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, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
_______ to _______
Commission file number 1-3382
------
CAROLINA POWER & LIGHT COMPANY
------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-0165465
-------------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
411 Fayetteville Street, Raleigh, North Carolina 27601-1748
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(Address of principal executive offices) (Zip Code)
919-546-6111
------------
(Registrant's telephone number, including area code)
NONE
----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock (Without Par
Value) shares outstanding at July 31, 1999: 159,581,559.
<PAGE>
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
------------------------------------------
The matters discussed throughout this 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.
Examples of forward-looking statements discussed in this Form 10-Q,
PART 1, ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", include, but are not limited to,
statements under the heading "Other Matters" concerning the effects of
electric utility industry restructuring and the outcome of the
Company's Year 2000 compliance efforts.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no 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 should be considered with respect to any
forward-looking statements made throughout this document include, but
are not limited to, the following: Governmental policies and regulatory
actions (including those of the Federal Energy Regulatory Commission,
the Environmental Protection Agency, the Nuclear Regulatory Commission,
the Department of Energy, the North Carolina Utilities Commission and
the South Carolina Public Service Commission); general industry trends;
operation of nuclear power facilities; availability of nuclear waste
storage facilities; nuclear decommissioning costs; changes in the
economy of areas served by the Company; legislative and regulatory
initiatives that impact the speed and degree of industry restructuring;
ability to obtain adequate and timely rate recovery of costs, including
potential stranded costs arising from industry restructuring;
competition from other energy suppliers; ability of the Company and its
suppliers and customers to successfully address Year 2000 readiness
issues; weather conditions and catastrophic weather-related damage;
market demand for energy; inflation; capital market conditions; the
success of the Company's diversified businesses; unanticipated changes
in operating expenses and capital expenditures and legal and
administrative proceedings. All such factors are difficult to predict,
contain uncertainties that may materially affect actual results, and
may be beyond the control of the Company. New factors emerge from time
to time and it is not possible for management to predict all of such
factors, nor can it assess the effect of each such factor on the
Company.
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
<TABLE>
- ------------------------------------------------------------------------------------------------------------
Carolina Power & Light Company
(ORGANIZED UNDER THE LAWS OF NORTH CAROLINA)
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(NOT AUDITED BY INDEPENDENT AUDITORS)
JUNE 30, 1999
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Statements of Income
Three Months Ended Six Months Ended
June 30 June 30
(In thousands except per share amounts) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues
Electric $ 733,999 $ 736,151 $1,472,558 $1,488,447
Diversified businesses 28,823 12,790 53,166 21,990
- -----------------------------------------------------------------------------------------------------------
Total Operating Revenues 762,822 748,941 1,525,724 1,510,437
Operating Expenses
Fuel 142,918 135,903 281,882 279,705
Purchased power 96,961 102,711 182,183 188,052
Other operation and maintenance 164,819 165,607 307,786 322,400
Depreciation and amortization 121,284 123,597 241,840 245,610
Taxes other than on income 34,669 34,571 70,670 69,451
Harris Plant deferred costs, net 1,964 2,028 3,488 3,807
Diversified businesses 42,836 24,931 81,096 47,552
- -----------------------------------------------------------------------------------------------------------
Total Operating Expenses 605,451 589,348 1,168,945 1,156,577
- -----------------------------------------------------------------------------------------------------------
Operating Income 157,371 159,593 356,779 353,860
- -----------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 2,270 1,037 4,563 4,474
Other, net (8,250) (3,395) (15,246) (11,424)
- -----------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (5,980) (2,358) (10,683) (6,950)
- -----------------------------------------------------------------------------------------------------------
Income before Interest Charges and Income Taxes 151,391 157,235 346,096 346,910
- -----------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 43,993 43,998 86,394 86,820
Other interest charges 3,042 2,719 5,803 5,330
Allowance for borrowed funds used during (2,964) (1,487) (4,792) (2,898)
construction
- -----------------------------------------------------------------------------------------------------------
Net Interest Charges 44,071 45,230 87,405 89,252
- -----------------------------------------------------------------------------------------------------------
Income before Income Taxes 107,320 112,005 258,691 257,658
Income Taxes 44,161 46,536 103,320 105,619
- -----------------------------------------------------------------------------------------------------------
Net Income 63,159 65,469 155,371 152,039
Preferred Stock Dividend Requirements 742 741 1,483 1,483
- -----------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 62,417 $ 64,728 $ 153,888 $ 150,556
- -----------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 144,466 143,892 144,380 143,829
Basic Earnings per Common Share $ 0.43 $ 0.45 $ 1.07 $ 1.05
Diluted Earnings per Common Share $ 0.43 $ 0.45 $ 1.06 $ 1.05
Dividends Declared per Common Share $ 0.500 $ 0.485 $ 1.000 $ 0.970
- -----------------------------------------------------------------------------------------------------------
See Supplemental Data and Notes to Consolidated Interim Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Carolina Power & Light Company
BALANCE SHEETS June 30 December 31
(In thousands) 1999 1998 1998
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Electric Utility Plant
Electric utility plant in service $ 10,418,318 $ 10,199,995 $10,280,638
Accumulated depreciation (4,685,796) (4,358,703) (4,496,632)
- ------------------------------------------------------------------------------------------------------------------------
Electric utility plant in service, net 5,732,522 5,841,292 5,784,006
Held for future use 11,984 11,886 11,984
Construction work in progress 408,959 196,555 306,866
Nuclear fuel, net of amortization 184,095 218,506 196,684
- ------------------------------------------------------------------------------------------------------------------------
Total Electric Utility Plant, Net 6,337,560 6,268,239 6,299,540
- ------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 81,303 40,336 28,872
Accounts receivable 448,655 484,812 406,418
Taxes receivable - - 21,000
Fuel 90,806 88,595 78,086
Materials and supplies 142,458 143,707 146,615
Deferred fuel cost 44,411 25,914 42,647
Prepayments 8,175 2,282 18,446
Other current assets 82,680 68,781 58,772
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 898,488 854,427 800,856
- ------------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 253,000 302,904 277,894
Abandonment costs 9,005 24,397 16,083
Harris Plant deferred costs 58,341 61,839 60,021
Unamortized debt expense 16,922 37,712 27,010
Nuclear decommissioning trust funds 345,947 286,301 310,702
Miscellaneous other property and investments 398,087 253,380 294,678
Other assets and deferred debits 248,767 293,946 260,622
- ------------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,330,069 1,260,479 1,247,010
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 8,566,117 $ 8,383,145 $8,347,406
- ------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock equity $ 2,975,565 $ 2,836,285 $ 2,949,305
Preferred stock - redemption not required 59,376 59,376 59,376
Long-term debt, net 2,716,447 2,581,325 2,614,414
- ------------------------------------------------------------------------------------------------------------------------
Total Capitalization 5,751,388 5,476,986 5,623,095
- ------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 201,610 168,075 53,172
Accounts payable 231,787 277,812 265,163
Taxes accrued 35,280 46,431 -
Interest accrued 47,104 43,034 39,941
Dividends declared 74,385 72,101 74,400
Other current liabilities 114,282 99,451 108,824
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 704,448 706,904 541,500
- ------------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 1,636,415 1,689,799 1,678,924
Accumulated deferred investment tax credits 206,722 216,925 211,822
Other liabilities and deferred credits 267,144 292,531 292,065
- ------------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,110,281 2,199,255 2,182,811
- ------------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 8,566,117 $ 8,383,145 $ 8,347,406
- ------------------------------------------------------------------------------------------------------------------------
SCHEDULES OF COMMON STOCK EQUITY
(In thousands)
Common stock (without par value, authorized 200,000,000, issued and $ 1,383,143 $ 1,369,636 $ 1,374,773
outstanding 151,337,503, 151,330,894 and 151,337,503 shares, respectively)
Unearned ESOP common stock (144,254) (157,306) (152,979)
Capital stock issuance expense (790) (790) (790)
Retained earnings 1,737,466 1,624,745 1,728,301
- ------------------------------------------------------------------------------------------------------------------------
Total Common Stock Equity $ 2,975,565 $ 2,836,285 $ 2,949,305
- ------------------------------------------------------------------------------------------------------------------------
See Supplemental Data and Notes to Consolidated Interim Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Carolina Power & Light Company
STATEMENTS OF CASH FLOWS Three Months Ended Six Months Ended
June 30 June 30
(In thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Activities
Net income $ 63,159 $ 65,469 $ 155,371 $ 152,039
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 143,534 144,886 286,905 290,047
Harris Plant deferred costs 1,065 1,074 1,679 1,887
Deferred income taxes (15,407) (13,145) (32,805) (36,602)
Investment tax credit (2,550) (2,551) (5,100) (5,103)
Deferred fuel cost (credit) (2,172) (11,862) (1,765) (5,284)
Net (increase) decrease in receivables, inventories,
prepaid expenses
and other current assets (61,429) (117,960) (69,861) (140,392)
Net increase (decrease) in payables and accrued 36,676 50,781 55,432 94,011
expenses
Miscellaneous 32,260 10,085 27,080 (3,046)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 195,136 126,777 416,936 347,557
- --------------------------------------------------------------------------------------------------------------------
Investing Activities
Gross property additions (139,938) (94,464) (309,004) (171,798)
Nuclear fuel additions (5,439) (15,179) (32,573) (71,283)
Contributions to nuclear decommissioning trust (7,712) (7,688) (17,995) (17,939)
Net cash flow of company-owned life insurance program (6,729) (2,797) (6,850) (2,524)
Investment in non-electric activities (41,611) (20,084) (106,545) (40,055)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (201,429) (140,212) (472,967) (303,599)
- --------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt - 1,001 400,970 1,001
Net increase (decrease) in commercial paper classified as
long-term debt 117,500 130,270 (144,750) 164,400
Retirement of long-term debt (47) (40,000) (1,683) (41,476)
Dividends paid on common and preferred stock (73,264) (70,712) (146,219) (141,340)
Miscellaneous (187) (633) 144 (633)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing 44,002 19,926 108,462 (18,048)
Activities
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 37,709 6,491 52,431 25,910
Cash and Cash Equivalents at Beginning of the Period 43,594 33,845 28,872 14,426
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 81,303 $ 40,336 $ 81,303 $ 40,336
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest $ 28,351 $ 35,170 $ 81,370 $ 91,127
income taxes $ 108,337 $ 120,724 $ 109,493 $ 126,794
- --------------------------------------------------------------------------------------------------------------------
See Supplemental Data and Notes to Consolidated Interim Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Carolina Power & Light Company
SUPPLEMENTAL DATA Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues (in thousands)
Retail $ 580,155 $ 593,570 $ 1,182,419 $ 1,191,332
Wholesale 136,832 128,355 258,120 263,775
Miscellaneous revenue 17,012 14,226 32,019 33,340
- -----------------------------------------------------------------------------------------------------------
Total Electric 733,999 736,151 1,472,558 1,488,447
Diversified businesses 28,823 12,790 53,166 21,990
- -----------------------------------------------------------------------------------------------------------
Total Operating Revenues $ 762,822 $ 748,941 $ 1,525,724 $ 1,510,437
- -----------------------------------------------------------------------------------------------------------
Energy Sales (millions of kWh)
Retail
Residential 2,753 2,868 6,416 6,306
Commercial 2,689 2,640 5,121 4,999
Industrial 3,827 3,904 7,111 7,383
Other 326 318 638 632
- -----------------------------------------------------------------------------------------------------------
Total Retail 9,595 9,730 19,286 19,320
Wholesale 3,772 3,447 7,042 7,316
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Total Energy Sales 13,367 13,177 26,328 26,636
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Energy Supply (millions of kWh)
Generated - coal 6,840 6,779 13,392 13,565
nuclear 5,405 5,069 11,145 10,658
hydro 145 266 355 641
combustion turbines 47 140 67 159
Purchased 1,392 1,415 2,320 2,571
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Total Energy Supply (Company Share) 13,829 13,669 27,279 27,594
- -----------------------------------------------------------------------------------------------------------
Detail of Income Taxes (in thousands)
Income tax expense (credit) - current $ 62,118 $ 62,232 $ 141,225 $ 147,324
deferred (15,407) (13,145) (32,805) (36,602)
investment tax credit (2,550) (2,551) (5,100) (5,103)
- -----------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ 44,161 $ 46,536 $ 103,320 $ 105,619
- -----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Interim Financial
</TABLE>
<PAGE>
Carolina Power & Light Company
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
A. Organization. Carolina Power & Light Company (the Company) is
-------------
a public service corporation primarily engaged in the
generation, transmission, distribution and sale of electricity
in portions of North and South Carolina. The Company has no
other material segments of business. Operating income on the
Statements of Income includes approximately $171 million and
$172 million attributable to the electric segment for the
three months ended June 30, 1999 and 1998, respectively, and
$385 million and $379 million for the six months ended June
30, 1999 and 1998, respectively.
B. Basis of Presentation. These consolidated interim financial
----------------------
statements should be read in conjunction with the Company's
consolidated financial statements included in the Company's
1998 Annual Report on Form 10-K. The amounts are unaudited
but, in the opinion of management, reflect all adjustments
necessary to fairly present the Company's financial position
and results of operations for the interim periods. Due to
temperature variations between seasons of the year 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. Certain amounts for 1998 have been
reclassified to conform to the 1999 presentation, with no
effect on previously reported net income or common stock
equity.
In preparing financial statements that conform with generally
accepted accounting principles, management must make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements and amounts of
revenues and expenses reflected during the reporting period.
Actual results could differ from those estimates.
2. NCNG MERGER
-----------
On July 15, 1999, the Company completed the acquisition of North
Carolina Natural Gas Corporation (NCNG) pursuant to the terms of an
Agreement and Plan of Merger by and between the Company and NCNG dated
November 10, 1998, as amended and restated April 22, 1999. Each
outstanding share of NCNG common stock was converted into the right to
receive 0.8054 shares of Company common stock which amounted to
8,244,056 Company shares, with cash being paid in lieu of fractional
shares. NCNG is operating as a wholly-owned subsidiary of the Company.
In conjunction with the merger, the Company and NCNG signed a joint
stipulation agreement with the Public Staff of the North Carolina
Utilities Commission (NCUC) in which the Company agreed to cap base
retail electric rates, with limited exceptions, through December 2004,
and NCNG agreed to cap margin rates for gas sales and transportation
services, with limited exceptions, through November 1, 2003. Management
is of the opinion that this agreement will not have a material adverse
effect on the consolidated results of operations or financial position
of the Company.
3. NUCLEAR DECOMMISSIONING
-----------------------
In the Company's retail jurisdictions, provisions for nuclear
decommissioning costs are approved by the NCUC and the South Carolina
Public Service Commission and are based on site-specific estimates that
include the costs for removal of all radioactive and other structures
at the site. In the wholesale jurisdiction, the provisions for nuclear
decommissioning costs are based on amounts agreed upon in applicable
rate agreements. Based on the site-specific estimates discussed below,
and using an assumed after-tax earnings rate of 7.75% and an assumed
cost escalation rate of 4%, current levels of rate recovery for nuclear
decommissioning costs are adequate to provide for decommissioning of
the Company's nuclear facilities.
The Company's most recent site-specific estimates of decommissioning
costs were developed in 1998, using 1998 cost factors, and are based on
prompt dismantlement decommissioning, which reflects the cost of
removal of all radioactive and other structures currently at the site,
with such removal occurring shortly after operating license expiration.
These estimates, in 1998 dollars, are $279.8 million for Robinson Unit
No. 2, $299.6 million for Brunswick Unit No. 1, $298.7 million for
Brunswick Unit No. 2 and $328.1 million for the Harris Plant. The
estimates are subject to change based on a variety of factors
including, but not limited to, cost escalation, changes in technology
applicable to nuclear decommissioning and changes in federal, state or
local regulations. The cost estimates exclude the portion attributable
to North Carolina Eastern Municipal Power Agency, which holds an
undivided ownership interest in the Brunswick and Harris nuclear
generating facilities. Operating licenses for the Company's nuclear
units expire in the year 2010 for Robinson Unit No. 2, 2016 for
Brunswick Unit No. 1, 2014 for Brunswick Unit No. 2 and 2026 for the
Harris Plant.
The Financial Accounting Standards Board is proceeding with its project
regarding accounting practices related to obligations associated with
the retirement of long-lived assets, and an exposure draft of a
proposed accounting standard is expected to be issued during the last
half of 1999. It is uncertain when the final statement will be issued
and what effects it may ultimately have on the Company's accounting for
nuclear decommissioning and other retirement costs.
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
Contingencies existing as of the date of these statements are described
below. No significant changes have occurred since December 31, 1998,
with respect to the commitments discussed in Note 12 of the financial
statements included in the Company's 1998 Annual Report on Form 10-K.
A. Applicability of SFAS-71. As a regulated entity, the Company
-------------------------
is subject to the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" (SFAS-71). Accordingly, the
Company records certain assets and liabilities resulting from
the effects of the ratemaking process, which would not be
recorded under generally accepted accounting principles for
unregulated entities. The Company's ability to continue to
meet the criteria for application of SFAS-71 may be affected
in the future by competitive forces, deregulation and
restructuring in the electric utility industry. In the event
that SFAS-71 no longer applied to a separable portion of the
Company's operations, related regulatory assets and
liabilities would be eliminated unless an appropriate
regulatory recovery mechanism is provided. Additionally, these
factors could result in an impairment of electric utility
plant assets as determined pursuant to Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The Company's regulatory assets totaled $426 million,
$493 million and $480 million as of June 30, 1999 and 1998 and
December 31, 1998, respectively.
B. Claims and Uncertainties. a) The Company is subject to
---------------------------
federal, state and local regulations addressing air and water
quality, hazardous and solid waste management and other
environmental matters.
Various organic materials associated with the production of
manufactured gas, generally referred to as coal tar, are
regulated under various federal and state laws. There are
several manufactured gas plant (MGP) sites to which the
Company and certain entities that were later merged into the
Company had some connection. In this regard, the Company,
along with others, is participating in a cooperative effort
with the North Carolina Department of Environment and Natural
Resources, Division of Waste Management (DWM), which has
established a uniform framework to address MGP sites. The
investigation and remediation of specific MGP sites will be
addressed pursuant to one or more Administrative Orders on
Consent (AOC) between the DWM and the potentially responsible
party or parties. The Company has signed AOCs to investigate
certain sites and anticipates signing AOCs to remediate sites
as well. The Company continues to identify parties connected
to individual MGP sites, and to determine the relative
relationships of the Company and other parties to those sites
and the degree to which the Company will undertake efforts
with others at individual sites. The Company does not expect
the costs associated with these sites to be material to the
financial position and results of operations of the Company.
The Company has been notified by regulators such as the North
Carolina Department of Environment and Natural Resources, the
South Carolina Department of Health and Environmental Control,
and the United States Environmental Protection Agency of its
involvement or potential involvement in several sites, other
than MGP sites, that may require investigation and/or
remediation. Although the Company may incur costs at these
sites, based upon the current status of the sites, the Company
does not expect those costs to be material to the results of
operations of the Company.
The Company carries a liability for the estimated costs
associated with certain remedial activities. This liability is
not material to the financial position of the Company.
b) As required under the Nuclear Waste Policy Act of 1982, the
Company entered into a contract with the U.S. Department of
Energy (DOE) under which the DOE agreed to begin taking spent
nuclear fuel by no later than January 31, 1998. All similarly
situated utilities were required to sign the same standard
contract.
In April of 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 U.S. 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 (including the
----------------------
Company) petitioned the U.S. 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. 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 issued an
order which precluded DOE from treating the delay as an
unavoidable delay. However, the Court of Appeals 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 (including the Company)
filed a motion with the U.S. Court of Appeals to enforce the
mandate in NSP v. DOE. Specifically, the 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 Court of Claims and before the Court of
Appeals. The Company is in the process of evaluating whether
it should file a similar action for damages. In NSP v. United
-------------
States, the United States Court of Claims decided that NSP
------
must pursue its administrative remedies instead of filing an
action in the Court of Claims. NSP has filed an interlocutory
appeal to the U.S. Court of Appeals based on NSP's position
that the Court of Claims has jurisdiction to decide the
matter. A group of utilities (including the Company) has
submitted an amicus brief in support of NSP's position.
The Company also continues to monitor legislation that has
been introduced in Congress which might provide some limited
relief. The Company cannot predict the outcome of this matter.
c) In the opinion of management, liabilities, if any, arising
under other pending claims would not have a material effect on
the financial position and results of operations of the
Company.
<PAGE>
5. EARNINGS PER COMMON SHARE
-------------------------
Restricted stock awards and contingently issuable shares had a dilutive
effect on earnings per share and increased the weighted-average number
of common shares outstanding for dilutive purposes by 289,087 and
282,988 for the three and six months ended June 30, 1999, respectively,
and by 260,173 and 237,980 for the three and six months ended June 30,
1998, respectively. The weighted-average number of common shares
outstanding for dilutive purposes was 144.8 million and 144.7 million
for three and six months ended June 30, 1999, respectively, and 144.2
million and 144.1 million for the three and six months ended June 30,
1998, respectively.
6. NEW ACCOUNTING STANDARD
-----------------------
The Financial Accounting Standards Board (FASB) has delayed the
effective date for Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The delay, published as SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB statement No. 133", changes the effective date
to fiscal years beginning after June 15, 2000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
-----------------------------------------------------------------------
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999,
As Compared With the Corresponding Periods One Year Earlier
-----------------------------------------------------------
Operating Revenues - Electric
-----------------------------
For the three and six months ended June 30, 1999, electric operating
revenues were affected by the following factors (in millions):
Three Months Six Months
------------ ----------
Weather $ (20) $ (18)
Customer growth/changes in usage patterns 13 31
Price 2 (15)
Sales to other utilities 1 (13)
Sales to North Carolina Eastern Municipal Power Agency (1) -
Other 3 (1)
- ---
Total $ (2) $ (16)
=== ====
The decrease in the weather component of revenue for both periods is
the result of milder than normal temperatures in the current periods as
compared to prior periods. The increase in the customer growth/changes
in usage patterns component of revenue for both comparison periods
reflects continued growth in the number of customers served by the
Company; while residential and commercial sales increased for the
six-month period, industrial sales have decreased, primarily reflecting
a cyclical decline in the chemical and textile industries. During the
three-month period, the price component of revenues was negatively
impacted by the effect of real-time pricing on sales to industrial
customers which was more than offset by other price-related increases,
primarily due to changes in the price structure of the contract between
the Company and North Carolina Electric Membership Corporation. The
price-related decrease for the six-month period is primarily due to the
effect of real-time pricing on sales to industrial customers. The
decrease in sales to other utilities for the six-month period is
primarily due to milder temperatures in the Northeast and Midwest
during the first quarter of 1999 and to the expiration of long-term
sales agreements.
Operating Expenses - Electric
-----------------------------
Other operation and maintenance expense decreased during the six months
ended June 30, 1999 primarily due to the timing of plant outages.
Diversified Business Operations
-------------------------------
Operating revenues and expenses of diversified business operations
primarily reflect results of two of the Company's subsidiaries,
Strategic Resource Solutions Corp. (SRS) and Interpath Communications,
Inc. (Interpath). The increase in operating revenues for the three- and
six-month periods is primarily due to an increase in the customer base
of both subsidiaries. The increase in operating expenses for the three-
and six-month periods is primarily attributable to Interpath's business
expansion program. Operating expenses at SRS did not increase
significantly due to cost-cutting measures implemented during 1998 and
early 1999.
<PAGE>
MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES
For the Three and Six Months Ended June 30, 1999
---------------------------------------------------
Cash Flow and Financing
-----------------------
On March 5, 1999 the Company issued $400 million principal amount of
Senior Notes, 5.95% Series due March 1, 2009. The net proceeds from the
issuance were used to reduce commercial paper borrowings.
As of June 30, 1999, the Company's revolving credit facilities totaled
$750 million, all of which are long-term agreements supporting its
commercial paper borrowings. The Company is required to pay minimal
annual commitment fees to maintain its credit facilities. Consistent
with management's intent to maintain its commercial paper on a
long-term basis, and as supported by its long-term revolving credit
facilities, the Company included in long-term debt all commercial paper
outstanding of approximately $337 million, $410 and $488 million as of
June 30, 1999, June 30, 1998 and December 31, 1998, respectively.
The Company's First Mortgage Bonds are currently rated "A2" by Moody's
Investors Service, "A" by Standard and Poor's and "A+" by Duff and
Phelps. Moody's Investors Service, Standard and Poor's and Duff and
Phelps have rated the Company's commercial paper "P-1", "A-1" and
"D-1", respectively.
OTHER MATTERS
-------------
NCNG Merger
-----------
On July 15, 1999, the Company completed the acquisition of NCNG
pursuant to the terms of an Agreement and Plan of Merger by and between
the Company and NCNG dated November 10, 1998, as amended and restated
April 22, 1999. Each outstanding share of NCNG common stock was
converted into the right to receive 0.8054 shares of Company common
stock which amounted to 8,244,056 Company shares, with cash being paid
in lieu of fractional shares. NCNG is operating as a wholly-owned
subsidiary of the Company.
In conjunction with the merger, the Company and NCNG signed a joint
stipulation agreement with the Public Staff of the NCUC in which the
Company agreed to cap base retail electric rates, with limited
exceptions, through December 2004, and NCNG agreed to cap margin rates
for gas sales and transportation services, with limited exceptions,
through November 1, 2003. Management is of the opinion that this
agreement will not have a material adverse effect on the consolidated
results of operations or financial position of the Company.
Competition
-----------
Wholesale Competition
---------------------
On May 13, 1999, the Federal Energy Regulatory Commission (FERC) issued
a Notice of Proposed Rulemaking (NOPR) on Regional Transmission
Organizations (RTOs). This NOPR proposes to set minimum characteristics
and functions for transmission entities, including independent system
operators and transmission companies, to become FERC-approved RTOs. The
NOPR does not require RTO membership for all utilities by a certain
date. Initial comments on the NOPR are due on August 23, 1999 and reply
comments are due on September 29, 1999. The FERC is expected to issue a
final rule by the end of this year. The Company will submit comments
regarding the NOPR and may file reply comments as well. The Company
continues to evaluate the potential effects of this NOPR. The Company
cannot predict the outcome of this matter.
North Carolina Activities
-------------------------
In May 1999, the North Carolina General Assembly approved legislation
that expanded from 23 to 29 members the study commission it established
to evaluate the future of electric service in the state. All 29 study
commission members have been appointed. The study commission is
expected to resume its meetings in August and to make its final report
to the North Carolina General Assembly during 2000. The Company cannot
predict the outcome of this matter.
<PAGE>
South Carolina Activities
-------------------------
The 1999 session of the South Carolina General Assembly adjourned in
June 1999, without approving any legislation regarding electric
industry restructuring. The South Carolina General Assembly is expected
to continue considering the electric industry restructuring bills that
were introduced this year during its 2000 legislative session. The
Company cannot predict the outcome of this matter.
Federal Activities
------------------
Several bills regarding electric industry restructuring have been
introduced in Congress this year. A draft bill is expected to be
introduced in the House Commerce Committee sometime during the fall of
1999. The Company cannot predict the outcome of this matter.
Company Activities
-------------------
The Company and Southern Natural Gas Company, a subsidiary of SONAT,
Inc., have delayed the planned-in-service date of the Palmetto
Interstate Pipeline. In conjunction with this delay, on-going route
selection and survey activities have been suspended. Since the
announcement of the Palmetto Interstate Pipeline in March, two other
competing pipelines have been proposed. The delay with allow the
Company to analyze those alternatives. The Company cannot predict the
outcome of this matter.
Year 2000
---------
Background
----------
The Company's overall goal is to be Year 2000 ready, and its efforts to
reach this goal are on target. "Year 2000 ready" means that critical
systems, devices, applications or business relationships have been
evaluated and are expected to be suitable for continued use into and
beyond the Year 2000, or contingency plans are in place. Critical
systems are defined as those that (i) directly relate to the safe and
reliable generation and delivery of electricity and (ii) support the
Company's ability to provide high-quality customer service.
The Company began addressing the Year 2000 issue in 1994 by beginning
to assess its business computer systems, such as general ledger,
payroll, customer billing and inventory control. The majority of these
systems were corrected and have been running in the Company's
day-to-day computing environment since 1996. Also, by the mid-1990s,
two major accounting systems were replaced with systems that were
designed to be Year 2000 ready. The Company has addressed the remaining
business systems and will conduct supplementary testing, as
appropriate.
During mid-1997, a Corporate Year 2000 Project was established to
provide leadership and direction to the Year 2000 efforts throughout
the Company and its subsidiaries. Also, the project scope was expanded
to include "embedded" systems (such as process control computers, chart
recorders, data loggers, calibration equipment and chemical analysis
equipment), end-user computing hardware and software (including
personal computers, spreadsheets, word processing and other personal
and workgroup applications), plant and corporate facilities (such as
security systems, elevators and heating and cooling systems) and
business relationships with key suppliers and customers.
The Company has used a multi-step approach in conducting its Year 2000
Project. These steps are: inventory, assessment, remediation and
testing, and contingency planning. The first step, an inventory of all
systems and devices with potential Year 2000 problems, was completed in
January 1998. The next step, completed in the first half of 1998, was
to conduct an initial assessment of the inventory to determine the
state of its Year 2000 readiness. As part of the assessment phase,
remediation strategies were identified and remediation cost estimates
were developed. The Company has utilized both internal and external
resources to remediate and test for Year 2000 readiness. The Company's
primary approach has been for the Corporate Year 2000 Program Office to
provide overall leadership and direction and assign responsibility to
individual departments and business units for Year 2000 readiness in
their respective areas. Staffing decisions regarding the labor required
to complete the project have been made at the department/business unit
level. Several hundred of the Company's employees as well as contract
personnel have been used on this effort. Vendor labor has also been
occasionally used. The Company achieved its goal of Year 2000 readiness
for all critical systems by the June 30,1999 target date with one
exception. This exception is a power plant system that will be replaced
during a planned outage this fall. Supplementary testing to maintain
Year 2000 readiness will continue through 1999, as appropriate.
Several external reviews of the project have been conducted to validate
the reliability of risk and cost estimates as well as work processes
and work products. These have included project reviews by two
consulting firms, an embedded systems audit by an engineering firm and
a legal review by an external law firm. In addition, the Company is
actively conducting formal communications with the suppliers and
customers with which it has active contracts to determine the extent to
which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The Company ranked its vendors
and suppliers to identify those considered to be critical. Those
identified as critical include telecommunications providers, fuel
suppliers (nuclear, coal, natural gas and other), transportation
carriers, vendors of certain nuclear systems and components, vendors of
fossil power plant digital control systems and financial services
suppliers. The Company cannot predict the outcome of other companies'
remediation efforts.
Costs
-----
As of June 30, 1999, the total remaining cost of the Year 2000 Project
is estimated at $7 million. To date, the Company has incurred and
expensed approximately $13 million related to the inventory, assessment
and remediation of non-compliant systems, equipment and applications.
The remaining $7 million budgeted for the Year 2000 Project includes
the following expenditures: $2.5 million for meters to be installed
during the remainder of 1999, $1.5 million for compliance efforts at
non-regulated subsidiaries of the Company, $2 million for remaining
project costs to be incurred during the balance of 1999 and into 2000,
and $1 million for Year 2000 readiness contingencies. The costs of the
project and the date on which the Company plans to complete the Year
2000 modifications are based on management's best estimates, which were
derived using assumptions of future events including the continued
availability of certain resources, third parties' Year 2000 readiness
and other factors.
Risk Assessment
---------------
At this time, the Company believes its most reasonably likely worst
case scenario is that key customers could experience significant
reductions in their power needs due to their own Year 2000 issues. The
Company is conducting informal meetings with its largest wholesale,
industrial and commercial customers and is holding information sharing
forums to gather information on Year 2000 readiness. Based on the
information provided through these contacts, the Company has not
identified any major customer that appears to be at significant risk of
not being Year 2000 ready. For this reason, the Company does not
believe that this scenario is likely to occur. Nonetheless, the Company
has assessed the effect of such a scenario by using current financial
data. That data indicates that if the Company's twenty key industrial
customers experienced significant reduced power needs for a period of
one month, the Company's revenues would decrease by approximately 6%
for that month.
An alternative worst-case scenario includes the effect of cascading
disruptions caused by other entities whose electrical systems are
connected to the Company's. The Company has assessed the risk of this
scenario, believes that its contingency plans would mitigate the
long-term occurrence of such a scenario, and does not expect that it
would have a material adverse effect on its financial position and
results of operations.
Contingency Plans
-----------------
Contingency plans have been prepared to help ensure that the Company's
critical business processes will continue to function on January 1,
2000 and beyond. The Company's contingency plans are structured to
address both remediation of systems and their components and overall
business operating risk. These plans are intended to mitigate internal
risks, as well as potential risks in the supply chain of the Company's
suppliers and customers. The Company's contingency plans were developed
by June 30, 1999 in accordance with the target dates established by the
Nuclear Regulatory Commission and the North American Electric
Reliability Council (NERC).
The Company has developed contingency plans to mitigate the risk
associated with the failure of critical vendors or suppliers. Based on
the Company's on-going assessment of the risk of non-compliance, the
Company will take action up to and including entering into a business
relationship with an alternate vendor or supplier.
One of the Company's emergency contingency plans specifically addresses
emergency scenarios that may arise due to the fact that electric
utility systems throughout the southeast region of the United States
are interconnected. The Company has been working actively with the NERC
and the Southeastern Electric Reliability Council to address the issue
of overall grid reliability and protection. In order to mitigate the
risk of cascading regional electric failures, the Company can, as a
last resort, isolate its transmission system either automatically or
manually. The Company's emergency readiness contingency plan includes
the performance of regular training exercises that include simulated
disaster recovery scenarios. As part of its Year 2000 contingency
planning, the Company is reviewing its disaster recovery scenarios to
identify those that can be used specifically for Year 2000 readiness
training.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
During the six months ended June 30, 1999, the Company's market risk
exposure was affected by the issuance of $400 million principal amount
of Senior Notes, 5.95% Series due March 1, 2009. Total fixed rate
long-term debt at June 30, 1999 was $1.975 billion, with an average
interest rate of 7.02%. Related to the issuance, the Company settled
its interest rate lock, receiving approximately $9.7 million which will
reduce interest expense over the 10-year debt term. The proceeds from
the issuance were used to reduce commercial paper borrowings. Total
commercial paper outstanding at June 30, 1999 was $337 million, with an
average interest rate of 5.03%.
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
------- -----------------
Legal aspects of certain matters are set forth in Part I, Item I Notes
to the Consolidated Interim Financial Statements, Note 4: Commitments
and Contingencies.
Item 2. Changes in Securities and Use of Proceeds
------- -----------------------------------------
STRATEGIC RESOURCE SOLUTIONS CORP.
(a) Securities Issued. On August 9, 1999, the Company issued 4,239
-------------------
shares of its Common Stock (Common Shares) in connection with the June
5, 1997 merger of Knowledge Builders, Inc. (KBI) into a wholly-owned
subsidiary of the Company (CaroCapital, Inc., a North Carolina
Enterprise Corporation since renamed Strategic Resource Solutions
Corp). Of these, 3,903 shares were issued as post-closing merger
consideration to the former holders of KBI common stock for KBI shares
that were canceled in the merger. The remaining 336 shares were issued
as incentive compensation payments based upon the 1998 performance of
SRS and its subsidiaries arising under incentive compensation
agreements entered into pursuant to the merger agreement with KBI.
(b) Underwriters and Other Purchasers. No underwriters were used in
------------------------------------
connection with this issuance of Common Shares. The Common Shares were
issued (A) as merger consideration to former holders of KBI common
stock whose KBI shares were canceled in the merger and (B) as incentive
compensation payments to certain SRS employees based upon the 1998
performance of SRS.
(c) Consideration. The consideration for 3,903 of the Common Shares
--------------
issued was the cancellation of former shares of KBI in the merger. The
other 336 Common Shares were issued as compensation pursuant to certain
incentive compensation award agreements.
(d) Exemption from Registration Claimed. The Common Shares described
--------------------------------------
above were issued on the basis of an exemption from registration under
Section 4(2) of the Securities Act of 1933. The Common Shares were
issued to a limited number of persons and subjected to restrictions on
resale appropriate for private placements, and appropriate disclosure
was made to all persons to whom Common Shares were issued.
RESTRICTED STOCK AWARDS:
(a) Securities Delivered. On July 21, 1999, 10,400 shares of the
----------------------
Company's Common Shares were delivered to a certain key employee of the
Company pursuant to the terms of the Company's 1997 Equity Incentive
Plan (Plan), which was approved by the Company's shareholders on May 7,
1997. Section 9 of the Plan provides for the granting of Restricted
Stock by the Personnel, Executive Development and Compensation
Committee (now known as the Committee on Organization and
Compensation), (the Committee) to key employees of the Company. The
Common Shares delivered pursuant to the Plan were acquired in market
transactions directly for the account of the recipient 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 a certain key employee of the Company.
The Plan defines "key employee" as an officer or other employee of the
Company who, in the opinion of the Committee, can contribute
significantly to the growth and profitability of, or perform services
of major importance to, the Company.
(c) Consideration. The Common Shares were delivered to provide an
--------------
incentive to the employee recipient 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 recipient.
All award decisions were made by the Committee, which consists entirely
of non-employee directors.
Item 4. Submission of Matter to a Vote of Security Holders
------- --------------------------------------------------
a) The Annual Meeting of the Shareholders was held on May 12, 1999.
b) The meeting involved the election of one Class II director to
serve a one-year term and four Class I 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 II Votes For Votes Withheld
-------- --------- --------------
(Term expiring in 2000)
Sherwood H. Smith Jr. 130,726,989 1,993,640
Class I
-------
(Term expiring in 2002)
Leslie M. Baker Jr. 130,817,610 1,903,019
John H. Mullin II 130,592,003 2,128,626
William O. McCoy 130,742,209 1,978,420
J. Tylee Wilson 130,726,517 1,994,112
Item 5. Other Information
------- -----------------
POTENTIAL TRANSITION TO HOLDING COMPANY STRUCTURE
-------------------------------------------------
The Company is considering the formation of a holding company
structure, in which the Company would become a subsidiary of a newly
formed holding company. This conversion is being considered because of
the advantages it might offer as the Company continues to confront the
rapidly changing environment facing electric utilities. The holding
company structure would allow greater organizational flexibility,
including a clearer separation of regulated businesses from each other
and from unregulated businesses such as energy services,
telecommunications, and electric generation projects for wholesale
markets. This structure would also offer greater financing flexibility,
because the holding company would not be required to obtain utility
commission approval each time it seeks to issue securities to raise
cash or as consideration in acquisitions.
The Company's shareholders would have to approve formation of a holding
company structure, as would various regulatory authorities. If the
Company converts to a holding company structure, each share of the
Company's common stock will automatically be exchanged for one share of
common stock of the new holding company. There can be no assurance as
to when or whether the contemplated holding company structure will be
submitted for shareholder approval or be established.
SALE OF SRS's Lighting Division
-------------------------------
On July 2, 1999, SRS completed the sale of its lighting division to
SLI, Inc.
CONTINUED OWNERSHIP OF INTERPATH
--------------------------------
The Company is currently examining strategic options regarding
continued ownership of Interpath and expects to announce its intentions
later this year.
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) See EXHIBIT INDEX
(b) Reports on Form 8-K filed during or with respect to the quarter:
The Company filed a Current Report on Form 8-K on July 22,
1999, reporting under Item 5 the July 15, 1999 completion of
the Company's acquisition of NCNG. Exhibits related to the
issuance were listed under Item 7 of the Report.
<PAGE>
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.
CAROLINA POWER & LIGHT COMPANY
------------------------------
(Registrant)
By /s/ Glenn E. Harder
-----------------------------------
Glenn E. Harder
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1999
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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