress Energy recorded an unrealized loss of $13 million for six months ended June 30, 2004. The CVO values at June 30, 2003 were unchanged from the January 1, 2003 values, thus requiring no recognition of unrealized gain or loss for the six months ended June 30, 2003. 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 $5 million for the three months ended June 30, 2004 and 2003, respectively, in order to maintain an effective tax rate consistent with the estimated annual rate. Income tax expense was increased by $43 million and decreased by $5 million for the six months ended June 30, 2004 and 2003, respectively. The tax credits associated with the Company's synthetic fuel operations primarily drive the required levelization amount. Fluctuations in estimated annual earnings and tax credits can also cause large swings in the effective tax rate for interim periods. Therefore, this adjustment will vary each quarter, but will have no effect on net income for the year. Other expenses increased $3 million and $6 million for the three and six months ended June 30, 2004 and 2003, respectively, as compared to the same prior year periods. This increase is due primarily to an increase in depreciation expense at the Service Company due to assets being placed in service. DISCONTINUED OPERATIONS In 2002, the Company approved the sale of NCNG to Piedmont Natural Gas Company, Inc. The sale closed on September 30, 2003. Net proceeds of approximately $443 million from the sale of NCNG were used to reduce outstanding short-term debt. NCNG contributed $1 million of net income for the three months ended June 30, 2004 compared with $3 million of net income for the same prior year period. During the three months ended June 30, 2004, the Company recorded an additional gain after taxes of approximately $1 million related to deferred taxes on the loss from the NCNG sale. NCNG contributed $1 million of net income for the six months ended June 30, 2004 compared to $14 million for the comparable prior year period. 55 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 of $915 million increased $8 million for the six months ended June 30, 2004, when compared to $907 million in the corresponding period in the prior year. The slight improvement in cash from operating activities for the 2004 period is primarily due to approximately $100 million of lower operating cash flow at PEF for the period in 2003, which resulted from an under recovery of fuel costs, and reduced working capital needs of nearly $50 million in the current year. These improvements in cash from operating activities were partially offset by a $114 million decrease in net income for the period. Net cash used in investing activities of $591 million decreased $604 million for the six months ended June 30, 2004, when compared to $1.2 billion in the corresponding period in the prior year. The decrease is primarily due to reduced nonregulated capital expenditures, primarily the purchase of North Texas Gas assets and a long-term power supply contract during the first half of 2003. In addition, proceeds from the sale of Railcar Ltd. assets reduced net investing cash requirements during the first half of 2004. For the first six months of 2004, Progress Energy's cash from operations less cash used in investing activities increased approximately $600 million. The improvement was due to the reduction in capital expenditures discussed above. The positive cash flow combined with the equity issuance of $58 million, helped reduce the Company's consolidated leverage to 58.2% from 58.9% as of December 31, 2003. Progress Energy took advantage of favorable market conditions and entered into a new $1.1 billion five year line of credit, effective August 5, 2004, and expiring August 4, 2009. This facility replaces Progress Energy's $250 million 364 day line of credit and its three-year $450 million line of credit, which were set to expire in November 2004. On July 28, 2004, PEC extended its $165 million 364-day line of credit, which was to expire on July 29, 2004. The line of credit will expire on July 27, 2005. On April 30, 2004, PEC redeemed $34.7 million of Darlington County 6.6% Series Pollution Control Bonds at 102.5% of par, $1.795 million of New Hanover County 6.3% Series Pollution Control Bonds at 101.5% of par, and $2.58 million of Chatham County 6.3% Series Pollution Control Bonds at 101.5% of par with cash from operations. 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 and early long term debt financings 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 cash from operations. On February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25 million 6.48% medium term notes with excess cash. For the six months ended June 30, 2004, the Company issued approximately 1.3 million shares representing approximately $58 million in proceeds from its Investor Plus Stock Purchase Plan and its employee benefit plans. For the six months ended June 30, 2004 and 2003, the dividends paid on common stock were approximately $280 million and $268 million, respectively. 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. A 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. 56 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 June 30, 2004, Progress Energy's contractual cash obligations and other commercial commitments have not changed materially from what was reported in the 2003 Annual Report on Form 10-K. The total amount of liquidity requirements associated with guarantees for the company's nonregulated portfolio and power supply agreements is $497 million. As of June 30, 2004, the current portion of long-term debt is $343 million. As of June 30, 2004, Progress Energy's guarantees issued on behalf of third parties were approximately $24 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. Synthetic Fuels Tax Credits Progress Energy's synthetic fuel operations are subject to numerous risks that may impact the Company, its operations, and the value of its securities. Many of these risks are discussed in the Company's 2003 10-K, particularly the Risk Factors section. You should carefully read about these risks. 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. Synthetic fuel tax credit amounts not utilized are carried forward indefinitely as alternative minimum tax credits. 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 $1.4 billion, of which $584 million have been used and $807 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 July 2004, Progress Energy was notified that the Internal Revenue Service (IRS) field auditors anticipate taking an adverse position regarding the placed-in-service date of the Company's four Earthco synthetic fuel facilities. Due to the auditors' position, the IRS has decided to exercise its right to withdraw from the Pre-Filing Agreement (PFA) program with Progress Energy. With the IRS's withdrawal from the PFA program, the review of Progress Energy's Earthco facilities is back on the normal procedural audit path of the Company's tax returns. The IRS has indicated that the field audit team will provide its written recommendation later this year. After the field audit team's written recommendation is received, the Company will begin the Appeals process within the IRS. Through June 30, 2004 the Company, on a consolidated basis, has claimed $1 billion of tax credits generated by Earthco facilities. If these credits were 57 disallowed, the Company's one time exposure for cash tax payments would be $229 million (excluding interest), and earnings and equity would be reduced by $1 billion, excluding interest. The Company believes that the appeals process could take up to two years to complete, however, it cannot control the actual timing of resolution and cannot predict the outcome of this matter. 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 concluded the IRS PFA program with respect to Colona. In June 2004, the Company through its subsidiary, Progress Fuels sold, in two transactions, a combined 49.8 percent partnership interest in Colona Synfuel Limited Partnership, LLLP, one of its synthetic fuel facilities. Substantially all proceeds from the sales will be received over time, which is typical of such sales in the industry. Gain from the sales will be recognized on a cost recovery basis. The Company's book value of the interests sold totaled approximately $5 million. Based on projected production levels, the Company anticipates receiving total gross proceeds of approximately $30 million per year, on an annualized basis. Under the agreements, the buyers have a right to unwind the transactions if an IRS reconfirmation private letter ruling (PLR) is not received by October 15, 2004. Therefore, no gain would be recognized prior to the expiration of that right. 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 management's opinion, Progress Energy is complying with all the necessary requirements to be allowed such credits under Section 29, and, although it cannot provide certainty, it believes that it will prevail in these matters. Accordingly, the Company has no current plans to alter its synthetic fuel production schedule as a result of these matters. However, should the Company fail to prevail in these matters, there could be material liability for previously taken Section 29 credits, with a material adverse impact on earnings and cash flows. 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 (Robinson) for an additional 20 years through July 2030. The original operating license of 40 years was set to expire in 2010. NRC operating licenses held by PEC currently expire in December 2014 and September 2016 for Brunswick Units 2 and 1, respectively. An application to extend these licenses 20 years is expected to be submitted in October 2004. The NRC operating license held by PEC for the Shearon Harris Nuclear Plant (Harris Plant) currently expires in October 2026. An application to extend this license 20 years is expected to be submitted in the fourth quarter of 2006. The NRC operating license held by PEF for Crystal River Unit No. 3 (CR3) currently expires in December 2016. An application to extend this license 20 years is expected to be submitted in the first quarter 2009. On February 27, 2004, PEC requested to have its license for the Independent Spent Fuel Storage Installation at the Robinson Plant extended 20 years with an exemption request for an additional 20-year extension. Its current license is due to expire in August 2006. PEC expects to receive this extension. During the first quarter of 2004, PEC met the requirements of both the NCUC and the SCPSC for the implementation of 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. In February 2004, the NRC issued a revised Order for inspection requirements for reactor pressure vessel heads at PWRs. Progress Energy has reviewed the required inspection frequencies and has incorporated them into long range plans. Harris will complete the required non-visual NDE inspection prior to February 2008. Both CR3 and Robinson will be required to inspect their new heads within 7 years or four refueling outages after replacement. CR3 plans to inspect its new head prior to the end of 2009 and Robinson will need to inspect its new head prior to 2012. 58 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 and to proceed with the acquisition. The City sought and received wholesale power supply bids and on June 23, 2004, executed a wholesale power supply contract with PEF. On May 12, 2004, the City solicited bids to operate and maintain the distribution system. The City received bids on July 1, 2004, and expects to make its selection in August 2004. The City has indicated that its goal is to begin electric operations in June 2005. 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. 59 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 solely 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 and six months ended June 30, 2004 and 2003 are not material to PEC's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2004, PEC's contractual cash obligations and other commercial commitments have not changed materially from what was reported in the 2003 Annual Report on Form 10-K. Cash provided by operating activities decreased $45 million for the six months ended June 30, 2004, when compared to the corresponding period in the prior year. The decrease was caused primarily by a $34 million increase in working capital requirements. Cash used in investing activities decreased $13 million for the six months ended June 30, 2004, when compared to the corresponding period in the prior year primarily due to lower construction spending. $150 million of First Mortgage Bonds matured on January 15, 2004 and $150 million of First Mortgage Bonds matured on April 15, 2004. The remaining $300 million current portion of long-term debt will be refinanced or retired through commercial paper, capital market transactions and internally generated funds. On July 28, 2004, PEC extended its $165 million 364-day line of credit, which was to expire on July 29, 2004. The line of credit will expire on July 27, 2005. 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. A 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. 60 Item 3. Quantitative and Qualitative Disclosures About Market Risk Progress Energy, Inc. Other than described below, the various risks that the Company is exposed to has not materially changed since December 31, 2003. 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. The exposure to changes in interest rate from the Company's commercial paper was not materially different than at December 31, 2003. The exposure to changes in interest rates from the Company's fixed rate and variable rate long-term debt at June 30, 2004 has changed from December 31, 2003. The total fixed rate long-term debt at June 30, 2004 was $8.6 billion, with an average interest rate of 6.53% and fair market value of $9.3 billion. The total variable rate long-term debt at June 30, 2004, was $1.1 billion, with an average interest rate of 1.70% and fair market value of $1.1 billion. The company maintains a portion of its outstanding debt with floating interest rates. As of June 30, 2004 approximately 22% of consolidated debt was in floating rate mode compared to 18% at the end of 2003. 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. As of June 30, 2004, Progress Energy had $1 billion 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 between March 2006 and March 2011. During the year, Progress Energy has entered into $350 million notional of open interest rate fair value hedges. 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 June 30, 2004, PEC had $70 million notional of pay fixed forward starting swaps, entered into in March 2004, to hedge its exposure to interest rates with regard to a future issuance of debt and $26 million notional of pay fixed forward starting swaps, in April 2004, to hedge its exposure to interest rates with regard to an upcoming railcar lease. In July 2004, PEC entered into an additional $30 million notional pay fixed forward swap, increasing the total to $126 million. These agreements have a computational period of ten years. In May 2004, the Company terminated interest rate cash flow hedges, with a total notional amount of $400 million, related to projected outstanding balances of commercial paper. Amounts in accumulated other comprehensive income related to these terminated hedges will be reclassified to earnings as the hedged interest payments occur. The Company holds interest rate collars with a varying notional amount (currently at the maximum of $195 million) to hedge floating rate exposure associated with variable rate long-term debt at Progress Ventures. The Company is required to hedge 50% of the amount outstanding under its bank facility through March 2007. 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. 61 PEF has entered into derivative instruments to hedge its exposure to price fluctuations on fuel oil purchases. These instruments did not have a material impact on the Company's consolidated financial position or results of operations. 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 June 30, 2004, Progress Fuels Corporation is hedging exposures to the price variability of portions 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. Progress Energy Carolinas, Inc. Other than described below, the various risks that PEC is exposed to has not materially changed since December 31, 2003. 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 PEC's fixed rate long-term debt, variable rate long-term debt and commercial paper at June 30, 2004 was not materially different than at December 31, 2003. As of June 30, 2004, PEC had $70 million notional of pay fixed forward starting swaps, entered into in March 2004, to hedge its exposure to interest rates with regard to a future issuance of debt and $26 million notional of pay fixed forward starting swaps, in April 2004, to hedge its exposure to interest rates with regard to an upcoming railcar lease. In July 2004, PEC entered into an additional $30 million notional pay fixed forward swap, increasing the total to $126 million. These agreements have a computational period of ten years. 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. 62 Item 4: Controls and Procedures Progress Energy, Inc. Pursuant to 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 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. There has been no change identified in Progress Energy's internal control over financial reporting during the quarter ended June 30, 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 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 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 identified in PEC's internal control over financial reporting during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, PEC's internal control over financial reporting. 63 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 asserted defenses to the District's claims. SRS 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 stated that the City and the District seek "more than $300 million in damages and penalties." PEC was later added as a cross-defendant. In November 2003, PEC filed a motion to dismiss the plaintiffs' first amended complaint. In June 2004, the Company reached a settlement agreement with the District in this matter. The settlement totaled approximately $43.1 million and was recorded as a charge to diversified business cost of sales in the Company's Consolidated Statement of Income for the three-months ended June 30, 2004. The accrual of the settlement was recorded on an undiscounted basis. The terms of the settlement require SRS to pay the District $10.1 million upon approval, and an additional $16 million in 2005 and $17 million 2006. In addition, during a transition period ending September 10, 2004, SRS will provide maintenance and training on the equipment and software it installed and maintained for the District. The agreement, upon approval, settles all claims and cross-claims related to SRS, Progress Energy, Progress Energy Solutions and PEC. 2. 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) an 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. 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 was heard by the Circuit Court of Broward County, Florida on June 7, 2004. The case was dismissed on procedural issues, but allowed the plaintiff to refile. The case was refiled on June 23, 2004. 64 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 heard argument on the Progress Affiliates' Appeal and the Global's cross appeal on May 26, 2004. There has been no ruling on the appeal or the cross appeal. The Company cannot predict the outcome of these matters, but will vigorously defend against the allegations. 3. In re Progress Energy, Inc. Securities Litigation, Master File No. 04-CV-636 (JES) 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.'s former 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 securities laws arising out of the Company's issuance of CVOs nearly identical to those alleged in the February 3, 2004 Gerber Asset Management complaint. On April 29, 2004, the Honorable John E. Sprizzo ordered among other things that (1) the two class action cases be consolidated, (2) Peak6 Capital Management LLC shall serve as the lead plaintiff in the consolidated action, and (3) the lead plaintiff shall file a consolidated amended complaint on or before June 14, 2004. The lead plaintiffs filed a consolidated amended complaint on June 15, 2004. In addition to the allegations asserted in the Gerber Asset Management and Fried complaints, the consolidated amended complaint alleges that the Company failed to disclose that excess fuel credits could not be carried over from one tax year into later years. On July 30, 2004, the Company filed a motion to dismiss the complaint. The Company cannot predict the outcome of this matter, but will vigorously defend against the allegations. 65 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities RESTRICTED STOCK AWARDS: (a) Securities Delivered. On April 28, 2004, 23,300 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. 66 Item 4. Submission of Matters to a Vote of Security Holders Progress Energy Inc. (a) The Annual Meeting of the Shareholders of Progress Energy, Inc. was held on May 12, 2004. (b) The meeting involved the election of five Class III directors to serve for three-year terms. Proxies for the meeting were solicited pursuant to Regulation 14, there was no solicitation in opposition to management's nominees as listed below, and all nominees were elected. (c) The total votes for the election of directors were as follows: Class III Votes For Votes Withheld (Term Expiring in 2007) Charles W. Coker 208,883,229 4,775,358 Robert B. McGehee 209,390,084 4,268,503 E. Marie McKee 209,566,761 4,091,826 Peter S. Rummell 209,456,069 4,202,518 Jean Giles Wittner 207,028,428 6,630,159 (d) The shareholder proposal relating to stock options for Directors and certain Executive Officers was presented, but was not approved by the shareholders. The number of shares voted for the proposal was 23,184,068 The number of shares voted against the proposal was 148,433,662 The number of abstaining votes was 4,850,014 The delivered not voted total was 37,190,843 Carolina Power & Light Company, doing business as Progress Energy Carolinas, Inc. (a) The Annual Meeting of the Shareholders of Carolina Power & Light Company was held on May 12, 2004. (b) The meeting involved the election of five Class III directors to serve three-year terms. Proxies for the meeting were solicited pursuant to Regulation 14, there was no solicitation in opposition to management's nominees as listed below, and all nominees were elected. (c) The total votes for the election of directors were as follows: Class III Votes For Votes Withheld (Term Expiring in 2007) Charles W. Coker 1 59,964,384 6,387 Robert B. McGehee 159,964,895 5,876 E. Marie McKee 159,965,517 5,254 Peter S. Rummell 159,964,707 6,064 Jean Giles Wittner 159,964,687 6,064 67 Item 5. Other Information Appointment of Presiding Director John H. Mullin, III was appointed Chairman of the Corporate Governance Committee of the Company's Board of Directors at the Board meeting that immediately followed the Company's Annual Meeting of Shareholders on May 12, 2004. By virtue of that position, Mr. Mullin is also the Presiding Director of the Board. (Mr. Mullin succeeds J. Tylee Wilson, who retired from the Board on May 12, 2004.) As Presiding Director, Mr. Mullin chairs the executive sessions of the non-employee Directors. Mr. Mullin can be contacted by writing to John H. Mullin, III, Presiding Director, Progress Energy Board of Directors, c/o Corporate Secretary, P.O. Box 1551, Raleigh, NC 27602. Progress Energy screens mail addressed to Mr. Mullin for security purposes and to ensure that it relates to discrete business matters that are relevant to Progress Energy. Mail addressed to Mr. Mullin which satisfies these screening criteria will be forwarded to him. 68 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Progress Progress Energy Number Description Energy, Inc. Carolinas, Inc. ------ ----------- ------------ --------------- 10(i) Progress Energy, Inc. $1,130,000,00 5-Year X Revolving Credit Agreement dated as of August 5, 2004 31(a) Certifications pursuant to Section 302 of the X X Sarbanes-Oxley Act of 2002 - Chairman, President 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, President 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 9, 12 Yes July 21, 2004 July 21, 2004 5, 9 No July 7, 2004 July 7, 2004 7, 9 Yes June 15, 2004 June 16, 2004 7, 9 No May 28, 2004 May 28, 2004 7, 9 No May 13, 2004 May 18, 2004 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 Carolina Power & Light Company d/b/a Progress Energy Carolinas, Inc. Financial Item Statements Reported Included Date of Event Date Filed or Furnished 9, 12 Yes July 21, 2004 July 21, 2004 9, 12 Yes April 21, 2004 April 21, 2004
69 SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROGRESS ENERGY, INC. CAROLINA POWER & LIGHT COMPANY Date: August 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 EX-10 2 pei_exhibit10i-.txt EXHIBIT 10(I) CREDIT AGREEMENT Exhibit 10(i) [EXECUTION COPY] =============================================================================== CREDIT AGREEMENT Dated as of August 5, 2004 Among PROGRESS ENERGY, INC. (Borrower) and THE BANKS LISTED ON THE SIGNATURE PAGES HEREOF (Banks) and CITIBANK, N.A. (Administrative Agent) and SUNTRUST BANK (Issuing Bank) =============================================================================== CITIGROUP GLOBAL MARKETS, INC. and J.P. MORGAN SECURITIES INC. (Joint Lead Arrangers) JPMORGAN CHASE BANK (Syndication Agent) TABLE OF CONTENTS Section Page Article I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms.................................................1 Section 1.02. Computation of Time Periods..........................................12 Section 1.03. Accounting Terms.....................................................12 Article II AMOUNTS AND TERMS OF THE ADVANCES Section 2.01. The Advances.........................................................13 Section 2.02. Making the Advances..................................................13 Section 2.03. Fees.................................................................14 Section 2.04. Reduction of the Commitments.........................................15 Section 2.05. Repayment of Advances................................................17 Section 2.06. Interest on Advances.................................................17 Section 2.07. Additional Interest on Eurodollar Rate Advances......................17 Section 2.08. Interest Rate Determination..........................................18 Section 2.09. Voluntary Conversion of Advances.....................................19 Section 2.10. Prepayments of Advances..............................................19 Section 2.11. Increased Costs......................................................20 Section 2.12. Illegality...........................................................21 Section 2.13. Payments and Computations............................................21 Section 2.14. Sharing of Payments, Etc.............................................22 Section 2.15. Extension of Commitment Termination Date.............................22 Section 2.16. Letters of Credit....................................................24 Article III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Closing......................................28 Section 3.02. Conditions Precedent to Each Borrowing and to the Issuance of Letters of Credit................................................29 Article IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of the Borrower.......................30 Article V COVENANTS OF THE COMPANY Section 5.01. Affirmative Covenants................................................32 Section 5.02. Negative Covenants...................................................34 Article VI EVENTS OF DEFAULT Section 6.01. Events of Default....................................................36 i Article VII THE ADMINISTRATIVE AGENT Section 7.01. Authorization and Action.............................................38 Section 7.02. The Administrative Agent's Reliance, Etc.............................38 Section 7.03. The Administrative Agent and its Affiliates..........................39 Section 7.04. Lender Credit Decision...............................................39 Section 7.05. Indemnification......................................................39 Section 7.06. Successor Administrative Agent.......................................40 Article VIII MISCELLANEOUS Section 8.01. Amendments, Etc......................................................40 Section 8.02. Notices, Etc.........................................................41 Section 8.03. No Waiver; Remedies..................................................41 Section 8.04. Costs, Expenses, Taxes and Indemnification...........................41 Section 8.05. Right of Set-off.....................................................44 Section 8.06. Binding Effect.......................................................45 Section 8.07. Assignments and Participations.......................................45 Section 8.08. Waiver of Consequential Damages......................................49 Section 8.09. USA PATRIOT Act Notice...............................................49 Section 8.10. Tax Disclosure.......................................................49 Section 8.11. Governing Law........................................................49 Section 8.12. Waiver of Jury Trial.................................................50 Section 8.13. Execution in Counterparts............................................50 Section 8.14. Severability.........................................................50 Section 8.15. Headings.............................................................50 Section 8.16. Entire Agreement.....................................................50
SCHEDULES I - List of Commitments and Applicable Lending Offices EXHIBITS A-1 - Form of Notice of Borrowing A-2 - Form of Notice of Conversion B - Form of Assignment and Acceptance C-1 - Form of Opinion of General Counsel to Progress Energy Service Company, LLC C-2 - Form of Opinion of Special Counsel for the Borrower C-3 - Form of Opinion of General Counsel to the Borrower upon Extension of the Commitment Termination Date C-4 - Form of Opinion of Special Counsel for the Borrower upon Extension of the Commitment Termination Date D - Form of Opinion of Counsel for the Administrative Agent and the Arrangers E - Form of Request for Extension of Commitment Termination Date F - Form of Compliance Certificate ii CREDIT AGREEMENT Dated as of August 5, 2004 This CREDIT AGREEMENT (this "Agreement") is made by PROGRESS ENERGY, INC., a North Carolina corporation (the "Borrower"), the banks listed on the signature pages hereof (the "Banks"), CITIBANK, N.A. ("Citibank"), as administrative agent (the "Administrative Agent") for the Lenders (as herinafter defined) and SUNTRUST BANK, as Issuing Bank. Article I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Additional Lender" shall have the meaning assigned such term in Section 2.04(b). "Administrative Agent" has the meaning specified in the introductory paragraph of this Agreement. "Advance" means an advance by a Lender to the Borrower as part of a Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by, or is under common control with such Person or is a director or officer of such Person. "Applicable Lending Office" means, with respect to each Lender, (i) such Lender's Domestic Lending Office in the case of a Base Rate Advance, or (ii) such Lender's Eurodollar Lending Office, in the case of a Eurodollar Rate Advance. "Applicable Margin" means for each Type of Advance at all times during which any Applicable Rating Level set forth below is in effect, the interest rate per annum set forth below next to such Applicable Rating Level: 2 - --------------------------------------------------------------------------------------------- Applicable Rating Level Applicable Margin for Applicable Margin for Base Rate Eurodollar Rate Advances Advances - --------------------------------------------------------------------------------------------- 1 0.625% 0% - --------------------------------------------------------------------------------------------- 2 0.750% 0% - --------------------------------------------------------------------------------------------- 3 0.875% 0% - --------------------------------------------------------------------------------------------- 4 1.125% .125% - --------------------------------------------------------------------------------------------- 5 1.500% .500% - ---------------------------------------------------------------------------------------------
provided, that (i) the Applicable Margins for Eurodollar Rate Advances set forth above for each Applicable Rating Level shall increase at any time the aggregate principal amount of Outstanding Credits is greater than 33% of the aggregate Commitments by 0.125% at Levels 1, 2, 3 and 4 and by 0.250% at Level 5, (ii) the Applicable Margins set forth above for each Applicable Rating Level shall increase upon the occurrence and during the continuance of any Event of Default by 2.0%, and (iii) any change in the Applicable Margin resulting from a change in the Applicable Rating Level shall become effective upon the date of announcement of a change in the Moody's Rating or the S&P Rating that results in a change in the Applicable Rating Level. "Applicable Rating Level" at any time shall be determined in accordance with the then-applicable S&P Rating and the then-applicable Moody's Rating as follows: - ------------------------------------------------------------------------------- S&P Rating/Moody's Rating Applicable Rating Level - ------------------------------------------------------------------------------- A- or higher or A3 or higher 1 - ------------------------------------------------------------------------------- BBB+ or Baa1 2 - ------------------------------------------------------------------------------- BBB or Baa2 3 - ------------------------------------------------------------------------------- BBB- or Baa3 4 - ------------------------------------------------------------------------------- lower than Level 4 or unrated 5 - ------------------------------------------------------------------------------- In the event that the S&P Rating and the Moody's Rating are not at the same Applicable Rating Level but differ by only one Applicable Rating Level, then, the higher of the two ratings shall determine the Applicable Rating Level. In the event that the S&P Rating and the Moody's Rating differ by more than one Applicable Rating Level, then the Applicable Rating Level immediately below the higher of the two ratings shall be the Applicable Rating Level. The Applicable Rating Level shall be redetermined on the date of announcement of a change in the S&P Rating or the Moody's Rating. 3 "Arrangers" means Citigroup Global Markets, Inc. and J.P. Morgan Securities Inc. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit B hereto. "Banks" has the meaning specified in the introductory paragraph of this Agreement. "Base Rate" means, for any Interest Period or any other period, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall at all times be equal to the higher from time to time of: (i) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; and (ii) 1/2 of one percent per annum above the Federal Funds Rate in effect from time to time. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.06(a). "Borrower" has the meaning specified in the introductory paragraph of this Agreement. "Borrowing" means a borrowing consisting of simultaneous Advances of the same Type made by each of the Lenders pursuant to Section 2.01 or Converted pursuant to Section 2.08 or 2.09. "Business Day" means a day of the year on which banks are not required or authorized to close at the principal office of any Lender and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Change of Control" means the occurrence, after the date of this Agreement, of any Person or "group" (within the meaning of Rule 13(d) or 14(d) of the Securities and Exchange Commission under the Exchange Act), directly or indirectly, acquiring beneficial ownership of or control over securities of the Borrower (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Borrower entitled to vote in the election of directors. "Citibank" has the meaning specified in the introductory paragraph of this Agreement. "Commitment" has the meaning specified in Section 2.01. "Commitment Increase" shall have the meaning assigned such term in Section 2.04(b). 4 "Commitment Increase Approvals" means any governmental approval, resolution of the Board of Directors of the Borrower or resolution of the Board of Directors of any Subsidiary not obtained by or on behalf of the Borrower or such Subsidiary, as applicable, and in full force and effect on the date hereof, which governmental approval or resolution is required to be obtained in order to authorize the Commitment Increase and the performance by the Borrower and the Subsidiaries of their respective obligations under this Agreement after giving effect to the Commitment Increase. "Commitment Termination Date" means, with respect to a Lender, the earlier to occur of (i) August 5, 2009, subject to such later date that may be established for such Lender pursuant to Section 2.15, and (ii) the date of termination in whole of the Commitments pursuant to Section 2.04 or 6.01. "Consolidated" refers to the consolidation of the accounts of the Borrower and its Subsidiaries in accordance with GAAP. "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type, or the selection of a new, or the renewal of the same, Interest Period for Eurodollar Rate Advances, pursuant to Section 2.08(g) or 2.09. "CP&L" means the Carolina Power & Light Company. "Declining Lender" has the meaning assigned to that term in Section 2.15. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "EBITDA" means, with respect to the Borrower and its Consolidated Subsidiaries for any period, the sum of (i) net income (or net loss), (ii) Interest Expense, (iii) income tax expense, (iv) depreciation expense, (v) amortization expense and (vi) other non-cash charges deducted in determining net income (or net loss), in each case determined in accordance with GAAP. "Eligible Assignee" means (i) any other Lender or any Affiliate of a Lender meeting the criteria set forth in clause (ii) hereof and (ii) (A) any other commercial bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator), (B) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator), (C) a commercial bank organized under the laws of any other country that is a member of the OECD, or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow, or the Cayman Islands, or a political subdivision of any such country, and having a combined capital and surplus of at least $250,000,000 (as established in its most recent report of condition to its primary regulator); provided that such bank is acting through a branch or agency located in the United States or in the country in which it is organized or another country that is described in this clause (C), (D) the central bank of 5 any country that is a member of the OECD, or (E) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership or other entity) that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business, whose outstanding unsecured indebtedness is rated AA- or better by S&P or Aa3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured indebtedness) or, in the case of an Affiliate of a Lender only, whose obligations are fully guaranteed by a finance company, insurance company or other financial institution or fund whose outstanding unsecured indebtedness has such a rating. "Environmental Laws" means any federal, state or local laws, ordinances or codes, rules, orders, or regulations relating to pollution or protection of the environment, including, without limitation, laws relating to hazardous substances, laws relating to reclamation of land and waterways and laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollution, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to each Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance made as part of the same Borrowing an interest rate per annum equal to (i) the rate appearing on Page 3750 of the Telerate Service (or such other page or service as may replace such Page 3750 for the purpose of displaying London Interbank Offered Rates of prime banks in the London interbank market) as of 11:00 a.m. (London time) on the day that is two Business Days prior to the first day of such Interest Period, as the London Interbank Offered Rate for Dollar deposits for a period comparable to such Interest Period or (ii) if no quotation is given on Page 3750 of the Telerate Service (or such other page or service as may replace such Page 3750 for the purpose of displaying London Interbank Offered Rates of prime banks in the London interbank market), the rate (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) at which Dollar deposits are offered to the principal London offices of Citibank in immediately available funds for a period comparable to such Interest Period as of 11:00 a.m. (London time) on the day that is two Business Days prior to the first day of such Interest Period. "Eurodollar Rate Advance" means an Advance that bears interest as provided in Section 2.06(b). 6 "Eurodollar Rate Reserve Percentage" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning assigned to that term in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934, and the regulations promulgated thereunder, in each case as amended and in effect from time to time. "Existing Credit Facilities" means the Amended and Restated Credit Agreement, dated as of July 26, 2002, as amended to the date hereof, among the Borrower, the lenders party thereto, and Citibank, N.A., as administrative agent for such lenders, and the Amended and Restated Credit Agreement dated as of November 10, 2003 among Borrower, the lenders party thereto and Citibank, N.A. as administrative agent for such lenders. "Extending Commitment Lender" has the meaning assigned to that term in Section 2.15(b). "Extension Date" means August 5, 2009. "Extension of Credit" means (i) the making of an Advance or (ii) the issuance of a Letter of Credit or the amendment of any Letter of Credit having the effect of extending the stated termination date thereof or increasing the maximum amount to be drawn thereunder. "Facility Fee Percentage" means, at all times during which any Applicable Rating Level set forth below is in effect, the rate per annum set forth below next to such Applicable Rating Level: - ---------------------------------------------------------------------- Applicable Rating Level Facility Fee Percentage - ---------------------------------------------------------------------- 1 0.125% - ---------------------------------------------------------------------- 2 0.150% - ---------------------------------------------------------------------- 3 0.175% - ---------------------------------------------------------------------- 4 0.250% - ---------------------------------------------------------------------- 5 0.300% - ---------------------------------------------------------------------- provided, that a change in the Facility Fee Percentage resulting from a change in the Applicable Rating Level shall become effective upon the date of announcement of a change in the Moody's Rating or the S&P Rating that results in a change in the Applicable Rating Level. 7 "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "First Mortgage Bonds" means those bonds issued from time to time by CP&L pursuant to the Mortgage. "Florida Power" means Florida Power Corporation. "Florida Power Mortgage" means the Indenture, dated as of January 1, 1944, between Florida Power, Guaranty Trust Company of New York and the Florida National Bank of Jacksonville, as modified, amended or supplemented from time to time. "Florida Power Mortgage Bonds" means those bonds issued from time to time by Florida Power pursuant to the Florida Power Mortgage. "FPC" means Florida Progress Corporation. "GenCo Financing" means the $241,000,000 credit facility among Progress Genco Ventures, LLC, certain lenders named therein and JPMorgan Chase Bank, as agent for the lenders, as amended, and the supporting agreements entered into in connection with the development, construction, operation and financing of the projects to be financed with the proceeds of such credit agreement, including (i) the "Support Guarantee", (ii) the "Tolling Guarantee", (iii) the "Fuel Guarantee" and (iv) the "Master Guarantee and Support Agreement". "GAAP" means generally accepted accounting principles, including principles of consolidation, consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). "Guaranty" of any Person means any obligation, contingent or otherwise, of such Person (i) to pay any Liability of any other Person or to otherwise protect, or having the practical effect of protecting, the holder of any such Liability against loss (whether such obligation arises by virtue of such Person being a partner of a partnership or participant in a joint venture or by agreement to pay, to keep well, to purchase assets, goods, securities or services or to take or pay, or otherwise) or (ii) incurred in connection with the issuance by a third Person of a Guaranty of any Liability of any other Person (whether such obligation arises by agreement to reimburse or indemnify such third Person or otherwise). The word "Guarantee" when used as a verb has the correlative meaning. "Hostile Acquisition" shall mean any Target Acquisition (as defined below) involving a tender offer or proxy contest that has not been recommended or approved by the board of directors (or similar governing body) of the Person that is the subject of such Target Acquisition prior to the first public announcement or disclosure relating to such Target Acquisition. As used in this 8 definition, the term "Target Acquisition" shall mean any transaction, or any series of related transactions, by which any Person directly or indirectly (i) acquires any ongoing business or all or substantially all of the assets of any other Person or division thereof, whether through purchase of assets, merger or otherwise, (ii) acquires (in one transaction or as the most recent transaction in a series of transactions) control of at least a majority in ordinary voting power of the securities of any other such Person that have ordinary voting power for the election of directors or (iii) otherwise acquires control of more than a 50% ownership interest in any other such Person. "ISP" means, with respect to any Letter of Credit, the "International Standby Practices 1998" published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance). "Increasing Lender" shall have the meaning assigned such term in Section 2.04(b). "Indebtedness" of any Person means (i) any obligation of such Person for borrowed money, (ii) any obligation of such Person evidenced by a bond, debenture, note or other similar instrument, (iii) any obligation of such Person to pay the deferred purchase price of property or services, except a trade account payable that arises in the ordinary course of business but only if and so long as the same is payable on customary trade terms, (iv) any obligation of such Person as lessee under a capital lease, (v) any Mandatorily Redeemable Stock of such Person (the amount of such Mandatorily Redeemable Stock to be determined for this purpose as the higher of the liquidation preference and the amount payable upon redemption of such Mandatorily Redeemable Stock), (vi) any obligation of such Person to purchase securities or other property that arises out of or in connection with the sale of the same or substantially similar securities or property, (vii) any non-contingent obligation of such Person to reimburse any other Person in respect of amounts paid under a letter of credit or other Guaranty issued by such other Person to the extent that such reimbursement obligation remains outstanding after it becomes non-contingent, (viii) any Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) a mortgage, lien, pledge, charge or other encumbrance on any asset of such Person, (ix) any Liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA, (x) any Synthetic Lease Obligations of such Person and (xi) any Indebtedness of others Guaranteed by such Person. "Interest Expense" means, with respect to the Borrower and its Consolidated Subsidiaries for any period, the sum of (i) all interest expense (including all amortization of debt discount and expense and reported interest) on all Indebtedness of the Borrower and its Consolidated Subsidiaries during such period and (ii) the interest element of rental payments under operating leases, to the extent deducted in determining net income (or net loss) of the Borrower and its Consolidated Subsidiaries during such period. "Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Advance or the date of the Conversion of any Advance into such an Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as the Borrower may, in the Notice of Borrowing given by the Borrower to the Administrative Agent pursuant to Section 2.02, select; provided, however, that: 9 (i) the Borrower may not select any Interest Period that ends after the Commitment Termination Date; (ii) Interest Periods commencing on the same date for Advances comprising the same Borrowing shall be of the same duration; and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day; provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. The Administrative Agent shall promptly advise each Lender by or telecopy transmission of each Interest Period so selected by the Borrower. "Issuing Bank" shall mean SunTrust Bank, as issuer of Letters of Credit, or any other Lender that agrees to act as Issuing Bank hereunder. "LC Commitment" shall mean that portion of the Commitment that may be used by the Borrower for the issuance of Letters of Credit in an aggregate face amount not to exceed $150,000,000. "LC Disbursement" shall mean a payment made by the Issuing Bank pursuant to a Letter of Credit. "LC Documents" shall mean the Letters of Credit and all applications, agreements and instruments relating to the Letters of Credit. "LC Exposure" shall mean, at any time, the sum of (i) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (ii) the aggregate amount of all LC Disbursements that have not been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Lender shall be its Pro Rata Share of the total LC Exposure at such time. For all purposes of this Agreement, if on any date of determination of a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be "outstanding" in the amount so remaining available to be drawn. "Lenders" means the Lenders listed on the signature pages hereof and each Eligible Assignee that shall become a party hereto pursuant to Section 8.07. "Letter of Credit" shall mean any letter of credit issued pursuant to Section 2.16 by the Issuing Bank for the account of the Borrower. "Liability" of any Person means any indebtedness, liability or obligation of or binding upon, such Person or any of its assets, of any kind, nature or description, direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, whether arising under contract, applicable law, or otherwise, whether now existing or hereafter arising. 10 "Majority Lenders" means at any time Lenders holding at least 50% of the aggregate Outstanding Credits, or, if no Outstanding Credits are then outstanding, Lenders having at least 50% of the Commitments (provided that, for purposes hereof, neither the Borrower, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders holding such amount of the Advances or having such amount of the Commitments or (ii) determining the aggregate unpaid principal amount of the Advances or the total Commitments). "Mandatorily Redeemable Stock" means, with respect to any Person, any share of such Person's capital stock to the extent that it is (i) redeemable, payable or required to be purchased or otherwise retired or extinguished, or convertible into any Indebtedness or other Liability of such Person, (A) at a fixed or determinable date, whether by operation of a sinking fund or otherwise, (B) at the option of any Person other than such Person or (C) upon the occurrence of a condition not solely within the control of such Person, such as a redemption required to be made out of future earnings or (ii) convertible into Mandatorily Redeemable Stock. "Moody's" means Moody's Investors Service, Inc., or any successor thereto. "Moody's Rating" means, on any date of determination, the debt rating most recently announced by Moody's with respect to the Borrower's long-term senior unsecured non-credit-enhanced debt. "Mortgage" means the Mortgage and Deed of Trust, dated as of May 1, 1940, from CP&L to The Bank of New York (formerly Irving Trust Company) and to Frederick G. Herbst (W.T. Cunningham, successor), as modified, amended or supplemented from time to time. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Notice of Borrowing" has the meaning specified in Section 2.02(a). "Notice of Conversion" has the meaning specified in Section 2.09. "OECD" means the Organization for Economic Cooperation and Development. "Outstanding Credits" means, on any date of determination, an amount equal to the sum of (i) the aggregate principal amount of all Advances outstanding on such date plus (ii) the LC Exposure on such date. The "Outstanding Credits" of any Lender means, on any date of determination, an amount equal to the sum of (A) the aggregate principal amount of all outstanding Advances made by such lender plus (B) such Lender's LC Exposure on such date. "Patriot Act" means the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001), as in effect from time to time. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Plan" means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Borrower or any of its Affiliates and covered by Title IV of ERISA. "Pro Rata Share" shall mean, with respect to any Commitment of any Lender at any time, a percentage, the numerator of which shall be such Lender's Commitment (or if the Commitments have been terminated or expired or the Outstanding Credits have been declared to be due and payable, the Outstanding Credits made by such Lender), and the denominator of which shall be the sum of the Commitments of all Lenders (or if the Commitments have been terminated or expired or the Outstanding Credits have been declared to be due and payable, the Outstanding Credits made by all Lenders). 11 "Progress Capital" means Progress Capital Holdings, Inc. "Portfolio Transaction" means the sale of Florida Progress's and CP&L's portfolio of affordable housing investments. "Rail Transaction" means the sale of substantially all of the assets or capital stock of either Progress Rail Services, Inc. or Railcar, Ltd. "Reference Banks" means Citibank and JPMorgan Chase Bank. "Register" has the meaning specified in Section 8.07(c). "Responsible Officer" means the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller or any Assistant Treasurer of the Borrower the signatures of whom, in each case, have been certified to the Administrative Agent and each other Lender pursuant to Section 3.01(c), or in a certificate delivered to the Administrative Agent replacing or amending such certificate. Each Lender may conclusively rely on each certificate so delivered until it shall have received a copy of a certificate from the Secretary or an Assistant Secretary of the Borrower amending, canceling or replacing such certificate. "S&P" means Standard & Poor's Ratings Group or any successor thereto. "S&P Rating" means, on any date of determination, the debt rating most recently announced by S&P with respect to the Borrower's long-term senior unsecured non-credit-enhanced debt. "SEC Order" means Order Nos. 35-27728 and 70-10130 of the Securities and Exchange Commission issued September 29, 2003 and expiring September 30, 2006, and any order or orders issued by the Securities and Exchange Commission in replacement or as extension thereof or in addition thereto permitting the Borrower to obtain Extensions of Credit under this Agreement. "Significant Subsidiary" means CP&L, FPC, Florida Power, Progress Capital and any other Subsidiary of the Borrower that at any time constitutes a "significant subsidiary", as such term is defined in Regulation S-X of the Securities and Exchange Commission as in effect on the date hereof (17 C.F.R. Part 210). "Solvent" means, with respect to any person as of a particular date, that on such date such person is able to pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed as the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether at the time capital stock (or comparable interest) of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by said Person (whether directly or through one or more other Subsidiaries). 12 "Syndication Agent" means JPMorgan Chase Bank. "Synthetic Lease" means a lease transaction under which the parties intend that (i) the lease will be treated as an "operating lease" by the lessee pursuant to Statement of Financial Accounting Standards No. 13, as amended, and (ii) the lessee will be entitled to various tax and other benefits ordinarily available to owners (as opposed to lessees) of like property. "Synthetic Lease Obligations" means, with respect to any Person, the sum of (i) all remaining rental obligations of such Person as lessee under Synthetic Leases that are attributable to principal and, without duplication, and (ii) all rental and purchase price payment obligations of such Person under such Synthetic Leases assuming such Person exercises the option to purchase the lease property at the end of the lease term. "Termination Date" means, with respect to all Lenders, the earliest to occur of (i) the Commitment Termination Date, (ii) the date of repayment in full of the Advances pursuant to Section 2.10(b), and (iii) the date of acceleration of the Borrower's payment obligations hereunder in accordance with Section 6.01. "Termination Event" means (i) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation under such regulations), or (ii) the withdrawal of the Borrower or any of its Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the Pension Benefit Guaranty Corporation, or (v) any other event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Total Capitalization" means the sum of the value of the common stock, retained earnings, and preferred and preference stock of the Borrower (in each case, determined in accordance with GAAP), plus Consolidated Indebtedness of the Borrower. Section 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Section 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. 13 Article II AMOUNTS AND TERMS OF THE ADVANCES Section 2.01. The Advances. (a) Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Advances to the Borrower from time to time on any Business Day during the period from the date hereof to and including the day prior to the Commitment Termination Date, in an aggregate amount outstanding not to exceed at any time the amount set forth opposite such Lender's name on Schedule I hereto or, if such Lender has entered into any Assignment and Acceptance, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c), as such amount may be reduced pursuant to Section 2.04(a) (such Lender's "Commitment"), and the Issuing Bank agrees to issue Letters of Credit for the account of the Borrower from time to time on any Business Day during the period from the date hereof until the tenth Business Day prior to the Commitment Termination Date in an aggregate amount not to exceed the LC Commitment. Each Borrowing shall be in an aggregate amount not less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Advances of the same Type made on the same day by the Lenders ratably according to their respective Commitments. Until the day prior to the Commitment Termination Date, within the limits of each Lender's Commitment, the Borrower may from time to time borrow, repay pursuant to Section 2.05 or prepay pursuant to Section 2.10(b) and reborrow under this Section 2.01. In no event shall the Borrower be entitled to request or receive any Extension of Credit that would cause the aggregate Outstanding Credits to exceed the Commitments. (b) Any Lender may request that any Advances made by it be evidenced by one or more promissory notes. In such event, the Borrower shall prepare, execute and deliver to such Lender one or more promissory notes payable to the order of such Lender (or, if requested by such Lender, to such Lender and its assignees) and in a form approved by the Administrative Agent. Section 2.02. Making the Advances. (a) Each Borrowing shall be made on notice, given not later than 11:00 A.M. (New York City time) on the day of such proposed Borrowing, in the case of a Borrowing comprised of Base Rate Advances, or on the third Business Day prior to the date of the proposed Borrowing, in the case of a Borrowing comprised of Eurodollar Rate Advances, by the Borrower to the Administrative Agent, which shall give to each Lender prompt notice thereof by telecopier. Each such notice of a Borrowing (a "Notice of Borrowing") shall be by telecopier, confirmed promptly in writing, in substantially the form of Exhibit A-1 hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing comprised of Eurodollar Rate Advances, the Interest Period for each such Advance. In the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the Administrative Agent shall promptly notify each Lender of the applicable interest rate under Section 2.06(b). Each Lender shall, before 12:00 P.M. (New York City time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. 14 (b) Each Notice of Borrowing shall be irrevocable and binding on the Borrower and, in respect of any Borrowing comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss or expense incurred by such Lender as a result of any failure by the Borrower to fulfill on or before the date specified for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (c) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing (in the case of a Eurodollar Borrowing) or the time of any Borrowing (in the case of a Base Rate Borrowing) date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent (without duplication), forthwith on demand, such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (x) in the case of the Borrower, the interest rate applicable at the time to Advances comprising such Borrowing and (y) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement. (d) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. (e) If, for any reason, a Borrowing is not made on the date specified in any Notice of Borrowing, the Administrative Agent hereby agrees to repay to each Lender the amount, if any, that such Lender has made available to the Administrative Agent as such Lender's ratable portion of such Borrowing, together with interest thereon for each day from the date such amount is made available to the Administrative Agent until the date such amount is repaid to such Lender, at the Federal Funds Rate. Section 2.03. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee on each Lender's Commitment, irrespective of usage, from the date hereof, in the case of each Bank, and from the effective date specified in the Assignment and Acceptance pursuant to which it became a 15 Lender, in the case of each other Lender, until the Termination Date at the rate per annum equal to the Facility Fee Percentage from time to time in effect. Such fee shall be calculated on the basis of actual number of days elapsed in a year of 365 or 366 days. Such fee shall be payable quarterly in arrears on the last day of each March, June, September and December during the term of such Lender's Commitment, and on the Termination Date. (b) The Borrower agrees to pay to the Administrative Agent an agency fee in such amounts and payable at such times, as shall be agreed to between them in writing. (c) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a letter of credit fee at a rate per annum equal to the Applicable Margin for Eurodollar Rate Advances in effect from time to time on the average daily amount of each such Lender's LC Exposure from the date hereof until the later to occur of the Commitment Termination Date and the date on which there is no amount remaining available to be drawn under any Letter of Credit. Such fee shall be calculated on the basis of actual number of days elapsed in a year of 360 days. Such fee shall be payable quarterly in arrears on the last day of each March, June, September and December and on the later to occur of the Commitment Termination Date and the date on which there is no amount remaining available to be drawn under any Letter of Credit. (d) The Borrower agrees to pay to the Issuing Bank for its own account a fronting fee and such other customary fees and expenses relating to the issuance, amendment, and drawings under the Letters of Credit, in such amounts and payable at such times as shall be agreed between them in writing. Section 2.04. Reduction and Increase of the Commitments. (a) The Borrower shall have the right, upon at least three Business Days' notice to the Administrative Agent, irrevocably to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders; provided that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount that is less than the aggregate principal amount of the Outstanding Credits; and provided, further, that each partial reduction of Commitments shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof. Once terminated or reduced, the Commitments may not be reinstated. (b) (i) At any time prior to the Termination Date, the Borrower may increase the aggregate amount of the Commitments to an amount not greater than $1,500,000,000 (any such increase, a "Commitment Increase") by designating either one or more of the existing Lenders (each of which, in its sole discretion, may determine whether and to what degree to offer to participate in such Commitment Increase) or one or more other banks or other financial institutions reasonably acceptable to the Administrative Agent that at the time agree, in the case of any such bank or financial institution that is an existing Lender to increase its Commitment (an "Increasing Lender") and, in the case of any other such bank or financial institution (an "Additional Lender"), to become a party to this Agreement. The sum of the increases in the Commitments of the Increasing Lenders pursuant to this subsection (b) plus the Commitments of the Additional Lenders upon giving effect to the Commitment Increase shall not in the aggregate exceed the amount of the Commitment Increase. The Borrower shall provide prompt notice of any proposed Commitment Increase pursuant to this Section 2.04(b) to the Administrative Agent, which shall promptly provide a copy of such notice to the Lenders. 16 (ii) Any Commitment Increase shall become effective upon (A) the receipt by the Administrative Agent of (1) an agreement in form and substance satisfactory to the Administrative Agent signed by the Borrower, each Increasing Lender and each Additional Lender, setting forth the new Commitment of each such Lender and setting forth the agreement of each Additional Lender to become a party to this Agreement and to be bound by all the terms and provisions hereof binding upon each Lender, (2) certified copies of the Commitment Increase Approvals and such opinions of counsel for the Borrower with respect to the Commitment Increase as the Administrative Agent may reasonably request, and (3) a certificate (the statements contained in which shall be true) of a duly authorized officer of the Borrower stating that both before and after giving effect to such Commitment Increase (x) no Event of Default has occurred and is continuing, (y) all representations and warranties made by the Borrower in this Agreement are true and correct in all material respects, provided that all representations and warranties limited by materiality are, to the extent so limited, true and correct in all respects, and (z) all Commitment Increase Approvals have been obtained and are in full force and effect, and (B) the funding by each Increasing Lender and Additional Lender of the Loan(s) to be made by each such Lender described in paragraph (iii) below. (iii) Upon the effective date of any Commitment Increase, each Increasing Lender and each Additional Lender shall provide funds to the Administrative Agent in the manner described in Section 2.01 in an amount equal to the product of (x) the aggregate principal amount of Advances outstanding hereunder, expressed as a percentage of the Commitments (calculated, in each case, immediately prior to such Commitment Increase) and (y) the amount of such Lender's Commitment Increase. The funds so provided by any Lender shall be deemed to be an Advance or Advances made by such Lender on the date of such Commitment Increase, with such Advance(s) being (A) in an amount equal to the product of (x) the aggregate outstanding principal amount of each Advance expressed as a percentage of the Commitments (calculated, in each case, immediately prior to such Commitment Increase) and (y) the amount of such Lender's Commitment Increase and (B) of the same Type(s) and having the same Interest Period(s) as each Advance described in the preceding clause (A), such that after giving effect to such Commitment Increase and the Advances(s) made on the date of such Commitment Increase, each Advance outstanding hereunder shall consist of Advances made by the Lenders ratably in accordance with their pro rata shares of the Commitments. (iv) Notwithstanding any provision contained herein to the contrary, from and after the date of any Commitment Increase and the making of any Advances on such date pursuant to paragraph (iii) above, all calculations and payments of interest on the Advance comprising any Advances shall take into account the actual Commitment of each Lender and the principal amount outstanding of each Advance made by such Lender during the relevant period of time. 17 Section 2.05. Repayment of Advances. The Borrower shall repay the principal amount of each Advance made by each Lender on the Commitment Termination Date, subject to Section 2.15 hereof. Section 2.06. Interest on Advances. The Borrower shall pay interest on the unpaid principal amount of each Advance made by each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, plus the Applicable Margin, payable quarterly in arrears on the last day of each March, June, September and December and on the date such Base Rate Advance shall be paid in full; provided, however, that if and for so long as an Event of Default has occurred and is continuing, interest on the unpaid principal amount of each Base Rate Advance shall be payable on demand. (b) Eurodollar Rate Advances. If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of the Eurodollar Rate for such Interest Period, plus the Applicable Margin for such Eurodollar Rate Advance in effect from time to time, payable on the last day of such Interest Period and, if such Interest Period for such Advance has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period; provided, however, that if and for so long as an Event of Default has occurred and is continuing, interest on the unpaid amount of each Eurodollar Rate Advance shall be payable on demand. Section 2.07. Additional Interest on Eurodollar Rate Advances. The Borrower shall pay to each Lender additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Advance. All claims for such additional interest shall be submitted by such Lender to the Borrower (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within 90 days after the first day of such Interest Period; provided, however, that if a claim is not submitted to the Borrower within such 90-day period, such Lender shall thereby waive its claim to such additional interest incurred during such 90-day period but not to any such additional interest incurred thereafter. A certificate as to the amount of such additional interest, submitted to the Borrower (with a copy to the Administrative Agent) by such Lender, shall be conclusive and binding for all purposes, absent manifest error. 18 Section 2.08. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining the Eurodollar Rate. If any one or more of the Reference Banks shall not furnish such timely information to the Administrative Agent for determination of any such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Administrative Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.06(a) or (b), and the applicable rate, if any, furnished by each Reference Bank for determining the applicable interest rate under Section 2.06(b). (c) If fewer than two Reference Banks furnish timely information to the Administrative Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Administrative Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (e) If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Administrative Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. (f) On the date on which the aggregate unpaid principal amount of Advances comprising any Borrowing shall be reduced, by prepayment or otherwise, to less than $20,000,000, such Advances shall, if they are Advances of a Type other than Base Rate Advances, automatically Convert into Base Rate Advances, and on and after such date the right of the Borrower to Convert such Advances into Advances 19 of a Type other than Base Rate Advances shall terminate; provided, however, that if and so long as each such Advance shall be of the same Type and have the same Interest Period as Advances comprising another Borrowing or other Borrowings, and the aggregate unpaid principal amount of all such Advances shall equal or exceed $20,000,000, the Borrower shall have the right to continue all such Advances as, or to Convert all such Advances into, Advances of such Type having such Interest Period. (g) If an Event of Default has occurred and is continuing, (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended. Section 2.09. Voluntary Conversion of Advances. The Borrower may, on any Business Day prior to the Termination Date, upon notice given to the Administrative Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion, in the case of any proposed Conversion into Eurodollar Rate Advances, and on the date of the proposed Conversion, in the case of any proposed Conversion into Base Rate Advances, and subject to the provisions of Sections 2.08 and 2.12, Convert all Advances of one Type comprising the same Borrowing into Advances of another Type; provided, however, that any Conversion of any Eurodollar Rate Advances into Advances of another Type shall be made on, and only on, the last day of an Interest Period for such Eurodollar Rate Advances, except as otherwise provided in Section 2.12. Each such notice of a Conversion (a "Notice of Conversion") shall be by telecopier, confirmed promptly in writing, in substantially the form of Exhibit A-2 hereto and shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the aggregate amount of, Type of, and Interest Periods applicable to, the Advances to be Converted, (iii) the Type of Advance to which such Advances (or portions thereof) are proposed to be Converted, and (iv) if such Conversion is into or with respect to Eurodollar Rate Advances, the duration of the Interest Period for each such Advance. Section 2.10. Prepayments of Advances. (a) The Borrower shall have no right to prepay any principal amount of any Advances other than as provided in subsection (b) below. (b) The Borrower may, upon notice given to the Administrative Agent at least two Business Days prior to the proposed prepayment, in the case of any Eurodollar Rate Advance, and on the date of the proposed prepayment, in the case of any Base Rate Advance, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Advances comprising the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the amount prepaid and, in the case of any Eurodollar Rate Advance, any amount payable pursuant to Section 8.04(b); provided, however, that (i) each partial prepayment shall be in an aggregate principal amount not less than $5,000,000 and in integral multiples of $1,000,000 in excess thereof and (ii) in the case of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such prepayment. 20 Section 2.11. Increased Costs. (a) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage), in or in the interpretation of any law or regulation, or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances or any increase in the cost to such Lender or the Issuing Bank of participating in or issuing any Letter of Credit, then the Borrower shall from time to time, upon demand by such Lender or the Issuing Bank (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender or Issuing Bank additional amounts sufficient to reimburse such Lender or Issuing Bank for such increased cost. All claims for increased cost shall be submitted by such Lender or Issuing Bank to the Borrower (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within 90 days after such introduction, such change, or the beginning of such compliance, the occurrence of which resulted in such increased cost, and the Borrower shall make such payment within five Business Days after notice of such claim is received; provided, however, that if a claim is not submitted to the Borrower within such 90-day period, such Lender or Issuing Bank shall thereby waive its claim to such increased cost incurred during such 90-day period but not to any such increased cost incurred thereafter. A certificate as to the amount of such increased cost, submitted to the Borrower (with a copy to the Administrative Agent) by such Lender or Issuing Bank, shall be conclusive and binding for all purposes, absent manifest error. (b) If any Lender or the Issuing Bank determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or Issuing Bank or any corporation controlling such Lender or Issuing Bank and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend or participate in Letters of Credit or the obligation of Issuing Bank to issue Letters of Credit hereunder and other commitments of this type, then, upon demand by such Lender or the Issuing Bank (with a copy of such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Lender or Issuing Bank, from time to time as specified by such Lender or Issuing Bank, additional amounts sufficient to compensate such Lender or Issuing Bank or such corporation in the light of such circumstances, to the extent that such Lender or Issuing Bank reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment to lend or participate in Letters of Credit or the obligation of the Issuing Bank to issue Letters of Credit hereunder. All claims for such additional amounts shall be submitted by such Lender or Issuing Bank (with a copy to the Administrative Agent) as soon as is reasonably possible and in all events within 90 days after such determination by such Lender or Issuing Bank, and the Borrower shall make such payment within five Business Days after notice of such claim is received; provided, however, that if a claim is not submitted to the Borrower within such 90-day period, such Lender or Issuing Bank shall thereby waive its claim to such additional amounts incurred during such 90-day period but not to any such additional amounts incurred thereafter. A certificate as to such amounts submitted to the Borrower and the Administrative Agent by such Lender or Issuing Bank shall be conclusive and binding for all purposes, absent manifest error. 21 Section 2.12. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of the Lenders to make Eurodollar Rate Advances or to Convert Advances into Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, and (ii) the Borrower shall forthwith prepay in full all Eurodollar Rate Advances of all Lenders then outstanding, together with interest accrued thereon, unless the Borrower, within five Business Days of notice from the Administrative Agent, Converts all Eurodollar Rate Advances of all Lenders then outstanding into Advances of another Type in accordance with Section 2.09. Section 2.13. Payments and Computations. (a) The Borrower shall make each payment hereunder, without condition or deduction for any counterclaim, defense, recoupment or setoff, not later than 11:00 A.M. (New York City time) on the day when due in U.S. dollars to the Administrative Agent at its address referred to in Section 8.02 in same day funds. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or fees (other than pursuant to Section 2.02(c), 2.07 or 2.11) ratably to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to the Issuing Bank or to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) All computations of interest based on the base rate referred to in clause (i) of the definition of Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or Federal Funds Rate or of fees payable hereunder shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.07 shall be made by a Lender on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Administrative Agent (or, in the case of Section 2.07, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes. 22 (c) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender, together with interest thereon for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent at the Federal Funds Rate. Section 2.14. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances made by it (other than pursuant to Section 2.02(c), 2.07 or 2.11) in excess of its ratable share of payments on account of the Extensions of Credit obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participation in the Extensions of Credit made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery, together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by check to the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.14 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. Section 2.15. Extension of Commitment Termination Date. (a) So long as no Event of Default shall have occurred and be continuing and the Commitment Termination Date shall not have occurred, then at least 45 days but not more than 60 days prior to the Extension Date, the Borrower may request that the Lenders, by written notice to the Administrative Agent (in substantially the form attached hereto as Exhibit E) with a copy to the Arrangers, consent to a two-year extension of the Commitment Termination Date. Each Lender shall, in its sole discretion, determine whether to consent to such 23 request and shall notify the Administrative Agent of its determination at least 20 days but not more than 30 days prior to such Extension Date. The failure to respond by any Lender within such time period shall be deemed a denial of such request. The Administrative Agent shall deliver a notice to the Borrower and the Lenders at least 15 days but not more than 20 days prior to the Extension Date of the identity of the Lenders that have consented to such extension and the Lenders that have declined such consent (the "Declining Lenders"). If Lenders holding in the aggregate of less than 66 2/3% of the Commitments have consented to the requested extension, the Commitment Termination Date shall not be extended, and the Commitments of all Lenders shall terminate on the then current Commitment Termination Date. (b) If Lenders holding in the aggregate 66 2/3% or more of the Commitments have consented to the requested extension, subject to the conditions set forth in Section 2.15(c), the Commitment Termination Date shall be extended as to such consenting Lenders only (and not as to any Declining Lender) for a period of two years from the then current Commitment Termination Date, the Commitments of any Declining Lenders shall terminate on the Commitment Termination Date (as theretofore in effect), all Advances of and other amounts payable to such Declining Lenders shall be repaid to them on such date, and such Declining Lenders shall have no further liability with respect to Letters of Credit as of such date. If the Borrower so requests, each Lender consenting to such request shall be given the opportunity at least seven days but not more than 15 days prior to such Extension Date, in each Lender's sole discretion, to commit to increase its Commitment by submission of a written notice setting forth the desired increase in such Lender's Commitment to the Administrative Agent in amounts such that the aggregate Commitments hereunder after giving effect to any such extension and increase in the Commitments shall not exceed the aggregate Commitments immediately prior to the Extension Date. If the Administrative Agent receives commitments to increase the Commitments from the Lenders, that, when aggregated with the existing Commitments, (i) are less than or equal to the Commitments immediately prior to the Extension Date, the Administrative Agent shall accept all such Commitments, (ii) are greater than the Commitments on the date hereof, the Administrative Agent may determine, in its reasonable discretion, which Commitments to accept and the amounts by which each submitting Lender's Commitments shall be increased so that the aggregate Commitments after the Extension Date shall equal the aggregate Commitments immediately prior to the Extension Date (any Lender whose commitment to increase its Commitment hereunder is accepted by the Administrative Agent, an "Extending Commitment Lender"). If Lenders do not consent to increase the aggregate Commitments to an amount equal to the Commitments immediately prior to the Extension Date, the Borrower may, at least two days but not more than seven days prior to the Extension Date, request that the Administrative Agent, in its sole discretion, accept the Commitment or Commitments of an Eligible Assignee or Eligible Assignees such that the aggregate Commitments hereunder after the Extension Date shall not be greater than the aggregate Commitments hereunder immediately prior to the Extension Date. (c) Each such accepted Eligible Assignee and each Extending Commitment Lender shall deliver a signature page hereto indicating that it is bound by the terms hereof and setting forth its aggregate Commitment hereunder. Such new signature page shall constitute a part hereof upon acceptance by the Administrative Agent and, in the case of any signature page submitted by any Extending Commitment Lender, shall replace such Extending Commitment Lender's signature page. Any such extension shall become effective upon the Extension Date, if the Borrower shall have delivered to the Administrative Agent and each Lender, on or prior to the Extension Date, (i) opinions of counsel to the (d) Upon the extension of the Commitment Termination Date in accordance with this Section 2.15, the Administrative Agent shall deliver to each of the Lenders a revised Schedule I setting forth the Commitment of each of the Lenders after giving effect to such extension, and such Schedule I shall replace the Schedule I in effect before the extension of the Commitment Termination Date. 24 Borrower substantially in the forms of Exhibits C-3 and C-4 attached hereto upon which each Lender and the Administrative Agent may rely, together with any governmental order referred to therein attached thereto and (ii) a certificate of a duly authorized officer of the Borrower (the statements contained in which shall be true) to the effect that (x) the representations and warranties contained in Section 4.01 are correct on and as of the Extension Date before and after giving effect to the extension of the Commitment Termination Date, as though made on and as of the Extension Date, and (y) no event has occurred and is continuing, or would result from such extension of the Commitment Termination Date, that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both. Upon satisfaction of such conditions and the effectiveness of such extension, each new Lender and Extending Commitment Lender shall make Advances to the Borrower (A) in the case of each new Lender, equal to such Lender's ratable portion of the Advances outstanding immediately prior to the Extension Date and (B) in the case of each Extending Commitment Lender, equal to such portion of such Lender's ratable portion of the Advances (assuming that such Lender's Commitment consists only of the increased portion thereof) outstanding immediately prior to the Extension Date, in each case, without giving effect to any repayment of Advances to Declining Lenders made on the Extension Date. Section 2.16. Letters of Credit. (a) From time to time and on any Business Day during the period from the date hereof to the tenth Business Day preceding the Commitment Termination Date, the Issuing Bank, in reliance upon the agreements of the other Lenders pursuant to subsection (d) of this Section 2.16, agrees to issue, at the request of the Borrower, Letters of Credit for the account of the Borrower on the terms and conditions hereinafter set forth; provided, that (i) each Letter of Credit shall expire on the earlier of (A) the date one year after the date of issuance of such Letter of Credit (or in the case of any renewal or extension thereof, one year after such renewal or extension) and (B) the date that is five Business Days prior to the Commitment Termination Date; (ii) each Letter of Credit shall be in a stated amount of at least $25,000; and (iii) the Borrower may not request any Extension of Credit relating to a Letter of Credit if, after giving effect to such Extension of Credit, (X) the aggregate LC Exposure would exceed the LC Commitment or (Y) the aggregate Outstanding Credits would exceed the Commitments. Upon each Extension of Credit relating to a Letter of Credit, each Lender shall be deemed, and hereby irrevocably and unconditionally agrees, to purchase from the Issuing Bank without recourse a participation in such Letter of Credit equal to such Lender's Pro Rata Share of the aggregate amount available to be drawn under such Letter of Credit. Each Letter of Credit shall utilize the Commitment of each Lender by an amount equal to the amount of such participation. (b) To request an Extension of Credit relating to a Letter of Credit, the Borrower shall give the Issuing Bank and the Administrative Agent irrevocable written notice at least three Business Days prior to the requested date of such Extension of Credit specifying the date (which shall be a Business Day) on which such Extension of Credit is to occur, the expiration date of such Letter of Credit, the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. In addition to the satisfaction of the conditions in Section 3.02, such Extension of Credit will be subject to the 25 further conditions that such Letter of Credit shall be in such form and contain such terms as the Issuing Bank shall approve and that the Borrower shall have executed and delivered any additional applications, agreements and instruments relating to such Extension of Credit as the Issuing Bank shall reasonably require; provided, that in the event of any conflict between such applications, agreements or instruments and this Agreement, the terms of this Agreement shall control. (c) At least two Business Days prior to each Extension of Credit relating to a Letter of Credit, the Issuing Bank will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has received the notice related thereto and, if it has not, the Issuing Bank will provide the Administrative Agent with a copy thereof. Unless the Issuing Bank has received notice from the Administrative Agent on or before the Business Day immediately preceding the date on which the Issuing Bank is to make the requested Extension of Credit relating to such Letter of Credit directing the Issuing Bank not to make such Extension of Credit because such Extension of Credit is not then permitted hereunder because of the limitations set forth in subsection (a) of this Section 2.16, or that one or more conditions specified in Section 3.02 are not then satisfied, then, subject to the terms and conditions hereof, the Issuing Bank shall, on the requested date, make such Extension of Credit in accordance with the Issuing Bank's usual and customary business practices. (d) The Issuing Bank shall examine all documents purporting to represent a demand for payment under a Letter of Credit promptly following its receipt thereof. The Issuing Bank shall notify the Borrower and the Administrative Agent (i) of such demand for payment and (ii) whether the Issuing Bank has made or will make a LC Disbursement thereunder; provided, that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Lenders with respect to such LC Disbursement. The Borrower shall be irrevocably and unconditionally obligated to reimburse the Issuing Bank for any LC Disbursements paid by the Issuing Bank in respect of such drawing, without presentment, demand or other formalities of any kind. Unless the Borrower shall have notified the Issuing Bank and the Administrative Agent prior to 11:00 A.M. on the Business Day immediately prior to the date on which such drawing is honored that the Borrower intends to reimburse the Issuing Bank for the amount of such drawing in funds other than from the proceeds of Advances, the Borrower shall be deemed to have timely given a Notice of Borrowing to the Administrative Agent requesting a Borrowing compromising Base Rate Advances on the date on which such drawing is honored in the amount payable to the Issuing Bank in respect of such LC Disbursement; provided, that for purposes solely of such Borrowing, the conditions precedents set forth in Section 3.02 hereof shall not be applicable. The Administrative Agent shall notify the Lenders of such Borrowing in accordance with Section 2.03(a), and each Lender shall make the proceeds of its Base Rate Advance included in such Borrowing available to the Administrative Agent for the account of the Issuing Bank in accordance with Section 2.03(a). The proceeds of such Borrowing shall be applied directly by the Administrative Agent to reimburse the Issuing Bank for such LC Disbursement. (e) If for any reason a Borrowing may not be (as determined in the sole discretion of the Administrative Agent), or is not, made in accordance with the foregoing provisions and the Borrower has not otherwise reimbursed the Issuing Bank for an LC Disbursement, then each Lender shall be obligated to fund the participation that such Lender purchased pursuant to subsection (a) in an amount equal to its Pro Rata Share of such LC Disbursement on and as of the date on 26 which such Borrowing should have occurred. Each Lender's obligation to fund its participation shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation (i) any setoff, counterclaim, recoupment, defense or other right that such Lender or any other Person may have against the Issuing Bank or any other Person for any reason whatsoever, (ii) the existence of an Event of Default or the termination of the Commitments, (iii) any adverse change in the condition (financial or otherwise) of the Borrower or any of its Subsidiaries, (iv) any breach of this Agreement by the Borrower or any other Lender, (v) any amendment, renewal or extension of any Letter of Credit or (vi) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. On the date that such participation is required to be funded, each Lender shall promptly transfer, in immediately available funds, the amount of its participation to the Administrative Agent for the account of the Issuing Bank. Whenever, at any time after the Issuing Bank has received from any such Lender the funds for its participation in a LC Disbursement, the Issuing Bank (or the Administrative Agent on its behalf) receives any payment on account thereof from the Borrower, the Administrative Agent or the Issuing Bank, as the case may be, will distribute to such Lender its Pro Rata Share of such payment; provided, that if such payment is required to be returned for any reason to the Borrower or to a trustee, receiver, liquidator, custodian or similar official in any bankruptcy proceeding, such Lender will return to the Administrative Agent or the Issuing Bank any portion thereof previously distributed by the Administrative Agent or the Issuing Bank to it. (f) To the extent that any Lender shall fail to pay when due any amount required to be paid pursuant to subsection (d) of this Section 2.16, such Lender shall pay interest to the Issuing Bank (through the Administrative Agent) on such amount from the date such amount became due and payable to the date such payment is made at a rate per annum equal to the Federal Funds Rate. (g) If any Event of Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Administrative Agent or the Majority Lenders demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Issuing Bank and the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid fees thereon; provided, that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or notice of any kind, upon the occurrence of any Event of Default described in subsection (e) of Section 6.01. Such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. The Borrower agrees to execute any documents and/or certificates to effectuate the intent of this subsection. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrower's risk and expense, such deposits shall not bear interest. Interest and profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so 27 applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time; or, if the maturity of the Advances has been accelerated, with the consent of the Majority Lenders, be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not so applied as aforesaid) shall be returned to the Borrower promptly after all Events of Default have been cured or waived. (h) Promptly following the end of each fiscal quarter of the Borrower, the Issuing Bank shall deliver (through the Administrative Agent) to each Lender and the Borrower a report describing the Letters of Credit outstanding and the LC Exposure at the end of such fiscal quarter. Upon the request of any Lender from time to time, the Issuing Bank shall deliver to such Lender any other information reasonably requested by such Lender with respect to each Letter of Credit then outstanding. (i) The Borrower's obligation to reimburse LC Disbursements hereunder shall be absolute, unconditional and irrevocable and shall be performed strictly in accordance with the terms of this Agreement under all circumstances whatsoever and irrespective of any of the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit or this Agreement; (ii) the existence of any claim, set-off, defense or other right that the Borrower or any Subsidiary or Affiliate of the Borrower may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Person or entity for which any such beneficiary or transferee may be acting), any Lender (including the Issuing Bank) or any other Person, whether in connection with this Agreement or any Letter of Credit or any document related hereto or thereto or any unrelated transaction; (iii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document to the Issuing Bank that does not comply with the terms of such Letter of Credit; (v) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Subsection, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder; or (vi) the existence of an Event of Default. Neither the Administrative Agent, the Issuing Bank, any Lender nor any Affiliate of the foregoing Persons, nor any director, officer, employee, agent of any such Person or Affiliate shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any 28 payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to above), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; provided, that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank's failure to exercise care when determining whether drafts or other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree, that in the absence of gross negligence or willful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented that appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. (j) Each Letter of Credit (1) if a standby Letter of Credit, shall be subject to the rules of the ISP, and (2) if a commercial Letter of Credit shall be subject to the Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time, and, to the extent not inconsistent therewith, the governing law of this Agreement set forth in Section 8.09. Article III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Closing. The obligation of each Lender to make its initial Advance and of the Issuing Bank to issue its initial Letter of Credit shall not become effective unless and until all fees due and payable by the Borrower in connection with this Agreement have been paid and the Administrative Agent shall have received the following: (a) Promissory notes, in a form acceptable to the Administrative Agent, payable to the order of each Lender that has requested such a note. (b) Copies of the resolutions of the Board of Directors of the Borrower approving this Agreement and all documents evidencing other necessary corporate action, certified by the Secretary or an Assistant Secretary of the Borrower to be true and correct, and in full force and effect on and as of the date hereof. 29 (c) A certificate of the Secretary or an Assistant Secretary of the Borrower, dated as of the date hereof, certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the other documents to be delivered hereunder. (d) A certificate of a Responsible Officer of the Borrower, dated as of the date hereof, certifying (i) the accuracy of the representations and warranties contained herein and (ii) that no event has occurred and is continuing that constitutes an Event of Default or that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both. (e) Certified copies of all governmental approvals and authorizations required to be obtained in connection with the execution, delivery and performance by the Borrower of this Agreement. (f) Certified copies of the Restated Charter and By-Laws of the Borrower. (g) Favorable opinions of Frank A. Schiller, General Counsel of Progress Energy Service Company LLC, and of Hunton & Williams LLP, counsel for the Borrower, substantially in the forms of Exhibit C-1 and C-2, respectively, hereto and as to such other matters as the Issuing Bank or any Lender through the Administrative Agent may reasonably request. (h) A favorable opinion of King & Spalding LLP, counsel for the Administrative Agent, substantially in the form of Exhibit D hereto. (i) The commitments under the Existing Credit Facilities, shall have been terminated and all amounts outstanding under such facilities shall have been paid in full. Section 3.02. Conditions Precedent to Each Borrowing and to the Issuance of Letters of Credit. The obligation of each Lender to make an Advance on the occasion of each Borrowing (including the initial Borrowing) and of the Issuing Bank to make any Extension of Credit relating to a Letter of Credit shall be subject to the further conditions precedent that (a) in the case of the making of an Advance, the Administrative Agent shall have received the written confirmatory Notice of Borrowing with respect thereto, and (b) on the date of any Extension of Credit, the following statements shall be true (and the giving of the Notice of Borrowing or the giving of notice of a requested Letter of Credit pursuant to Section 2.16(b) and the acceptance by the Borrower of the proceeds of the Borrowing or the issuance of a requested Letter of Credit related thereto shall constitute a representation and warranty by the Borrower that on the date of such Borrowing or issuance of such Letter of Credit such statements are true): (i) The representations and warranties contained in Section 4.01 are correct on and as of the date of such Extension of Credit before and after giving effect to such Extension of Credit and to the application of the proceeds therefrom, as though made on and as of such date; provided, that such condition shall not apply to the last sentence of Section 4.01(e) in connection with any Advance made to pay maturing commercial paper issued under the Borrower's commercial paper program; and 30 (ii) No event has occurred and is continuing, or would result from such Extension of Credit or from the application of the proceeds therefrom that would constitute an Event of Default but for the requirement that notice be given or time elapse, or both; and (c) the Administrative Agent shall have received such other approvals, opinions and documents as the Issuing Bank or any Lender through the Administrative Agent may reasonably request. Article IV REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) Each of the Borrower and each Significant Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and is duly qualified to do business in and is in good standing under the laws of each other jurisdiction where the nature of its business or the nature of property owned or used by it makes such qualification necessary (except where failure to so qualify would not have a material adverse affect on the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole). (b) The execution, delivery and performance by the Borrower of this Agreement are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Borrower's charter or by-laws or (ii) any law or contractual restriction binding on or affecting the Borrower or its properties. (c) No authorization or approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement, other than the SEC Order, which has been duly issued and is in full force and effect, and a notification to the North Carolina Utilities Commission, which has been timely made. (d) This Agreement has been duly executed and delivered by the Borrower and is, and any promissory note when delivered pursuant to Section 2.01(b) will be, the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. (e) The Consolidated balance sheets of the Borrower and its Subsidiaries as of December 31, 2003, and the related Consolidated statements of income and retained earnings of the Borrower and its Subsidiaries for the fiscal year then ended, and the Consolidated balance sheets of the Borrower and its Subsidiaries as of March 31, 2004, and the related Consolidated statements of income and retained earnings of the Borrower and its Subsidiaries, copies of each of which have been furnished to each Lender and the Issuing Bank, fairly present (subject, in the case of such financial statements dated March 31, 2004, to year end adjustments) the financial condition of the Borrower and its Subsidiaries as at such dates and the results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied. Since December 31, 2003, there has been no material adverse change in the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. 31 (f) Except as described in the reports and registration statements that the Borrower, CP&L, FPC and Florida Power have filed with the Securities and Exchange Commission prior to the date of this Agreement, there is no pending or threatened action or proceeding affecting the Borrower or any Subsidiary before any court, governmental agency or arbitrator, that may materially adversely affect the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. (g) No proceeds of any Extension of Credit will be used to acquire any security in any transaction that is subject to Sections 13 and 14 of the Exchange Act. (h) No proceeds of any Extension of Credit will be used in connection with any Hostile Acquisition. (i) The Borrower is not engaged in the business of extending credit for the purpose of buying or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to buy or carry any margin stock or to extend credit to others for the purpose of buying or carrying any margin stock. (j) Following application of the proceeds of each Extension of Credit, not more than 5% of the value of the assets (either of the Borrower only or of the Borrower and the Subsidiaries on a Consolidated basis) subject to the provisions of Section 5.02(a) or 5.02(e) will be margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). (k) No Termination Event has occurred or is reasonably expected to occur with respect to any Plan. (l) The Borrower is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (m) The Borrower is in substantial compliance with all applicable laws, rules, regulations and orders of any governmental authority, the noncompliance with which would materially and adversely affect the business or condition of the Borrower, such compliance to include, without limitation, substantial compliance with ERISA, Environmental Laws and paying before the same become delinquent all material taxes, assessments and governmental charges imposed upon it or upon its property, except to the extent compliance with any of the foregoing is then being contested in good faith by appropriate legal proceedings. (n) All written information furnished by the Borrower to the Administrative Agent, the Issuing Bank and the Lenders in connection with this Agreement (the "Disclosed Information") was (and all information furnished in the future by the Borrower to the Administrative Agent, the Issuing Bank and the Lenders will be) 32 complete and correct in all respects material to the creditworthiness of the Borrower when delivered. As of the date hereof, the Disclosed Information does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances under which made. (o) The Borrower is Solvent. Article V COVENANTS OF THE COMPANY Section 5.01. Affirmative Covenants. So long as there shall be any Outstanding Credits, any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower shall, unless the Majority Lenders shall otherwise consent in writing: (a) Compliance with Laws, Etc. Except to the extent contested in good faith, comply, and cause each Subsidiary to comply, with all applicable laws, rules, regulations and orders (such compliance to include, without limitation, ERISA and applicable environmental laws and paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property), the non-compliance with which would materially adversely affect the Borrower's business or credit. (b) Preservation of Corporate Existence, Etc. Except as provided in Section 5.02(d), preserve and maintain, and cause each Significant Subsidiary to preserve and maintain, its corporate existence, rights (charter and statutory) and franchises. (c) Visitation Rights. At any reasonable time and from time to time, permit the Administrative Agent or any of the Lenders or any agents or representatives thereof to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower and any Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and any Subsidiary with any of their respective officers or directors. (d) Keeping of Books. Keep, and cause each Subsidiary to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower and such Subsidiary in accordance with GAAP. (e) Maintenance of Properties, Etc. Maintain and preserve, and cause each Subsidiary to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. (f) Maintenance of Insurance. Maintain, and cause each Subsidiary to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates. 33 (g) Taxes. File, and cause each Subsidiary to file, all tax returns (federal, state and local) required to be filed and paid and pay all taxes shown thereon to be due, including interest and penalties except, in the case of taxes, to the extent the Borrower or such Subsidiary is contesting the same in good faith and by appropriate proceedings and has set aside adequate reserves for the payment thereof in accordance with generally accepted accounting principles. (h) Material Obligations. Pay, and cause each Significant Subsidiary to pay, promptly as the same shall become due each material obligation of the Borrower or such Significant Subsidiary. (i) Reporting Requirements. Furnish to the Issuing Bank and the Lenders: (i) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a Consolidated balance sheet of the Borrower and the Subsidiaries as at the end of such quarter and Consolidated statements of income and retained earnings of the Borrower and the Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the treasurer or the chief financial officer of the Borrower, together with a certificate of the treasurer or chief financial officer of the Borrower, setting forth in reasonable detail the calculation of the Borrower's compliance with Section 5.01(j) and stating that no Event of Default and no event that, with the giving of notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing, or if an Event of Default or such event has occurred and is continuing, a statement setting forth details of such Event of Default or event and the action that the Borrower has taken and proposes to take with respect thereto; (ii) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the annual report for such year for the Borrower and the Subsidiaries, containing Consolidated financial statements for such year certified by Deloitte & Touche or other independent public accountants acceptable to the Majority Lenders, together with a certificate of the treasurer or chief financial officer of the Borrower, substantially in the form of Exhibit F hereto, setting forth in reasonable detail the calculation of the Borrower's compliance with Section 5.01(j) and stating that no Event of Default and no event that, with the giving of notice or lapse of time or both, would constitute an Event of Default has occurred and is continuing, or if an Event of Default or such event has occurred and is continuing, a statement setting forth details of such Event of Default or event and the action that the Borrower has taken and proposes to take with respect thereto; (iii) promptly after the sending or filing thereof, copies of all reports that the Borrower sends to any of its security holders, copies of all reports and registration statements that the Borrower or any Subsidiary files with the Securities and Exchange Commission or any national securities exchange, and copies of any SEC Order issued after the date of this Agreement, to the extent not delivered by the Borrower pursuant to clause (i) or (ii) of this Section 5.01(i); 34 (iv) immediately upon any Responsible Officer's obtaining knowledge of the occurrence of any Event of Default or any event that, with the giving of notice or lapse of time, or both, would constitute an Event of Default, a statement of the chief financial officer or treasurer of the Borrower setting forth details of such Event of Default or event and the action that the Borrower proposes to take with respect thereto; (v) immediately upon obtaining knowledge thereof, notice of any change in either the Moody's Rating or the S&P Rating; (vi) as soon as possible and in any event within five days after the commencement thereof or any adverse determination or development therein, notice of all actions, suits and proceedings that may adversely affect the Borrower's ability to perform its obligations under this Agreement; (vii) as soon as possible and in any event within five days after the occurrence of a Termination Event, notice of such Termination Event; (viii) from time to time upon the reasonable request of any Lender or the Issuing Bank through the Administrative Agent, all information necessary for such Lender or the Issuing Bank to comply with the Patriot Act; and (ix) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any Subsidiary as any Lender or the Issuing Bank through the Administrative Agent may from time to time reasonably request. (j) Indebtedness to Total Capitalization. Maintain, at all times a ratio of Consolidated Indebtedness of the Borrower and its Subsidiaries to Total Capitalization of not more than .65:1.0. (k) Interest Coverage Ratio. Maintain, as of the last day of each fiscal quarter of the Borrower, a ratio of EBITDA for the 12-month period ending on such date to Interest Expense for the 12-month period ending on such date of not less than 2.5:1. (l) Use of Proceeds. Use the proceeds of each Advance solely for general corporate purposes (including, in each case, without limitation, as a commercial paper back-up). No proceeds of any Advance will be used to acquire any equity security of a class that is registered pursuant to Section 12 of the Exchange Act, or any security in any transaction that is subject to Sections 13 and 14 of the Exchange Act. (m) Ownership of Subsidiaries. Own at all times, directly or indirectly and free and clear of all liens and encumbrances, 100% of the common stock of CP&L, FPC and Florida Power. Section 5.02. Negative Covenants. So long as there shall be any Outstanding Credits, any other amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will not, without the written consent of the Majority Lenders: 35 (a) Liens, Etc. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any Subsidiary to assign, any right to receive income, in each case to secure any Indebtedness of any Person, other than (i) liens, mortgages and security interests created by the Mortgage and the Florida Power Mortgage, (ii) liens and security interests against the fuel used by the Borrower in its power generating operations in favor of the suppliers thereof, (iii) liens and security interests created in connection with the GenCo Financing, and (iv) liens, mortgages and security interests securing other Indebtedness of the Borrower and its Subsidiaries not exceeding $500,000,000 in the aggregate. (b) Indebtedness. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any Indebtedness other than (i) Indebtedness hereunder, (ii) Indebtedness secured by liens and security interests permitted pursuant to clauses (ii), (iii) and (iv) of subsection 5.02(a), (iii) Indebtedness evidenced by the First Mortgage Bonds and the Florida Power Mortgage Bonds and (iv) unsecured Indebtedness, including guarantees issued in connection with the financing of pollution control facilities operated by CP&L, FPC or Florida Power, guarantees of Indebtedness incurred by any wholly-owned Subsidiary and guarantees of debt securities issued by any financing Subsidiary established to secure debt financing in the offshore markets. (c) Lease Obligations. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any obligations for the payment of rental for any property under leases or agreements to lease having a term of one year or more that would cause the direct or contingent Consolidated liabilities of the Borrower and its Subsidiaries in respect of all such obligations payable in any calendar year to exceed 10% of the Consolidated operating revenues of the Borrower and its Subsidiaries for the immediately preceding calendar year. (d) Mergers, Etc. Merge with or into or consolidate with or into, or acquire all or substantially all of the assets or securities of, any Person, unless, in each case, (i) immediately after giving effect thereto, no event shall occur and be continuing that constitutes an Event of Default or an event that with the giving of notice or lapse of time, or both, would constitute an Event of Default, and (ii) in the case of any such merger to which the Borrower is a party, such other Person is a utility company and the resulting or surviving corporation, if not the Borrower, (x) is organized and existing under the laws of the United States of America or any State thereof, (y) is a corporation satisfactory to the Majority Lenders, and (z) shall have expressly assumed, by an instrument satisfactory in form and substance to the Majority Lenders, the due and punctual payment of all amounts due under this Agreement and the performance of every covenant and undertaking of the Borrower contained in this Agreement. (e) Sales, Etc. of Assets. Sell, lease, transfer or otherwise dispose of, or permit any Subsidiary to sell, lease, transfer or otherwise dispose of, any of its assets, other than the following sales: (i) sales of generating capacity to the wholesale customers of the Borrower and the Subsidiaries, (ii) sales of nuclear fuel, (iii) sales of accounts receivable, (iv) sales in connection with a transaction authorized by subsection (d) of this Section, (v) the Portfolio Transaction, (vi) the Rail Transaction, (vii) sales of investments in securities with a maturity of less than one year, or (viii) other sales not exceeding $250,000,000 in the aggregate in any fiscal year of the Borrower. 36 (f) Margin Stock. Use any proceeds of any Advance to buy or carry margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). (g) Change in Nature of Business. Engage, or cause or permit CP&L or Florida Power to engage, in a material manner in businesses other than those in which they are engaged on the date hereof and businesses reasonably related thereto. (h) Hostile Acquisitions. Use any proceeds of any Extension of Credit in connection with any Hostile Acquisition. Article VI EVENTS OF DEFAULT Section 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Advance or LC Disbursement when due, or shall fail to pay any interest on the principal amount of any Advance or LC Disbursement or any fees or other amount payable hereunder within five Business Days after such interest or fees or other amount shall become due; or (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in any document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made or deemed made; or (c) The Borrower shall fail to perform or observe any other term, covenant or agreement contained in Section 5.01(b), 5.01(i)(iv), 5.01(j), 5.01(k), 5.01(m) or 5.02 on its part to be performed or observed; or the Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and any such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Administrative Agent or any Lender; or (d) The Borrower or any Significant Subsidiary shall fail to pay any amount in respect of any Indebtedness in excess of $50,000,000 (but excluding Indebtedness hereunder) of the Borrower or such Significant Subsidiary (as the case may be), or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or any other default under any agreement or instrument relating to any such Indebtedness, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or 37 (e) The Borrower or any Significant Subsidiary shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Significant Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property; or the Borrower or any Significant Subsidiary shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order for the payment of money in excess of $50,000,000 shall be rendered against the Borrower or any Significant Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) Any Termination Event with respect to a Plan shall have occurred, and, 30 days after the occurrence thereof, (i) such Termination Event (if correctable) shall not have been corrected and (ii) the then present value of such Plan's vested benefits exceeds the then current value of assets accumulated in such Plan by more than the amount of $20,000,000 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount); or (h) The Borrower or any of its Affiliates as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $20,000,000; or (i) A Change of Control shall occur; then, and in any such event, the Administrative Agent shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, (i) declare the Commitments and the obligation of each Lender and the Issuing Bank to make Extensions of Credit to be terminated, whereupon the same shall forthwith terminate, (ii) declare the Outstanding Credits, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon such principal amount, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower, and (iii) exercise the remedies specified in Section 2.16(g); provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any Subsidiary under the Federal Bankruptcy Code, (A) the obligation of each Lender and the Issuing Bank to make Extensions of Credit shall automatically be terminated and (B) Outstanding Credits, all such interest and all such other amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. 38 Article VII THE ADMINISTRATIVE AGENT Section 7.01. Authorization and Action. (a) The Issuing Bank and each Lender hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably provided for by this Agreement (including, without limitation, enforcement or collection of the Advances), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon the Issuing Bank and all Lenders; provided, however, that the Administrative Agent shall not be required to take any action that exposes the Administrative Agent to personal liability or that is contrary to this Agreement or applicable law. (b) The Issuing Bank shall act on behalf of the Lenders with respect to any Letters of Credit issued by it and the documents associated therewith until such time and except for so long as the Administrative Agent may agree at the request of the Majority Lenders to act for the Issuing Bank with respect thereto; provided, that the Issuing Bank shall have all the benefits and immunities (i) provided to the Administrative Agent in this Article VII with respect to any acts taken or omissions suffered by the Issuing Bank in connection with Letters of Credit issued by it or proposed to be issued by it and the application and agreements for letters of credit pertaining to the Letters of Credit as fully as if the term "Administrative Agent" as used in this Article VII included the Issuing Bank with respect to such acts or omissions and (ii) as additionally provided in this Agreement with respect to the Issuing Bank. Section 7.02. The Administrative Agent's Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by each or any of them under or in connection with this Agreement, except for their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Administrative Agent: (i) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to the Issuing Bank or any Lender and shall not be responsible to the Issuing Bank or any Lender for any statements, warranties or representations made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (iv) shall not be responsible to the Issuing Bank or any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (v) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopy or e-mail) believed by it to be genuine and signed or sent by the proper party or parties. 39 Section 7.03. The Administrative Agent and its Affiliates. With respect to its Commitments and, the Advances made by it, the Administrative Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not an Administrative Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include each Agent in its individual capacity, as applicable. The Administrative Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any Subsidiary and any Person who may do business with or own securities of the Borrower or any Subsidiary, all as if the Administrative Agent were not the Administrative Agent and without any duty to account therefor to the Lenders. Section 7.04. Lender Credit Decision. Each of the Issuing Bank and each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Issuing Bank or any other Lender (as applicable) and based on the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each of the Issuing Bank and each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Issuing Bank or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Section 7.05. Indemnification. The Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed by the Borrower) and the Issuing Bank, ratably according to the respective principal amounts of the Outstanding Credits then held by each of them (or if there are no Outstanding Credits at the time, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Administrative Agent and the Issuing Bank in any way relating to or arising out of this Agreement or any action taken or omitted by the Administrative Agent or the Issuing Bank (as the case may be) under this Agreement; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's or the Issuing Bank's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Administrative Agent or the Issuing Bank (as the case may be) promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by the Administrative Agent or the Issuing Bank (as the case may be) in connection with the preparation, execution, administration, or enforcement of, or legal advice in respect of rights or responsibility under, this Agreement, to the extent that the Administrative Agent or the Issuing Bank (as the case may be) is not reimbursed for such expenses by the Borrower. 40 Section 7.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders, the Issuing Bank and the Borrower and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, the Administrative Agent may appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Article VIII MISCELLANEOUS Section 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, in the case of any such amendment, waiver or consent of or in respect of this Agreement, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all of the Lenders, do any of the following: (i) waive any of the conditions specified in Section 3.01 or 3.02, (ii) increase the Commitment of any Lender or subject any Lender to any additional obligations, (iii) reduce, or waive the payment of, the principal of, or interest on, the Advances, reimbursement obligations in respect of LC Disbursements, or any fees or other amounts payable to the Lenders ratably hereunder, (iv) postpone any date fixed for any payment of principal of, or interest on, the Advances, reimbursement obligations in respect of LC Disbursements, or any fees or other amounts payable to the Lenders ratably hereunder, (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Advances, or the number of Lenders, which shall be required for the Lenders or any of them to take any action under this Agreement, or (vi) amend, waive, or in any way modify or suspend any provision requiring the pro rata application of payments or of Section 2.15 or of this Section 8.01; provided further, that no amendment, waiver or consent shall, unless in writing and signed by each Lender affected thereby, reduce, waive or postpone the date of payment of any amount payable to such Lender, and provided, further, that (A) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent and the Issuing Bank in addition to the Lenders required hereinabove to take such action, affect the rights or duties of 41 such Administrative Agent or the Issuing Bank under this Agreement and (B) this Agreement may be amended and restated without the consent of any Lender, the Administrative Agent or the Issuing Bank if, upon giving effect to such amendment and restatement, such Lender, Administrative Agent or the Issuing Bank, as the case may be, shall no longer be a party to this Agreement (as so amended and restated) or have any Commitment or other obligation hereunder and shall have been paid in full all amounts payable hereunder to such Lender, the Administrative Agent or the Issuing Bank, as the case may be. Section 8.02. Notices, Etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telegraphic communication) and mailed, telecopied, e-mailed or delivered, if to the Borrower, at its address at 410 S. Wilmington Street, PEB 19A3, Raleigh, North Carolina 27601, Attention: Director of Financial Operations, Treasury Department, Facsimile no.: (919) 546-7826, e-mail: charles.beuris@pgnmail.com; if to any Lender, at its Domestic Lending Office set forth opposite its name on Schedule I hereto; if to the Issuing Bank, at its address at 25 Park Place, 16th Floor, Atlanta, Georgia, 30303, Attention: International Operations, SunTrust Bank, Facsimile no.: (404) 588-8129; and if to the Administrative Agent, at its address at Two Penns Way, Suite 200, New Castle, Delaware 19720, Attention: Bank Loan Syndications, Facsimile no.: (212) 994-0161; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties or, in the case of any Lender, to the Administrative Agent, the Issuing Bank and the Borrower. All such notices and communications shall be effective when received by the addressee thereof. Section 8.03. No Waiver; Remedies. No failure on the part of any Lender, the Issuing Bank or the Administrative Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 8.04. Costs, Expenses, Taxes and Indemnification. (a) The Borrower agrees to pay on demand all costs and expenses of the Administrative Agent (and as described in clause (iv) below, the Lenders and the Issuing Bank) in connection with (i) the preparation, execution, negotiation, syndication and delivery of this Agreement and the other documents to be delivered hereunder, (ii) the first Borrowing under this Agreement, (iii) any modification, amendment or supplement to this Agreement and the other documents to be delivered hereunder and (iv) the enforcement of the rights and remedies of the Lenders, the Issuing Bank and the Administrative Agent under this Agreement and the other documents to be delivered hereunder (whether through negotiations or legal proceedings), all the above costs and expenses to include, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent, the Issuing Bank and each of the Lenders with respect thereto. In addition, the Borrower shall pay any and all stamp and other taxes 42 payable or determined to be payable in connection with the execution and delivery of this Agreement and the other documents to be delivered hereunder, and agrees to save the Administrative Agent, the Issuing Bank and each Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. (b) If (i) due to payments made by the Borrower due to the acceleration of the maturity of the Advances pursuant to Section 6.01 or due to any other reason, any Lender receives payments of principal of any Eurodollar Rate Advance based upon the Eurodollar Rate other than on the last day of the Interest Period for such Advance, or (ii) due to any Conversion of Eurodollar Advance other than on the last day of an Interest Period pursuant to Section 2.12, the Borrower shall, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. In addition, if the Borrower fails to prepay any Advance on the date for which notice of prepayment has been given, the Borrower shall, upon demand by any Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any losses, costs or expenses (including loss of anticipated profits) that it may reasonably incur as a result of such prepayment not having been made on the date specified by the Borrower for such prepayment. (c) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.13, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender, the Issuing Bank and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender, the Issuing Bank or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender, the Issuing Bank or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Lender, the Issuing Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (d) The Borrower will indemnify each Lender, the Issuing Bank and the Administrative Agent for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable under this Section 8.04) paid by such Lender, the Issuing Bank or the Administrative Agent 43 (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender, the Issuing Bank or the Administrative Agent (as the case may be) makes written demand therefor. (e) Prior to the date of the initial Borrowing or on the date of the Assignment and Acceptance pursuant to which it became a Lender, in the case of each Lender that becomes a Lender by virtue of entering into an Assignment and Acceptance, and from time to time thereafter if requested by the Borrower or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Administrative Agent and the Borrower with the forms prescribed by the Internal Revenue Service of the United States certifying that such Lender is exempt from United States withholding taxes with respect to all payments to be made to such Lender hereunder. If for any reason during the term of this Agreement, any Lender becomes unable to submit the forms referred to above or the information or representations contained therein are no longer accurate in any material respect, such Lender shall notify the Administrative Agent and the Borrower in writing to that effect. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments hereunder are not subject to United States withholding tax, the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States. (f) Any Lender claiming any additional amounts payable pursuant to Section 8.04(c) or (d) shall use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) (i) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender and (ii) to otherwise minimize the amounts due, or to become due, under Sections 8.04(c) and (d). (g) If the Borrower makes any additional payment to the Issuing Bank or any Lender pursuant to Sections 8.04(c) and (d) in respect of any Taxes, and the Issuing Bank or such Lender determines that it has received (i) a refund of such Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge solely as a result of any deduction or credit for any Taxes with respect to which it has received payments under Sections 8.04(c) and (d), the Issuing Bank or such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Borrower such amount as the Issuing Bank or such Lender shall have determined to be attributable to the deduction or withholding of such Taxes. If the Issuing Bank or such Lender later determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 8.04(g), the Borrower shall upon demand of the Issuing Bank or such Lender promptly repay the amount of such overpayment. Any determination made by the Issuing Bank or such Lender pursuant to this Section 8.04(g) shall in the absence of bad faith or manifest error be conclusive, and nothing in this Section 8.04(g) shall be construed as requiring the Issuing Bank or any Lender to conduct its business or to arrange or alter in any respect its tax or financial affairs so that it is entitled to receive such a refund, credit or reduction or as allowing any Person to inspect any records, including tax returns, of the Issuing Bank or any Lender. 44 (h) The Borrower hereby agrees to indemnify and hold harmless each Lender, the Issuing Bank, the Arrangers, the Syndication Agent, the Administrative Agent, counsel to the Administrative Agent and their respective officers, directors, partners, employees, Affiliates and advisors (each, an "Indemnified Person") from and against any and all claims, damages, losses, liabilities, costs, or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding), joint and several, that may actually be incurred by or asserted or awarded against any Indemnified Person (including, without limitation, in connection with any investigation, litigation or proceeding or the preparation of a defense in connection therewith) in each case by reason of or in connection with the execution, delivery, or performance of this Agreement, or the use by the Borrower of the proceeds of any Extension of Credit (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), except to the extent that such claims, damages, losses, liabilities, costs, or expenses are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of the party seeking indemnification. The Borrower also agrees not to assert any claim against any Indemnified Party on any theory of liability for special or punitive damages arising out of or otherwise relating to this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of any Extension of Credit. (i) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 8.04 shall survive the payment in full of principal and interest hereunder and the termination of the Commitments. Section 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Outstanding Credits due and payable pursuant to the provisions of Section 6.01, each Lender and the Issuing Bank are hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or the Issuing Bank to or for the credit or the account of the Borrower now or hereafter existing under this Agreement, irrespective of whether or not such Lender or the Issuing Bank shall have made any demand under this Agreement and although such obligations may be unmatured. Each Lender and the Issuing Bank agree promptly to notify the Borrower after any such set-off and application made by such Lender or the Issuing Bank; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender and the Issuing Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender or the Issuing Bank may have. 45 Section 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Administrative Agent and when the Administrative Agent shall have been notified by each Lender and the Issuing Bank that such Lender or the Issuing Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent, the Issuing Bank and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Issuing Bank and each Lender. Section 8.07. Assignments and Participations. (a) Each Lender may, with the consent of the Administrative Agent, the Issuing Bank and the Borrower (each such consent not to be unreasonably withheld or delayed and, in the case of the Borrower, such consent shall not be required if an Event of Default has occurred and is continuing), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the Advances owing to it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement, (ii) the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than the lesser of (A) $10,000,000 and (B) all of such Lender's rights and obligations and, if the preceding clause (A) is applicable, shall be an integral multiple of $1,000,000, (iii) each such assignment shall be to an Eligible Assignee, and (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance and such parties (other than when Citibank is an assigning party) shall also deliver to the Administrative Agent a processing and recordation fee of $3,500. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its 46 obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender. (c) The Administrative Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance (and copies of the related consents of the Borrower and the Administrative Agent to such assignment) delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit B hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. (e) Each Lender may assign to one or more banks or other entities any Advance made by it. (f) Each Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any promissory note held pursuant to Section 2.01(b) for all purposes of this Agreement, (iv) the Borrower, the Issuing Bank, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) the holder of any such participation, other than an Affiliate of such Lender, shall not be entitled to require such Lender to take or omit to take any action hereunder, except action 47 (A) extending the time for payment of interest on, or the final maturity of any portion of the principal amount of, the Advances or (B) reducing the principal amount of or the rate of interest payable on the Advances. Without limiting the generality of the foregoing: (i) such participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.07, 2.11 and 8.04(b) only if, and to the same extent, the Lender from which such participating banks or other entities acquired its participation would, at the time, be entitled to claim thereunder; and (ii) such participating banks or other entities shall also, to the fullest extent permitted by law, be entitled to exercise the rights of set-off contained in Section 8.05 as if such participating banks or other entities were Lenders hereunder. (g) If any Lender (or any bank, financial institution, or other entity to which such Lender has sold a participation) shall make any demand for payment under Section 2.11(b), then within 30 days after any such demand (if, but only if, such demanded payment has been made by the Borrower), the Borrower may, with the approval of the Administrative Agent (which approval shall not be unreasonably withheld) demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Borrower all (but not less than all) of such Lender's Commitment (if any) and the Advances owing to it within the period ending on the later to occur of such 30th day and the last day of the longest of the then current Interest Periods for such Advances, provided that (i) no Event of Default or event that, with the passage of time or the giving of notice, or both, would constitute an Event of Default shall then have occurred and be continuing, (ii) the Borrower shall have satisfied all its presently due obligations to such Lender under this Agreement, and (iii) if such Eligible Assignee designated by the Borrower is not an existing Lender on the date of such demand, the Borrower shall have delivered to the Administrative Agent an administrative fee of $3,500. If any such Eligible Assignee designated by the Borrower shall fail to consummate such assignment on terms acceptable to such Lender, or if the Borrower shall fail to designate any such Eligible Assignees for all or part of such Lender's Commitment or Advances, then such demand by the Borrower shall become ineffective; it being understood for purposes of this subsection (g) that such assignment shall be conclusively deemed to be on terms acceptable to such Lender, and such Lender shall be compelled to consummate such assignment to an Eligible Assignee designated by the Borrower, if such Eligible Assignee (i) shall agree to such assignment by entering into an Assignment and Acceptance in substantially the form of Exhibit B hereto with such Lender and (ii) shall offer compensation to such Lender in an amount equal to all amounts then owing by the Borrower to such Lender hereunder made by the Borrower to such Lender, whether for principal, interest, fees, costs or expenses (other than the demanded payment referred to above and payable by the Borrower as a condition to the Borrower's right to demand such assignment), or otherwise. (h) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Lender. 48 (i) Anything in this Section 8.07 to the contrary notwithstanding, any Lender may (i) assign and pledge all or any portion of its Commitment and the Advances owing to it to any Federal Reserve Bank (and its transferees) as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank; provided, that no such assignment shall release the assigning Lender from its obligations hereunder; or (ii) assign its Commitments, Advances and other rights and obligations hereunder to any of its Affiliates upon notice to, but without the consent of, the Borrower and the Administrative Agent. (j) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC") of such Granting Lender identified as such in writing from time to time by the Granting Lender to the Administrative Agent, the Issuing Bank and the Borrower, the option to provide to the Borrower all or any part of any Advance that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any such SPC to make any Advance, (ii) if such SPC elects not to exercise such option or otherwise fails to provide all or any part of such Advance, the Granting Lender shall be obligated to make such Advance pursuant to the terms hereof and (iii) no SPC or Granting Lender shall be entitled to receive any greater amount pursuant to Section 2.07 or 2.11 than the Granting Lender would have been entitled to receive had the Granting Lender not otherwise granted such SPC the option to provide any Advance to the Borrower. The making of an Advance by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Advance were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement for which a Lender would otherwise be liable so long as, and to the extent that, the related Granting Lender provides such indemnity or makes such payment. In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against or join any other person in instituting against such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. Notwithstanding the foregoing, the Granting Lender unconditionally agrees to indemnify the Borrower, the Administrative Agent, the Issuing Bank and each Lender against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be incurred by or asserted against the Borrower, the Administrative Agent, the Issuing Bank or such Lender, as the case may be, in any way relating to or arising as a consequence of any such forbearance or delay in the initiation of any such proceeding against its SPC. Each party hereto hereby acknowledges and agrees that no SPC shall have the rights of a Lender hereunder, such rights being retained by the applicable Granting Lender. Accordingly, and without limiting the foregoing, each party hereby further acknowledges and agrees that no SPC shall have any voting rights hereunder and that the voting rights attributable to any Advance made by an SPC shall be exercised only by the relevant Granting Lender and that each Granting Lender shall serve as the administrative agent and attorney-in-fact for its SPC and shall on behalf of its SPC receive any and all payments made for the benefit of such SPC and take all actions hereunder to the extent, if any, such SPC shall have any rights hereunder. In addition, notwithstanding anything to the contrary contained in this Agreement any SPC may with notice to, but without the prior written consent of any other party hereto, assign all or a portion of its interest in any Advances to the Granting Lender. This Section may not be amended without the prior written consent of each Granting Lender, all or any part of whose Advance is being funded by an SPC at the time of such amendment. 49 Section 8.08. Waiver of Consequential Damages To the fullest extent permitted by applicable law, the Borrower shall not asset, and hereby waives, any claim against any Indemnified Person, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Extension of Credit or the use of proceeds thereof. No Indemnified Person referred to in Section 8.04(h) shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby. Section 8.09. USA PATRIOT Act Notice Each Lender that is subject to the Patriot Act, the Issuing Bank and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower pursuant to the requirements of the Patriot Act that it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender, the Issuing Bank or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Patriot Act. Section 8.10. Tax Disclosure. Notwithstanding any agreement between the parties hereto to the contrary, the Borrower (and each employee, representative, or other agent of the Borrower) may disclose to any and all other Persons, without limitation of any kind, the tax treatment and tax structure of this Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to the Borrower relating to such tax treatment and tax structure; provided, however, that such disclosure may not be made to the extent required to be kept confidential to comply with any applicable federal or state securities laws. Section 8.11. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. The Borrower (i) irrevocably submits to the non-exclusive jurisdiction of any New York State court or Federal court sitting in New York City in any action arising out of this Agreement, (ii) agrees that all claims in such action may be decided in such court, (iii) waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum and (iv) consents to the service of process by mail. A final judgment in any such action shall be conclusive and may be enforced in other jurisdictions. Nothing herein shall affect the right of any party to serve legal process in any manner permitted by law or affect its right to bring any action in any other court. 50 Section 8.12. Waiver of Jury Trial. THE BORROWER, THE ADMINISTRATIVE AGENT, THE ISSUING BANK AND EACH LENDER EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY AND LAWFULLY DO SO, ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING TO THIS AGREEMENT IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER INSTRUMENT OR DOCUMENT DELIVERED HEREUNDER OR THEREUNDER. Section 8.13. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 8.14. Severability. Any provision of this Agreement that is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section 8.15. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 8.16. Entire Agreement. This Agreement constitutes the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Except as is expressly provided for herein, nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. S-1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. PROGRESS ENERGY, INC. By ----------------------------- Name: Title: S-2 CITIBANK, N.A., as Administrative Agent and Lender By ----------------------------- Name: Title: S-3 JPMORGAN CHASE BANK By ----------------------------- Name: Title: S-4 SUNTRUST BANK, as Issuing Bank and Lender By ----------------------------- Name: Title: S-5 BANK OF AMERICA, N.A. By ----------------------------- Name: Title: S-6 BANK OF TOKYO-MITSUBISHI TRUST COMPANY By ----------------------------- Name: Title: S-7 BARCLAYS BANK PLC By ----------------------------- Name: Title: S-8 THE ROYAL BANK OF SCOTLAND PLC NEW YORK BRANCH By ----------------------------- Name: Title: S-9 BNP PARIBAS By ----------------------------- Name: Title: S-10 CALYON NEW YORK BRANCH By ----------------------------- Name: Title: S-11 DEUTSCHE BRANCH AG NEW YORK BRANCH By ----------------------------- Name: Title: S-12 LEHMAN BROTHERS BANK, FSB By ----------------------------- Name: Title: S-13 UBS LOAN FINANCE LLC By ----------------------------- Name: Title: S-14 WACHOVIA BANK, N.A. By ----------------------------- Name: Title: S-15 WILLIAM STREET COMMITMENT CORPORATION By ----------------------------- Name: Title: S-16 SUMITOMO MITSUI BANKING CORPORATION By ----------------------------- Name: Title: S-17 THE BANK OF NEW YORK By ----------------------------- Name: Title: S-18 UFJ BANK By ----------------------------- Name: Title: S-19 MELLON BANK, N.A. By ----------------------------- Name: Title: SCHEDULE I LIST OF COMMITMENTS AND APPLICABLE LENDING OFFICES Eurodollar Domestic Name of Bank Lending Office Lending Office Commitment Citibank, N.A. Two Penns Way, Ste. 200 Same as Eurodollar Lending $135,000,000.00 New Castle, Delaware 19720 Office Attention: Bank Loan Syndications JPMorgan Chase Bank Same as Eurodollar Lending $135,000,000.00 Office Bank of America, N.A. 100 N. Tryon St. Same as Eurodollar Lending $95,000,000.00 NC1-007-13-13 Office Charlotte, NC 28255 Attention: Daryl Patterson Bank of Tokyo-Mitsubishi $95,000,000.00 Trust Company Barclays Bank plc 222 Broadway - 8th Floor Same as Eurodollar Lending $95,000,000.00 New York, NY 10038 Office Attention: Erik Hoffman The Royal Bank of 101 Park Avenue, 12th Floor Same as Eurodollar Lending $90,000,000.00 Scotland plc, New York New York, NY 10178 Office Branch Attention: Sheila Shaw BNP Paribas 787 Seventh Avenue Same as Eurodollar Lending $50,000,000.00 New York, NY 10019 Office Attention: Project Finance & Utilities Calyon New York Branch 1301 Avenue of the Americas Same as Eurodollar Lending $50,000,000.00 New York, NY 10019 Office Attention: David Gener Deutsche Bank AG 60 Wall Street, 11th Floor Same as Eurodollar Lending $50,000,000.00 New York Branch New York, NY 10005 Office Lehman Brothers Bank, FSB 745 7th Avenue, 16th Floor Same as Eurodollar Lending $50,000,000.00 New York, NY 10019 Office Attention: Richard Bloom SunTrust Bank 200 South Orange Avenue Same as Eurodollar Lending $50,000,000.00 Mail Code 1106 Office Orlando, Florida 32801 Attention: William Barr UBS Loan Finance LLC 677 Washington Boulevard Same as Eurodollar Lending $50,000,000.00 Stamford, CT 06901 Office Attention: Marie Haddad Wachovia Bank, N.A. $50,000,000.00 William Street Commitment 85 Broad Street, 6th Floor Same as Eurodollar Lending $50,000,000.00 Corporation New York, NY 10004 Office Attention: Philip F. Green Sumitomo Mitsui Banking 277 Park Avenue Same as Eurodollar Lending $25,000,000.00 Corporation New York, NY Office Attention: Jason Valenstein The Bank of New York One Wall Street, 19th Floor Same as Eurodollar Lending $25,000,000.00 New York, NY 10286 Office Attention: Charlotte Sohn, V.P. UFJ Bank $25,000,000.00 Mellon Bank, N.A. $10,000,000.00
EXHIBIT A-1 Form of Notice of Borrowing NOTICE OF BORROWING [Date] Citibank, N.A., as Administrative Agent for the Lenders parties to the Agreement referred to below Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Bank Loan Syndications Ladies and Gentlemen: The undersigned, Progress Energy, Inc., refers to the Credit Agreement, dated as of August 5, 2004 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, the Lenders thereunder, Citibank, N.A., as Administrative Agent for the Lenders, and SunTrust Bank, as Issuing Bank for Letters of Credit issued thereunder, and hereby gives you notice pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Agreement: (i) The Business Day of the Proposed Borrowing is ___________, 20____. (ii) The Type of Advances comprising the Proposed Borrowing is [Base Rate Advances][Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Borrowing is $ . (iv) The Interest Period for each Eurodollar Rate Advance that is an Advance made as part of the Proposed Borrowing is months. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (v) [(i)] the representations and warranties contained in Section 4.01 of the Credit Agreement are correct, before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (ii) [no event has occurred and is A-1-1 continuing, or would result from such Proposed Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both.]1[all proceeds of the Proposed Borrowing shall be used to repay maturing commercial paper issued under the Borrower's commercial paper program.] Very truly yours, PROGRESS ENERGY, INC. By ------------------------------ Name: Title: - ------------------- 1 Does not apply to any Advance made to pay maturing commercial paper issued under the Borrower's commercial paper program. A-1-2 EXHIBIT A-2 Form of Notice of Conversion NOTICE OF CONVERSION [Date] Citibank, N.A., as Administrative Agent for the Lenders parties to the Agreement referred to below Two Penns Way, Suite 200 New Castle, Delaware 19720 Attention: Bank Loan Syndications Ladies and Gentlemen: The undersigned, Progress Energy, Inc., refers to the Credit Agreement, dated as of August 5, 2004 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, the Lenders thereunder, Citibank, N.A., as Administrative Agent for the Lenders, and SunTrust Bank, as Issuing Bank for the Letters of Credit issued thereunder, and hereby gives you notice pursuant to Section 2.09 of the Credit Agreement that the undersigned hereby requests a Conversion under the Credit Agreement, and in that connection sets forth the terms on which such Conversion (the "Proposed Conversion") is requested to be made: (i) The Business Day of the Proposed Conversion is ______________, 20____. (ii) The Type of, and Interest Period applicable to, the Advances (or portions thereof) proposed to be Converted: (iii) The Type of Advance to which such Advances (or portions thereof) are proposed to be Converted: ________________________. (iv) Except in the case of a Conversion to Base Rate Advances, the initial Interest Period to be applicable to the Advances resulting from such Conversion: ______________________________. (v) The aggregate amount of Advances (or portions thereof) proposed to be Converted is $______________. A-2-1 The undersigned hereby certifies that, on the date hereof, and on the date of the Proposed Conversion, no event has occurred and is continuing, or would result from such Proposed Conversion, that constitutes an Event of Default. Very truly yours, PROGRESS ENERGY, INC. By ----------------------------- Name: Title: A-2-2 EXHIBIT B Form of Assignment and Acceptance ASSIGNMENT AND ACCEPTANCE Dated ________________, 20___ Reference is made to the Credit Agreement, dated as of August 5, 2004 (as amended, modified and supplemented from time to time, the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., the Lenders (as defined in the Credit Agreement) thereunder, Citibank, N.A., as Administrative Agent for the Lenders thereunder (the "Administrative Agent") and SunTrust Bank, as Issuing Bank for Letters of Credit issued thereunder. (the "Assignor") and (the "Assignee") agree as follows: ---------- ---------- 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof that represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement, including, without limitation, such interest in the Assignor's Commitment (to the extent it has not been terminated), the Advances owing to the Assignor and, to the extent permitted by applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the transactions governed thereby, including but not limited to contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned hereby. After giving effect to such sale and assignment, the Assignee's Commitment (if any) and the amount of the Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01(e) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are B-1 delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; [and] (vi) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (vii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty].2 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] - ------------------- 2 If the Assignee is organized under the laws of a jurisdiction outside the United States. B-2 IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. [NAME OF ASSIGNOR] [NAME OF ASSIGNEE] By______________________ By______________________ Name: Name: Title: Title: Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Accepted this day of , 20 ---- ------------ -- CITIBANK, N.A., as Administrative Agent By_________________________ Name: Title: SUNTRUST BANK, as Issuing Bank By_________________________ Name: Title: PROGRESS ENERGY, INC.3 By__________________________ Name: Title: 3 If required. B-3 SCHEDULE 1 TO ASSIGNMENT AND ACCEPTANCE Dated ____________________, 20____ Section 1 Percentage Interest Assigned: % ------ Section 2 Assignee's Commitment4: $ Aggregate Outstanding Principal Amount of Advances owing to Assignee: $ Section 3 Effective Date5 - --------------------- 4 For use in connection with the Extension. 5 This date should be no earlier than the date of acceptance by the Administrative Agent. EXHIBIT C-1 Form of Opinion of General Counsel to Progress Energy Service Company, LLC August 5, 2004 To each of the Lenders parties to the Credit Agreement referred \to below, Citibank, N.A., as Administrative Agent, and SunTrust Bank, as Issuing Bank Re: Progress Energy, Inc. Ladies and Gentlemen: This opinion is furnished to you by me as General Counsel to Progress Energy Service Company, LLC pursuant to Section 3.01(g) of the Credit Agreement, dated as of August 5, 2004 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc. (the "Borrower"), certain lenders thereunder (the "Lenders"), Citibank, N.A., as Administrative Agent for the Lenders, and SunTrust Bank, as Issuing Bank for Letters of Credit issued thereunder. In connection with the preparation, execution and delivery of the Credit Agreement, I have examined: (1) The Credit Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement. (3) The Amended and Restated Articles of Incorporation of the Borrower (the "Charter"). (4) The By-Laws of the Borrower and all amendments thereto (the "By-Laws"). I have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as I have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, I have, when relevant facts were not independently established by me, relied upon certificates of the Borrower or its officers or of public officials. I have assumed the authenticity of all documents submitted to me as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of signatures (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. For purposes of my opinions expressed in paragraph 1 below as to existence and good standing, I have relied as of their respective dates on certificates of public officials, copies of which are attached hereto as Exhibit A. Whenever the phrase "to my knowledge" is used in this opinion it refers to my actual knowledge and the actual knowledge of the attorneys who work under my supervision and who were involved in the representation of the Borrower in connection with the transactions contemplated by the Credit Agreement. I or attorneys working under my supervision are qualified to practice law in the States of North Carolina and Florida, and the opinions expressed herein are limited to the law of the States of North Carolina and Florida, the Federal law of the United States and, in reliance on a certificate issued by the Secretary of State of South Carolina and attached hereto as part of Exhibit A, the laws of the State of South Carolina for purposes of the first sentence of opinion paragraph 1 below. Based upon the foregoing and upon such investigation as I have deemed necessary, I am of the following opinion: 1. Each of the Borrower and CP&L is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina, and CP&L is duly qualified to do business and in good standing in the State of South Carolina. Each of Florida Power and FPC is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. Progress Capital is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. The Borrower has the corporate power and authority to enter into the transactions contemplated by the Credit Agreement. 2. The execution, delivery and performance of the Credit Agreement by the Borrower have been duly authorized by all necessary corporate action on the part of the Borrower and the Credit Agreement has been duly executed and delivered by the Borrower. 3. The execution, delivery and performance of the Credit Agreement by the Borrower will not (i) violate the Charter or the By-Laws or any law, rule or regulation applicable to the Borrower (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or (ii) result in a breach of, or constitute a default under, any judgment, decree or order binding on the Borrower, or any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound. 4. No authorization, approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of the Credit Agreement, other than the SEC Order, which has been duly issued and is in full force and effect, and a notification to the North Carolina Utilities Commission, which has been timely made. 5. To my knowledge, except as described in the reports and registration statements that the Borrower, CP&L, FPC and Florida Power have filed with the Securities and Exchange Commission, there are no pending or overtly threatened actions or proceedings against the Borrower or any of such Subsidiaries before any court, governmental agency or arbitrator, that may materially adversely affect the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. The opinions set forth above are subject to the qualification that no opinion is expressed herein as to the enforceability of the Credit Agreement or any other document. The foregoing opinions are solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Credit Agreement after the date hereof and (ii) Hunton & Williams LLP and King & Spalding LLP, in connection with their respective opinions delivered on the date hereof under Section 3.01 of the Credit Agreement. This letter speaks only as of the date hereof and may not be relied on by any person with respect to any date after the date hereof. I do not undertake to advise you of any changes in the opinions expressed herein from matters that may hereafter arise or be brought to my attention. Very truly yours, EXHIBIT C-2 Form of Opinion of Special Counsel for the Borrower August 5, 2004 To each of the Lenders parties to the Credit Agreement referred to below, Citibank, N.A., as Administrative Agent, and SunTrust Bank, as Issuing Bank Re: Progress Energy, Inc. Ladies and Gentlemen: This opinion is furnished to you by us as counsel for Progress Energy, Inc. (the "Borrower") pursuant to Section 3.01(g) of the Credit Agreement, dated as of August 5, 2004 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain lenders thereunder (the "Lenders"), Citibank, N.A., as Administrative Agent for the Lenders, and SunTrust Bank, as Issuing Bank for Letters of Credit issued thereunder. In connection with the preparation, execution and delivery of the Credit Agreement, we have examined: (1) The Credit Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement. (3) The opinion letter of even date herewith, addressed to you by Frank A. Schiller, counsel to the Borrower and delivered in connection with the transactions contemplated by the Credit Agreement (the "Company Opinion Letter"). We have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as we have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, we have, when relevant facts were not independently established by us, relied upon certificates of the Borrower or its officers or of public officials. We have assumed the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the originals (other than those of the Borrower), and the due execution and delivery, pursuant to due C-2-1 authorization, of the Credit Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. Whenever the phrase "to our knowledge" is used in this opinion it refers to the actual knowledge of the attorneys of this firm involved in the representation of the Borrower without independent investigation. We are qualified to practice law in the States of North Carolina, Florida and New York, and the opinions expressed herein are limited to the law of the States of North Carolina, Florida and New York and the federal law of the United States. To the extent that our opinions expressed herein depend upon opinions expressed in paragraphs 1 through 4 of the Company Opinion Letter, we have relied without independent investigation on the accuracy of the opinions expressed in the Company Opinion Letter, subject to the assumptions, qualifications and limitations set forth in the Company Opinion Letter. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the opinion that the Credit Agreement constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms except as enforcement may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting the rights of creditors generally and (b) principles of equity, whether considered at law or in equity. The opinion set forth above is subject to the following qualifications: (a) In addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (b) No opinion is expressed herein as to (i) Section 8.05 of the Credit Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (c) No opinion is expressed herein as to provisions, if any, in the Credit Agreement, which (A) purport to excuse, release or exculpate a party for liability for or indemnify a party against the consequences of its own acts, (B) purport to make void any act done in contravention thereof, (C) purport to authorize a party to make binding determinations in its sole discretion, (D) relate to the effects of laws which may be enacted in the future, (E) require waivers, consents or amendments to be made only in writing, (F) purport to waive rights of offset or to create rights of set off other than as provided by statute, or (G) purport to permit acceleration of indebtedness and the exercise of remedies by reason of the occurrence of an immaterial breach of the Credit Agreement or any related document. Further, we express no opinion as to the necessity for any Lender, by reason of such Lender's particular circumstances, to qualify to transact business in the State of New York or as to any Lender's liability for taxes in any jurisdiction. C-2-2 The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Credit Agreement after the date hereof in accordance with the provisions thereof and (ii) King & Spalding LLP, in connection with their opinion delivered on the date hereof under Section 3.01 of the Credit Agreement. This letter speaks only as of the date hereof and may not be relied on by any person with respect to any date after the date hereof. We do not undertake to advise you of any changes in the opinions expressed herein from matters that may hereafter arise or be brought to our attention. Very truly yours, EXHIBIT C-3 FORM OF OPINION OF GENERAL COUNSEL TO THE BORROWER UPON EXTENSION OF THE COMMITMENT TERMINATION DATE ___________ ___, 20__ To each of the Lenders parties to the Credit Agreement referred to below and to Citibank, N.A., as Administrative Agent Re: Progress Energy, Inc. Ladies and Gentlemen: This opinion is furnished to you by me as General Counsel to Progress Energy, Inc. (the "Borrower") in connection with the extension of the Commitment Termination Date until ________ __, _____ under Section 2.15 (the "Extension") of the Credit Agreement, dated as of August 5, 2004 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain lenders from time to time parties thereto (the "Lenders"), Citibank, N.A., as Administrative Agent for the Lenders, and SunTrust Bank, as Issuing Bank for Letters of Credit issued thereunder. In connection with the preparation, execution and delivery of the Credit Agreement, I have examined: (1) The Credit Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement. (3) The Request for Extension of Commitment Termination Date and Certificate, dated _____, submitted by the Borrower in connection with the Extension. (4) The Amended and Restated Articles of Incorporation of the Borrower (the "Charter"). (5) The By-Laws of the Borrower and all amendments thereto (the "By-Laws"). I have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as I have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, I have, when relevant facts were not independently established by me, relied upon certificates of the Borrower or its officers or of public officials. I have assumed the authenticity of all documents submitted to me as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the signatures (other C-3-1 than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. For purposes of my opinions expressed in paragraph 1 below as to existence and good standing, I have relied as of their respective dates on certificates of public officials, copies of which are attached hereto as Exhibit A. Whenever the phrase "to my knowledge" is used in this opinion it refers to the my actual knowledge and the actual knowledge of the attorneys who work under my supervision and who were involved in the representation of the Borrower in connection with the transactions contemplated by the Credit Agreement. I or attorneys working under my supervision are qualified to practice law in the States of North Carolina and Florida, and the opinions expressed herein are limited to the law of the States of North Carolina and Florida, the Federal law of the United States and, in reliance on a certificate issued by the Secretary of State of South Carolina and attached hereto as part of Exhibit A, the laws of the State of South Carolina for purposes of the first sentence of opinion paragraph 1 below. Based upon the foregoing and upon such investigation as I have deemed necessary, I am of the following opinion: 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina, and is duly qualified to do business and in good standing in the State of South Carolina. 2. The execution, delivery and performance by the Borrower of the Credit Agreement, after giving effect to the Extension, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not violate (i) the Charter or the By-Laws or any law, rule or regulation applicable to the Borrower (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or (ii) result in breach of, or constitute a default under, any judgment, decree or order binding on the Borrower, or any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound. The Credit Agreement has been duly executed and delivered on behalf of the Borrower. 3. No authorization, approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance, by the Borrower of the Credit Agreement, after giving effect to the Extension, other than the SEC Order, which has been duly issued and is in full force and effect, and a notification to the North Carolina Utilities Commission, which has been timely made. 4. To my knowledge, except as described in the reports and registration statements that the Borrower has filed with the Securities and Exchange Commission, there are no pending or overtly threatened actions or proceedings against the Borrower or any of the Subsidiaries before any court, governmental agency or arbitrator, that may materially adversely affect the financial condition, operations or properties of the Borrower and its Subsidiaries, taken as a whole. C-3-2 The opinions set forth above are subject to the qualification that no opinion is expressed herein as to the enforceability of the Credit Agreement or any other document. The foregoing opinions are solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Credit Agreement after the date hereof and (ii) Hunton & Williams LLP and King & Spalding LLP, in connection with their opinion delivered on the date hereof under Section 3.01 of the Credit Agreement. This letter speaks only as of the date hereof and may not be relied on by any person with respect to any date after the date hereof. I do not undertake to advise you of any changes in the opinions expressed herein from matters that may hereafter arise or be brought to my attention. Very truly yours, C-3-3 EXHIBIT C-4 FORM OF OPINION OF SPECIAL COUNSEL TO THE BORROWER UPON EXTENSION OF THE COMMITMENT TERMINATION DATE AND EXERCISE OF THE TERM LOAN CONVERSION OPTION ___________ ___, 20__ To each of the Lenders parties to the Credit Agreement referred to below and to Citibank, N.A., as Administrative Agent Re: Progress Energy, Inc. Ladies and Gentlemen: This opinion is furnished to you by us as counsel for Progress Energy, Inc. (the "Borrower") in connection with the extension of the Commitment Termination Date until August [ ], 2011 under Section 2.15 (the "Extension") of the Credit Agreement, dated as of August 5, 2004 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain lenders from time to time parties thereto (the "Lenders"), Citibank, N.A., as Administrative Agent for the Lenders and SunTrust Bank, as Issuing Bank for Letters of Credit issued thereunder. In connection with the preparation, execution and delivery of the Credit Agreement, we have examined: (1) The Credit Agreement. (2) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement. (3) The Request for Extension of Commitment Termination Date and Certificate, dated _____, submitted by the Borrower in connection with the Extension. (4) The opinion letter of even date herewith, addressed to you by __________, counsel to the Borrower and delivered in connection with the transactions contemplated by the Credit Agreement (the "Borrower Opinion Letter"). We have also examined the originals, or copies of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower and agreements, instruments and other documents as we have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, we have, when relevant facts were not independently established by us, relied upon certificates of the Borrower or its officers or of public officials. We have assumed the authenticity of all documents submitted C-4-1 to us as originals, the conformity to originals of all documents submitted as certified or photostatic copies and the authenticity of the originals (other than those of the Borrower), and the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Lenders and the Administrative Agent and the validity and binding effect thereof on such parties. Whenever the phrase "to our knowledge" is used in this opinion it refers to the actual knowledge of the attorneys of this firm involved in the representation of the Borrower without independent investigation. We are qualified to practice law in the States of North Carolina, Florida and New York, and the opinions expressed herein are limited to the law of the States of North Carolina, Florida and New York applicable to public utilities and the federal law of the United States. To the extent that our opinions expressed herein depend upon opinions expressed in paragraphs 1 through 4 of the Borrower Opinion Letter, we have relied without independent investigation on the accuracy of the opinions expressed in the Borrower Opinion Letter, subject to the assumptions, qualifications and limitations set forth in the Borrower Opinion Letter. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the following opinion the Credit Agreement after giving effect to the Extension constitutes the valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms except as enforcement may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting the rights of creditors generally and (b) principles of equity, whether considered at law or in equity. The opinion set forth above is subject to the following qualifications: (a) In addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (b) No opinion is expressed herein as to (i) Section 8.05 of the Credit Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (c) No opinion is expressed herein as to provisions, if any, in the Credit Agreement, which (A) purport to excuse, release or exculpate a party for liability for or indemnify a party against the consequences of its own acts, (B) purport to make void any act done in contravention thereof, (C) purport to authorize a party to make binding determinations in its sole discretion, (D) relate to the effects of laws which may be enacted in the future, (E) require waivers, consents or amendments to be made only in writing, (F) purport to waive rights of offset or to create rights of set off other than as provided by statute, or (G) purport to permit acceleration of indebtedness and the exercise of remedies by reason of the occurrence of an immaterial breach of the Credit Agreement or any related document. Further, we express no opinion as to the necessity for any Lender, by reason of such Lender's particular circumstances, to qualify to transact business in the State of New York or as to any Lender's liability for taxes in any jurisdiction. C-4-2 The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than (i) any other Person that may become a Lender under the Credit Agreement after the date hereof in accordance with the provisions thereof and (ii) King & Spalding LLP, in connection with their opinion delivered on the date hereof under Section 3.01 of the Credit Agreement. This letter speaks only as of the date hereof and may not be relied on by any person with respect to any date after the date hereof. We do not undertake to advise you of any changes in the opinions expressed herein from matters that may hereafter arise or be brought to our attention. Very truly yours, C-4-3 EXHIBIT D FORM OF OPINION OF COUNSEL TO THE ADMINISTRATIVE AGENT AND THE ARRANGERS August 5, 2004 To Citibank, N.A. ("Citibank"), as Administrative Agent for the Lenders referred to below, and to each of the Arrangers and Lenders parties to the Credit Agreement referred to below Re: Progress Energy, Inc. Ladies and Gentlemen: We have acted as counsel to the Administrative Agent and the Arrangers in connection with the preparation, execution and delivery of the Credit Agreement, dated as of August [ ], 2004 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain Lenders from time to time parties thereto, Citibank, N.A., as Administrative Agent for the Lenders and SunTrust Bank, as Issuing Bank for Letters of Credit issued thereunder. In this connection, we have examined the following documents: 1. a counterpart of the Credit Agreement, executed by the parties thereto; 2. the documents furnished by or on behalf of the Borrower pursuant to subsections (b) through (g) of Section 3.01 of the Credit Agreement, including, without limitation, the opinion of Hunton & Williams LLP (the "Borrower Opinion"). In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that you have independently evaluated, and are satisfied with, the creditworthiness of the Borrower and the business terms reflected in the Credit Agreement. We have relied, as to factual matters, on the documents we have examined. To the extent that our opinions expressed below involve conclusions as to matters governed by law other than the law of the State of New York, we have relied upon the Borrower Opinion and have assumed without independent investigation the correctness of the matters set forth therein, our opinions expressed below being subject to the assumptions, qualifications and limitations set forth in the Borrower Opinion. D-1 Based upon and subject to the foregoing, and subject to the qualifications set forth below, we are of the opinion that the Credit Agreement is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. Our opinion is subject to the following qualifications: (a) The enforceability of the Borrower's obligations under the Credit Agreement is subject to the effect of any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar law affecting creditors' rights generally. (b) The enforceability of the Borrower's obligations under the Credit Agreement is subject to the effect of general principles of equity, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law). Such principles of equity are of general application, and, in applying such principles, a court, among other things, might not allow a contracting party to exercise remedies in respect of a default deemed immaterial, or might decline to order an obligor to perform covenants. (c) We note further that, in addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties is determined to have constituted negligence. (d) We express no opinion herein as to (i) the enforceability of Section 8.05 of the Credit Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under federal or state securities laws, or (v) the enforceability of waivers by parties of their respective rights and remedies under law. (e) Our opinions expressed above are limited to the law of the State of New York, and we do not express any opinion herein concerning any other law. The foregoing opinion is solely for your benefit and may not be relied upon by any other person or entity. Very truly yours, D-2 EXHIBIT E FORM OF REQUEST FOR EXTENSION OF THE COMMITMENT TERMINATION DATE CREDIT AGREEMENT dated as of August 5, 2004 -------------------------------- PROGRESS ENERGY, INC. (Borrower) AND THE BANKS LISTED ON THE SIGNATURE PAGES HEREOF (Banks) and CITIBANK, N.A. (Administrative Agent) Request for Extension of Commitment Termination Date and Certificate of Representations and Warranties and No Default I, [______________], [_________________] of Progress Energy, Inc., do hereby request that the Commitment Termination Date of the Credit Agreement, dated as of August 5, 2004 (the "Credit Agreement", the terms defined therein being used herein as therein defined), among Progress Energy, Inc., certain Lenders from time to time parties thereto, Citibank, N.A., as Administrative Agent for the Lenders, and SunTrust Bank, as Issuing Bank for Letters of Credit issued thereunder, be extended for a two-year period (hereinafter the "Proposed Extension") pursuant to Section 2.15 of the Credit Agreement and, in connection therewith, hereby certify as follows: (i) as of the date hereof, the representations and warranties set forth in Section 4.01 (including without limitation those regarding any required approvals of or notices to governmental bodies) of the Credit Agreement are and will be as of the effective date of the Proposed Extension accurate both before and after giving effect to the Proposed Extension; and E-1 (ii) as of the date hereof, no Event of Default, as defined in Section 6.01 of the Credit Agreement, has occurred, nor has any event occurred, that with the giving of notice or the passage of time or both, would constitute an Event of Default, in either case both before and after giving effect to the Proposed Extension. Witness my hand this ______ day of _________, ____. ------------------------ [----------------] E-2 EXHIBIT F FORM OF COMPLIANCE CERTIFICATE [Letterhead of Progress Energy, Inc.] [Date] To each of the Lenders parties to the Credit Agreement referred to below, Citibank, N.A., as Administrative Agent, and SunTrust Bank, as Issuing Bank Progress Energy, Inc. Ladies and Gentlemen: This compliance certificate is furnished to you pursuant to Section 5.01(i)(ii) of the Credit Agreement, dated as of August 5, 2004 (the "Credit Agreement"), among Progress Energy, Inc., a North Carolina corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks"), Citibank, N.A. ("Citibank"), as administrative agent (the "Administrative Agent") for the Lenders (as hereinafter defined), and SunTrust Bank, as Issuing Bank for Letters of Credit issued thereunder. Terms defined in the Credit Agreement are used herein as therein defined. 1. As of [_______], 200__, the ratio of Consolidated Indebtedness of the Borrower and its Subsidiaries to Total Capitalization was _____ to 1.0, calculated, in accordance with Section 5.01(j) of the Credit Agreement, as follows: A. Indebtedness as of such date was $________, calculated as follows: Current Indebtedness: Amount [List all forms of current Debt] ---------------------------------- $ ---------------------------------- ---------------------------------- ---------------------------------- ---------- Total current Indebtedness $__________ F-1 Long-term Indebtedness: Amount [list all forms of long-term Indebtedness] ---------------------------------- $ ---------------------------------- ---------------------------------- ---------------------------------- Total long-term Indebtedness $__________ Total Indebtedness (current Indebtedness plus long-term $__________ Indebtedness ) B. Total Capitalization as of such date was $_____, calculated as follows: Consolidated Indebtedness $ Preferred Stock $ Common Stock $ Retained Earnings $__________ 2. As of [_______], 200__, the ratio of EBITDA to Interest Expense of the Borrower and its subsidiaries to Total Capitalization was ____ to 1.0, calculated, in accordance with Section 5.01(k) of the Credit Agreement, as follows: EBITDA $ Interest Expense $ Ratio 3. As of [_______], 200__, and as of the date hereof, no Event of Default and no event that, with the giving of notice or lapse of time or both, will constitute an Event of Default, has occurred and in continuing. I hereby certify that the calculations set forth in paragraph 1 hereof were prepared in accordance with GAAP. Very truly yours, PROGRESS ENERGY, INC. By__________________________________ Name: Title: F-2 EX-31 3 pei_2qexhibit31-.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: August 6, 2004 /s/ Robert B. McGehee --------------------- Robert B. McGehee Chairman, President & 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: August 6, 2004 /s/ Geoffrey S. Chatas ---------------------- Geoffrey S. Chatas Executive Vice President & 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: August 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: August 6, 2004 /s/ Geoffrey S. Chatas ---------------------- Geoffrey S. Chatas Executive Vice President & Chief Financial Officer EX-32 4 pei_2qexhibit32-.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 June 30, 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 Chairman, President & Chief Executive Officer August 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 June 30, 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 August 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 June 30, 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 August 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 June 30, 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 August 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-----