UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
I.R.S.
Exact name of each Registrant as specified in Employer
Commission its charter, state of incorporation, address of Identification
File No. principal executive offices and telephone number Number
1-8349 FLORIDA PROGRESS CORPORATION 59-2147112
A Florida Corporation
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
1-3274 FLORIDA POWER CORPORATION 59-0247770
d/b/a Progress Energy Florida, Inc.
A Florida Corporation
100 Central Avenue
St. Petersburg, Florida 33701
Telephone (727) 820-5151
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Florida Progress Corporation:
7.10% Cumulative Quarterly Income Preferred New York Stock Exchange
Securities, Series A, of FPC Capital I (and the
Guarantee of Florida Progress with respect thereto)
Florida Power Corporation: None
1
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Florida Progress Corporation: None
Florida Power Corporation: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Act).
YES [ ] NO [X]
As of June 30, 2002, the aggregate market value of the voting and non-voting
common equity of each of the registrants held by non-affiliates was $0. All of
the common stock of Florida Progress Corporation is owned by Progress Energy,
Inc., its corporate parent. All of the common stock of Florida Power Corporation
is owned by Florida Progress Corporation.
As of February 28, 2003, each registrant had the following shares of common
stock outstanding:
Registrant Description Shares
---------- ----------- ------
Florida Progress Corporation Common Stock (without par value) 98,616,658
Florida Power Corporation Common Stock (without par value) 100
Florida Progress Corporation and Florida Power Corporation meet the conditions
set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore
filing this Form 10-K with the reduced disclosure format permitted by General
Instruction I(2) to such Form 10-K.
This combined Form 10-K is filed separately by two registrants: Florida Progress
Corporation and Florida Power Corporation. 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.
2
TABLE OF CONTENTS
GLOSSARY
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. CONTROLS AND PROCEDURES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
RISK FACTORS
3
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined FORM
10-K are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
AST Advanced Separation Technologies, Incorporated
Btu British thermal units
CERCLA or Superfund Comprehensive Environmental Response
Compensation & Liability Act
Code Internal Revenue Service Code
CVO Contingent Value Obligation
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company Florida Progress Corporation
CP&L Carolina Power & Light Company
CP&L Energy CP&L Energy, Inc.
CR3 Florida Power's nuclear generating plant,
Crystal River Unit No. 3
DOE United States Department of Energy
EITF Emerging Issues Task Force
EITF Issue 02-03 EITF Issue 02-03, "Accounting for Contracts
Involved in Energy Trading and Risk Management
Activities"
EPA United States Environmental Protection Agency
ERISA Employee Retirement Income Security Act of 1974
FASB Financial Accounting Standards Board
FDEP Florida Department of Environmental Protection
FERC Federal Energy Regulatory Commission
FIN No. 45 FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others - an Interpretation of
FASB Statements No. 5, 57 and 107 and Rescission
of FASB Interpretation No. 34"
FIN No. 46 FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation
of ARB No. 51"
Financial Statements Florida Progress' Financial Statements and
Florida Power's Financial Statements, for the
year ended December 31, 2002 contained under
ITEM 8 herein
Florida Power or the Utility Florida Power Corporation
Florida Progress or FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Funding Corp. Florida Progress Funding Corporation
Georgia Power Georgia Power Company
IRS Internal Revenue Service
ISO Independent System Operator
kV Kilovolt
kVA Kilovolt-ampere
LTIP Long-Term Incentive Plan
MGP Manufactured Gas Plant
MW Megawatts
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
NRC United States Nuclear Regulatory Commission
PLR Private Letter Ruling
Preferred Securities FPC-obligated mandatorily redeemable preferred
securities of FPC Capital I
Preferred Stock Florida Power Cumulative Preferred Stock, $100
par value
Progress Capital Progress Capital Holdings, Inc.
Progress Energy Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly Electric
Fuels Corporation
4
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
PVI Progress Ventures, Inc., formerly referred to as
Energy Ventures, a business segment of Progress
Energy
PUHCA Public Utility Holding Company Act of 1935, as
amended
PURPA Public Utility Regulatory Policies Act of 1978
PWR Pressurized Water Reactors
QFs Qualifying facilities
RTO Regional Transmission Organization
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
SFAS No. 4 Statement of Financial Accounting Standards
No. 4, "Reporting Gains and Losses from
Extinguishment of Debt (an amendment of
Accounting Principles Board (APB) Opinion
No. 30)"
SFAS No. 5 Statement of Financial Accounting Standards
No. 5, "Accounting for Contingencies"
SFAS No. 13 Statement of Financial Accounting Standards
No. 13, "Accounting for Leases"
SFAS No. 71 Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain
Types of Regulation"
SFAS No. 87 Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions"
SFAS No. 106 Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions"
SFAS No. 121 Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets
to be Disposed Of"
SFAS No. 123 Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based
Compensation"
SFAS No. 133 Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative and Hedging
Activities"
SFAS No. 138 Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133"
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. 144 Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"
SFAS No. 145 Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13
and Technical Corrections"
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"
the Trust FPC Capital I
5
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 report 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, examples of forward-looking statements discussed in this report
include, but are not limited to, statements under the following headings: 1)
"Liquidity and Capital Resources" about operating cash flows, estimated capital
requirements through the year 2005 and future financing plans, and 2) "Risk
Factors."
Any forward-looking statement speaks only as of the date on which such statement
is made, and neither Florida Progress nor Florida Power 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; the impact of Florida Power's
rate case settlement; deregulation or restructuring in the electric industry
that may result in increased competition and unrecovered (stranded) costs; the
uncertainty regarding the timing, creation and structure of regional
transmission organizations; weather conditions that directly influence the
demand for electricity and natural gas; recurring seasonal fluctuations in
demand for electricity and natural gas; fluctuations in the price of energy
commodities and purchased power; successful maintenance and operation of Florida
Power's energy commodities and purchased power; economic fluctuations and the
corresponding impact on the Florida Power's commercial and industrial customers;
the inherent risks associated with the operation of nuclear facilities,
including environmental, health, regulatory and financial risks; the impact of
any terrorist acts generally and on our generating facilities and other
properties; the ability to successfully access capital markets on favorable
terms; the impact that increases in leverage may have on the Company and Florida
Power; the ability of the Company and Florida Power to maintain their current
credit ratings; the impact of derivative contracts used in the normal course of
business; the Company's continued ability to use Section 29 tax credits related
to its coal and synthetic fuels businesses; the continued depressed state of the
telecommunications industry and the Company's ability to realize future returns
from Progress Telecommunications Corporation (Progress Telecom); the Company's
ability to successfully integrate newly acquired assets or properties into its
operations as quickly or as profitably as expected; 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 Florida Progress'
and Florida Power's SEC reports. All such factors are difficult to predict,
contain uncertainties that may materially affect actual results and may be
beyond the control of Florida Progress and Florida Power. Many, but not all of
the factors that may impact actual results are discussed under the heading "Risk
Factors". You should carefully read the "Risk Factors" section of this report.
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
Florida Progress and Florida Power.
6
PART I
ITEM 1. BUSINESS
GENERAL
COMPANY
Florida Progress Corporation (Florida Progress or the Company, which term
includes consolidated subsidiaries unless otherwise indicated) is a wholly owned
subsidiary of Progress Energy, Inc. (Progress Energy), a registered holding
company under the Public Utility Holding Company Act (PUHCA) of 1935. Progress
Energy and its subsidiaries, including Florida Progress, are subject to the
regulatory provisions of PUHCA. Florida Progress is the parent company of
Florida Power Corporation (Florida Power or the Utility) and certain other
subsidiaries. Progress Energy controls Florida Power Corporation and the other
Florida Progress subsidiaries through its ownership of Florida Progress.
On November 30, 2000, the acquisition of Florida Progress by CP&L Energy, Inc.
(CP&L Energy) became effective. On December 4, 2000, CP&L Energy was renamed
Progress Energy. Effective January 1, 2003, Florida Power began doing business
under the name Progress Energy Florida, Inc. The legal name of the entity has
not been changed and there is no restructuring of any kind related to the name
change. The current corporate and business unit structure remains unchanged.
Florida Progress' revenues for the year ended December 31, 2002, were $4.4
billion, and assets at year-end were $6.6 billion. Its principal executive
offices are located at 410 South Wilmington Street, Raleigh, North Carolina
27601-1748, telephone number (919) 546-6111. Information about Florida Progress
and its subsidiaries can be found at Progress Energy's home page on the Internet
at http://www.progress-energy.com, the contents of which are not and shall not
be deemed to be a part of this document or any other SEC filing. The Company
makes available free of charge on its website its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments
to these reports as soon as reasonably practicable after such material is
electronically filed or furnished to the Securities and Exchange Commission
(SEC). Florida Progress was incorporated in Florida on January 21, 1982.
Florida Progress' principal business segment is Florida Power, which encompasses
all regulated public utility operations (See ITEM 1 "Business - Utility
Operations - Florida Power") and accounts for approximately 70% and 84% of
Florida Progress' revenues and assets, respectively, at year end in 2002.
Florida Progress' other business segments, including Energy and Related
Services, Rail Services, and Other, represent its diversified operations (See
ITEM 1 "Business - Diversified Operations").
Progress Capital Holdings, Inc. (Progress Capital) is the downstream holding
company for Florida Progress' diversified subsidiaries and provides a portion of
the financing for the non-utility operations. Diversified operations includes
Progress Fuels Corporation (Progress Fuels), formerly Electric Fuels Corporation
(Electric Fuels), and Progress Telecom. On January 2, 2002, Electric Fuels
changed its name to Progress Fuels. Progress Fuels is a diversified non-utility
energy company, whose principal business segments are Energy and Related
Services and Rail Services. Florida Progress' Other category consists primarily
of Progress Telecom, the Company's Investment in FPC Capital Trust, and the
holding company, Florida Progress. Progress Telecom is a provider of wholesale
telecommunications services.
After the acquisition of Florida Progress, Progress Energy hired a financial
adviser to assist Florida Progress in evaluating its strategic alternatives with
respect to Progress Fuels' Inland Marine Transportation and Rail Services
segments. On November 1, 2001, the Inland Marine Transportation segment was sold
to AEP Resources, Inc. During 2001, Progress Energy decided to retain the Rail
Services segment in the near term. 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. On March 12, 2003, Progress
Energy announced that Railcar Ltd. signed a letter of intent to sell
predominately all of its railroad leasing assets to The Andersons, Inc. The
proceeds of the sale will be used to pay off Railcar Ltd. lease obligations. The
transaction is still subject to various closing conditions including financing,
due diligence and the completion of a definitive purchase agreement.
7
ACQUISITIONS
On November 30, 2000, CP&L Energy, which subsequently changed its name to
Progress Energy, acquired all of the outstanding shares of Florida Progress'
common stock in accordance with the Amended and Restated Plan of Exchange,
including the related Plan of Share Exchange, dated as of August 22, 1999, as
amended and restated as of March 3, 2000, among CP&L Energy, Florida Progress
and Carolina Power & Light Company (CP&L). Florida Progress Shareholders
received $54.00 in cash or shares of Progress Energy common stock, subject to
proration, and one contingent value obligation (CVO) in exchange for each of
their shares of Florida Progress common stock. The exchange ratio for the shares
of Progress Energy common stock issued to Florida Progress shareholders was
1.3473. Each CVO represents the right to receive contingent payments based upon
the net after-tax cash flow to Progress Energy generated by four synthetic fuel
facilities purchased by subsidiaries of Florida Progress in 1999.
Westchester Gas Company Acquisition
On April 26, 2002, Progress Fuels, a wholly owned subsidiary of Progress Energy,
completed the acquisition of Westchester Gas Company, which included
approximately 215 natural gas producing wells, 52 miles of intrastate gas
pipeline and 170 miles of gas-gathering systems. The aggregate purchase price of
approximately $153 million consisted of cash consideration of approximately $22
million and the issuance of 2.5 million shares of Progress Energy common stock
valued at approximately $129 million. The purchase price included approximately
$2 million of direct transaction costs. The properties are located within a
25-mile radius of Jonesville, Texas, on the Texas-Louisiana border. This
transaction added 140 billion cubic feet of gas reserves to Progress Fuels'
growing energy portfolio.
Acquisition of Natural Gas Wells
During the first quarter of 2003, Progress Fuels entered into three independent
transactions to acquire approximately 162 natural gas producing wells with
proven reserves of 195 billion cubic feet (Bcf) from Republic Energy, Inc. and
two other privately-owned companies, all headquartered in Texas. The gross total
purchase price for the transactions was approximately $133 million.
DIVESTITURES
Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a resolution to
sell the assets of Railcar Ltd., a leasing subsidiary included in the Rail
Services segment. An estimated impairment on assets held for sale of $58.8
million has been recognized for the write-down of the assets to be sold to fair
value less the costs to sell.
On March 12, 2003, the Company signed a letter of intent to sell Railcar Ltd. to
The Andersons, Inc. The proceeds of the sale will be used by the Company to pay
off Railcar Ltd. lease obligations. The transaction is still subject to various
closing conditions including financing, due diligence and the completion of a
definitive purchase agreement.
Sale of MEMCO Barge Line, Inc.
On July 23, 2001, Progress Energy announced the disposition of the Inland Marine
Transportation segment of FPC, which was operated by MEMCO Barge Line, Inc.
Inland Marine provided transportation of coal, agricultural and other dry-bulk
commodities as well as fleet management services. On November 1, 2001, Progress
Energy completed the sale of the Inland Marine Transportation segment to AEP
Resources, Inc., a wholly owned subsidiary of American Electric Power.
ENVIRONMENTAL
General
In the areas of air quality, water quality, control of toxic substances and
hazardous and solid wastes and other environmental matters, the Company is
subject to regulation by various federal, state and local authorities. The
Company considers itself to be in substantial compliance with those
environmental regulations currently applicable to its business and operations
and believes it has all necessary permits to conduct such operations.
8
Environmental laws and regulations constantly evolve and the ultimate costs of
compliance cannot always be accurately estimated. For further information with
respect to environmental matters, see Note 22E to the Financial Statements.
Clean Air Legislation
The 1990 amendments to the Clean Air Act require substantial reductions in
sulfur dioxide and nitrogen oxide emissions from fossil-fueled electric
generating plants. The Clean Air Act required Florida Power to meet more
stringent provisions effective January 1, 2000. The Company meets the sulfur
dioxide emissions requirements by fuel switching and maintaining sufficient
sulfur dioxide emission allowances. Installation of additional equipment was
necessary to reduce nitrogen oxide emissions. Increased operation and
maintenance costs, including emission allowance expense, installation of
additional equipment and increased fuel costs are not expected to be material to
the financial position or results of operations of the Company.
The U.S. Environmental Protection Agency (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. Florida Power was asked to provide information to the EPA as part of
this initiative and cooperated in providing the requested information. The EPA
initiated enforcement actions against other unaffiliated utilities as part of
this initiative, some of which have resulted in or may result in settlement
agreements calling for expenditures, ranging from $1.0 billion to $1.4 billion.
A utility that was not subject to a civil enforcement action settled its New
Source review issues with the EPA for $300 million. These settlement agreements
have generally called for expenditures to be made over extended time periods,
and some of the companies may seek recovery of the related costs through rate
adjustments. The Company cannot predict the outcome of this matter.
Superfund
The provisions of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA), authorize the EPA to require the
clean up of hazardous waste sites. This statute imposes retroactive joint and
several liability. Some states have similar types of legislation. There are
presently several sites with respect to which the Company has been notified by
the EPA, the State of Florida or other state agencies with respect to potential
liability, as described below in greater detail.
Various organic materials associated with the production of manufactured gas,
generally referred to as coal tar, are regulated under various federal and state
laws. The lead or sole regulatory agency that is responsible for a particular
former coal tar site depends largely upon the state in which the site is
located. There are several manufactured gas plant (MGP) sites to which Florida
Power has some connection. In this regard, Florida Power, with other potentially
responsible parties, is participating in investigating and, if necessary,
remediating former coal tar sites with several regulatory agencies, including,
but not limited to, the EPA and the Florida Department of Environmental
Protection (FDEP). Although Florida Power may incur costs at these sites about
which it has been notified, based upon current status of these sites, Florida
Power does not expect those costs to be material to the financial position or
results of operations of Florida Power. The Company has accrued amounts to
address known costs at certain of these sites.
The Company is periodically notified by regulators such as the EPA and various
state agencies of their involvement or potential involvement in sites, other
than MGP sites, that may require investigation and/or remediation. Although the
Company may incur costs at the sites about which they have been notified, based
upon the current status of these sites, the Company does not expect those costs
to be material to the financial position or results of operations of the
Company.
Other Environmental Matters
On November 1, 2001, the Company completed the sale of the Inland Marine
Transportation segment to AEP Resources, Inc. In connection with the sale, the
Company entered into environmental indemnification provisions covering both
unknown and known sites. The Company has recorded an accrual to cover estimated
probable future environmental expenditures. The Company believes that it is
reasonably possible that additional costs, which cannot be currently estimated,
may be incurred related to the environmental indemnification provision beyond
the amounts accrued. The Company cannot predict the outcome of this matter.
9
Florida Power has filed claims with the Company's general liability insurance
carriers to recover costs arising out of actual or potential environmental
liabilities. Some claims have settled and others are still pending. While
management cannot predict the outcome of these matters, the outcome is not
expected to have a material effect on the financial position or results of
operations.
EMPLOYEES
As of February 28, 2003, Florida Progress and its subsidiaries had approximately
7,800 regular full-time employees. As of February 28, 2003, Florida Power had
approximately 4,000 regular full-time employees. The International Brotherhood
of Electrical Workers (IBEW) represents approximately 2,100 of these full-time
employees. Florida Power and the IBEW reached agreement in early December on a
new, three-year labor contract. The previous contract expired December 1, 2002.
UTILITY OPERATIONS - FLORIDA POWER
GENERAL
Florida Power was incorporated in Florida in 1899, and is an operating public
utility engaged in the generation, purchase, transmission, distribution and sale
of electricity. At December 31, 2002, Florida Power had a total summer
generating capacity (including jointly-owned capacity) of approximately 8,024
megawatts (MW).
Florida Power provided electric service during 2002 to an average of 1.5 million
customers in west central Florida. Its service area covers approximately 20,000
square miles and includes the densely populated areas around Orlando, as well as
the cities of St. Petersburg and Clearwater. Florida Power is interconnected
with 20 municipal and 9 rural electric cooperative systems. Major wholesale
power sales customers include Seminole Electric Cooperative, Inc., Florida
Municipal Power Agency, Florida Power & Light, and Tampa Electric Company.
Florida Power is subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC) and the Florida Public Service Commission (FPSC).
BILLED ELECTRIC REVENUES
Florida Power's electric revenues billed by customer class, for the last three
years, are shown as a percentage of total electric revenues in the table below:
BILLED ELECTRIC REVENUES
Revenue Class 2002 2001 2000
------------- ---- ---- ----
Residential 55% 54% 53%
Commercial 24% 24% 24%
Industrial 7% 7% 8%
Others 6% 6% 5%
Wholesale (a) 8% 9% 10%
(a) These revenues are managed by Progress Ventures on behalf of Florida
Power.
Important industries in the territory include phosphate rock mining and
processing, electronics design and manufacturing, and citrus and other food
processing. Other important commercial activities are tourism, health care,
construction and agriculture.
10
FUEL AND PURCHASED POWER
General
Florida Power's consumption of various types of fuel depends on several factors,
the most important of which are the demand for electricity by Florida Power's
customers, the availability of various generating units, the availability and
cost of fuel and the requirements of federal and state regulatory agencies.
Florida Power's energy mix for the last three years is presented in the
following table:
ENERGY MIX PERCENTAGES
Fuel Type 2002 2001 2000
--------- ---- ---- ----
Coal (a) 33% 33% 34%
Oil 16% 16% 15%
Nuclear 15% 15% 15%
Gas 15% 14% 14%
Purchased Power 21% 22% 22%
(a) Includes synthetic fuel from unrelated third parties and petroleum
coke.
Florida Power is generally permitted to pass the cost of recoverable fuel and
purchased power to its customers through fuel adjustment clauses. The future
prices for and availability of various fuels discussed in this report cannot be
predicted with complete certainty. However, Florida Power believes that its fuel
supply contracts, as described below, will be adequate to meet its fuel supply
needs.
Florida Power's average fuel costs per million British thermal units (Btu) for
the last three years were as follows:
AVERAGE FUEL COST
(per million Btu)
2002 2001 2000
---- ---- ----
Coal (a) $2.43 $2.16 $1.89
Oil 3.77 3.81 4.15
Nuclear .46 .47 .47
Gas 4.06 4.52 4.32
Weighted Average 2.60 2.59 2.46
(a) Includes synthetic fuel from unrelated third parties and petroleum
coke.
Changes in the unit price for coal, oil and gas are due to market conditions.
Since these costs are primarily recovered through recovery clauses established
by regulators, the fluctuation does not materially affect net income.
Coal
Florida Power anticipates a combined requirement of approximately 5.7 million to
6.1 million tons of coal and synthetic fuel in 2003. Most of the coal is
expected to be supplied from the Appalachian coal fields of the United States.
Approximately two-thirds of the fuel is expected to be delivered by rail and the
remainder by barge. All of this fuel is supplied by Progress Fuels pursuant to
contracts between Florida Power and Progress Fuels.
For 2003, Progress Fuels has medium-term and long-term contracts with various
sources for approximately 100% of the fuel requirements of Florida Power's coal
units. These contracts have price adjustment provisions. All the coal to be
purchased for FPC is considered to be low sulfur coal by industry standards.
Oil and Gas
Oil is purchased under contracts and in the spot market from several suppliers.
The majority of the cost of Florida Power's oil and gas is determined by market
prices as reported in certain industry publications. Management believes that
11
Florida Power has access to an adequate supply of oil for the reasonably
foreseeable future. Florida Power believes that the threat of or a war against
Iraq could negatively impact the price of oil. Florida Power's natural gas
supply is purchased under firm supply and transportation contracts and in the
spot market from numerous suppliers. Florida Power also uses interruptible
transportation contracts on certain occasions when available. Florida Power
believes that existing contracts for oil are sufficient to cover its
requirements if natural gas is unavailable during certain time periods.
Nuclear
Nuclear fuel is processed through four distinct stages. Stages I and II involve
the mining and milling of the natural uranium ore to produce a concentrate and
the conversion of this uranium concentrate into uranium hexafluoride. Stages III
and IV entail the enrichment of the uranium hexafluoride and the fabrication of
the enriched uranium hexafluoride into usable fuel assemblies.
Florida Power has sufficient uranium, conversion, enrichment and fabrication
contracts to meet its near term nuclear fuel requirement needs. Florida Power
expects to contract for all of its future long-term uranium, conversion and
enrichment service needs with contract durations ranging from five to ten years.
Although Florida Power cannot predict the future availability of uranium and
nuclear fuel services, Florida Power does not currently expect to have
difficulty obtaining uranium oxide concentrate or the services necessary for its
conversion, enrichment and fabrication into nuclear fuel.
Purchased Power
Florida Power, along with other Florida utilities, buys and sells power in the
wholesale market on a short- and long-term basis. As of December 31, 2002,
Florida Power had a variety of purchase power agreements for the purchase of
approximately 1,304 MW of firm power. These agreements include (1) long-term
contracts for the purchase of about 473 MW of purchased power with other
investor-owned utilities, including a contract with The Southern Company for
approximately 413 MW, and (2) approximately 831 MW of capacity under contract
with certain qualifying facilities (QFs). The capacity currently available from
QFs represents about 10% of Florida Power's total installed system capacity.
COMPETITION
Electric Industry Restructuring
Florida Power continues to monitor progress toward a more competitive
environment and has actively participated in regulatory reform deliberations in
Florida. Movement toward deregulation in this state has been affected by recent
developments related to deregulation of the electric industry in California and
other states.
On December 11, 2001, the Florida 2020 Study Commission issued its final report
to the Florida Legislature regarding possible changes to the regulation of
electric utilities in Florida. The Florida legislature did not take any action
on the final report during the 2001 or 2002 session.
In response to a legislative directive, the FPSC and the FDEP submitted in
February 2003 a joint report on renewable electric generating technologies for
Florida. The report assessed the feasibility and potential magnitude of
renewable electric capacity for Florida, and summarized the mechanisms other
states have adopted to encourage renewable energy. The report did not contain
any policy recommendations. The Company cannot anticipate when, or if,
restructuring legislation will be enacted, or if the Company would be able to
support it in its final form.
Regional Transmission Organizations
As a result of Order 2000, Florida Power, along with Florida Power & Light
Company and Tampa Electric Company (the Applicants) filed with the FERC in
October 2000 an application for approval of a GridFlorida RTO. The GridFlorida
proposal is pending before both the FERC and the FPSC. The FERC provisionally
approved the structure and governance of GridFlorida. In December 2001, the FPSC
found the Applicants were prudent in proactively forming GridFlorida but ordered
the Applicants to modify the proposal in several material respects, including a
change in structure to a not-for-profit Independent Systems Operator (ISO). The
Commission's most recent order in September 2002 ordered further state
proceedings. The issues to be addressed as modifications include but are not
limited to 1) pricing/rate structure; 2) elimination of the pancaking of
revenues; 3) cost recovery of incremental costs; 4) demarcation dates for new
12
facilities and long-term transmission contracts; and 6) market design. The
Florida Office of Public Counsel appealed the September 2002 order to the
Florida Supreme Court and on October 28, 2002, the FPSC abated its proceedings
pending the outcome of the appeal. It is unknown what the outcome of this appeal
will be at this time. It is unknown when the FERC or the FPSC will take final
action with regard to the status of GridFlorida or what the impact of further
proceedings will have on the Company's earnings, revenues or pricing.
Standard Market Design
On July 31, 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). The proposed rules
set forth in the SMD NOPR would require, among other things, that 1) all
transmission owning utilities transfer control of their transmission facilities
to an independent third party; 2) transmission service to bundled retail
customers be provided under the FERC-regulated transmission tariff, rather than
state-mandated terms and conditions; 3) new terms and conditions for
transmission service be adopted nationwide, including new provisions for pricing
transmission in the event of transmission congestion; 4) new energy markets be
established for the buying and selling of electric energy; and 5) load serving
entities be required to meet minimum criteria for generating reserves. 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. Florida Power filed comments on November 15, 2002 and supplemental comments
on January 10, 2003. On January 15, 2003, the FERC announced the issuance of a
White Paper on SMD NOPR to be released in April 2003. Florida Power plans to
file comments on the White Paper. The FERC has also indicated that it expects to
issue final rules during the summer of 2003.
Merchant Plants
There has been no change in the statutory framework for siting new generation
since the Florida Supreme Court's decision in Tampa Electric Company v. Garcia,
767 So.2d 428 (Fla. 2000) in April 2000. The Court reversed a decision of the
Florida Public Service Commission and held that under Florida's Power Plant
Siting Act, an applicant for any new generation over 75 MW that includes a steam
generating facility must be a load-serving utility or the output of the proposed
plant must be under firm contract to a load-serving utility. Thus, site
certification for merchant generation for large, non-peaking capacity cannot be
independently undertaken. At the present time there are no pending legislative
proposals for change.
Franchise Agreements
Florida Power holds franchises with varying expiration dates in 104 of the
municipalities in which it distributes electric energy. Florida Power also
serves within a number of municipalities and in all its unincorporated areas
without existing franchise agreements. The general effect of these franchises is
to provide for the manner in which Florida Power occupies rights-of-way in
incorporated areas of municipalities for the purpose of constructing, operating
and maintaining an energy transmission and distribution system.
Approximately 36% of Florida Power's total utility revenues for 2002 were from
the incorporated areas of the 104 municipalities that had franchise ordinances
during the year. Since 2000, Florida Power has renewed 27 expiring franchises
and reached agreement on a franchise with a city that did not previously have a
franchise. Franchises with eight municipalities have expired without renewal.
All but 26 of the existing franchises cover a 30-year period from the date
enacted. The exceptions are 22 franchises each with a term of 10 years and
expiring between 2005 and 2012; two franchises each with a term of 15 years and
expiring in 2017; one 30-year franchise that was extended in 2000 for five years
expiring in 2005; and one franchise with a term of 20 years expiring in 2020. Of
the 104 franchises, 39 expire between January 1, 2003 and December 31, 2012 and
65 expire between January 1, 2013 and December 31, 2031.
Ongoing negotiations are taking place with the municipalities to reach agreement
on franchise terms and to enact new franchise ordinances. For further
information with respect to franchise litigation, see Note 22 to the Financial
Statements.
13
Stranded Costs
An important issue encompassed by industry restructuring is the recovery of
"stranded costs." Stranded costs primarily include the generation assets of
utilities whose value in a competitive marketplace would be less than their
current book value, as well as above-market purchased power commitments to QFs.
Thus far, all states that have passed restructuring legislation have provided
for the opportunity to recover a substantial portion of stranded costs.
Assessing the amount of stranded costs for a utility requires various
assumptions about future market conditions, including the future price of
electricity. For Florida Power, the single largest stranded cost exposure is its
commitment to QFs. Florida Power has taken a proactive approach to this industry
issue. Since 1996, Florida Power has been seeking ways to address the impact of
escalating payments from contracts it was obligated to sign under provisions of
Public Utility Regulatory Policies Act of 1978 (PURPA).
REGULATORY MATTERS
General
Florida Power is subject to the jurisdiction of the FPSC with respect to, among
other things, retail rates and issuance of securities. In addition, Florida
Power is subject to regulation by the FERC with respect to transmission and
sales of wholesale power, accounting and certain other matters. The underlying
concept of utility ratemaking is to set rates at a level that allows the utility
to collect revenues equal to its cost of providing service including a
reasonable rate of return on its equity. Increased competition as a result of
industry restructuring may affect the ratemaking process.
Electric Retail Rates
The FPSC authorizes retail "base rates" that are designed to provide a utility
with the opportunity to earn a specific rate of return on its "rate base," or
average investment in utility plant. These rates are intended to cover all
reasonable and prudent expenses of utility operations and to provide investors
with a fair rate of return.
On March 27, 2002, the parties in Florida Power's rate case entered into a
Stipulation and Settlement Agreement (the Agreement) related to retail rate
matters. The Agreement was approved by the FPSC on April 23, 2002. The Agreement
is generally effective from May 1, 2002 through December 31, 2005. The Agreement
eliminates the authorized Return on Equity (ROE) range normally used by the FPSC
for the purpose of addressing earning levels; provided, however, that if Florida
Power's base rate earnings fall below a 10% return on equity, Florida Power may
petition the FPSC to amend its base rates.
The Agreement provides that Florida Power will reduce its retail rates by 9.25%;
resulting in a reduction of retail revenues from the sale of electricity by an
annual amount of $125 million. The Agreement also provides that Florida Power
will operate under a Revenue Sharing Incentive Plan (the Plan) through 2005, and
thereafter until terminated by the FPSC, that establishes annual revenue caps
and sharing thresholds. The Plan provides that retail base rate revenues between
the sharing thresholds and the caps will be divided into two shares - a 1/3
share to be retained by Florida Power's shareholders, and a 2/3 share to be
refunded to Florida Power's retail customers; provided, however, that for the
year 2002 only, the refund to customers will be limited to 67.1% of the 2/3
customer share. The retail base rate revenue sharing threshold amount for 2002
was $1.296 billion and will increase $37 million each year thereafter. The Plan
also provides that all retail base rate revenues above the retail base rate
revenue caps established for each year will be refunded 100% to retail customers
on an annual basis. For 2002, the refund to customers will be limited to 67.1%
of the retail base rate revenues that exceed the 2002 cap. The retail base
revenue cap for 2002 was $1.356 billion and will increase $37 million each year
thereafter. As of December 31, 2002, $4.7 million was accrued and will be
refunded to customers in March 2003. On February 24, 2003, the parties to the
Agreement filed a motion seeking an order from the FPSC to enforce the
Agreement. In this motion, the parties dispute Florida Power's calculation of
retail revenue subject to refund and contend that the refund should be
approximately $23 million. Florida Power cannot predict the outcome of this
matter.
The Agreement also provides that beginning with the in-service date of Florida
Power's Hines Unit 2 and continuing through December 31, 2005, Florida Power
will be allowed to recover through the fuel cost recovery clause a return on
14
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.
Hines Unit 2 is a 516 MW combined-cycle unit under construction and currently
scheduled for completion in late 2003.
Additionally, the Agreement provides that Florida Power will effect a mid-course
correction of its fuel cost recovery clause to reduce the fuel factor by $50
million for the remainder of 2002. The fuel cost recovery clause will operate as
it normally does, including, but not limited to any additional mid-course
adjustments that may become necessary, and the calculation of true-ups to actual
fuel clause expenses.
Florida Power will suspend accruals on its reserves for nuclear decommissioning
and fossil dismantlement through December 31, 2005. Additionally, for each
calendar year during the term of the Agreement, Florida Power will record a
$62.5 million depreciation expense reduction, and may, at its option, record up
to an equal annual amount as an offsetting accelerated depreciation expense. In
addition, Florida Power is authorized, at its discretion, to accelerate the
amortization of certain regulatory assets over the term of the Agreement. There
was no accelerated depreciation or amortization expense recorded for the year
ended December 31, 2002.
Under the terms of the Agreement, Florida Power agreed to continue the
implementation of its four-year Commitment to Excellence Reliability Plan and
expects to achieve a 20% improvement in its annual System Average Interruption
Duration Index by no later than 2004. If this improvement level is not achieved
for calendar years 2004 or 2005, Florida Power will provide a refund of $3
million for each year the level is not achieved to 10% of its total retail
customers served by its worst performing distribution feeder lines.
Per the Agreement, Florida Power was required to refund to customers $35 million
of revenues collected during the interim period of March 13, 2001 through April
30, 2002. This one-time retroactive revenue refund was recorded in the first
quarter of 2002 and was returned to retail customer over an eight-month period
ended December 31, 2002.
Fuel and Other Cost Recovery
Florida Power's operating costs not covered by the utility's base rates include
fuel, purchased power and energy conservation expenses and specific
environmental costs. The state commission allows electric utilities to recover
certain of these costs through various cost recovery clauses, to the extent the
respective commission determines in an annual hearing that such costs are
prudent. In addition, in December 2002, the FPSC approved an Environmental Cost
Recovery Clause which will permit the Company to recover the costs of specified
environmental projects to the extent these expenses are found to be prudent in
an annual hearing and not otherwise included in base rates. Costs will be
recovered through this recovery clause in the same manner as the other existing
clause mechanisms.
The state commission's determination results in the addition of a rider to a
utility's base rates to reflect the approval of these costs and to reflect any
past over- or under-recovery. Due to the regulatory treatment of these costs and
the method allowed for recovery, changes from year to year have no material
impact on operating results.
NUCLEAR MATTERS
Florida Power has one nuclear generating plant, Crystal River Unit No. 3 (CR3),
which is subject to regulation by the NRC. The NRC's jurisdiction encompasses
broad supervisory and regulatory powers over the construction and operation of
nuclear reactors, including matters of health and safety, antitrust
considerations and environmental impact. Florida Power has a license to operate
the nuclear plant through December 3, 2016. Florida Power currently has a 91.8%
ownership interest in CR3. On February 20, 2003, Florida Power notified the NRC
of its intent to submit an application to extend the plant license in the first
quarter of 2009.
In late 2002, CR3 received a license amendment authorizing a small power level
increase. The power level increase of approximately 8 MW was implemented in
February 2003.
On March 18, 2002, the NRC sent a bulletin to companies that hold licenses for
pressurized water reactors (PWRs) requiring information on the structural
integrity of the reactor vessel head and a basis for concluding that the vessel
head will continue to perform its function as a coolant pressure boundary. The
Company filed responses as required. Inspections of the vessel heads at the
Company's PWR plants have been performed during previous outages. In October
2001, at CR3, one nozzle was found to have a crack and was repaired; however, no
degradation of the reactor vessel head was identified. Current plans are to
replace the vessel head at CR3 during its next regularly scheduled refueling
outage in 2003.
15
On August 9, 2002, the NRC issued an additional bulletin dealing with head
leakage due to cracks near the control rod nozzles. The NRC has asked licensees
to commit to high inspection standards to ensure the more susceptible plants
have no cracks. For CR3, the Company has responded to the NRC that previous
inspections are sufficient until the reactor head is replaced in the fall of
2003.
In February 2003, the NRC issued Order EA-03-009, requiring specific inspections
of the reactor pressure vessel head and associated penetration nozzles at PWRs.
The Company has responded to the Order, stating that the Company intends to
comply with the provisions of the Order. No adverse impact is anticipated.
Security
On February 25, 2002, the NRC issued an order requiring interim compensatory
measures with regard to security at nuclear plants. This order formalized many
of the security enhancements made at the Company's nuclear plants since
September 2001. This order includes additional restrictions on access, increased
security presence 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 completed the requirements by the
established deadlines. NRC inspections for compliance are underway.
In addition, in January 2003, the NRC issued a final order with regard to access
control. This order requires the Company to enhance its current access control
program by January 7, 2004. The Company expects that it will be in full
compliance with the order by the established deadline.
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.
Enrichment Facilities Decontamination
Florida Power filed an action against the United States in the U.S. Court of
Claims on November 1, 1996 challenging certain retroactive assessments imposed
by the federal government on domestic nuclear power companies to fund the
decommissioning and decontamination of the government's uranium enrichment
facilities. The government is collecting this assessment on an annual basis,
which is levied upon all domestic utilities that had enrichment services
contracts with the government. Collection of the special assessments began in
1992 and is scheduled to continue for a 15-year period. A number of other
utilities have filed similar actions against the government.
The Claims Court issued a decision granting the government's summary judgment
motion. That decision was appealed to the U.S. Court of Appeals for the Federal
Circuit, which stayed its consideration of the case pending a decision by the
U.S. Supreme Court on a petition for writ of certiorari that was filed by
Commonwealth Edison et al. in their case against the government. This Supreme
Court refused to accept that case for review, effectively resolving the case in
favor of the government. Based on a joint motion, Florida Power's appeal has
been dismissed with prejudice.
ENVIRONMENTAL MATTERS
There are two former MGP sites and 11 other active waste sites or categories of
sites associated with Florida Power that have required or are anticipated to
require investigation and/or remediation costs. As of December 31, 2002 and
2001, Florida Power has accrued approximately $10.9 million and $8.5 million,
respectively, for probable and reasonably estimable costs at these sites.
Florida Power does not believe that it can provide an estimate of the reasonably
possible total remediation costs beyond what it has currently accrued. In 2002,
Florida Power filed a petition for recovery of approximately $4.0 million in
environmental costs through the Environmental Cost Recovery Clause with the
FPSC. Florida Power was successful with this filing and will recover costs
through rates for investigation and remediation associated with transmission and
distribution substations and transformers. As more activity occurs at these
sites, Florida Power will assess the need to adjust the accruals. These accruals
have been recorded on an undiscounted basis. Florida Power measures its
liability for these sites based on available evidence including its experience
in investigating and remediating environmentally impaired sites. This process
often includes assessing and developing cost-sharing arrangements with other
potentially responsible parties.
16
DIVERSIFIED OPERATIONS
GENERAL
Florida Progress' diversified operations are owned directly or indirectly
through Progress Capital, a Florida corporation and wholly owned subsidiary of
Florida Progress. Progress Capital holds the capital stock of, and provides the
financing for, Florida Progress' non-utility subsidiaries. Its primary
subsidiary is Progress Fuels, formerly Electric Fuels. On January 2, 2002,
Electric Fuels changed its name to Progress Fuels.
Formed in 1976, Progress Fuels is an energy and transportation company. When the
Inland Marine Transportation unit was sold in November 2001, Progress Fuels was
reorganized into two business units, Energy and Related Services and Rail
Services. Progress Fuels' energy and related services business unit supplies
coal to Florida Power's Crystal River Energy Complex and other utility and
industrial customers. This business unit also produces and sells natural gas and
synthetic fuel along with operating terminal services and offshore marine
transportation. Progress Fuels also manages all of Progress Energy's synthetic
fuel facilities (See Note 16 to the Financial Statements).
The rail services business unit, led by Progress Rail Services Corporation
(Progress Rail), is one of the largest integrated and diversified suppliers of
railroad and transit system products and services in North America and is
headquartered in Albertville, Alabama. Rail Services' principal business
functions include the Mechanical Group, Rail and Trackwork Group, and Recycling
Group.
The Company intends to sell the assets of Railcar Ltd., a leasing subsidiary,
during 2003 and has therefore reported these assets as assets held for sale. On
March 12, 2003, the Company signed a letter of intent to sell Railcar Ltd. to
The Andersons, Inc. The proceeds of the sale will be used by the Company to pay
off Railcar Ltd. lease obligations. The transaction is still subject to various
closing conditions including financing, due diligence and the completion of a
definitive purchase agreement. With operations in 26 states, Canada and Mexico,
Progress Rail offers a full range of railcar parts, maintenance-of-way
equipment, rail and other track material, railcar repair facilities, railcar
scrapping and metal recycling as well as railcar sales and leasing.
The Mechanical Group is primarily focused on railroad rolling stock that
includes freight cars, transit cars and locomotives, the repair and maintenance
of these units, and the manufacturing or reconditioning of major components for
these units. The Rail and Trackwork Group focuses on rail and other track
components, the infrastructure which supports the operation of rolling stock, as
well as the equipment used in maintaining the railroad infrastructure and
right-of-way. The Recycling Group supports the Mechanical and Rail and Trackwork
Groups through its reclamation of reconditionable material. In addition, the
Recycling Group is a major supplier of recyclable scrap metal to North American
steel mills and foundries through its processing locations as well as its scrap
brokerage operations.
Rail Services' key railroad industry customers are Class 1 railroads, regional
and shortline railroads, major North American transit systems, major railcar and
locomotive builders, and major railcar lessors. The U.S. operations are located
in 26 states and include further geographic coverage through mobile crews on a
selected basis. This coverage allows for Rail Services' customer base to be
dispersed throughout the U.S., Canada and Mexico.
After the acquisition of Florida Progress, Progress Energy hired a financial
adviser to assist Florida Progress in evaluating its strategic alternatives with
respect to Progress Fuels' Inland Marine Transportation and Rail Services
segments. On July 23, 2001, Progress Energy announced the disposition of the
Inland Marine Transportation segment of the Company, which was operated by MEMCO
Barge Line, Inc. Inland Marine provided transportation of coal, agricultural and
other dry-bulk commodities as well as fleet management services. Progress Energy
entered into a contract to sell MEMCO Barge Line, Inc., to AEP Resources, Inc.,
a wholly owned subsidiary of American Electric Power. On November 1, 2001, the
Company completed the sale of the Inland Marine Transportation segment (See Note
4 to the Financial Statements). During 2001, Progress Energy decided to retain
the Rail Services segment in the near term. An SEC order approving the merger of
Florida Progress with Progress Energy requires Progress Energy to divest of Rail
Services and certain immaterial, non-regulated investments of Florida Progress
by November 30, 2003. Progress Energy is pursuing alternatives, but does not
expect to find the right divestiture opportunity by that date. Therefore,
Progress Energy plans to seek an extension from the SEC.
17
In October 1998, Florida Progress formed a new subsidiary, Progress Telecom.
Progress Telecom has data fiber network transport capabilities that stretch from
New York to Miami, Florida, with gateways to Latin America and conducts
primarily a carrier's carrier business. Progress Telecom markets wholesale
fiber-optic-based capacity service in the Eastern United States to long-distance
carriers, internet service providers and other telecommunications companies.
Progress Telecom also markets wireless structure attachments to wireless
communication companies and governmental entities. As a result of the
acquisition by Progress Energy, Progress Telecom now manages the fiber-optic
network of Caronet, Inc. (Caronet), a subsidiary of Progress Energy, stretching
from Atlanta to Washington, D. C. Progress Telecom combined its fiber network
with Caronet's fiber network in 2001. As of December 31, 2002, Progress Telecom
and Caronet owned and managed approximately 8,400 route miles and more than
130,000 fiber miles of fiber-optic cable. For additional information regarding
asset and investment impairments, see Note 7 to the Financial Statements.
Progress Telecom competes with other providers of fiber-optic telecommunications
services, including local exchange carriers and competitive access providers, in
the Eastern United States.
Lease revenue for dedicated transport and data services is generally billed in
advance on a fixed rate basis and recognized over the period the services are
provided. Revenues relating to design and construction of wireless
infrastructure are recognized upon completion of services (i.e., as the revenue
is earned) for each completed phase of design and construction.
COMPETITION
Florida Progress' non-utility subsidiaries compete in their respective
marketplaces in terms of price, quality of service, location and other factors.
Progress Fuels competes in several distinct markets. Its coal and synthetic fuel
operations compete in the eastern United States utility and industrial coal
markets, and its rail operations compete in the railcar repair, parts and
associated services markets primarily in the eastern United States, but also in
the midwest and west. Factors contributing to Progress Fuels' success in these
markets include a competitive cost structure and strategic locations. There are
numerous competitors in each of these markets, although no one competitor is
dominant in any industry. The business of Progress Fuels and its subsidiaries,
taken as a whole, is not subject to significant seasonal fluctuation.
18
ITEM 2. PROPERTIES
GENERAL
Florida Progress believes that its physical properties and those of its
subsidiaries are adequate to carry their businesses as currently conducted.
Florida Progress and its subsidiaries maintain property insurance against loss
or damage by fire or other perils to the extent that such property is usually
insured.
UTILITY OPERATIONS
As of December 31, 2002, Florida Power's 14 generating plants represent a
flexible mix of fossil, nuclear, combustion turbine and combined cycle resources
with a total summer generating capacity (including jointly-owned capacity) of
8,024 MW. At December 31, 2002, Florida Power has the following generating
facilities:
- -----------------------------------------------------------------------------------------------------------------------
Facility Location No. of In-Service Fuel Florida Summer Net
Units Date Ownership Capability (a)
(in %) (in MW)
- -----------------------------------------------------------------------------------------------------------------------
STEAM TURBINES
Anclote Holiday, FL 2 1974-1978 Gas/Oil 100 993
Bartow St. Petersburg, FL 3 1958-1963 Gas/Oil 100 444
Crystal River Crystal River, FL 4 1966-1984 Coal 100 2,302
Suwannee River Live Oak, FL 3 1953-1956 Gas/Oil 100 143
--------- --------------------------------
Total 12 3,882
COMBINED CYCLE
Hines Bartow, FL 1 1999 Gas/Oil 100 482
Tiger Bay Fort Meade, FL 1 1997 Gas 100 207
--------- --------------------------------
Total 2 689
COMBUSTION TURBINES
Avon Park Avon Park, FL 2 1968 Gas/Oil 100 52
Bartow St. Petersburg, FL 4 1958-1972 Gas/Oil 100 187
Bayboro St. Petersburg, FL 4 1973 Oil 100 184
DeBary DeBary, FL 10 1975-1992 Gas/Oil 100 667
Higgins Oldsmar, FL 4 1969-1970 Gas 100 122
Intercession City Intercession City, FL 14 1974-2000 Gas/Oil 100 (c) 1,041 (b)
Rio Pinar Rio Pinar, FL 1 1970 Oil 100 13
Suwannee River Live Oak, FL 3 1980 Gas/Oil 100 164
Turner Enterprise, FL 4 1970-1974 Oil 100 154
University of Florida
Cogeneration Gainesville, FL 1 1994 Gas 100 35
--------- --------------------------------
Total 47 2,619
NUCLEAR
Crystal River Crystal River, FL 1 1977 Uranium 91.78 834 (b)
--------- --------------------------------
Total 1 834
TOTAL 62 8,024
- -----------------------------------------------------------------------------------------------------------------------
(a) Amounts represent Florida Power's net summer peak rating, gross of
co-ownership interest in plant capacity.
(b) Facilities are jointly owned. The capacities shown include joint owners'
share.
(c) Florida Power and Georgia Power Company ("Georgia Power") are co-owners of
a 143 MW advanced combustion turbine located at Florida Power's
Intercession City site (Unit P11). Georgia Power has the exclusive right to
the output of this unit during the months of June through September.
Florida Power has that right for the remainder of the year.
19
As of December 31, 2002, including both the total generating capacity of 8,024
MW and the total firm contracts for purchased power of 1,304 MW, Florida Power
had total capacity resources of approximately 9,328 MW. Hines Unit 2 is a 516 MW
combined-cycle unit currently under construction and scheduled for completion in
late 2003.
Several entities have acquired undivided ownership interests in CR3 in the
aggregate amount of 8.22%. The joint ownership participants are: City of Alachua
- - 0.08%, City of Bushnell - 0.04%, City of Gainesville - 1.41%, Kissimmee
Utility Authority - 0.68%, City of Leesburg - 0.82%, Utilities Commission of the
City of New Smyrna Beach - 0.56%, City of Ocala - 1.33%, Orlando Utilities
Commission - 1.60% and Seminole Electric Cooperative, Inc. - 1.70%. Florida
Power and Georgia Power are co-owners of a 143 MW advance combustion turbine
located at Florida Power's Intercession City site (P11). Georgia Power has the
exclusive right to the output of this unit during the months of June through
September. Florida Power has that right for the remainder of the year.
Otherwise, Florida Power has good and marketable title to its principal plants
and important units, subject to the lien of its mortgage and deed of trust, with
minor exceptions, restrictions and reservations in conveyances, as well as minor
defects of the nature ordinarily found in properties of similar character and
magnitude. Florida Power also owns certain easements over private property on
which transmission and distribution lines are located.
As of December 31, 2002, Florida Power distributed electricity through 370
substations with an installed transformer capacity of approximately 45,000,000
kVA. Of this capacity, about 31,000,000 kVA is located in transmission
substations and 14,000,000 kVA in distribution substations. Florida Power has
the second largest transmission network in Florida. Florida Power has
approximately 5,000 circuit miles of transmission lines, of which 2,600 circuit
miles are operated at 500, 230, or 115 kV and the balance at 69 kV. Florida
Power has approximately 28,000 circuit miles of distribution lines, which
operate at various voltages ranging from 2.4 to 25 kV.
DIVERSIFIED OPERATIONS
Progress Fuels owns and/or operates approximately 5,300 railcars and 100
locomotives that are used for the transportation and shipping of coal, steel,
and other bulk products. Through a joint venture, Progress Fuels has four
oceangoing tug/barge units.
Progress Fuels controls, either directly or through subsidiaries, coal reserves
located in eastern Kentucky and southeastern Virginia of approximately 12
million tons and controls, through mineral leases, additional estimated coal
reserves of approximately 18 million tons. The reserves controlled include
substantial quantities of high quality, low sulfur coal that is appropriate for
use at Florida Power's existing generating units. Progress Fuels' total
production of coal during 2002 was approximately 2.6 million tons.
In connection with its coal operations, Progress Fuel's business units own and
operate an underground mining complex located in southeastern Kentucky and
southwestern Virginia. Other subsidiaries own and operate surface and
underground mines, coal processing and loadout facilities and a river terminal
facility in eastern Kentucky, a railcar-to-barge loading facility in West
Virginia, and two bulk commodity terminals on the Kanawha River near Charleston,
West Virginia. Progress Fuels and its subsidiaries employ both company and
contract miners in their mining activities.
Progress Fuels has oil and gas leases on about 20,000 acres in Garfield and Mesa
counties in Colorado, containing proven natural gas net reserves of 98 billion
cubic feet. This subsidiary currently operates 96 gas wells on the properties.
Progress Fuels also has oil and gas leases on about 35,000 acres concentrated
within a 25-mile radius along the Texas and Louisiana border, containing proven
natural gas reserves of 125 billion cubic feet. This subsidiary currently
operates 234 gas wells on the properties. Progress Fuels' natural gas production
in 2002 was 11.8 billion cubic feet. The Company is exploring opportunities to
divest of its Mesa properties in 2003.
Progress Fuels owns and operates a manufacturing facility at the Florida Power
Energy Complex in Crystal River, Florida. The manufacturing process utilizes the
fly ash generated by the burning of coal as the major raw material in the
production of lightweight aggregate used in construction building blocks.
Progress Rail, a Progress Fuels subsidiary, is one of the largest integrated
processors of railroad materials in the United States, and is a leading supplier
of new and reconditioned freight car parts, rail, rail welding and track work
components, railcar repair facilities, railcar and locomotive leasing,
maintenance-of-way equipment and scrap metal recycling. It has facilities and
offices in 26 states, Mexico and Canada.
20
As a result of the acquisition by Progress Energy, Progress Telecom now manages
the fiber-optic network of Caronet, Inc. (Caronet), a subsidiary of Progress
Energy, stretching from Atlanta to Washington, D.C. Progress Telecom combined
its fiber network with Caronet's fiber network in 2001.
Progress Telecom provides wholesale telecommunications services throughout the
Eastern United States. Progress Telecom incorporates more than 130,000 fiber
miles in its network, including over 160 Points-of-Presence, or physical
locations where a presence for network access exists.
ITEM 3. LEGAL PROCEEDINGS
1. Wanda L. Adams, et al. v. Florida Power Corporation and Florida Progress
Corporation, U.S. District Court, Middle District of Florida, Ocala
Division, Case No. 95-123-C.V.-OC-10.
Florida Power and Florida Progress have successfully resolved and settled
the multi-party lawsuit served on the companies in 1995. In 1995, Florida
Power and Florida Progress were named defendants in an age discrimination
lawsuit. The number of plaintiffs was 116, but four of those plaintiffs
have had their federal claims dismissed and 74 others have had their state
age claims dismissed. While no dollar amount was requested, each plaintiff
sought back pay, reinstatement or front pay through their projected dates
of normal retirement, costs and attorneys' fees.
In October 1996, the Federal Court approved an agreement between the
parties to provisionally certify this case as a class action suit under the
Age Discrimination in Employment Act (ADEA).
Florida Power filed a motion to decertify the class and in August 1999, the
Court granted Florida Power's motion. In October 1999, the judge certified
the question of whether the case should be tried as a class action to the
Eleventh Circuit Court of Appeals for immediate appellate review. In
December 1999, the Court of Appeals agreed to review the judge's order
decertifying the class.
In anticipation of a potential ruling decertifying the case as a class
action, plaintiffs filed a virtually identical lawsuit, which identified
all opt-in plaintiffs as named plaintiffs. On July 5, 2001, the Eleventh
Circuit Court of Appeals ruled that as a matter of law, disparate claims
cannot be brought under the Age Discrimination in Employment Act. This
ruling has the effect of decertifying the case as a class action. On
October 3, 2001, the plaintiffs filed a petition in the United States
Supreme Court, requesting a hearing of the case, on the issue of whether
disparate claims can be brought under the ADEA. On December 3, 2001, the
United States Supreme Court agreed to hear the case. Oral arguments on the
issue were held on March 20, 2002. On April 1, 2002, the U.S. Supreme Court
issued a per curiam affirmed order in the case stating they had
improvidently granted the oral argument and they would uphold the ruling of
the Eleventh Circuit Court of Appeals. Therefore, the case will remain
decertified. As a result of the decertification, the trial court has
grouped the plaintiffs cases to be tried. The trial for the first set of
twelve plaintiffs began on July 22, 2002. The jury entered a verdict in
favor of Florida Power in that trial on August 9, 2002. The next group of
plaintiffs' to be tried was named, but no trial date was set. The parties
attended a second mediation on October 31 and November 1, 2002. The Company
was able to reach a settlement of this matter with all but one plaintiff,
the details of which are subject to a confidentiality agreement. The amount
of the settlements are not expected to have a material adverse impact on
the Company.
The Company believes this proceeding no longer meets the disclosure
standards for this item, and thus will no longer report on it. (For
additional information, see Note 22F to the Financial Statements -
Commitments and Contingencies - Legal Matters - Age Discrimination Suit.)
2. Calgon Carbon Corporation v. Potomac Capital Investment Corporation,
Potomac Electric Power Company, Progress Capital Holdings, Inc., and
Florida Progress Corporation, United States District Court for the Western
District of Pennsylvania, Civil Action No. 98-0072.
Calgon Carbon Corporation (Calgon) filed a complaint on January 12, 1998,
asserting securities fraud, breach of contract and other claims in
connection with the sale to it by two of the defendants in December 1996 of
their interests in Advanced Separation Technologies, Incorporated (AST), a
corporation engaged in the business of designing and assembling proprietary
21
separation equipment. Prior to closing, Progress Capital, a wholly owned
subsidiary of Florida Progress, owned 80% of the outstanding stock of AST
and Potomac Capital Investment Corporation (an entity unaffiliated with
Progress Capital or Florida Progress) owned 20%. Calgon paid Progress
Capital an aggregate of approximately $57.5 million (producing net proceeds
of approximately $56 million after certain fees and expenses) in respect of
Progress Capital's share of AST's stock. Calgon claims that AST's assets
and revenues were overstated and liabilities and expenses were understated
for 1996. Calgon also alleges undisclosed facts relating to accounting
methodology, poor products, manufacturing and quality control problems and
undisclosed warranty claims. Calgon seeks damages, punitive damages and the
right to rescind the purchase. The defendants have filed a motion for
summary judgement, which is pending. As a result of documents recently
produced by the plaintiff which Florida Progress believes undercut several
of Calgon's claims, discovery has been reopened. Defendants will be allowed
to supplement their motion. (See Note 22 to the Financial Statements -
Commitments and Contingencies - Legal Matters - Advanced Separation
Technologies.)
3. Wallace Bentley, et al. v. City of Tallahassee, Interstate Fibernet, Inc.
and Florida Power Corporation, Circuit Court for Leon County, Florida. Case
No. 98-7107.
In December 1998, Florida Power was served with this class action lawsuit
seeking damages, declaratory and injunctive relief for the alleged improper
use of electric transmission easements. The plaintiffs contend that the
licensing of fiber-optic telecommunications lines to third parties or
telecommunications companies for other than Florida Power's internal use
along the electric transmission line right-of-way exceeds the authority
granted in the easements. In June 1999, plaintiffs amended their complaint
to add Progress Telecom as a defendant and adding counts for unjust
enrichment and constructive trust. In January 2000, the trial court
conditionally certified the class statewide. In mediation held in March
2000, the parties reached a tentative settlement of this claim. In January
2001, the trial court preliminarily approved the amended settlement
agreement, certified the settlement class and approved the class notice. On
November 16, 2001, the trial court issued a final order approving the
settlement. Several objectors to the settlement appealed the order to the
1st District Court of Appeal. On February 12, 2003, the appellate court
issued an opinion upholding the trial court's subject matter jurisdiction
over the case, but reversing the trial court's order approving the
mandatory settlement class for purposes of declaratory and injunctive
relief. The appellate court remanded the case to the trial court for
further proceedings. The Company filed a motion requesting discretionary
review before the Florida Supreme Court, which is pending before the 1st
District Court of Appeal. The objectors and the class plaintiffs also have
filed similar requests for discretionary review as well as requests for
rehearing before the 1st District Court of Appeal, all of which are
pending. The Company cannot predict the outcome of any future proceedings
in this case.
(See Note 22 to the Financial Statements - Commitments and Contingencies -
Legal Matters - Easement Litigation.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by ITEM 4 is omitted pursuant to Instruction I (2)(c)
to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
22
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
FLORIDA PROGRESS
All of Florida Progress' common stock is owned by Progress Energy, and as a
result there is no established public trading market for the stock.
Florida Progress receives dividends from Florida Power. Florida Power's Amended
Articles of Incorporation and its Indenture dated as of January 1, 1944, under
which it issues first mortgage bonds, contain provisions restricting dividends
in certain circumstances. At December 31, 2002, Florida Power's ability to pay
dividends was not limited by these restrictions.
Florida Progress and Progress Capital have entered into a Second Amended and
Restated Guaranty and Support Agreement dated as of August 7, 1996, pursuant to
which Florida Progress has unconditionally guaranteed the payment of Progress
Capital's debt (as defined in the agreement).
Florida Progress did not issue any equity securities during 2002 that were not
registered under the Securities Act.
FLORIDA POWER
All of Florida Power's common stock is owned by Florida Progress, and as a
result there is no established public trading market for the stock. For the past
three years, Florida Power has paid quarterly dividends to Florida Progress
totaling the amounts shown in the Statements of Common Equity in the Financial
Statements. Florida Power's amended articles of incorporation, and its Indenture
dated as of January 1, 1944, as supplemented, under which it issues first
mortgage bonds, contain provisions restricting dividends in certain
circumstances. At December 31, 2002, Florida Power's ability to pay dividends
was not limited by these restrictions.
Florida Power did not issue any equity securities during 2002 that were not
registered under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by ITEM 6 is omitted pursuant to Instruction I(2)(a)
to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements that involve estimates, projections, goals, forecasts, assumptions,
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Please review
"Risk Factors" and "SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion
of the factors that may impact any such forward-looking statements made herein.
OVERVIEW
Florida Progress' income from continuing operations for the years ended December
31, 2002 and 2001 were $230.1 million and $265.4 million respectively. The year
over year comparisons were most significantly impacted by:
o $144.0 million of after-tax impairments and related charges in the
telecommunications operations in 2002;
o $44.7 million of after-tax estimated impairment on assets held for sale
related to Railcar Ltd. in 2002;
o $108.1 million of after-tax long-lived asset impairments related to the
Rail Services operations in 2001;
o improved operations of the Rail Services segment, exclusive of the asset
impairment, and
o improved earnings at Florida Power.
These and other key operating results are discussed by segment, below.
FLORIDA POWER CORPORATION
Florida Power's operating results are primarily influenced by customer demand
for electricity, its ability to control costs and its regulatory return on
equity. Annual demand for electricity is based on the number of customers and
their annual usage, with usage largely driven by weather. Since Florida Power
serves a predominately retail customer base, operating results are primarily
influenced by the level of retail sales and the costs associated with those
sales.
The FPSC oversees the retail sales of the state's investor-owned electric
utilities and authorizes retail base rates. Base rates and the resulting base
revenues are intended to cover all reasonable and prudent expenses of utility
operations and provide investors with a fair rate of return.
Costs not covered by base rates include fuel, purchased power energy
conservation expenses and certain environmental costs. The FPSC allows electric
utilities to recover these costs, referred to as "pass-through" costs, through
various cost recovery clauses to the extent those costs are prudent. Due to the
regulatory treatment of these expenses and the method allows for recovery,
changes from year to year have no material impact on operating results.
Florida Power contributed earnings of $322.6 million and $309.6 million for the
years ended December 31, 2002 and 2001, respectively. Florida Power's earnings
in 2002 were affected by the outcome of the Florida Power rate case settlement,
which included a one-time retroactive revenue refund of $35.0 million ($21.0
million after tax), a decrease in retail rates of 9.25% (effective May 1, 2002),
which resulted in an additional $79.5 million decline in revenues, and an
estimated revenue sharing refund of $4.7 million. These revenue declines were
partially offset by $78.2 million of lower depreciation and amortization
pursuant to the rate case and increased service revenue rates. See Note 12 to
the Florida Progress consolidated financial statements for further discussion of
the rate case settlement.
A comparison of the results of operations of Florida Power for 2002 and 2001
follows.
24
Revenues
Florida Power's electric revenues for the years ended December 31, 2002 and 2001
and the percentage change by year and by customer class, as well as the impact
of the rate case settlement on revenue, are as follows:
---------------------------------------------------------------------
(in millions)
---------------------------------------------------------------------
Customer Class 2002 % Change 2001
---------------------------------------------------------------------
Residential $ 1,645 0.1% $ 1,643
Commercial 731 (3.1) 754
Industrial 211 (5.4) 223
Governmental 173 (1.7) 176
Revenue Sharing Refund (5) - -
Retroactive Retail Rate Refund (35) - -
--------- ---------
Total Retail Revenues 2,720 (2.7) 2,796
Wholesale 230 (20.1) 288
Unbilled (3) - (22)
Miscellaneous 115 (23.8) 151
--------- ---------
Total Electric Revenues $ 3,062 (4.7)% $ 3,213
---------------------------------------------------------------------
Florida Power's electric energy sales for the years ended December 31, 2002 and
2001 and the percentage change by year and by customer class are as follows:
-------------------------------------------------------------------------
(in thousands of mWh)
-------------------------------------------------------------------------
Customer Class 2002 % Change 2001
-------------------------------------------------------------------------
Residential 18,754 6.5% 17,604
Commercial 11,420 3.2 11,061
Industrial 3,835 (1.0) 3,872
Governmental 2,850 4.5 2,726
--------- ---------
Total Retail Energy Sales 36,859 4.5 35,263
Wholesale 4,180 (11.4) 4,719
Unbilled 5 - (511)
--------- ---------
Total mWh Sales 41,044 4.0% 39,471
-------------------------------------------------------------------------
Florida Power electric revenues decreased $151.1 million from 2001 to 2002. The
revenue declines were driven by the $119.2 million impact of the rate case,
mentioned previously. Additionally, wholesale revenues declined $58.1 million,
driven primarily by a contract that was not renewed. Year over year comparisons
were also unfavorably impacted by the recognition of $63.0 million of revenue
deferred from 2000 to 2001. Partially offsetting the unfavorable revenue impacts
was growth in the residential (approximately 29,000 additional customers) and
commercial (approximately 4,000 additional customers) customer classes.
Additional offsets included weather conditions, primarily a warmer than normal
summer in 2002, and an increase in other service revenue, resulting primarily
from increased rates allowed under the rate case settlement, along with higher
transmission wheeling revenues.
Residential and commercial sales increased in 2001 and reflect continued growth
in the number of customers served by Florida Power Electric, partially offset by
milder weather and a downturn in the economy. Florida Power Electric added over
35,000 new customers in 2001.
Expenses
Fuel used in generation and purchased power was $1.4 billion for the year ended
December 31, 2002, a decrease of $58.8 million from 2001. The decrease is
primarily due to a lower recovery of fuel expense that resulted from a
mid-course correction of Florida Power's fuel cost recovery clause, as part of
the rate settlement, and lower purchased power costs, partially offset by an
increase in coal prices and volume from high system requirements. Fuel and
purchased power expenses are recovered primarily through cost recovery clauses
and, as such, have no material impact on operating results.
25
Operations and maintenance expense increased $85.1 million in 2002 when compared
to $487.1 million in 2001, due primarily to a reduced pension credit of $30.8
million, increased costs related to the Commitment to Excellence program of
$11.3 million, and an increase in other salary and benefit costs of $21.5
million related partially to increased medical costs. The Commitment to
Excellence program was initiated in 2002 to improve service and reliability.
Depreciation and amortization expense decreased $158.1 million in 2002 when
compared to $453.0 million in 2001. In addition to the depreciation and
amortization reduction of approximately $79.0 million related to the rate case,
depreciation declined an additional $97.0 million related to accelerated
amortization on the Tiger Bay regulatory asset, which was created as a result of
the early termination of certain long-term cogeneration contracts. See Note 12A
to the financial statements for further detail on the rate case. Florida Power
amortizes the regulatory asset according to a plan approved by the FPSC in 1997
and plans to fully amortize the asset by the end of 2003. In 2001, $97.0 million
of accelerated amortization was recorded on the Tiger Bay regulatory asset, of
which $63.0 million was associated with deferred revenue from 2000 and had no
impact on 2001 earnings.
According to an SEC order under PUHCA, Progress Energy's tax benefit not related
to acquisition interest expense is to be allocated to profitable subsidiaries.
Therefore, the tax benefit that was previously held in Progress Energy's holding
company was allocated to its profitable subsidiaries effective with 2002. This
resulted in the allocation of a $19.9 million tax benefit to Florida Power in
2002. Other fluctuations in income taxes are primarily due to changes in pretax
income.
PROGRESS FUELS CORPORATION
Progress Fuels makes up the majority of Florida Progress' diversified
operations. The results of operations for Progress Fuels' Energy and Related
Services and Rail Services units are discussed below.
Energy and Related Services - Income from continuing operations for Energy and
Related Services were $117.5 million and $128.5 million for 2002 and 2001,
respectively.
The Energy and Related Services unit sold 6.5 million and 8.1 million tons of
synthetic fuel in 2002 and 2001. The sales resulted in tax credits of $170.3
million and $213.4 million for 2002 and 2001, respectively. The synthetic fuel
is produced at a loss; however, the production and sale of the fuels qualifies
for tax credits under Section 29 of the Code, which more than offsets the loss.
Production in 2002 was curtailed to ensure effective utilization of the credits.
The synthetic fuels operations generated losses before income taxes of $111.1
million and $165.8 million in 2002 and 2001, respectively. Other fluctuations in
income taxes are primarily due to changes in pretax income.
The Energy and Related Services unit also includes operations related to natural
gas exploration and production. In 2001, these operations included the
operations of Mesa Hydrocarbons, Inc. (Mesa), which owns natural gas reserves
and operates wells in Colorado and sells natural gas. In 2002, it also included
similar operations of Westchester Gas Company, which was purchased during 2002.
These gas operations generated income from continuing operations of $9.6 million
and $5.3 million in 2002 and 2001, respectively. Westchester Gas Company
produced 5.8 million cubic feet of gas in 2002, which represented 49% of the
combined production for the year. This increased production drove the earnings
increase from 2001 to 2002. The Company is exploring opportunities to divest of
its Mesa properties in 2003.
Rail Services - Rail Services' operations represent the activities of Progress
Rail and include railcar and locomotive repair, trackwork, rail parts
reconditioning and sales, scrap metal recycling, railcar leasing and other rail
related services. Rail Services' results for the year ended December 31, 2001,
include Rail Services' cumulative revenues and net loss from the date of
acquisition, November 30, 2000, because Rail Services had been held for sale
from the date of acquisition through the second quarter of 2001.
Rail Services contributed net losses from continuing operations of $47.4 million
and $144.4 million for the years ended December 31, 2002 and 2001, respectively.
The net loss in 2002 includes a $44.7 million after-tax estimated impairment on
assets held for sale related to Railcar Ltd., a leasing subsidiary of Progress
Rail. The Company intends to sell the assets of Railcar Ltd. in 2003 and has
reported these assets as assets held for sale. See Note 4A to the Florida
Progress consolidated financial statements for discussion of this planned
divestiture. On March 12, 2003, Progress Energy announced that Railcar Ltd.
signed a letter of intent to sell predominately all of its railroad leasing
assets to The Andersons, Inc. The proceeds of the sale will be used to pay off
26
Railcar Ltd. lease obligations. The transaction is still subject to various
closing conditions including financing, due diligence and the completion of a
definitive purchase agreement. The net loss in 2001 includes a $108.1 million
after-tax long-lived asset impairment, which is discussed in Note 7 of the
Florida Progress consolidated financial statements and an after-tax loss on the
sale of scrap operations of $18.7 million. Rail Services' results for both years
were affected by a downturn in the overall economy, decreases in rail service
procurement by major railroads and a downturn in the domestic scrap market. Rail
Services' 2002 results were favorably impacted by aggressive cost cutting, new
business opportunities and restructuring initiatives.
An SEC order approving the merger of Florida Progress with Progress Energy
requires Progress Energy to divest of Rail Services by November 30, 2003.
Progress Energy is actively pursuing alternatives, but does not expect to find
the right divestiture opportunity by that date. Therefore, Progress Energy plans
to seek an extension from the SEC.
OTHER
The Other segment includes telecommunications, holding company and financing
expenses and had net losses from continuing operations of $162.6 million and
$28.3 million in 2002 and 2001, respectively. The increase in net loss is due
primarily to the recognition of asset impairments and related charges in the
telecommunications business unit. This is partially offset by lower interest
charges resulting from lower interest rates and the capitalization of interest
related to the building of nonregulated generating plants.
Progress Telecom had net losses of $156.2 million and $10.9 million for 2002 and
2001, respectively. The decrease in earnings in 2002, when compared to 2001, is
primarily due to asset impairments and after tax charges of $144.0 million. See
Note 7 to the Florida Progress consolidated financial statements for further
discussion of these charges.
Application of Critical Accounting Policies and Estimates
Florida Progress prepared its consolidated financial statements in accordance
with accounting principles generally accepted in the United States. In doing so,
certain estimates were made that were critical in nature to the results of
operations. The following discusses those significant estimates that may have a
material impact on its financial results and are subject to the greatest amount
of subjectivity. Senior management has discussed the development and selection
of these critical accounting policies with the Audit Committee of Progress
Energy's Board of Directors.
Utility Regulation
Florida Power is subject to regulation that sets the prices (rates) it is
permitted to charge customers based on the costs that regulatory agencies
determine Florida Power is permitted to recover. At times, regulators permit the
future recovery through rates of costs that would be currently charged to
expense by a nonregulated company. This ratemaking process results in deferral
of expense recognition and the recording of regulatory assets based on
anticipated future cash inflows. As a result of the changing regulatory
framework, a significant amount of regulatory assets has been recorded. Florida
Power continually reviews these assets to assess their ultimate recoverability
within the approved regulatory guidelines. Impairment risk associated with these
assets relates to potentially adverse legislative, judicial or regulatory
actions in the future. Additionally, the state regulatory agency often provides
flexibility in the manner and timing of the depreciation of property, nuclear
decommissioning costs and amortization of the regulatory assets. Note 12 to the
Florida Progress consolidated financial statements provides additional
information related to the impact of utility regulation on Florida Power.
Asset Impairments
Florida Progress evaluates the carrying value of long-lived assets for
impairment whenever indicators exist. Examples of these indicators include
current period losses combined with a history of losses, or a projection of
continuing losses, or a significant decrease in the market price of a long-lived
asset group. If an indicator exists, the asset group held and used is tested for
recoverability by comparing the carrying value to the sum of undiscounted
expected future cash flows directly attributable to the asset group. If the
asset group is not recoverable through undiscounted cash flows or if the asset
group is to be disposed of, an impairment loss is recognized for the difference
27
between the carrying value and the fair value of the asset group. A high degree
of judgment is required in developing estimates related to these evaluations and
various factors are considered, including projected revenues and cost and market
conditions.
During 2002, Florida Progress recorded pre-tax long-lived asset impairments of
$214.6 million related to its telecommunications business. See Note 7 to the
Florida Progress consolidated financial statements for further information on
this impairment and other charges. The fair value of these assets was determined
using an external valuation study heavily weighted on a discounted cash flow
methodology and using market approaches as supporting information. However, if
the telecommunications market continues to deteriorate, the Company's
telecommunications related assets may be further adversely affected.
Synthetic Fuels Tax Credits
Florida Progress, through the Energy and Related Services business unit,
produces synthetic fuel from coal fines. The production and sale of the
synthetic fuel qualifies for tax credits under Section 29 of the Internal
Revenue Code (Section 29) if certain requirements are satisfied, including a
requirement that the synthetic fuel differs significantly in chemical
composition from the feedstock used to produce such synthetic fuel. Any
synthetic fuel tax credit amounts not utilized are carried forward indefinitely
and are included in deferred taxes on the accompanying Consolidated Balance
Sheet. All of Florida Progress's synthetic fuel facilities have received private
letter rulings from the Internal Revenue Service (IRS) with respect to their
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.
Pension and Other Postretirement Benefits
Florida Progress' reported costs of providing pension and other postretirement
benefits (described in Note 15 to the Florida Progress consolidated financial
statements), primarily health benefits, are dependent on numerous factors
resulting from actual plan experience and assumptions of future experience. For
example, such costs are impacted by employee demographics, changes made to plan
provisions, and key actuarial assumptions such as rates of return on plan
assets, discount rates used in determining benefit obligations and annual costs
and, for other postretirement benefits, medical trend rates.
Due to a decline in market interest rates for high-quality (AAA/AA) debt
securities, which are used as the benchmark for setting the discount rate,
Florida Progress lowered the discount rate to 6.60% at December 31, 2002, which
will increase the 2003 benefit costs recognized. In addition, the continuing
declines in the equity markets have adversely affected the fair value of plan
assets, which will also increase the benefit costs recognized in 2003.
Evaluations of the effects of these factors has not been completed, but the
Florida Progress estimates that 2003 total cost for pension and other
postretirement benefits will increase by approximately $26 million over the
amount recorded in 2002, due in large part to these factors. The majority of
that increase has been anticipated and reflected in the Florida Progress's
budgeting/forecasting process. Recoveries in the level of interest rates and
equity markets would, correspondingly, have positive effects on future years'
benefit cost recognition.
Florida Progress has substantial pension plan assets, with a fair value of
approximately $687.4 million at December 31, 2002. Florida Progress's expected
rate of return on pension plan assets has been 9.25%. Under the accounting
standard for pension accounting, the expected rate of return used in pension
cost recognition is a long-term rate of return; therefore, Florida Progress
would only adjust that return if its fundamental assessment of the debt and
equity markets changes or its investment policy changes significantly. Florida
Progress continues to believe that its pension plan's investment mix supports
the long-term rate of 9.25% being used. A 0.25% change in the expected rate of
return for 2002 would have changed 2002 pension cost by approximately $2.0
million.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Florida Progress' utility and diversified operations are capital-intensive
businesses. Florida Progress relies upon its operating cash flow, commercial
paper facilities and its ability to access long-term capital markets for its
liquidity needs. Since a substantial majority of Florida Progress' operating
costs are related to its regulated electric utility, a significant portion of
these costs are recovered from customers through fuel and energy cost recovery
clauses.
28
At Florida Power, cash from operations is the primary source of cash for the
utility's construction expenditures. Florida Power's estimated capital
requirements for 2003, 2004 and 2005 are $590 million, $450 million and $500
million, respectively.
In addition to funding its construction commitments with cash from operations,
the companies access the capital markets through the issuance of commercial
paper, secured and unsecured notes, preferred securities and equity through
Progress Energy, which can offer issuances of common stock. Risk factors
associated with commercial paper back up credit facilities and credit ratings
are discussed below under "Risk Factors".
Florida Power's interim financing needs are funded primarily through its
commercial paper program. In addition, Florida Power has an uncommitted bank bid
facility that authorizes them to borrow and re-borrow. The facility was
established to temporarily supplement commercial paper borrowings, as needed.
In addition to funding the working capital needs of its diversified businesses
primarily through its commercial paper program, Progress Energy can issue
long-term debt to fund the capital requirements of Progress Fuels.
CASH FLOW FROM OPERATING ACTIVITIES
Florida Progress' cash from operations of $671 million decreased $280.2 million
compared with 2001 due primarily to lower operating cash flow at Florida Power.
The utility's operating cash flow decreased by $500 million, due primarily to
higher working capital requirements.
Florida Progress' cash from operations of $928.2 million in 2001 increased
$430.5 million compared with 2000 due primarily to improved operating cash flow
at Florida Power. The utility's improved operating cash flow was due to customer
growth and the recovery of fuel costs previously deferred. Florida Power is
allowed full recovery of prudently incurred costs through rates charged to
customers.
CASH FLOW FROM INVESTING ACTIVITIES
Cash requirements for investing activities during 2002 of $647.7 million
increased $144.8 million when compared with 2001. The increase was due mainly to
an increase in utility property additions of $196.6 million compared to 2001.
Cash requirements for investing activities during 2001 decreased $43.7 million
when compared with 2000 due primarily to lower investing activity at Florida
Progress' diversified operations.
Florida Power's construction expenditures, including nuclear fuel, totaled
$550.1 million, $396.5 million and $286.8 million for 2002, 2001 and 2000,
respectively. These expenditures are primarily for distribution lines and
generating facilities necessary to meet the needs of the utility's growing
customer base.
In planning for its future generation needs, Florida Power develops a forecast
of annual demand for electricity, including a forecast of the level and duration
of peak demands during the year. These forecasts have historically been
developed using a 15% reserve margin. The reserve margin is the difference
between a company's net system generating capacity and the maximum demand on the
system. In December 1999, the FPSC approved a joint proposal by Florida Power,
Florida Power & Light and Tampa Electric Company to increase the reserve margin
to 20% by 2004.
In response, Florida Power is constructing a second generating unit at the Hines
site. Hines Unit 2 is the same combined-cycle technology as Hines Unit 1 and has
a summer generating capacity of approximately 516 MW. In addition, Florida Power
is currently planning for the construction of a third unit at the Hines Energy
Complex.
Progress Fuels' capital expenditures for 2002, 2001 and 2000 were $102.0
million, $61.8 million and $88.2 million, respectively. These capital
expenditures have been primarily for the expansion of its synthetic fuel
operations and the construction of a new rail car repair and trackworks
facility.
CASH FLOW FROM FINANCING ACTIVITIES
Cash flow from operations exceeded cash requirements from investing activity in
2002. Long-term debt financing activity was limited to refinancing of Florida
Power's tax-exempt debt discussed below.
29
Strong cash flow from operations and lower investing activities during 2001 when
compared with 2000 enabled Florida Progress to reduce debt by approximately $200
million.
In February 2002, $50 million of Progress Capital's medium-term notes, 5.78%
Series, matured. Progress Energy funded this maturity through the issuance of
commercial paper. As of December 31, 2002, Progress Capital had $223 million of
fixed rate medium-term notes outstanding. The final medium-term note is due in
May 2008. Progress Energy intends to fund these maturing notes through
internally generated funds and the issuance of commercial paper.
During 2002, Florida Power took advantage of historically low interest rates and
refinanced several issues of tax-exempt debt as well as certain taxable issues.
In July 2002, Florida Power issued approximately $241 million of Pollution
Control Revenue Refunding Bonds, secured by First Mortgage Bonds. Proceeds from
this issuance were used to redeem $241 million of Pollution Control Revenue
Bonds in August of 2002. Also in July 2002, $30 million of medium-term notes,
6.54% Series, matured. Florida Power funded this maturity through the issuance
of commercial paper.
On February 18, 2003 Florida Power issued $425 million of 4.80% First Mortgage
bonds due March 1, 2013 and $225 million of 5.90% First Mortgage Bonds due March
1, 2033. Proceeds from the bond issue were or will be used as follows:
o $155.6 million to redeem the aggregate outstanding balance ($150 million)
of our 8% First Mortgage Bonds due December 1, 2022.
o $215.0 million to refinance Florida Power's secured and unsecured
indebtedness, $70 million of which matured on March 1, 2003, and $145
million of which matures on July 1, 2003.
o $257.1 million to repay the balance of our outstanding commercial paper,
with the remaining proceeds to be used to reduce the outstanding balance of
notes payable to affiliated companies.
Our 8% First Mortgage Bonds due December 1, 2022 will be redeemed at a price of
103.75% of the principal amount outstanding ($150 million) plus accrued interest
to the redemption date of March 24, 2003.
The Company and its subsidiaries participate in two internal money pools,
operated by Progress Energy, to more effectively utilize cash resources and to
reduce outside short-term borrowings. Short-term borrowing needs are met first
by available funds of the money pool participants. Borrowing companies pay
interest at a rate designed to approximate the cost of outside short-term
borrowings. Subsidiaries, which invest in the money pool, earn interest on a
basis proportionate to their average monthly investment. The interest rate used
to calculate earnings approximates external interest rates. Funds may be
withdrawn from or repaid to the pool at any time without prior notice.
The Company's consolidated subsidiaries have lines of credit totaling $290.5
million, which are used to support the issuance of commercial paper. The lines
of credit were not drawn on as of December 31, 2002. The lines of credit consist
of two revolving bank credit facilities for Florida Power. The Florida Power
facilities consist of $90.5 million with a 364-day term expiring in April 2003,
and $200 million long-term revolving bank credit facility, expiring in 2004.
Florida Power is currently negotiating the renewal of its 364-day facility.
The Company's financial policy precludes issuing commercial paper in excess of
its supporting lines of credit. At December 31, 2002, the total amount of
commercial paper outstanding was $257.1 million, leaving approximately $33
million available for issuance. The Company is required to pay minimal annual
commitment fees to maintain its credit facilities.
These credit agreements contain various terms and conditions that could affect
the Company's ability to borrow under these facilities. These include a maximum
debt to total capital ratio, a material adverse change clause and a
cross-default provision. For Florida Power, the maximum total debt to total
capital ratio is 65%. Indebtedness as defined by the bank agreements includes
certain letters of credit and guarantees which are not recorded on the
Consolidated Balance Sheets. As of December 31, 2002, the calculated ratio for
Florida Power, pursuant to the terms of the agreement, was 48.6%
Florida Power's credit facilities include a provision under which lender could
refuse to advance funds in the event of a material adverse change in the
borrower's financial condition.
30
Each of these credit agreements contains a cross-default provision for defaults
of indebtedness in excess of $10 million. Under these provisions, if the
applicable borrower or certain affiliates fail to pay various debt obligations
in excess of $10 million the lenders could accelerate payment of any outstanding
borrowing and terminate their commitments to the credit facility.
Florida Power has an uncommitted bank bid facility authorizing it to borrow and
re-borrow, and have loans outstanding at any time, up to $100 million. At
December 31, 2002, there were no outstanding loans against these facilities.
Florida Power currently has filed registration statements under which it can
issue an aggregate of $50 million of various long-term debt securities. Florida
Power expects to increase its shelf capacity in the second or third quarter of
2003.
Credit Rating Matters
As of February 7, 2003, the major credit rating agencies rated the Company's
securities as follows:
Moody's
Investors Service Standard and Poor's
Florida Power Corporation
Corporate Credit Rating Not Applicable BBB+
Commercial Paper P-1 A-2
Senior Secured Debt A1 BBB+
Senior Unsecured Debt A2 BBB+
Preferred Stock Baa1 BBB-
FPC Capital I
Preferred Stock* Baa1 BBB-
Progress Capital Holdings, Inc.
Senior Unsecured Debt* A3 BBB
*Guaranteed by Florida Progress Corporation
These ratings reflect the current views of these rating agencies and no
assurances can be given that these ratings will continue for any given period of
time. However, the Company monitors its financial condition as well as market
conditions that could ultimately affect its credit ratings.
The Company and its subsidiaries' debt indentures and credit agreements do not
contain any "ratings trigger" which would cause the acceleration of interest and
principal payments in the event of a ratings downgrade.
In March 2002, Standard & Poor's affirmed the ratings of Florida Power but
revised the outlook to negative from stable. S&P stated that its change in
outlook reflected the lower-than-projected credit protection measures.
On February 7, 2003, Moody's Investors Service changed the outlook of Florida
Power Corporation (A1 senior secured) and Progress Capital's (A3 senior
unsecured) from stable to negative and lowered the trust preferred rating of FPC
Capital I from A3 to Baa1 with a negative outlook.
The change in outlook by the rating agencies has not materially affected the
Company's access to liquidity or the cost of its short-term borrowings.
Fitch Ratings Service announced on February 14, 2003 that it was downgrading the
ratings of Florida Power. The ratings outlook is stable. Florida Power's senior
secured rating was changed to A- from AA- and its senior unsecured rating was
changed to BBB+ from A+. Florida Power's short-term rating was changed to F-2
from F-1+.
Interest Rate Derivatives
In December 2002, Florida Power entered into a Treasury Rate Lock agreement,
with a notional amount of $35 million, to hedge the interest rate risk on an
anticipated debt issuance. At December 31, 2002, the value of this hedge was a
$0.5 million liability position. In January and February 2003, Florida Power
entered into Treasury Rate Lock agreements, with a total notional amount of $55
million, to hedge the interest rate risk on an anticipated debt issuance. These
contracts are designated as cash flow hedges for accounting purposes.
31
NEW ACCOUNTING STANDARDS
See Note 1 to the Financial Statements for a discussion of the anticipated
impact of new accounting standards.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FLORIDA PROGRESS
Market risk represents the potential loss arising from adverse changes in market
rates and prices. Florida Progress is exposed to certain market risks, including
changes in interest rates with respect to its long-term debt 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.
These financial instruments are held for purposes other than trading. The risks
discussed below do not include the price risks associated with non-financial
instrument transactions and positions associated with Florida Progress'
operations, such as sales commitments and inventory.
INTEREST RATE RISK
The Company manages its interest rate risks through the use of a combination of
fixed and variable rate debt. Variable rate debt has rates that adjust in
periods ranging from daily to monthly.
The following tables provide information as of December 31, 2002 and 2001, about
the Company's interest rate risk sensitive instruments. The tables present
principal cash flows and weighted-average interest rates by expected maturity
dates for the fixed long-term debt and the FPC obligated mandatorily redeemable
securities of trust.
December 31, 2002 Fair Value
2003 2004 2005 2006 2007 Thereafter Total December 31
- ---------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 275 $ 68 $ 49 $ 109 $ 124 $ 826 $ 1,451 $ 1,598
Average interest rate 6.42% 6.57% 6.66% 6.98% 6.79% 6.97% 6.82% -
Variable rate long-
term debt - - - - - $ 241 $ 241 $ 241
Average interest rate 1.11% 1.11% -
FPC mandatorily
redeemable securities
of Trust - - - - - $ 300 $ 300 $ 303
Fixed rate 7.10% 7.10% -
Unsecured note with - - - - - $ 500 $ 500 $ 512
parent
Average interest rate 6.45% 6.45%
Interest rate forward
contracts (a) $ 35 - - - - - $ 35 $ (0.5)
(a) Treasury Rate Lock agreement on $35 million designed as cash flow hedge of
anticipated fixed-rate debt issuance.
33
December 31, 2001 Fair Value
2002 2003 2004 2005 2006 Thereafter Total December 31
- ---------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 88 $ 276 $ 68 $ 48 $ 109 $ 1,192 $ 1,781 $ 1,832
Average interest rate 5.96% 6.42% 6.60% 6.72% 6.97% 6.87% 6.75% -
FPC mandatorily
redeemable securities
of Trust - - - - - $ 300 $ 300 $ 291
Fixed rate 7.10% 7.10% -
Unsecured note with - - - - - $ 500 $ 50 $ 494
parent
Average interest rate 6.43% 6.43%
FLORIDA POWER
The information required by this item is incorporated herein by reference to the
Florida Progress Quantitative and Qualitative Disclosures About Market Risk
insofar as it relates to Florida Power.
The following tables provide information as of December 31, 2002 and 2001, about
Florida Power's interest rate risk sensitive instruments.
December 31, 2002 Fair Value
2003 2004 2005 2006 2007 Thereafter Total December 31
- ----------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 217 $ 43 $ 48 $ 48 $ 89 $ 782 $ 1,227 $ 1,351
Average interest rate 6.15% 6.69% 6.72% 6.76% 6.80% 7.00% 6.80% -
Variable rate long-
term debt - - - - - $ 241 $ 241 $ 241
Average interest rate 1.11% 1.11% -
Interest rate forward $ 35 - - - - $ 35 $ (0.5)
contracts (a)
(a) Treasury Rate Lock agreement on $35 million designed as cash flow hedge of
anticipated fixed-rate debt issuance.
December 31, 2001 Fair Value
2002 2003 2004 2005 2006 Thereafter Total December 31
- ---------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 32 $ 217 $ 43 $ 48 $ 48 $ 1,112 $ 1,500 $ 1,538
Average interest rate 6.55% 6.15% 6.69% 6.72% 6.76% 6.89% 6.76% -
34
MARKETABLE SECURITIES PRICE RISK
Florida Power maintains trust funds, as required by the Nuclear Regulatory
Commission, to fund certain costs of decommissioning its nuclear plants. These
funds are primarily invested in stocks, bonds and cash equivalents, which are
exposed to price fluctuations in equity markets and to changes in interest
rates. At December 31, 2002 and 2001, the fair values of these funds were
approximately $373.6 million and $406.1 million, respectively. The Company
actively monitors its portfolio by benchmarking the performance of its
investments against certain indices and by maintaining, and periodically
reviewing, target allocation percentages for various asset classes. The
accounting for nuclear decommissioning recognizes that the Company's regulated
electric rates provide for recovery of these costs, net of any trust fund
earnings, and therefore, fluctuations in trust fund marketable security returns
do not affect the earnings of the Company.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements, supplementary data and
consolidated financial statement schedules are included herein:
Page
Independent Auditors' Report - Deloitte and Touche LLP 37
Independent Auditors' Report - KMPG LLP 38
Consolidated Financial Statements - Florida Progress Corporation:
Consolidated Statements of Income and Comprehensive Income for the Years Ended
December 31, 2002, 2001 and 2000 39
Consolidated Balance Sheets as of December 31, 2002 and 2001 40
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 41
Consolidated Schedules of Capitalization for the Years Ended December 31, 2002,
2001 and 2000 42
Consolidated Statements of Common Equity 43
Consolidated Quarterly Financial Data (Unaudited) 43
Financial Statements - Florida Power Corporation:
Statements of Income and Comprehensive Income for the Years Ended
December 31, 2002, 2001, and 2000 44
Balance Sheets as of December 31, 2002 and 2001 45
Statements of Cash Flows for the Years Ended December 31, 2002, 2001
and 2000 46
Schedules of Capitalization as of December 31, 2002 and 2001 47
Statements of Common Equity for the Years Ended December 31, 2002, 2001
and 2000 48
Quarterly Financial Data (Unaudited) 48
Notes to Financial Statements 49
Independent Auditors' Report on Consolidated Financial Statement Schedules 85
Financial Statement Schedules for the Years Ended December 31, 2002, 2001 and
2000:
II-Valuation and Qualifying Accounts - Florida Progress Corporation 86
II-Valuation and Qualifying Accounts - Florida Power Corporation 87
All other schedules have been omitted as not applicable or not required or
because the information required to be shown is included in the Consolidated
Financial Statements or the accompanying Notes to the Financial Statements.
36
INDEPENDENT AUDITORS' REPORT
TO THE BOARDS OF DIRECTORS OF FLORIDA PROGRESS CORPORATION AND FLORIDA POWER
CORPORATION:
We have audited the accompanying consolidated balance sheets and schedules of
capitalization of Florida Progress Corporation and its subsidiaries (Florida
Progress) and the accompanying balance sheets and schedules of capitalization of
Florida Power Corporation (Florida Power) as of December 31, 2002 and 2001, and
the related Florida Progress consolidated statements of income and comprehensive
income, of common equity, and of cash flows and the related Florida Power
statements of income and comprehensive income, of common equity, and of cash
flows for each of the two years in the period ended December 31, 2002. These
financial statements are the responsibility of the respective company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements of Florida
Progress and the financial statements of Florida Power for the year ended
December 31, 2000 were audited by other auditors whose report, dated February
15, 2001 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Florida Progress and of Florida Power,
respectively, at December 31, 2002 and 2001, and the results of their respective
operations and cash flows for each of the two years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
February 12, 2003
37
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF FLORIDA PROGRESS CORPORATION:
We have audited the accompanying statements of income and comprehensive income,
cash flows, and common equity of Florida Progress Corporation and subsidiaries,
and of Florida Power Corporation, for the year ended December 31, 2000. In
connection with our audit of these financial statements, we also have audited
the financial statement schedules listed in Item 8 therein. These financial
statements are the responsibility of the respective management of Florida
Progress Corporation and Florida Power Corporation. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Florida
Progress Corporation and subsidiaries, and Florida Power Corporation for the
year ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
fiancial statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/KPMG LLP
KPMG LLP
St. Petersburg, Florida
February 15, 2001
38
CONSOLIDATED STATEMENTS of INCOME AND COMPREHENSIVE INCOME
Florida Progress Corporation Years ended December 31
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Operating Revenues
Utility $ 3,061,732 $ 3,212,841 $ 2,871,563
Diversified business 1,291,534 1,323,620 1,358,772
- --------------------------------------------------------------------------------------------------------------
Total Operating Revenues 4,353,266 4,536,461 4,230,335
- --------------------------------------------------------------------------------------------------------------
Operating Expenses
Utility
Fuel used in electric generation 853,500 912,735 681,869
Purchased power 514,975 514,528 498,458
Operation and maintenance 572,237 487,144 589,131
Depreciation and amortization 294,856 452,972 402,625
Taxes other than on income 227,699 230,169 213,280
Diversified business
Cost of sales 1,329,157 1,374,445 1,336,276
Impairment of long-lived assets 281,157 160,569 130,700
Other 32,679 100,401 143,135
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses 4,106,260 4,232,963 3,995,474
- --------------------------------------------------------------------------------------------------------------
Operating Income 247,006 303,498 234,861
- --------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 6,647 9,005 8,418
Other, net (13,676) (26,085) (26,332)
- --------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (7,029) (17,080) (17,914)
- --------------------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 185,808 194,841 209,510
Allowance for borrowed funds used during construction (2,659) (1,087) (3,117)
- --------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 183,149 193,754 206,393
- --------------------------------------------------------------------------------------------------------------
Income before Income Taxes 56,828 92,664 10,554
Income Tax Benefit (173,223) (172,719) (124,715)
- --------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 230,051 265,383 135,269
Discontinued Operations, Net of Tax:
Income from discontinued operations - 2,682 8,972
Net gain (loss) on disposal of discontinued operations,
(net of applicable income tax expense and benefit of
$2,880 and $7,896, respectively) 5,120 (23,734) -
- --------------------------------------------------------------------------------------------------------------
Net Income $ 235,171 $ 244,331 $ 144,241
- --------------------------------------------------------------------------------------------------------------
Change in net unrealized losses on cash flow hedges
(net of tax of $3,678) (6,150) - -
Reclassification adjustment for amounts included in net
income (net of tax of $315) (515) - -
Minimum pension liability adjustment (net of tax
of $2,829) (4,503) - -
Foreign currency and other (1,584) (1,578) (982)
- --------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 222,419 $ 242,753 $ 143,259
- --------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
39
CONSOLIDATED BALANCE SHEETS
Florida Progress Corporation
(In thousands) December 31
Assets 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 7,477,025 $7,151,729
Accumulated depreciation (4,123,947) (3,984,308)
- ---------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,353,078 3,167,421
Held for future use 7,921 8,274
Construction work in progress 426,641 292,883
Nuclear fuel, net of amortization 40,260 62,536
- ---------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,827,900 3,531,114
- ---------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 33,601 5,201
Accounts receivable 385,431 357,038
Unbilled accounts receivable 60,481 63,080
Receivables from affiliated companies 42,418 26,976
Deferred income taxes 26,209 32,334
Inventory 492,273 485,891
Deferred fuel cost 37,503 15,147
Prepayments and other current assets 93,802 73,684
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 1,171,718 1,059,351
- ---------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 130,114 174,081
Unamortized debt expense 23,363 21,021
Nuclear decommissioning trust funds 373,551 406,100
Diversified business property, net 699,493 669,078
Miscellaneous other property and investments 83,222 115,496
Prepaid pension cost 226,413 202,167
Other assets and deferred debits 90,716 144,875
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,626,872 1,732,818
- ---------------------------------------------------------------------------------------------------------------
Total Assets $ 6,626,490 $ 6,323,283
- ---------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ---------------------------------------------------------------------------------------------------------------
Capitalization (see consolidated schedules of capitalization)
- ---------------------------------------------------------------------------------------------------------------
Common stock $ 1,628,951 $ 1,409,034
Retained earnings 598,191 666,201
Accumulated other comprehensive loss (15,737) (2,985)
Preferred stock of subsidiaries - not subject to mandatory redemption 33,497 33,497
Unsecured note with parent 500,000 500,000
Long-term debt, net 1,710,363 1,989,684
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization 4,455,265 4,595,431
- ---------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 275,397 88,053
Accounts payable 348,842 292,292
Payables to affiliated companies 102,619 116,520
Notes payable to affiliated companies 379,677 147,583
Interest accrued 68,120 67,861
Short-term obligations 257,100 154,250
Customer deposits 121,998 118,285
Other current liabilities 167,164 141,304
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,720,917 1,126,148
- ---------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes - 165,816
Accumulated deferred investment tax credits 47,914 54,387
Regulatory liabilities 61,004 50,193
Other liabilities and deferred credits 341,390 331,308
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 450,308 601,704
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 22)
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 6,626,490 $ 6,323,283
- ---------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
40
CONSOLIDATED STATEMENTS of CASH FLOWS
Florida Progress Corporation Years ended December 31
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 235,171 $ 244,331 $ 144,241
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations - (2,682) (8,972)
Net (gain) loss on disposal of discontinued operations (5,120) 23,734 -
Impairment of long-lived assets 281,157 160,569 130,700
Depreciation and amortization 386,126 537,983 453,757
Deferred income taxes and investment tax credits, net (239,526) (201,787) (236,978)
Deferred fuel cost (credit) (22,356) 75,287 (122,076)
Net (increase) decrease in accounts receivable (34,619) 39,808 (137,794)
Net (increase) decrease in inventories (39,914) (131,662) 47,572
Net increase in prepayments and other current assets (11,918) (10,600) (57,602)
Net increase in accounts payable 38,564 55,685 48,979
Net increase in other current liabilities 28,723 216,957 84,242
Other 54,749 (56,391) 174,627
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 671,037 951,232 520,696
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Property additions (550,019) (353,433) (286,800)
Diversified business property additions (153,908) (133,447) (194,195)
Nuclear fuel additions (58) (43,087) -
Net contributions to nuclear decommissioning trust 12,206 (19,973) (19,971)
Proceeds from sale of assets 34,825 24,988 -
Proceeds from sale of discontinued operations 8,000 28,023 -
Other 1,231 (5,927) (45,673)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (647,723) (502,856) (546,639)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 235,975 299,201 7,307
Proceeds from issuance of long-term debt to parent - 500,000 -
Net increase (decrease) in short-term obligations 102,850 (813,042) 330,611
Retirement of long-term debt (350,477) (190,642) (166,441)
Net increase (decrease) in intercompany notes 232,094 (102,403) -
Equity contributions from parent 87,155 90,149 84,490
Dividends paid to parent (303,181) (248,804) -
Dividends paid on common stock - - (215,277)
Other 670 (1,786) (168)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 5,086 (467,327) 40,522
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used in) Discontinued Operations - (48) 33
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 28,400 (18,999) 14,612
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 5,201 24,200 9,588
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 33,601 $ 5,201 $ 24,200
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 180,032 $ 169,983 $ 195,500
income taxes (net of refunds) $ 60,303 $ (3,926) $ 182,500
Noncash Activities
o On April 26, 2002, Progress Fuels Corporation received an equity
contribution from Progress Energy, Inc., with which it acquired 100% of
Westchester Gas Company. In conjunction with the purchase, Progress Energy,
Inc., issued approximately $129 million in common stock.
See Notes to Financial Statements.
41
CONSOLIDATED SCHEDULES of CAPITALIZATION
Florida Progress Corporation December 31
(In thousands except share data) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value, 250,000,000 shares
authorized; 98,616,658 outstanding in 2002 and 2001 $1,628,951 $1,409,034
Accumulated other comprehensive loss (15,737) (2,985)
Retained earnings 598,191 666,201
- ----------------------------------------------------------------------------------------------------------
Total Common Stock Equity $2,211,405 $2,072,250
- ----------------------------------------------------------------------------------------------------------
Preferred Stock of Florida Power Corporation - not subject to mandatory
redemption
Authorized-4,000,000 shares cumulative, $100 par value Preferred Stock;
5,000,000 shares cumulative, no par value preferred stock; 1,000,000 shares,
$100 par value Preference Stock $100 par value Preferred Stock:
4.00% - 39,980 shares outstanding (redemption
price $104.25) $ 3,998 $ 3,998
4.40% - 75,000 shares outstanding (redemption
price $102.00) 7,500 7,500
4.58% - 99,990 shares outstanding (redemption
price $101.00) 9,999 9,999
4.60% - 39,997 shares outstanding (redemption
price $103.25) 4,000 4,000
4.75% - 80,000 shares outstanding (redemption
price $102.00) 8,000 8,000
- ----------------------------------------------------------------------------------------------------------
Total Preferred Stock of Florida Power Corporation $ 33,497 $ 33,497
- ----------------------------------------------------------------------------------------------------------
Long-Term Debt (maturities and weighted-average
interest rates as of December 31, 2002)
Florida Power Corporation:
First mortgage bonds, maturing 2003-2023 6.83% $ 810,000 $ 810,000
Pollution control revenue bonds, maturing 2018-2027 1.11% 240,865 240,865
Medium-term notes, maturing 2003-2028 6.74% 416,900 449,100
Unamortized premium and discount, net (6,433)
(2,935)
- ----------------------------------------------------------------------------------------------------------
$ 1,461,332 $ 1,497,030
- ----------------------------------------------------------------------------------------------------------
Florida Progress Funding Corporation:
Mandatorily redeemable preferred securities, maturing
2039 7.10% $ 300,000 $ 300,000
- ----------------------------------------------------------------------------------------------------------
$ 300,000 $ 300,000
- ----------------------------------------------------------------------------------------------------------
Progress Capital Holdings, Inc.:
Medium-term notes, maturing 2003-2008 6.96% $ 223,000 $ 273,000
Unsecured note with parent, maturing 2011 6.43% 500,000 500,000
Miscellaneous notes, maturing 2003-2004 1.53% 1,428 7,707
- ----------------------------------------------------------------------------------------------------------
724,428 780,707
- ----------------------------------------------------------------------------------------------------------
Less: Current portion of long-term debt (275,397) (88,053)
- ----------------------------------------------------------------------------------------------------------
Total Long-Term Debt, Net $ 2,210,363 $ 2,489,684
- ----------------------------------------------------------------------------------------------------------
Total Capitalization $ 4,455,265 $ 4,595,431
==========================================================================================================
See Notes to Financial Statements.
42
CONSOLIDATED STATEMENTS of COMMON EQUITY
Florida Progress Corporation Years ended December 31
(In thousands except share data) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Beginning Balance $ 2,072,250 $ 1,987,581 $ 2,008,707
Net income 235,171 244,331 144,241
Other comprehensive loss (12,752) (1,578) (982)
Common stock issued - 162,570 shares - - 6,854
Equity contribution from parent, net 219,917 90,720 44,038
Dividend to parent (303,181) (248,804) -
Common stock dividends - - (215,277)
- -------------------------------------------------------------------------------------------------------------
Ending Balance $ 2,211,405 $ 2,072,250 $ 1,987,581
- -------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Florida Progress Corporation
(In thousands) First Quarter Second Quarter Third Quarter Fourth Quarter
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
Operating revenues $ 978,779 $ 1,110,223 $ 1,187,120 $ 1,077,144
Operating income (loss) 102,683 128,803 (43,249) 58,769
Income (loss) from continuing operations 75,773 90,356 (57,021) 120,943
Net income (loss) 75,773 90,356 (51,901) 120,943
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Operating revenues $ 1,131,247 $ 1,119,984 $ 1,246,939 $ 1,038,291
Operating income (loss) 129,265 130,120 178,265 (134,152)
Income (loss) from continuing operations 75,625 101,900 181,452 (93,594)
Net income (loss) 75,988 89,811 167,332 (88,800)
o In the opinion of management, all adjustments necessary to fairly present
amounts shown for interim periods have been made. Results of operations for
an interim period may not give a true indication of results for the year.
Certain reclassifications have been made to previously reported amounts to
conform to the current year's presentation.
o Fourth quarter 2001 includes impairment, loss on sale of assets and other
charges of $201.3 million ($136.5 million after tax).
o Third quarter 2002 includes impairment and other charges related to Progress
Telecommunications Corporation, of $233.0 million ($137.4 million after tax)
(See Note 7).
o Fourth quarter 2002 includes estimated impairment on assets held for sale of
Railcar Ltd. of $66.5 million ($44.7 million after tax) (See Note 4A).
See Notes to Financial Statements.
43
STATEMENTS of INCOME AND COMPREHENSIVE INCOME
Florida Power Corporation Years ended December 31
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Operating Revenues
Utility $ 3,061,732 $ 3,212,841 $ 2,871,563
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 3,061,732 3,212,841 2,871,563
- ---------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 853,500 912,735 681,869
Purchased power 514,975 514,528 498,458
Operation and maintenance 572,237 487,144 589,131
Depreciation and amortization 294,856 452,972 402,625
Taxes other than on income 227,699 230,169 213,280
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,463,267 2,597,548 2,385,363
- ---------------------------------------------------------------------------------------------------------------------
Operating Income 598,465 615,293 486,200
- ---------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 1,624 2,872 1,852
Other, net (5,927) (10,780) (407)
- ---------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (4,303) (7,908) 1,445
- ---------------------------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 109,442 114,794 128,479
Allowance for borrowed funds used during construction (2,659) (1,087) (3,117)
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 106,783 113,707 125,362
- ---------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 487,379 493,678 362,283
Income Tax Expense 163,273 182,590 150,473
- ---------------------------------------------------------------------------------------------------------------------
Net Income 324,106 311,088 211,810
Dividends on Preferred Stock 1,512 1,512 1,512
- ---------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 322,594 $ 309,576 $ 210,298
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive Income, Net of Tax:
Net Income $ 324,106 $ 311,088 $ 211,810
Change in net unrealized losses on cash flow hedges
(net of tax of $200) (318) - -
Minimum pension liability adjustment (net of tax of $1,486) (2,366) - -
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 321,422 $ 311,088 $ 211,810
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
44
BALANCE SHEETS
Florida Power Corporation
(In thousands) December 31
Assets 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $7,477,025 $ 7,151,729
Accumulated depreciation (4,123,947) (3,984,308)
- ----------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,353,078 3,167,421
Held for future use 7,921 8,274
Construction work in progress 426,641 292,883
Nuclear fuel, net of amortization 40,260 62,536
- ----------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,827,900 3,531,114
- ----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 15,636 -
Accounts receivable 186,630 185,562
Unbilled accounts receivable 60,481 63,080
Receivables from affiliated companies 44,976 16,424
Notes receivable from affiliated companies - 119,799
Deferred income taxes 26,209 32,334
Inventory 235,043 188,630
Deferred fuel cost 37,503 15,147
Prepayments and other current assets 5,339 4,336
- ----------------------------------------------------------------------------------------------------------------------
Total Current Assets 611,817 625,312
- ----------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 130,114 174,081
Unamortized debt expense 14,503 11,844
Nuclear decommissioning trust funds 373,551 406,100
Miscellaneous other property and investments 39,298 44,403
Prepaid pension cost 222,543 198,351
Other assets and deferred debits 6,517 18,435
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 786,526 853,214
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $5,226,243 $ 5,009,640
- ----------------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------------------
Capitalization (see schedules of capitalization)
- ----------------------------------------------------------------------------------------------------------------------
Common stock $1,081,257 $ 1,081,257
Retained earnings 969,795 950,387
Accumulated other comprehensive loss (2,684) -
Preferred stock - not subject to mandatory redemption 33,497 33,497
Long-term debt, net 1,244,411 1,465,030
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization 3,326,276 3,530,171
- ----------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 216,921 32,000
Accounts payable 147,978 150,595
Payables to affiliated companies 88,661 189,817
Notes payable to affiliated companies 237,425 -
Taxes accrued 24,472 1,768
Interest accrued 55,675 54,440
Short-term obligations 257,100 154,250
Customer deposits 121,998 118,285
Other current liabilities 55,323 63,919
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,205,553 765,074
- ----------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 361,133 394,828
Accumulated deferred investment tax credits 47,423 53,875
Regulatory liabilities 61,004 50,193
Other liabilities and deferred credits 224,854 215,499
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 694,414 714,395
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 22)
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $5,226,243 $ 5,009,640
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
45
STATEMENTS of CASH FLOWS
Florida Power Corporation Years ended December 31
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 324,106 $ 311,088 $ 211,810
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 320,886 467,025 453,291
Deferred income taxes and investment tax credits, net (37,349) (41,080) (59,495)
Deferred fuel (credit) cost (22,356) 75,287 (122,076)
Net (increase) decrease in accounts receivable (27,021) 32,271 (117,191)
Net (increase) decrease in inventories (46,413) (49,514) 28,124
Net (increase) decrease in prepayments and other current assets (1,004) 4,761 (55,550)
Net increase (decrease) in accounts payable (103,773) 130,761 33,720
Net increase in other current liabilities 18,538 107,816 30,433
Other 2,468 (110,237) 52,599
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 428,082 928,178 455,665
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Property additions (550,019) (353,433) (286,800)
Nuclear fuel additions (58) (43,087) -
Net contributions to nuclear decommissioning trust 12,206 (19,973) (19,971)
Other 11,632 7,239 3,501
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (526,239) (409,254) (303,270)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 235,975 297,621 -
Net increase (decrease) in short-term obligations 102,850 (238,280) 39,374
Retirement of long-term debt (277,559) (82,000) (76,800)
Net increase (decrease) in intercompany notes 357,225 (109,350) -
Equity contributions from parent - - 71,000
Advances to/from parent - (139,979) 20,200
Dividends paid to parent (303,186) (248,804) (201,277)
Dividends paid on preferred stock (1,512) (1,512) (1,512)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 113,793 (522,304) (149,015)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 15,636 (3,380) 3,380
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year - 3,380 -
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 15,636 $ - $ 3,380
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 105,549 $ 106,384 $ 135,000
income taxes (net of refunds) $ 173,168 $ 210,629 $ 194,400
See Notes to Financial Statements.
46
SCHEDULES of CAPITALIZATION
Florida Power Corporation December 31
(In thousands except share data) 2002 2001
- ---------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value $1,081,257 $1,081,257
Accumulated other comprehensive loss (2,684) -
Retained earnings 969,795 950,387
- ---------------------------------------------------------------------------------------------------------
Total Common Stock Equity $2,048,368 $2,031,644
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Preferred Stock - not subject to mandatory redemption
Authorized-4,000,000 shares cumulative, $100 par value Preferred Stock;
5,000,000 shares cumulative, no par value preferred stock; 1,000,000 shares,
$100 par value Preference Stock $100 par value Preferred Stock:
4.00% - 39,980 shares outstanding (redemption
price $104.25) $ 3,998 $ 3,998
4.40% - 75,000 shares outstanding (redemption
price $102.00) 7,500 7,500
4.58% - 99,990 shares outstanding (redemption
price $101.00) 9,999 9,999
4.60% - 39,997 shares outstanding (redemption
price $103.25) 4,000 4,000
4.75% - 80,000 shares outstanding (redemption
price $102.00) 8,000 8,000
- ---------------------------------------------------------------------------------------------------------
Total Preferred Stock $ 33,497 $ 33,497
- ---------------------------------------------------------------------------------------------------------
Long-Term Debt (maturities and weighted-average interest rates as of December 31, 2002)
First mortgage bonds, maturing 2003-2023 6.83% $ 810,000 $ 810,000
Pollution control revenue bonds, maturing 2018-2027 1.11% 240,865 240,865
Medium-term notes, maturing 2003-2028 6.74% 416,900 449,100
Unamortized premium and discount, net (6,433) (2,935)
- ---------------------------------------------------------------------------------------------------------
Less: Current portion of long-term debt (216,921) (32,000)
- ---------------------------------------------------------------------------------------------------------
Total Long-Term Debt, Net $1,244,411 $1,465,030
- ---------------------------------------------------------------------------------------------------------
Total Capitalization $3,326,276 $3,530,171
- ---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
47
STATEMENTS of COMMON EQUITY
Florida Power Corporation Years ended December 31
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Beginning Balance $ 2,031,644 $ 1,965,028 $ 1,885,007
Net income 324,106 311,088 211,810
Preferred stock dividends at stated rates (1,512) (1,512) (1,512)
Other comprehensive loss (2,684) - -
Equity contribution from parent - 5,844 71,000
Dividends paid to parent (303,186) (248,804) (201,277)
- -----------------------------------------------------------------------------------------------------------------
Ending Balance $ 2,048,368 $ 2,031,644 $ 1,965,028
- -----------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Florida Power Corporation
(In thousands) First Quarter Second Quarter Third Quarter Fourth Quarter
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
Operating revenues $686,441 $765,923 $863,637 $745,731
Operating income 120,417 150,974 207,100 119,974
Net income 58,121 77,131 124,152 64,702
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Operating revenues $810,474 $783,660 $906,131 $712,576
Operating income 145,425 164,904 213,158 91,806
Net income 71,984 84,689 114,457 39,958
In the opinion of management, all adjustments necessary to fairly present
amounts shown for interim periods have been made. Results of operations for an
interim period may not give a true indication of results for the year. Certain
reclassifications have been made to previously reported amounts to conform to
the current year's presentation.
See Notes to Financial Statements.
48
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
A. Organization
Florida Progress Corporation (the Company or Florida Progress) is a holding
company under the Public Utility Holding Company Act of 1935 (PUHCA). The
Company became subject to the regulations of PUHCA when it was acquired by
CP&L Energy, Inc. on November 30, 2000 (See Note 2). CP&L Energy, Inc.
subsequently changed its name to Progress Energy, Inc. (Progress Energy or
the Parent). Florida Progress' two primary subsidiaries are Florida Power
Corporation (Florida Power) and Progress Fuels Corporation (Progress Fuels).
Throughout the report, the terms utility and regulated will be used to
discuss items pertaining to Florida Power. Diversified business and
nonregulated will be used to discuss the subsidiaries of Florida Progress
excluding Florida Power.
Effective January 1, 2003, Florida Power began doing business under the
assumed name Progress Energy Florida, Inc. The legal name of the entity has
not changed and there is no restructuring of any kind related to the name
change. The current corporate and business unit structure remains unchanged.
B. Basis of Presentation
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP). Florida Power is regulated by the Florida Public Service Commission
(FPSC) and the Federal Energy Regulatory Commission (FERC). The utility
follows the accounting practices set forth in the Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation." This standard allows regulated entities to capitalize
or defer certain costs or reduce revenues based on regulatory approval and
management's ongoing assessment that it is probable these items will be
recovered or refunded through the ratemaking process. Significant
intercompany balances and transactions have been eliminated in consolidation
except as permitted by Statement of Financial Accounting Standards (SFAS)
No. 71, which provides that profits on intercompany sales to regulated
affiliates are not eliminated if the sales price is reasonable and the
future recovery of the sales price through the ratemaking process is
probable.
The financial statements include the financial results of the Company and
its majority-owned operations. Unconsolidated investments in 20% to
50% owned joint ventures are accounted for using the equity method. Other
investments are stated principally at cost. These equity and cost
investments, which total approximately $13.9 million and $33.1 million at
December 31, 2002 and 2001, respectively, are included in miscellaneous
property and investments on the Consolidated Balance Sheets. The primary
component of this balance is the Company's investment in affordable housing
of $8.9 million and $28.1 million, respectively, for December 31, 2002 and
2001.
Results of operations of Progress Rail Services Corporation and certain
other diversified operations are recognized one month in arrears.
Certain amounts for 2001 and 2000 have been reclassified to conform to the
2002 presentation.
C. Use of Estimates and Assumptions
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.
D. Utility Plant
Utility plant in service is stated at historical cost less accumulated
depreciation. The Company capitalizes all construction related direct labor
and material costs of units of property as well as indirect construction
costs. The costs of renewals and betterments are also capitalized.
49
Maintenance and repairs of property, and replacements and renewals of items
determined to be less than units of property, are charged to maintenance
expense as incurred. The cost of units of property replaced, renewed or
retired, plus removal or disposal costs, less salvage, is charged to
accumulated depreciation.
The balances of utility plant in service at December 31 are listed below (in
thousands), with a range of depreciable lives for each:
2002 2001
----------- -----------
Production plant (7-33 years) $ 3,432,865 $ 3,369,491
Transmission plant (30-75 years) 976,423 921,219
Distribution plant (12-50 years) 2,728,239 2,704,035
General plant and other (8-75 years) 339,498 156,984
----------- -----------
Utility plant in service $ 7,477,025 $ 7,151,729
=========== ===========
Substantially all of the electric utility plant is pledged as collateral for
the first mortgage bonds of Florida Power (See Note 8).
Allowance for funds used during construction (AFUDC) represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated assets. As prescribed in the regulatory
uniform systems of accounts, AFUDC is charged to the cost of the plant. The
equity funds portion of AFUDC is credited to other income and the borrowed
funds portion is credited to interest charges. Regulatory authorities
consider AFUDC an appropriate charge for inclusion in the rates charged to
customers by the utilities over the service life of the property. The total
equity funds portion of AFUDC was $2.3 million, $0.1 million and $1.3
million in 2002, 2001 and 2000, respectively. The composite AFUDC rate for
Florida Power's electric utility plant was 7.8% in 2002, 2001 and 2000.
E. Depreciation and Amortization - Utility Plant
For financial reporting purposes, substantially all depreciation of utility
plant other than nuclear fuel is computed on the straight-line method based
on the estimated remaining useful life of the property, adjusted for
estimated net salvage. Florida Power's depreciation provisions, including
decommissioning costs (See Note 1F), as a percentage of average depreciable
property other than nuclear fuel, were approximately 3.3%, 4.3% and 4.6% in
2002, 2001 and 2000, respectively. Total depreciation provisions were $230.6
million, $299.1 million and $301.0 million in 2002, 2001 and 2000,
respectively. Depreciation in 2002 was reduced pursuant to the rate case
settlement (See Note 12A).
Amortization of nuclear fuel costs, including disposal costs associated with
obligations to the U.S. Department of Energy (DOE), is computed primarily on
the units-of-production method and charged to fuel expense. Costs related to
obligations to the DOE for the decommissioning and decontamination of
enrichment facilities are also charged to fuel expense. The total of these
costs for the years ended December 31, 2002, 2001 and 2000 were $32.0
million, $29.1 million and $31.6 million, respectively.
Effective January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," and no longer amortizes goodwill (See Note 19).
Prior to the adoption of SFAS No. 142, the Company amortized goodwill on a
straight-line basis over a period not exceeding 40 years. Intangible assets
are being amortized on a straight-line basis over their respective lives.
F. Decommissioning and Dismantlement Provisions
Florida Power's nuclear plant depreciation expenses include a provision for
future decommissioning costs, which are recoverable through rates charged to
customers. Florida Power is placing amounts collected in an externally
managed trust fund.
In January 2002, Florida Power received regulatory approval from the FPSC to
decrease its retail provision for nuclear decommissioning from approximately
$20.5 million annually to approximately $7.7 million annually, effective
January 1, 2001. As a result of the settlement in the Florida Power rate
case, Florida Power suspended accruals on its reserves for nuclear
decommissioning through December 31, 2005.
Florida Power's most recent site-specific estimate of decommissioning costs
for Crystal River Nuclear Plant (CR3) was developed in 2000 based on prompt
dismantlement decommissioning. The estimate, in 2000 dollars, is $490.9
million and is 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.
50
The cost estimate excludes the portion attributable to other co-owners of
CR3. Florida Power has a license to operate the nuclear unit through
December 3, 2016. Application to extend the plant license for 20 years is
anticipated to be submitted in the first quarter of 2007.
Management believes that decommissioning costs that have been and will be
recovered through rates by Florida Power will be sufficient to provide for
the costs of decommissioning.
Florida Power's reserve for fossil plant dismantlement was approximately
$141.6 million and $140.5 million at December 31, 2002 and 2001,
respectively, and was included in accumulated depreciation. The provision
for fossil plant dismantlement was previously suspended per a 1997 FPSC
settlement agreement, but resumed mid-2001. The annual provision, approved
by the FPSC in 2001, was $8.8 million. The accrual for fossil dismantlement
reserves was suspended again in 2002 by the Florida Rate Case settlement.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," that will impact the
accounting for the decommissioning provisions beginning in 2003 (See Note
1R).
G. Diversified Business Property
Diversified business property is stated at cost less accumulated
depreciation. If an impairment loss is recognized on an asset, the fair
value becomes its new cost basis. The costs of renewals and betterments are
capitalized. The cost of repairs and maintenance is charged to expense as
incurred. Depreciation is computed on a straight-line basis using the
estimated useful lives as indicated in the table below. Depletion of mineral
rights is provided on the units-of-production method based upon the
estimates of recoverable amounts of clean mineral.
The Company uses the full cost method to account for its natural gas and oil
properties. Under the full cost method, substantially all productive and
nonproductive costs incurred in connection with the acquisition, exploration
and development of natural gas and oil reserves are capitalized. These
capitalized costs include the costs of all unproved properties, internal
costs directly related to acquisition and exploration activities. These
costs are amortized using the units-of-production method over the life of
the Company's proved reserves. Total capitalized costs are limited to a
ceiling based on the present value of discounted (at 10%) future net
revenues using current prices, plus the lower of cost or fair market value
of unproved properties. If the ceiling (discounted revenues) is not equal to
or greater than total capitalized costs, the Company is required to
write-down capitalized costs to this level. The Company performs this
ceiling test calculation every quarter. No write-downs were required in
2002, 2001 or 2000.
The following is a summary of diversified business property as of December
31 (in thousands), with a range of depreciable lives for each:
2002 2001
---------- ----------
Equipment (3 - 25 years) $ 328,790 $ 257,514
Land and mineral rights 76,145 72,972
Buildings and plants (5 - 40 years) 91,266 97,261
Oil and gas properties (units-of-production) 264,767 41,413
Telecommunications equipment (5 - 20 years) 40,827 184,539
Rail equipment (3 - 20 years) 54,283 72,733
Marine equipment (3 - 35 years) 80,501 78,868
Computers, office equipment and software (3 - 10 years) 30,306 39,600
Construction work in progress 34,163 106,839
Accumulated depreciation (301,555) (282,661)
---------- ----------
Diversified business property, net $ 699,493 $ 669,078
========== ==========
The decrease in telecommunications equipment from 2001 to 2002 is
attributable to an impairment of long-lived assets discussed in Note 7.
Diversified business depreciation expense was $64.9 million, $69.1 million
and $70.8 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The synthetic fuel facilities are being depreciated through
2007 when the Section 29 tax credits will expire.
51
H. Inventory
Inventory is carried at average cost. As of December 31, inventory was
comprised of the following (in thousands):
FLORIDA PROGRESS FLORIDA POWER
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Fuel $ 182,731 $ 155,188 $ 111,112 $ 92,417
Rail equipment and parts 155,206 200,697 - -
Materials and supplies 134,163 113,638 123,931 96,213
Other 20,173 16,368 - -
--------- --------- --------- ---------
Total inventory $ 492,273 $ 485,891 $ 235,043 $ 188,630
========= ========= ========= =========
I. Utility Revenues, Fuel and Purchased Power Expenses
The Company recognizes electric utility revenues as service is rendered to
customers. Operating revenues include unbilled electric utility revenues
earned when service has been delivered but not billed by the end of the
accounting period. Revenues include amounts resulting from fuel, purchased
power, energy conservation cost recovery and environmental cost recovery
clauses, which generally are designed to permit full recovery of these
costs. The adjustment factors are based on projected costs for a 12-month
period. The cumulative difference between actual and billed costs is
included on the balance sheet as a regulatory asset or liability. Any
difference is billed or refunded to customers during the subsequent period.
Florida Power accrues the nonfuel portion of base revenues for services
rendered but unbilled. As of December 31, 2002 and 2001, the amounts accrued
were $60.5 million and $63.1 million, respectively.
J. Diversified Business Revenues
Diversified business revenues include revenues from mining, processing and
procurement of coal; production and sale of natural gas; river terminal
services; production and sale of synthetic fuel; offshore marine
transportation; railcar repair and parts reconditioning; railcar leasing and
sales; manufacturing and supplying rail and track material; metal recycling
and sales of wholesale telecommunications services. Revenues are recognized
at the time products are shipped or as services are rendered. Leasing
activities are accounted for in accordance with SFAS No. 13, "Accounting for
Leases." Lease revenue for dedicated transport and data services is
generally billed in advance on a fixed rate basis and recognized over the
period the services are provided. Revenues relating to design and
construction of wireless infrastructure are recognized upon completion of
services for each completed phase of design and construction.
K. Income Taxes
Progress Energy and its affiliates file a consolidated federal income tax
return. The consolidated income tax of Progress Energy is allocated to
Florida Progress and Florida Power in accordance with the Inter-company
Income Tax Allocation Agreement. The agreement provides an allocation that
recognizes positive and negative corporate taxable income. The agreement
provides for an equitable method of apportioning the carry over of
uncompensated tax benefits. Progress Energy Holding Company tax benefits not
related to acquisition interest expense are allocated to profitable
subsidiaries, beginning in 2002, in accordance with a PUHCA order. Income
taxes are provided as if Florida Progress and Florida Power filed separate
returns.
Deferred income taxes have been provided for temporary differences. These
occur when there are differences between the book and tax bases of assets
and liabilities. Investment tax credits related to regulated operations have
been deferred and are being amortized over the estimated service life of the
related properties. Credits for the production and sale of synthetic fuel
are deferred to the extent they cannot be or have not been utilized in the
annual consolidated federal income tax returns (See Note 16).
L. Impairment of Long-lived Assets and Investments
The Company reviews the recoverability of long-lived and intangible assets
whenever indicators exist. Examples of these indicators include current
period losses, combined with a history of losses or a projection of
continuing losses, or a significant decrease in the market price of a
long-lived asset group. If an indicator exists, then the asset group is
tested for recoverability by comparing the carrying value to the sum of
52
undiscounted expected future cash flows directly attributable to the asset
group. If the asset group is not recoverable through undiscounted cash
flows, then an impairment loss is recognized for the difference between the
carrying value and the fair value of the asset group. The accounting for
impairment of long-lived assets is based on SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which was adopted by the
Company effective January 1, 2002. Prior to the adoption of this standard,
impairments were accounted for under SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which was superceded by SFAS No. 144. See Note 7 for a discussion of
impairment evaluations performed and charges taken.
M. Excise Taxes
The Company, as an agent for a state or local government, collects from
customers certain excise taxes levied by the state or local government upon
the customer. Florida Power accounts for excise taxes on a gross basis.
Excise taxes are separately billed to customers in addition to Florida
Power's base rates. For the years ended December 31, 2002, 2001 and 2000,
gross receipts tax and franchise taxes of approximately $131.7 million,
$133.0 million and $118.5 million, respectively, are included in taxes other
than on income on the accompanying Statements of Income and Comprehensive
Income. These approximate amounts are also included in electric operating
revenues.
N. Derivatives
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as assets or liabilities in the balance
sheet and measure those instruments at fair value (See Note 13).
In connection with the January 2003 FASB Emerging Issues Task Force (EITF)
meeting, the FASB was requested to reconsider an interpretation of SFAS No.
133. The interpretation, which is contained in the Derivatives
Implementation Group's C11 guidance, relates to the pricing of contracts
that include broad market indices. In particular, that guidance discusses
whether the pricing in a contract that contains broad market indices (e.g.,
CPI) could qualify as a normal purchase or sale (the normal purchase or sale
term is a defined accounting term, and may not, in all cases, indicate
whether the contract would be "normal" from an operating entity viewpoint).
The Company is currently reevaluating which contracts, if any, that have
previously been designated as normal purchases or sales would now not
qualify for this exception. The Company is currently evaluating the effects
that this guidance will have on its results of operations and financial
position.
O. Environmental
The Company accrues environmental remediation liabilities when the criteria
for SFAS No. 5, "Accounting for Contingencies," has been met. Environmental
expenditures are expensed as incurred or capitalized depending on their
future economic benefit. Expenditures that relate to an existing condition
caused by past operations and that have no future economic benefits are
expensed. Accruals for estimated losses from environmental remediation
obligations generally are recognized no later than completion of the
remedial feasibility study. Such accruals are adjusted as additional
information develops or circumstances change. Costs of future expenditures
for environmental remediation obligations are not discounted to their
present value. Recoveries of environmental remediation costs from other
parties are recognized when their receipt is deemed probable.
P. Other Policies
The Company considers cash and cash equivalents to include cash on hand,
cash in banks and temporary investments purchased with a maturity of three
months or less. Progress Energy and its subsidiaries participate in a money
pool arrangement to better manage cash and working capital requirements.
Under this arrangement, those companies with surplus short-term funds
provide short-term loans to participating affiliates (See Note 6).
The Company maintains an allowance for doubtful accounts receivable, which
totaled approximately $28.0 million and $25.7 million at December 31, 2002
and 2001, respectively. Florida Power's allowance for doubtful accounts
receivable totaled $2.5 million at December 31, 2002 and 2001, respectively.
Long-term debt premiums, discounts and issuance expenses are amortized over
the life of the related debt using the straight-line method. Any expenses or
call premiums associated with the reacquisition of debt obligations by
Florida Power are amortized over the applicable life using the straight-line
method consistent with ratemaking treatment.
53
The Company follows the guidance in SFAS No. 87 "Employers' Accounting for
Pensions," to account for its defined benefit retirement plans. In addition
to pension benefits, the Company provides other postretirement benefits
which are accounted for under SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions." See Note 15 for related
disclosures for these plans.
Liabilities for loss contingencies arising from litigation are recorded when
it is probable that a liability has been incurred and the amount can be
reasonably estimated in accordance with SFAS 5.
Q. Cost-Based Regulation
Florida Power's regulated operations are subject to SFAS No. 71, "Accounting
for the Effects of Certain Types of Regulation." SFAS No. 71 allows a
regulated company to record costs that have been or are expected to be
allowed in the ratemaking process in a period different from the period in
which the costs would be charged to expense by a nonregulated enterprise.
Accordingly, Florida Power records assets and liabilities that result from
the regulated ratemaking process that would not be recorded under GAAP for
nonregulated entities. These regulatory assets and liabilities represent
expenses deferred for future recovery from customers or obligations to be
refunded to customers and are primarily classified in the accompanying
Balance Sheets as regulatory assets and regulatory liabilities (See Note
12B).
R. New Accounting Standards
SFAS No. 143, "Accounting for Asset Retirement Obligations"
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations,"
in July 2001. This statement provides accounting and disclosure requirements
for retirement obligations associated with long-lived assets and is
effective January 1, 2003. This statement requires that the present value of
retirement costs for which the Company has a legal obligation be recorded as
a liability with an equivalent amount added to the asset cost and
depreciated over an appropriate period. The liability is then accreted over
time by applying an interest method of allocation to the liability.
Cumulative accretion and accumulated depreciation will be recognized for the
time period from the date the liability would have been recognized had the
provisions of this statement been in effect, to the date of adoption of this
statement. The cumulative effect of initially applying this statement is
recognized as a change in accounting principle. The adoption of this
statement will have no impact on the income of Florida Power, as the effects
are expected to be offset by the establishment of regulatory assets or
liabilities pursuant to SFAS No. 71.
The Company's review identified legal retirement obligations for nuclear
decommissioning, coal mine operations, synthetic fuel operations, and gas
production. The Company will record liabilities pursuant to SFAS No. 143
beginning in 2003. The Company used an expected cash flow approach to
measure the obligations. The following proforma liabilities reflect amounts
as if this statement had been applied during all periods (in millions):
Liability as of December 31, 2002 2001
---------- ----------
Regulated:
Nuclear decommissioning $ 302.8 $287.2
Nonregulated:
Coal mine operations $ 6.1 $ 5.6
Synfuel operations 1.4 1.1
Gas production 2.2 2.0
Nuclear decommissioning and coal mine operations have previously-recorded
liabilities. Amounts recorded for nuclear decommissioning were $283.8
million and $276.2 million at December 31, 2002 and 2001, respectively.
Amounts recorded for coal mine reclamation were $4.7 million and $4.8
million at December 31, 2002 and 2001, respectively. Synthetic fuel
operations and gas production had no previously recorded liabilities.
Proforma net income has not been presented for the years ended December 31,
2002, 2001 and 2000 because the proforma application of SFAS No. 143 to
prior periods would result in proforma net income and earnings per share not
materially different from the actual amounts reported for those periods in
the accompanying Consolidated Statements of Income and Comprehensive Income.
54
The Company has identified but not recognized asset retirement obligation
(ARO) liabilities related to electric transmission and distribution, gas
distribution, and telecommunications assets as the result of easements over
property not owned by the Company. These easements are generally perpetual
and only require retirement action upon abandonment or cessation of use of
the property for the specified purpose. The ARO liability is not estimable
for such easements, as the Company intends to utilize these properties
indefinitely. In the event the Company decides to abandon or cease the use
of a particular easement, an ARO liability would be recorded at that time.
Florida Power has previously recognized removal costs as a component of
depreciation in accordance with regulatory treatment. To the extent these
amounts do not represent SFAS No. 143 legal retirement obligations, they
will be disclosed as regulatory liabilities upon adoption of the statement.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections"
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This newly issued statement rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt (an amendment of Accounting
Principles Board (APB) Opinion No. 30)," which required all gains and losses
from the extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria set forth by APB Opinion 30 will now be used to
classify those gains and losses. Any gain or loss on extinguishment will be
recorded in the most appropriate line item to which it relates within net
income before extraordinary items. For Florida Power, any expenses or call
premiums associated with the reacquisition of debt obligations are amortized
over the applicable life using the straight-line method consistent with
ratemaking treatment (See Note 1P). SFAS No. 145 also amends SFAS No. 13 to
require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS No. 145 amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. For the
provisions related to the rescission of SFAS No. 4, SFAS No. 145 is
effective for the Company beginning in fiscal year 2004. The remaining
provisions of SFAS No. 145 are effective for the Company in fiscal year
2003. The Company is currently evaluating the effects, if any, that this
statement will have on its results of operations and financial position.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure"
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement
No. 123," and provided alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements
of SFAS No. 123, "Accounting for Stock-Based Compensation," to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This statement requires that
companies follow the prescribed format and provide the additional
disclosures in their annual reports for years ending after December 15,
2002. The Company applies the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by
SFAS Nos. 123 and 148, and related interpretations in accounting for its
stock-based compensation plans, as described in Note 14.
55
The following table illustrates the effect on net income (in thousands) if
the Company had applied the fair value recognition provisions of SFAS No.
123 to the stock option plan. The stock option plan was not in effect in
2000.
FLORIDA PROGRESS 2002 2001 2000
---------------- ---------------- ------------
Net income, as reported $ 235,171 $ 244,331 $ 144,241
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 2,806 600 -
---------------- ---------------- ------------
Proforma net income $ 232,365 $ 243,731 $ 144,241
================ ================ ============
FLORIDA POWER 2002 2001 2000
---------------- ---------------- ------------
Net income, as reported $ 324,106 $ 311,088 $ 211,810
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 2,372 500 -
---------------- ---------------- ------------
Proforma net income $ 321,734 $ 310,588 $ 211,810
================ ================ ============
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others"
In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others - an interpretation of FASB Statements
No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34" (FIN No.
45). This interpretation clarifies the disclosures to be made by a guarantor
in its interim and annual financial statements about obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of certain guarantees, a liability
for the fair value of the obligation undertaken in issuing the guarantee.
The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December
15, 2002. The applicable disclosures required by FIN No. 45 have been made
in Notes 9 and 22B. The Company is currently evaluating the effects, if any,
that this interpretation will have on its results of operations and
financial position.
FIN No. 46, "Consolidation of Variable Interest Entities"
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46).
This interpretation provides guidance related to identifying variable
interest entities (previously known as special purpose entities or SPEs) and
determining whether such entities should be consolidated. Certain
disclosures are required when FIN No. 46 becomes effective if it is
reasonably possible that a company will consolidate or disclose information
about a variable interest entity when it initially applies FIN No. 46. This
interpretation must be applied immediately to variable interest entities
created or obtained after January 31, 2003. For those variable interest
entities created or obtained on or before January 31, 2003, the Company must
apply the provisions of FIN No. 46 in the third quarter of 2003.
The Company has an arrangement with Railcar Asset Financing Trust (RAFT),
through its Railcar Ltd. subsidiary to which this interpretation may apply.
Because the Company expects to sell Railcar Ltd. during 2003 (See Note 4A),
the application of FIN No. 46 is not expected to have a material impact. The
Company is currently evaluating what effects, if any, this interpretation
will have on its results of operations and financial position.
EITF Issue 02-03, "Accounting for Contracts Involved in Energy Trading and
Risk Management Activities"
In June 2002, the Emerging Issues Task Force (EITF) reached consensus on a
portion of Issue 02-03, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." EITF Issue 02-03 requires all gains and
losses (realized or unrealized) on energy trading contracts to be shown net
in the income statement. Florida Power's policy already required the gains
and losses to be recorded on a net basis. The net of the gains and losses
are recorded in other, net on the Consolidated Statements of Income and
Comprehensive Income. Florida Power does not recognize a dealer profit or
unrealized gain or loss at the inception of a derivative unless the fair
value of that instrument, in its entirety, is evidenced by quoted market
prices or current market transactions.
56
2. Acquisition by Progress Energy
On November 30, 2000, Progress Energy acquired all of the outstanding shares
of Florida Progress' common stock in accordance with the Amended and
Restated Plan of Exchange, including the related Plan of Share Exchange,
dated as of August 22, 1999, as amended and restated as of March 3, 2000,
among CP&L Energy, Florida Progress and Carolina Power & Light Company
(CP&L). Florida Progress shareholders received $54.00 in cash or shares of
Progress Energy common stock having a value of $54.00, subject to proration,
and one contingent value obligation (CVO) in exchange for each share of
Florida Progress common stock. Each CVO represents the right to receive
contingent payments based upon the net after-tax cash flow to Progress
Energy generated by four synthetic fuel facilities purchased by subsidiaries
of Florida Progress in 1999.
The acquisition was accounted for by Progress Energy using the purchase
method of accounting; however, due to the significance of the public debt
and preferred securities of the Company and Florida Power, the acquisition
cost was not pushed down to the Florida Progress or Florida Power separate
financial statements. Even though a new basis of accounting and reporting
for the Company was not established, significant merger-related costs were
incurred in 2000 and reported in the following captions on the Consolidated
Statements of Income and Comprehensive Income (in millions):
Florida Power Diversified Total - Florida
Operation and Business Progress
Maintenance Expenses Corporation
-------------- ----------- ---------------
Employee separation costs $72.8 $17.9 $ 90.7
Other merger-related costs 21.4 34.9 56.3
-------------- ----------- --------------
Total $94.2 $52.8 $147.0
============== =========== ==============
In connection with the acquisition of the Company by Progress Energy, the
Company began the implementation of a plan to combine operations with
Progress Energy. In the fourth quarter 2000, the Company recorded executive
involuntary termination costs of $24.5 million and non-executive involuntary
termination costs of $41.8 million. Substantially all of the executive
termination expense was attributable to lump-sum severance costs paid in
December 2000. In connection with the termination of certain key executives,
the Company also recorded a curtailment and special termination benefit
charge of $25.5 million related to two supplemental defined benefit pension
plans (See Note 15). The non-executive involuntary termination accrual
includes estimates for administrative leave, severance, employer FICA,
medical benefits and outplacement costs associated with the Company's
employee involuntary termination plan. During 2001, the Company finalized
the plan to combine operations of the companies with certain final
termination payments occurring in 2002. The termination did not result in a
plan curtailment related to postretirement benefits other than pension. An
immaterial curtailment gain was recorded for the pension plan in 2001.
The activity for the non-executive involuntary termination costs is detailed
in the table below (in millions):
2002 2001
--------- ----------
Balance at January 1 $ 7.7 $41.8
Payments (4.1) (28.0)
Adjustments credited to operating results (3.6) (6.1)
--------- ----------
Balance at December 31 $ - $ 7.7
========= ==========
Other merger-related costs include $17.9 million of change of control costs
substantially related to the immediate vesting of a stock-based performance
plan (See Note 14), and $17.3 million of direct transaction costs related to
investment banker, legal and accounting fees. Other costs incurred include
employee retention costs and excise tax payments triggered by executive
severance and change of control payments.
3. Acquisitions
A. Westchester Acquisition
On April 26, 2002, Progress Fuels, a subsidiary of Florida Progress,
acquired 100% of Westchester Gas Company (Westchester). The acquisition
included approximately 215 natural gas-producing wells, 52 miles of
intrastate gas pipeline and 170 miles of gas-gathering systems located
within a 25-miles radius of Jonesville, Texas, on the Texas-Louisiana
border.
57
The aggregate purchase price of approximately $153 million consisted of cash
consideration of approximately $22 million and the issuance of 2.5 million
shares of Progress Energy common stock valued at approximately $129 million.
The purchase price included approximately $2 million of direct transaction
costs. The purchase price was primarily allocated to fixed assets, including
oil and gas properties, based on the preliminary fair values of the assets
acquired. The preliminary purchase price allocation is subject to adjustment
for changes in the preliminary assumptions and analyses used, pending
additional information including final asset valuations.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations for Westchester have
been included in Florida Progress' consolidated financial statements since
the date of acquisition. The proforma results of operations reflecting the
acquisition would not be materially different than the reported results of
operations for the years ended December 31, 2002 or 2001.
B. Other Acquisitions
During 2000, subsidiaries of Progress Fuels acquired seven businesses, in
separate transactions. The cash paid for the 2000 acquisitions was $45.7
million. The excess of the aggregate purchase price over the fair value of
net assets acquired was approximately $11.1 million. The acquisitions were
accounted for under the purchase method of accounting and, accordingly, the
operating results of the acquired businesses have been included in the
Company's financial statements since the date of acquisition. Each of the
acquired companies conducted operations similar to those of the subsidiaries
and has been integrated into Progress Fuels' operations. The proforma
results of consolidated operations for 2000, assuming the 2000 acquisitions
were made at the beginning of the year, would not differ significantly from
the historical results.
4. Divestitures
A. Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a
resolution approving the sale of Railcar Ltd., a subsidiary included in the
Rail Services segment. A series of sales transactions is expected to take
place throughout 2003. In accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," an estimated impairment on
assets held for sale of $66.5 million has been recognized for the write-down
of the assets to be sold to fair value less the costs to sell. This
impairment has been included in impairment of long-lived assets in the
Consolidated Statements of Income and Comprehensive Income (See Note 7).
The assets of Railcar Ltd. have been grouped as assets held for sale and are
included in other current assets on the Consolidated Balance Sheets as of
December 31, 2002. The assets are recorded at $23.6 million, which reflects
the Company's initial estimate of the fair value expected to be realized
from the sale of these assets. The majority of these assets, approximately
$21.6 million, are current assets. These assets are subject to certain
commitments under operating leases (See Note 20). The Company expects to be
relieved of the majority of these commitments as a result of the sale.
B. Inland Marine Transportation Divestiture
On July 23, 2001, Progress Energy announced the disposition of the Inland
Marine Transportation segment of the Company, which was operated by MEMCO
Barge Line, Inc. Inland Marine provided transportation of coal, agricultural
and other dry-bulk commodities as well as fleet management services.
Progress Energy entered into a contract to sell MEMCO Barge Line, Inc., to
AEP Resources, Inc., a wholly owned subsidiary of American Electric Power.
On November 1, 2001, the Company completed the sale of the Inland Marine
Transportation segment.
The results of operations for all periods presented have been restated for
the discontinued operations of the Inland Marine Transportation segment. The
net income of these operations is reported in the Consolidated Statements of
Income and Comprehensive Income as discontinued operations.
58
Results of discontinued operations for years ended December 31, were as
follows (in thousands):
2001 2000
--------- ---------
Revenues $142,721 $170,329
Earnings before income taxes 4,530 16,961
Income taxes 1,848 7,989
--------- ---------
Net earnings 2,682 8,972
Estimated loss on disposal of discontinued operations,
including provision of $5,468 for pre-tax operating income
during phase-out period (net of applicable income tax
benefit of $7,896) (23,734) -
--------- ---------
Income (loss) from discontinued operations $(21,052) $ 8,972
========= =========
The net gain on disposal of discontinued operations in the Company's
Consolidated Statements of Income and Comprehensive Income for year ended
December 31, 2002, represents the after-tax gain from the resolution of
approximately $5.1 million of contingencies in the purchase agreement of the
Inland Marine Transportation segment.
In connection with the sale, the Company entered into environmental
indemnification provisions covering both unknown and known sites. The
Company has recorded an accrual to cover estimated probable future
environmental expenditures. The Company believes that it is reasonably
possible that additional costs, which cannot be currently estimated, may be
incurred related to the environmental indemnification provision beyond the
amounts accrued. The Company cannot predict the outcome of this matter.
5. Financial Information by Business Segment
The Company's principal business segment is Florida Power, a utility engaged
in the generation, purchase, transmission, distribution and sale of
electricity primarily in Florida. The other reportable business segments are
Progress Fuels' Energy & Related Services and Rail Services. The Inland
Marine Transportation business, formerly a business segment, was sold in
November 2001 (See Note 4B). The Energy & Related Services segment includes
coal and synthetic fuel operations, natural gas production and sales, river
terminal services and off-shore marine transportation. Rail Services'
operations include railcar repair, rail parts reconditioning and sales,
railcar leasing and sales, providing rail and track material, and scrap
metal recycling. The Other category consists primarily of Progress
Telecommunications Corporation (Progress Telecom), the Company's
telecommunications subsidiary, the Company's investment in FPC Capital
Trust, which holds the Preferred Securities, and the holding company,
Florida Progress Corporation. Progress Telecom markets wholesale fiber-optic
based capacity service in the Eastern United States and also markets
wireless structure attachments to wireless communication companies and
governmental entities. The Company allocates a portion of its operating
expenses to business segments.
The Company's business segment information for 2002, 2001 and 2000 is
summarized below. The Company's significant operations are geographically
located in the United States with limited operations in Mexico and Canada.
The Company's segments are based on differences in products and services,
and therefore no additional disclosures are presented. Intersegment sales
and transfers consist primarily of coal sales from the Energy and Related
Services segment of Progress Fuels to Florida Power. The price Progress
Fuels charges Florida Power is based on market rates for coal procurement
and for water-borne transportation under a methodology approved by the FPSC.
Rail transportation is also based on market rates plus a return allowed by
the FPSC on equity in transportation equipment utilized in transporting coal
to Florida Power. The allowed rate of return is currently 12%. No single
customer accounted for 10% or more of unaffiliated revenues.
Segment net income (loss) for 2002 includes an estimated impairment on the
assets held for sale of Railcar Ltd. of $66.5 million pre-tax ($44.7 million
after-tax) included in the Rail Services segment and an asset impairment and
other charges related to Progress Telecom totaling $233.0 million on a
pre-tax basis ($144.0 million after-tax) included in the Other segment.
Segment net income (loss) for 2001 includes a long-lived asset impairment
pre-tax loss of $160.6 million (after-tax $108.1 million) included in the
Rail Services segment. Segment net income (loss) for 2000 includes a
long-lived asset impairment pre-tax loss of $70.2 million (after-tax $47.3
million) included in the Energy & Related Services segment and $60.5 million
impairment pre-tax loss (after-tax $36.3 million) included in the Rail
Services segment (See Note 7).
59
Energy
and
Related Rail
(In millions) Utility Services Services Other Consolidated
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2002
Revenues $ 3,061.7 $ 342.8 $ 714.5 $ 234.3 $ 4,353.3
Intersegment revenues - 525.6 4.6 (530.2) -
Depreciation and amortization 294.9 33.9 20.4 11.2 360.4
Net interest charges 106.8 21.9 32.8 21.6 183.1
Impairment of long-lived assets and
investments - - 66.5 214.6 281.1
Income tax expense (benefit) 163.3 (206.6) (19.4) (110.5) (173.2)
Income (loss) from continuing operations 322.6 117.5 (47.4) (162.6) 230.1
Total segment assets 5,226.2 708.0 614.5 77.8 6,626.5
Capital and investment expenditures 550.0 104.2 8.3 41.4 703.9
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001
Revenues $ 3,212.8 $ 369.7 $ 820.1 $ 133.9 $ 4,536.5
Intersegment revenues - 398.3 1.1 (399.4) -
Depreciation and amortization 453.0 23.6 33.8 12.0 522.4
Net interest charges 113.7 12.0 36.4 31.7 193.8
Impairment of long-lived assets - - 160.6 - 160.6
Income tax expense (benefit) 182.6 (253.6) (74.7) (27.0) (172.7)
Income (loss) from continuing operations 309.6 128.5 (144.4) (28.3) 265.4
Total segment assets 5,009.6 452.9 602.6 258.2 6,323.3
Capital and investment expenditures 353.4 43.5 18.0 72.0 486.9
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
Revenues $ 2,871.6 $ 329.3 $ 1,002.1 $ 27.3 $ 4,230.3
Intersegment revenues - 244.3 0.7 (245.0) -
Depreciation and amortization 402.6 25.2 32.3 13.3 473.4
Net interest charges 125.4 12.2 42.7 26.1 206.4
Impairment of long-lived assets - 70.2 60.5 - 130.7
Income tax expense (benefit) 150.5 (200.4) (28.9) (45.9) (124.7)
Income (loss) from continuing operations 210.3 34.1 (52.9) (56.2) 135.3
Total segment assets 4,978.0 345.4 802.3 366.9 6,492.6
Capital and investment expenditures 286.8 63.0 25.1 106.1 481.0
- --------------------------------------------------------------------------------------------------------------------
6. Related Party Transactions
The Company and its subsidiaries participate in two internal money pools,
operated by Progress Energy, to more effectively utilize cash resources and
to reduce outside short-term borrowings. Short-term borrowing needs are met
first by available funds of the money pool participants. Borrowing companies
pay interest at a rate designed to approximate the cost of outside
short-term borrowings. Subsidiaries, which invest in the money pool, earn
interest on a basis proportionate to their average monthly investment. The
interest rate used to calculate earnings approximates external interest
rates. The weighted-average interest rates associated with such money pool
balances were 2.18% and 4.47% at December 31, 2002 and 2001, respectively.
Funds may be withdrawn from or repaid to the pool at any time without prior
notice. At December 31, 2002, Florida Progress and Florida Power had $379.7
60
million and $237.4 million, respectively, of amounts payable to the money
pool that are included in notes payable to affiliated companies on the
Balance Sheets. At December 31, 2001, Florida Progress had $147.6 million of
amounts payable to the money pool and Florida Power had $119.8 million of
amounts receivable from the money pool that are included in notes payable to
affiliated companies and notes receivable from affiliated companies,
respectively, on the Balance Sheets. Interest expense related to advances
from Progress Energy was $6.6 million and $8.2 million for Florida Progress
in 2002 and 2001, respectively, and $0.6 million for Florida Power in 2002.
Florida Progress and Florida Power both recorded $1.2 million and $2.4
million of interest income related to the money pool for 2002 and 2001,
respectively. Interest expense and interest income related to the money pool
in 2000 was not significant.
During 2000, Progress Energy formed Progress Energy Service Company, LLC
(PESC) to provide specialized services, at cost, to the Company and its
subsidiaries, as approved by the U.S. Securities and Exchange Commission
(SEC). The Company and its subsidiaries have an agreement with PESC under
which PESC services, including purchasing, accounting, treasury, tax,
marketing, legal, and human resources are rendered at cost. Amounts billed
by PESC to Florida Progress and Florida Power for these services during 2002
and 2001 amounted to $248.6 million and $199.9 million, respectively, and
$116.1 million and $110.9 million, respectively. At December 31, 2002 and
2001, Florida Progress had a net payable to PESC of $43.1 million and $31.7
million, respectively. Florida Power had a net payable to the service
company of $36.6 million and $28.1 million, respectively, at December 31,
2002 and 2001. During 2002, the Office of Public Utility Regulation within
the SEC completed an audit examination of the Progress Energy's books and
records. This examination is a standard process for all PUHCA registrants.
Based on the review, the method for allocating PESC costs to the Parent and
its affiliates will change in 2003. The Company does not anticipate the
reallocation of costs will have a material impact on the results of
operations.
Progress Fuels has an outstanding note due to the Parent. The principal
outstanding on this note was $500.0 million at December 31, 2002 and 2001.
Progress Fuels recorded interest expense related to this note of $32.1
million and $5.4 million for 2002 and 2001, respectively.
Progress Fuels sells coal to Florida Power which are eliminated from
revenues in Florida Progress' consolidated financial statements. In
accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," profits on intercompany sales between Progress Fuels and
Florida Power are not eliminated if the sales price is reasonable and the
future recovery of sales price through the ratemaking process is probable.
In April 2000, Progress Ventures, Inc. (PVI), a wholly owned subsidiary of
Progress Energy, purchased a 90% interest in an affiliate of Progress Fuels
that owns a synthetic fuel facility located at the company-owned mine site
in Virginia. In May 2000, PVI purchased a 90% ownership interest in another
synthetic fuel facility located in West Virginia. The purchase agreements
contained a provision that would require PVI to sell, and the respective
Progress Fuels affiliate to repurchase, the 90% interest had the share
exchange among Florida Progress, CP&L Energy and CP&L not occurred.
Progress Fuels has accounted for the transactions as a sale for tax purposes
and, because of the repurchase obligation, as a financing for financial
reporting purposes in the pre-acquisition period and as a transfer of assets
within a controlled group as of the acquisition date. At the date of
acquisition, assets of $8.3 million were transferred to Progress Energy. As
of December 31, 2002 and 2001, the Company has a note receivable of $46.6
million and $59.9 million from PVI that has been recorded as a reduction to
equity for financial reporting purposes. Payments on the note during 2002
and 2001 totaled $17.2 million and $13.9 million, respectively, representing
$13.3 million and $3.9 million in principal and interest in 2002 and $9.4
million and $4.5 million in principal and interest in 2001.
From time-to-time the Company and its subsidiaries may receive equity
contributions from Progress Energy. During 2002, the Company received cash
equity contributions of $87.2 million. During 2001, the Company received
cash equity contributions of $90.1 million and a non-cash equity
contribution of $0.6 million. During 2000, the Company received cash equity
contributions totaling $84.5 million from Progress Energy.
In August 2002, CP&L transferred reservation payments for the manufacture of
two combustion turbines to Florida Power at CP&L's original cost of $20.0
million. These combustion turbines will be installed at the Florida Power
Hines facility in 2005. In December 2002, PVI transferred reservation
payments for the manufacture of one combustion turbine and exhaust stack to
Florida Power at PVI's original cost of $15.5 million. This combustion
turbine will be installed at a Florida Power production facility in 2004. At
December 31, 2002, Florida Power had a $14.2 million payable to CP&L related
to these transfers.
61
7. Impairment of Long-Lived Assets and Investments
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides
guidance for the accounting and reporting of impairment or disposal of
long-lived assets. The statement supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." In 2002, 2001 and 2000, the Company recorded impairments of
approximately $281.2 million, $160.6 million and $130.7 million,
respectively. The 2002 amount includes an estimated impairment of assets
held for sale of $66.5 million related to Railcar, Ltd. (See Note 4A).
Due to the decline of the telecommunications industry and continued
operating losses, the Company initiated an independent valuation study
during 2002 to assess the recoverability of the long-lived assets Progress
Telecom. Based on this assessment, the Company recorded asset impairments of
$214.6 million on a pre-tax basis and other charges of $18.4 million on a
pre-tax basis primarily related to inventory adjustments in the third
quarter of 2002. This write-down constitutes a significant reduction in the
book value of these long-lived assets.
The long-lived asset impairments include an impairment of property, plant
and equipment, construction work in process and intangible assets. The
impairment charge represents the difference between the fair value and
carrying amount of these long-lived assets. The fair value of these assets
was determined using a valuation study heavily weighted on the discounted
cash flow methodology, using market approaches as supporting information.
Due to results of divestiture efforts and the decision to retain the Rail
Services business segment in the near term, coupled with prior and current
year losses and a continued decline in the rail services industry, the
Company evaluated the recoverability of rail long-lived assets and
associated goodwill. Fair value was generally determined based on discounted
cash flows. As a result of this review, the Company recorded asset
impairments, primarily goodwill, of $160.6 million pre-tax ($108.1 million
after-tax) during the fourth quarter of 2001. Asset write-downs resulting
from this review were charged to diversified business expenses on the
Consolidated Statements of Income and Comprehensive Income.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other-than-temporary. During
the fourth quarter of 2001, the Company determined that the decline in fair
value of its affordable housing investments, held by Progress International
Holdings, a subsidiary of Progress Capital Holdings, Inc. (Progress Capital)
was other-than-temporary. As a result, the Company has recorded investment
impairments for other-than-temporary declines in the fair value of its
affordable housing investments. Investment write-downs of $9.1 million
pre-tax are included in other, net on the Consolidated Statements of Income
and Comprehensive Income.
During the fourth quarter of 2000, Progress Fuels evaluated the economic
feasibility of accessing and mining its existing coal reserves in light of
the intended changes for the use of these assets by management and a
significant downturn in the coal industry. Progress Fuels concluded that
approximately 180 million tons of its existing reserves are impaired. Based
on the Progress Fuels' expectation of future net cash flow, these reserves
were written-down to their fair value, resulting in a pre-tax loss of $70.2
million. This impairment charge is included in diversified business expenses
on the Consolidated Statements of Income and Comprehensive Income.
During 2000, Progress Energy hired a financial advisor to assist Florida
Progress in evaluating its strategic alternatives with respect to two of
Progress Fuels' business segments, Rail Services and Inland Marine
Transportation. Preliminary valuations on the Rail Services business segment
indicated that the carrying amounts of goodwill and other long-lived assets
are not recoverable. As such, the carrying values of these assets were
written down to estimated fair value based on discounted cash flows
considering cash flows expected to result from the use of the assets and
their eventual disposition. During the fourth quarter of 2000, the Rail
Services segment recognized the resulting pre-tax impairment loss of $60.5
million, which was substantially attributed to the write-down of goodwill.
This impairment charge is included in diversified business expenses on the
Consolidated Statements of Income and Comprehensive Income.
62
8. Debt and Credit Facilities
A. Lines of Credit
At December 31, 2002, Florida Power had committed lines of credit totaling
$290.5 million, all of which are used to support its commercial paper
borrowings. Florida Power is required to pay minimal annual commitment fees
to maintain its credit facilities. The following table summarizes Florida
Power's credit facilities used to support the issuance of commercial paper
(in millions):
Description Total
------------------
364-Day (expiring 4/1/03) $ 90.5
5-Year (expiring 11/30/03) 200.0
------------------
$ 290.5
==================
There were no loans outstanding under these facilities at December 31, 2002.
As of December 31, 2002 and 2001, Florida Power had $257.1 million and
$154.3 million, respectively, of outstanding commercial paper and other
short-term debt classified as short-term obligations. The weighted-average
interest rates of such short-term obligations at December 31, 2002 and 2001
were 1.55% and 2.49%, respectively. Florida Power no longer reclassifies
commercial paper to long-term debt. Certain amounts for 2001 have been
reclassified to conform to 2002 presentation, with no effect on previously
reported net income or common stock equity.
The combined aggregate maturities of Florida Progress long-term debt for
2003 through 2007 are approximately $275 million, $68 million, $49 million,
$109 million and $124 million, respectively. Florida Power's aggregate
maturities of long-term debt for 2003 through 2007 are approximately $217
million, $43 million, $48 million, $48 million and $89 million,
respectively.
B. Covenants and Default Provisions
Financial Covenants
Florida Power's credit line contains various terms and conditions that could
affect Florida Power's ability to borrow under these facilities. These
include a maximum debt to total capital ratio, a material adverse change
clause and a cross-default provision.
Florida Power's credit line requires a maximum total debt to total capital
ratio of 65.0%. Indebtedness as defined by the bank agreement includes
certain letters of credit and guarantees which are not recorded on the
Consolidated Balance Sheets. As of December 31, 2002, Florida Power's total
debt to total capital ratio was 48.6%.
Material adverse change clause
The credit facility of Florida Power includes a provision under which
lenders could refuse to advance funds in the event of a material adverse
change in the borrower's financial condition.
Default provisions
Florida Power's credit lines include cross-default provisions for defaults
of indebtedness in excess of $10 million. Florida Power's cross-default
provisions only apply to defaults of indebtedness by Florida Power and not
to other affiliates of Florida Power. The credit lines of Progress Energy
include a similar provision. Progress Energy's cross-default provisions only
apply to defaults of indebtedness by Progress Energy and its significant
subsidiaries, which includes Florida Power, Florida Progress, Progress Fuels
and Progress Capital.
In the event that either of these cross-default provisions were triggered,
the lenders could accelerate payment of any outstanding debt. Any such
acceleration would cause a material adverse change in the respective
company's financial condition. Certain agreements underlying the Company's
indebtedness also limit the Company's ability to incur additional liens or
engage in certain types of sale and leaseback transactions.
63
Other restrictions
Florida Power's mortgage indenture provides that it will not pay any cash
dividends upon its common stock, or make any other distribution to the
stockholders, except a payment or distribution out of net income of Florida
Power subsequent to December 31, 1943.
In addition, Florida Power's Articles of Incorporation provide that no cash
dividends or distributions on common stock shall be paid, if the aggregate
amount thereof since April 30, 1944, including the amount then proposed to
be expended, plus all other charges to retained earnings since April 30,
1944, exceed (a) all credits to retained earnings since April 30, 1944, plus
(b) all amounts credited to capital surplus after April 30, 1944, arising
from the donation to Florida Power of cash or securities or transfers
amounts from retained earnings to capital surplus. At December 31, 2002,
none of Florida Power's retained earnings of $598 million was restricted.
Florida Power's Articles also provide that cash dividends on common stock
shall be limited to 75% of net income available for dividends if common
stock equity falls below 25% of total capitalization, and to 50% if common
stock equity falls below 20%. On December 31, 2002, Florida Power's common
stock equity was approximately 50.7% of total capitalization.
C. Secured Obligations
Florida Power's first mortgage bonds are secured by their respective
mortgage indentures. Florida Power's mortgage constitutes a first lien on
substantially all of its fixed properties, subject to certain permitted
encumbrances and exceptions. The Florida Power mortgage also constitutes a
lien on subsequently acquired property. At December 31, 2002, Florida Power
had approximately $1.1 billion in aggregate principal amount of first
mortgage bonds outstanding including those related to pollution control
obligations. The Florida Power mortgage allows the issuance of additional
mortgage bonds upon the satisfaction of certain conditions.
D. Guarantees of Subsidiary Debt
Florida Progress has guaranteed the outstanding debt obligations for two of
its wholly owned subsidiaries, FPC Capital I and Progress Capital. At
December 31, 2002 and 2001, Progress Capital had $223 million and $273
million in medium term notes outstanding which was fully guaranteed by
Florida Progress. FPC Capital I had $300 million in mandatorily redeemable
securities outstanding at December 31, 2002 and 2001 for which Florida
Progress has guaranteed payment. See Note 9 for additional discussion of
these notes.
E. Hedging Activities
Florida Power uses interest rate derivatives to adjust the fixed and
variable rate components of its debt portfolio and to hedge cash flow risk
of fixed rate debt to be issued in the future. See discussion of risk
management and derivative transactions at Note 13.
9. Company-Obligated Mandatorily Redeemable Cumulative Quarterly Income
Preferred Securities of a Subsidiary Trust Holding Solely Florida Progress
Guaranteed Subordinated Deferrable Interest Notes
In April 1999, FPC Capital I (the Trust), an indirect wholly-owned
subsidiary of the Company, issued 12 million shares of $25 par cumulative
Company-obligated mandatorily redeemable preferred securities (Preferred
Securities) due 2039, with an aggregate liquidation value of $300 million
with an annual distribution rate of 7.10%, payable quarterly. Currently, all
12 million shares of the Preferred Securities that were issued are
outstanding. Concurrent with the issuance of the Preferred Securities, the
Trust issued to Florida Progress Funding Corporation (Funding Corp.) all of
the common securities of the Trust (371,135 shares), for $9.3 million.
Funding Corp. is a direct wholly owned subsidiary of the Company.
The existence of the Trust is for the sole purpose of issuing the Preferred
Securities and the common securities and using the proceeds thereof to
purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable
Interest Notes (subordinated notes) due 2039, for a principal amount of
$309.3 million. The subordinated notes and the Notes Guarantee (as discussed
below) are the sole assets of the Trust. Funding Corp.'s proceeds from the
sale of the subordinated notes were advanced to Progress Capital and used
for general corporate purposes including the repayment of a portion of
certain outstanding short-term bank loans and commercial paper.
64
The Company has fully and unconditionally guaranteed the obligations of
Funding Corp. under the subordinated notes (the Notes Guarantee). In
addition, the Company has guaranteed the payment of all distributions
required to be made by the Trust, but only to the extent that the Trust has
funds available for such distributions (Preferred Securities Guarantee). The
Preferred Securities Guarantee, considered together with the Notes
Guarantee, constitutes a full and unconditional guarantee by the Company of
the Trust's obligations under the Preferred Securities.
The subordinated notes may be redeemed at the option of Funding Corp.
beginning in 2004 at par value plus accrued interest through the redemption
date. The proceeds of any redemption of the subordinated notes will be used
by the Trust to redeem proportional amounts of the Preferred Securities and
common securities in accordance with their terms. Upon liquidation or
dissolution of Funding Corp., holders of the Preferred Securities would be
entitled to the liquidation preference of $25 per share plus all accrued and
unpaid dividends thereon to the date of payment.
These Preferred Securities are classified as long-term debt on Florida
Progress' Consolidated Balance Sheets.
10. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and short-term obligations
approximate fair value due to the short maturities of these instruments. At
December 31, 2002 and 2001, there were miscellaneous investments, consisting
primarily of investments in company-owned life insurance and other benefit
plan assets, with carrying amounts of approximately $64.1 million and $74.2
million, respectively, included in miscellaneous other property and
investments. The carrying amount of these investments approximates fair
value due to the short maturity of certain instruments and certain
instruments are presented at fair value. The carrying amount of the
Company's long-term debt, including current maturities, was $2.5 billion and
$2.6 billion at December 31, 2002 and 2001, respectively. The estimated fair
value of this debt, as obtained from quoted market prices for the same or
similar issues, was $2.7 billion and $2.8 billion at December 31, 2002 and
2001, respectively.
External funds have been established as a mechanism to fund certain costs of
nuclear decommissioning (See Note 1F). These nuclear decommissioning trust
funds are invested in stocks, bonds and cash equivalents. Nuclear
decommissioning trust funds are presented on the Balance Sheets at amounts
that approximate fair value. Fair value is obtained from quoted market
prices for the same or similar investments.
11. Preferred and Preference Stock
The authorized capital stock of the Company includes 10 million shares of
preferred stock, without par value, including 2 million shares designated as
Series A Junior Participating Preferred Stock. No shares of the Company's
preferred stock are issued or outstanding.
The authorized capital stock of Florida Power includes three classes of
preferred stock: 4 million shares of Cumulative Preferred Stock, $100 par
value; 5 million shares of Cumulative Preferred Stock, without par value;
and 1 million shares of Preference Stock, $100 par value. No shares of
Florida Power's Cumulative Preferred Stock, without par value, or Preference
Stock are issued or outstanding. All Cumulative Preferred Stock series are
without sinking funds and are not subject to mandatory redemption.
12. Regulatory Matters
A. Rates
Florida Power's retail rates are set by the FPSC, while its wholesale rates
are governed by the FERC. Florida Power's last general retail rate case was
approved in 1992 and allowed a 12% regulatory return on equity with an
allowed range between 11% and 13%.
Florida Power previously operated under an agreement committing several
parties not to seek any reduction in its base rates or authorized return on
equity. That agreement expired on June 30, 2001. The FPSC initiated a rate
proceeding in 2001 regarding Florida Power's future base rates. On March 27,
2002, the parties in Florida Power's rate case entered into a Stipulation
and Settlement Agreement (the Agreement) related to retail rate matters. The
Agreement was approved by the FPSC on April 23, 2002. The Agreement is
generally effective from May 1, 2002 through December 31, 2005; provided,
however, that if Florida Power's base rate earnings fall below a 10% return
on equity, Florida Power may petition the FPSC to amend its base rates.
65
The Agreement provides that Florida Power will reduce its retail revenues
from the sale of electricity by an annual amount of $125 million. The
Agreement also provides that Florida Power will operate under a Revenue
Sharing Incentive Plan (the Plan) through 2005, and thereafter until
terminated by the FPSC, that establishes annual revenue caps and sharing
thresholds. The Plan provides that retail base rate revenues between the
sharing thresholds and the retail base rate revenue caps will be divided
into two shares - a 1/3 share to be received by Florida Power's
shareholders, and a 2/3 share to be refunded to Florida Power's retail
customers; provided, however, that for the year 2002 only, the refund to
customers was limited to 67.1% of the 2/3 customer share. The retail base
rate revenue sharing threshold amounts for 2002 was $1.296 billion and will
increase $37 million each year thereafter. The Plan also provides that all
retail base rate revenues above the retail base rate revenue caps
established for each year will be refunded to retail customers on an annual
basis. For 2002, the refund to customers was limited to 67.1% of the retail
base rate revenues that exceeded the 2002 cap. The retail base revenue cap
for 2002 was $1.356 billion and will increase $37 million each year
thereafter. Any amounts above the retail base revenue caps will be refunded
100% to customers. As of December 31, 2002, $4.7 million has been accrued
and will be refunded to customers by March 2003.
The Agreement also provides that beginning with the in-service date of
Florida Power's Hines Unit 2 and continuing through December 31, 2005,
Florida Power 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. Hines Unit 2 is a 516 MW combined-cycle
unit under construction and currently scheduled for completion in late 2003.
Additionally, the Agreement provided that Florida Power would effect a
mid-course correction of its fuel cost recovery clause to reduce the fuel
factor by $50 million for the remainder of 2002. The fuel cost recovery
clause will operate as it normally does, including, but not limited to any
additional mid-course adjustments that may become necessary, and the
calculation of true-ups to actual fuel clause expenses.
Florida Power will suspend accruals on its reserves for nuclear
decommissioning and fossil dismantlement through December 31, 2005.
Additionally, for each calendar year during the term of the Agreement,
Florida Power will record a $62.5 million depreciation expense reduction,
and may, at its option, record up to an equal annual amount as an offsetting
accelerated depreciation expense. In addition, Florida Power is authorized,
at its discretion, to accelerate the amortization of certain regulatory
assets over the term of the Agreement. There was no accelerated depreciation
or amortization expense recorded for the year ended December 31, 2002.
Under the terms of the Agreement, Florida Power agreed to continue the
implementation of its four-year Commitment to Excellence Reliability Plan
and expects to achieve a 20% improvement in its annual System Average
Interruption Duration Index by no later than 2004. If this improvement level
is not achieved for calendar years 2004 or 2005, Florida Power will provide
a refund of $3 million for each year the level is not achieved to 10% of its
total retail customers served by its worst performing distribution feeder
lines.
The Agreement also provided that Florida Power was required to refund to
customers $35 million of revenues Florida Power collected during the interim
period since March 13, 2001. This one-time retroactive revenue refund was
recorded in the first quarter of 2002 and was returned to retail customers
over an eight-month period ended December 31, 2002. Any additional refunds
under the Agreement are recorded when they become probable.
In February 2003, Florida Power petitioned the FPSC to increase its fuel
factors due to continuing increases in oil and natural gas commodity prices.
The crisis in the Middle East along with the Venezuelan oil workers' strike
have put upward pressure on commodity prices that were not anticipated by
Florida Power when fuel factors for 2003 were approved by the FPSC in
November 2002. If Florida Power's petition is approved, the increase would
go into effect April 1, 2003.
B. Regulatory Assets and Liabilities
As a regulated entity, Florida Power is subject to the provisions of SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation."
Accordingly, the Florida Power records certain assets and liabilities
resulting from the effects of the ratemaking process, which would not be
recorded under GAAP for nonregulated entities. The utility's ability to
continue to meet the criteria for application of SFAS No. 71 may be affected
in the future by competitive forces and restructuring in the electric
utility industry. In the event that SFAS No. 71 no longer applied to Florida
Power's operations, related regulatory assets and liabilities would be
eliminated unless an appropriate regulatory recovery mechanism was provided.
Additionally, these factors could result in an impairment of utility plant
assets as determined pursuant to SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (See Note 1L).
66
Florida Power has regulatory assets (liabilities) at December 31, 2002 and
2001 as follows (in thousands):
2002 2001
----------- -----------
Deferred fuel (included in current assets) $37,503 $15,147
----------- -----------
Income taxes recoverable through future rates 32,623 27,610
Deferred purchased power contract termination costs 46,601 95,326
Loss on reacquired debt 19,756 19,848
Deferred DOE enrichment facilities-related costs 6,955 8,531
Other 24,179 22,766
----------- -----------
Total regulatory assets 130,114 174,081
----------- -----------
Nuclear maintenance and refueling (9,601) (346)
Storm reserve (Note 22C) (35,631) (35,527)
Other (15,772) (14,320)
----------- -----------
Total regulatory liabilities (61,004) (50,193)
----------- -----------
Net regulatory assets $ 106,613 $ 139,035
=========== ===========
Except for portions of deferred fuel, all assets earn a return or the cash
has not yet been expended, in which case the assets are offset by
liabilities that do not incur a carrying cost. The utility expects to fully
recover these assets and refund the liabilities through customer rates under
current regulatory practice.
The Tiger Bay regulatory asset, for contract termination costs, is recovered
pursuant to an agreement between Florida Power and several intervening
parties, which was approved by the FPSC in June 1997. The amortization of
the regulatory asset is calculated using revenues collected under the fuel
adjustment clause as if the purchased power agreements related to the
facility were still in effect, less the actual fuel costs and the related
debt interest expense. This will continue until the regulatory asset is
fully amortized. Under the plan, Florida Power had the option to accelerate
the amortization at its discretion. Including accelerated amounts, Florida
Power recorded amortization expense of $48.7 million, $130.5 million and
$71.2 million in 2002, 2001 and 2000, respectively.
In December 2000, Florida Power received approval from the FPSC to establish
a regulatory liability to defer 2000 revenues for disposition by April 2,
2001. Florida Power applied the deferred revenues of $63 million, plus
accrued interest, to amortization of the Tiger Bay regulatory asset during
the first quarter of 2001.
Similar approvals were given by the FPSC in November 1999. Florida Power
received approval from the FPSC to defer nonfuel revenues towards the
development of a plan that would allow customers to realize the benefits
earlier than if they were used to accelerate the amortization of the Tiger
Bay regulatory asset. Florida Power was unable to identify any rate
initiatives that might allow its ratepayers to receive these benefits
sooner. In September 2000, Florida Power recognized $44.4 million of
revenue, and recorded $44.4 million, plus interest, of amortization against
the Tiger Bay regulatory asset.
In compliance with a regulatory order, Florida Power accrues a reserve for
maintenance and refueling expenses anticipated to be incurred during
scheduled nuclear plant outages.
13. Risk Management Activities and Derivatives Transactions
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 non-performance by counterparties is not expected
to have a material effect on the consolidated financial position or
consolidated results of operations of the Company.
A. Commodity Contracts - General
Most of the Company's commodity contracts either are not derivatives
pursuant to SFAS No. 133 or qualify as normal purchases or sales pursuant to
SFAS No. 133. Therefore, such contracts are not recorded at fair value.
67
B. Commodity Derivatives - Cash Flow Hedges
Progress Fuels held natural gas and oil cash flow hedging instruments at
December 31, 2002. The objective for holding these instruments is to manage
a portion of the market risk associated with fluctuations in the price of
natural gas and oil on Progress Fuel's forecasted sales of natural gas and
oil production. As of December 31, 2002, Progress Fuels is hedging exposures
to the price variability of these commodities for contracts maturing through
December 2004.
The total fair value of these instruments at December 31, 2002 was a $10.2
million liability position. The ineffective portion of commodity cash flow
hedges was not material in 2002. As of December 31, 2002, $5.0 million of
after-tax deferred losses in accumulated other comprehensive income (OCI)
are expected to be reclassified to earnings during the next 12 months as the
hedged transactions occur. Due to the volatility of the commodities markets,
the value in OCI is subject to change prior to its reclassification into
earnings.
C. Commodity Derivatives - Economic Hedging and Trading
Nonhedging derivatives, primarily electricity forward contracts, may be
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 manages open positions with strict policies that limit its exposure
to market risk and require daily reporting to management of potential
financial exposures. Gains and losses from such contracts were not material
during 2002, 2001 or 2000, and the Company did not have material outstanding
positions in such contracts at December 31, 2002 or 2001.
D. Interest Rate Derivatives - Fair Value or Cash Flow Hedges
The Company manages its interest rate exposure in part by maintaining its
variable-rate and fixed rate-exposures within defined limits. In addition,
the Company also enters into financial derivative instruments, including,
but not limited to, interest rate swaps and lock agreements to manage and
mitigate interest rate risk exposure.
The Company uses cash flow hedging strategies to hedge variable interest
rates on long-term debt and to hedge interest rates with regard to future
fixed-rate debt issuances. At December 31, 2002, Florida Power held an
interest rate cash flow hedge, with a notional amount of $35 million,
related to an anticipated 2003 issuance of long-term debt. The fair value of
that hedge was a $0.5 million liability position at December 31, 2002. As of
December 31, 2002, an immaterial amount of after-tax deferred losses in OCI
is expected to be reclassified to earnings during the next 12 months as the
hedged interest payments occur. Due to the volatility of interest rates, the
value in OCI is subject to change prior to its reclassification into
earnings. At December 31, 2001, the Company held no interest rate cash flow
hedges.
The Company uses fair value hedging strategies to manage its exposure to
fixed interest rates on long-term debt. At December 31, 2002 and 2001, the
Company had no open interest rate fair value hedges.
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 these transactions is the cost of replacing the
agreements at current market rates.
14. Stock-Based Compensation
A. Long-Term Incentive Plans
Prior to November 30, 2000, the Company and one of its subsidiaries had
Long-Term Incentive Plans (LTIPs) which authorized the granting of common
stock to certain executives in various forms. These plans were terminated on
November 30, 2000, in conjunction with the acquisition by Progress Energy
(See Note 2). All outstanding LTIP awards as of November 30, 2000 were paid
in full in 2000 in accordance with the change in control provisions of these
plans. Certain executives were also eligible to receive restricted stock,
which also were fully vested and paid in conjunction with the merger.
Compensation costs for performance shares, performance units and restricted
stock were recognized at the fair market value of the Company's stock and
recognized over the performance cycle. Compensation costs related to the
LTIPs for 2000 were $17 million. In addition the Company recognized
merger-related costs of $18 million associated with these plans in 2000, as
a result of the immediate vesting of all outstanding awards.
68
B. Employee Stock Ownership Plan
Progress Energy sponsors the Progress Energy 401(k) Savings and Stock
Ownership Plan (401(k)) for which substantially all full-time non-bargaining
unit employees and certain part-time non-bargaining employees within
participating subsidiaries are eligible. Effective January 1, 2002, Florida
Progress is a participating subsidiary of the 401(k), which has matching and
incentive goal features, encourages systematic savings by employees and
provides a method of acquiring Progress Energy common stock and other
diverse investments. The 401(k), as amended in 1989, is an Employee Stock
Ownership Plan (ESOP) that can enter into acquisition loans to acquire
Progress Energy common stock to satisfy 401(k) common stock needs.
Qualification as an ESOP did not change the level of benefits received by
employees under the 401(k). Common stock acquired with the proceeds of an
ESOP loan is held by the 401(k) Trustee in a suspense account. The common
stock is released from the suspense account and made available for
allocation to participants as the ESOP loan is repaid. Such allocations are
used to partially meet common stock needs related to Progress Energy
matching and incentive contributions and/or reinvested dividends.
Florida Progress' matching and incentive goal compensation cost under the
401(k) is determined based on matching percentages and incentive goal
attainment as defined in the plan. Such compensation cost is allocated to
participants' accounts in the form of Progress Energy common stock, with the
number of shares determined by dividing compensation cost by the common
stock market value at the time of allocation. The 401(k) common stock share
needs are met with open market purchases, with shares released from the ESOP
suspense account and with newly issued shares. Florida Progress' matching
and incentive cost met with shares released from the suspense account
totaled approximately $2.0 million for the year ended December 31, 2002.
C. Stock Option Agreements
Pursuant to the Progress Energy's 1997 Equity Incentive Plan and 2002 Equity
Incentive Plans as amended and restated as of July 10, 2002, Progress Energy
may grant options to purchase shares of common stock to directors, officers
and eligible employees. During 2002 and 2001, approximately 2.9 million and
2.4 million common stock options were granted. Of these amounts,
approximately 0.5 million and 0.4 million, respectively, were granted to
officers and eligible employees of Florida Progress and Florida Power. No
compensation expense was recognized under the provisions of APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Had compensation expense been measured based on the fair value of the
options on the date of grant, calculated under the provisions of SFAS No.
123, "Accounting for Stock Based Compensation," Florida Progress's and
Florida Power's allocated share of such compensation expense would have
reduced reported net income in 2002 by approximately $2.8 million and $2.4
million, respectively. Compensation expense for 2001 was insignificant.
D. Other Stock-Based Compensation Plans
Progress Energy has additional compensation plans for officers and key
employees that are stock-based in whole or in part. The Company participates
in these plans. The two primary active stock-based compensation programs are
the Performance Share Sub-Plan (PSSP) and the Restricted Stock Awards
program (RSA), both of which were established pursuant to Progress Energy's
1997 Equity Incentive Plan and were continued under the 2002 Equity
Incentive Plan, as amended and restated as of July 10, 2002.
Under the terms of the PSSP, officers and key employees are granted
performance shares on an annual basis that vest over a three-year
consecutive period. Each performance share has a value that is equal to, and
changes with, the value of a share of Progress Energy's common stock, and
dividend equivalents are accrued on, and reinvested in, the performance
shares. The PSSP has two equally weighted performance measures, both of
which are based on Progress Energy's results as compared to a peer group of
utilities. Compensation expense is recognized over the vesting period based
on the expected ultimate cash payout and is reduced by any forfeitures.
69
The RSA allows Progress Energy to grant shares of restricted common stock to
officers and key employees of Progress Energy. The restricted shares
generally vest on a graded vesting schedule over a minimum of three years.
Compensation expense, which is based on the fair value of common stock at
the grant date, is recognized over the applicable vesting period and is
reduced by any forfeitures.
The total amount expensed by the Company for other stock-based compensation
under these plans was $1.4 million in 2002 and 2001, and $0.03 million in
2000.
15. Benefit Plans
A. Pension Benefits
The Company and some of its subsidiaries (including Florida Power) sponsor
noncontributory defined benefit pension plans covering most employees.
The Company also has supplementary defined benefit pension plans, which
provide additional benefits to certain higher-level employees. As a result
of the acquisition by Progress Energy, the benefits of two plans are now
frozen, and in 2000, the Company recorded merger-related charges of $24.4
million associated with the two plans (See Note 2). The net pension benefit
recognized in 2000 of $53.6 million does not include the merger-related
charges.
B. Other Postretirement Benefits
The Company and some of its subsidiaries (including Florida Power) also
provide certain health care and life insurance benefits for retired
employees that reach retirement age while working for the Company.
Shown below are the components of the net pension expense and net
postretirement benefit expense calculations for 2002, 2001 and 2000:
Pension Benefits Other Postretirement Benefits
--------------------------------- -----------------------------
(In millions) 2002 2001 2000 2002 2001 2000
--------------------------------- -----------------------------
Service cost $ 18.9 $ 10.5 $ 18.7 $ 4.7 $ 3.9 $ 3.2
Interest cost 44.2 42.0 42.5 15.0 12.5 10.9
Expected return on plan assets (75.8) (86.3) (92.0) (0.7) (0.6) (0.5)
Net amortization and deferral (7.3) (18.8) (22.8) 4.1 3.5 2.7
--------------------------------- -----------------------------
Net cost/(benefit) recognized by Florida Progress $ (20.0) $ (52.6) $ (53.6) $ 23.1 $ 19.3 $ 16.3
--------------------------------- -----------------------------
Net cost/(benefit) recognized by Florida Power $ (21.9) $ (50.3) $ (51.3) $ 21.9 $ 18.0 $ 15.9
The following weighted average actuarial assumptions at December 31 were
used in the calculation of the year-end obligation or each year's cost:
Pension Benefits Other Postretirement Benefits
------------------------------- ---------------------------------
(In millions) 2002 2001 2000 2002 2001 2000
------------------------------- ---------------------------------
Discount rate for obligation 6.60% 7.50% N/A 6.60% 7.50% N/A
Expected long-term rate of return 9.25% 9.25% 9.00% 5.00% 5.00% 5.00%
Rate of compensation increase:
Bargaining unit employees 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%
Nonbargaining unit employees 4.00% 4.00% 4.50% 4.00% 4.00% 4.50%
Nonqualified plans 4.00% 4.50% 4.50% N/A N/A N/A
------------------------------- ---------------------------------
The following summarizes the change in the benefit obligation and plan
assets for both the pension plan and postretirement benefit plan for 2002
and 2001:
70
Other Postretirement
Pension Benefits Benefits
------------------------ -------------------------
(In millions) 2002 2001 2002 2001
------------------------ -------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 587.8 $ 627.7 $ 180.4 $ 156.2
Service cost 18.9 10.5 4.7 3.9
Interest cost 44.2 42.0 15.0 12.5
Plan amendment - (43.0) - 7.8
Actuarial (gain)/loss 118.9 (13.4) 55.5 9.6
Transfers (17.6) - (5.4) -
Benefits paid (38.7) (35.0) (14.4) (9.6)
Curtailment gain and special
termination benefits (See Note 2) - (1.0) - -
------------------------ -------------------------
Benefit obligation at end of year $ 713.5 $ 587.8 $ 235.8 $ 180.4
------------------------ -------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 853.7 $ 948.8 $ 13.4 $ 11.6
Return on plan assets (114.4) (63.3) 1.3 0.5
Employer contributions 4.4 3.2 15.8 10.9
Transfers (17.6) - - -
Benefits paid (38.7) (35.0) (14.4) (9.6)
------------------------ -------------------------
Fair value of plan assets at end of year $ 687.4 $ 853.7 $ 16.1 $ 13.4
------------------------ -------------------------
Funded status $ (26.1) $ 265.9 $ (219.7) $ (167.0)
Unrecognized transition (asset) obligation (0.7) (5.6) 34.9 38.4
Unrecognized prior service cost (20.0) (21.7) 7.0 7.5
Unrecognized net actuarial (gain) loss 213.2 (96.5) 32.9 (16.6)
Minimum pension liability adjustment (7.3) - - -
------------------------ -------------------------
Prepaid (accrued) benefit cost-Florida Progress $ 159.1 $ 142.1 $ (144.9) $ (137.7)
------------------------ -------------------------
Prepaid (accrued) benefit cost-Florida Power $ 188.0 $ 168.4 $ (139.4) $ (132.9)
The Florida Progress net prepaid pension cost of $159.1 million and $142.1
million at December 31, 2002 and 2001, respectively, is included in the
accompanying Consolidated Balance Sheets as prepaid pension cost of $226.4
million and $202.2 million, respectively, and accrued benefit cost of $67.3
million and $60.1 million, respectively, which is included in other
liabilities and deferred credits. The Florida Power net prepaid pension cost
of $188.0 million and $168.4 million at December 31, 2002 and 2001,
respectively, is included in the accompanying Consolidated Balance Sheets as
prepaid pension cost of $222.5 million and $198.4 million, respectively, and
accrued benefit cost of $34.5 million and $30.0 million, respectively, which
is included in other liabilities and deferred credits. For Florida Progress,
the defined benefit plans with accumulated benefit obligations in excess of
plan assets had projected benefit obligations totaling $67.6 million and
$59.6 million at December 31, 2002 and 2001, respectively. Those plans had
accumulated benefit obligations totaling $67.3 million and $59.6 million,
respectively, and no plan assets. For Florida Power, the defined benefit
plans with accumulated benefit obligations in excess of plan assets had
projected benefit obligations totaling $34.8 million and $30.0 million at
December 31, 2002 and 2001, respectively. Those plans had accumulated
benefit obligations totaling $34.5 million and $30.0 million, respectively,
and no plan assets.
Florida Progress and Florida Power recorded a minimum pension liability
adjustment of $7.3 million and $3.9 million, respectively, at December 31,
2002, with a corresponding pre-tax charge to accumulated other comprehensive
loss, a component of common stock equity.
Accrued other postretirement benefit cost is included in other liabilities
and deferred credits in the respective balance sheets of Florida Progress
and Florida Power.
71
The assumed pre-Medicare and post Medicare health care cost trend rates are:
2002 2001
--------------------------
Initial medical cost trend for pre-medicare benefits 7.50% 7.50%
Initial medical cost trend for post-medicare benefits 7.50% 7.50%
Ultimate medical cost trend rate 5.25% 5.00%
Year ultimate medical cost trend rate is achieved 2009 2008
Assuming a 1% increase in the medical cost trend rates, the aggregate of the
service and interest cost components of the net periodic OPEB cost for 2002
would increase by $3.0 million, and the OPEB obligation at December 31,
2002, would increase by $23.3 million. Assuming a 1% decrease in the medical
cost trend rates, the aggregate of the service and interest cost components
of the net periodic OPEB cost for 2002 would decrease by $2.6 million and
the OPEB obligation at December 31, 2002, would decrease by $21.2 million.
16. Income Taxes
Income tax expense (benefit) applicable to continuing operations is
comprised of (in millions):
FLORIDA PROGRESS 2002 2001 2000
-------------- --------------- ------------
Payable currently: Federal $ 42.9 $ 3.4 $96.8
State 23.4 25.7 15.5
-------------- --------------- ------------
66.3 29.1 112.3
-------------- --------------- ------------
Deferred, net: Federal (220.0) (187.5) (215.6)
State (13.1) (6.5) (13.5)
-------------- --------------- ------------
(233.1) (194.0) (229.1)
-------------- --------------- ------------
Amortization of investment tax credits, net (6.4) (7.8) (7.9)
-------------- --------------- ------------
Income tax benefit $ (173.2) $ (172.7) $ (124.7)
============== =============== ============
FLORIDA POWER 2002 2001 2000
-------------- --------------- ------------
Payable currently: Federal $ 171.6 $ 192.9 $ 181.3
State 29.0 30.7 28.6
-------------- --------------- ------------
200.6 223.6 209.9
-------------- --------------- ------------
Deferred, net: Federal (28.2) (30.2) (46.0)
State (2.7) (3.0) (5.6)
-------------- --------------- ------------
(30.9) (33.2) (51.6)
-------------- --------------- ------------
Amortization of investment tax credits, net (6.4) (7.8) (7.8)
-------------- --------------- ------------
Income tax expense $ 163.3 $ 182.6 $ 150.5
============== =============== ============
72
The primary differences between the statutory rates and the effective income
tax rates are detailed below:
FLORIDA PROGRESS 2002 2001 2000
--------------- -------------- --------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefits 10.3 12.8 12.4
Amortization of investment tax credits (11.3) (8.4) (74.8)
Synthetic fuel income tax credits (299.7) (230.3) (1,402.7)
Other income tax credits (11.6) (6.5) (66.3)
Goodwill amortization - 9.7 0.2
Non-deductible acquisition costs - - 233.8
Net unfunded taxes from prior years - - 40.0
Impairment loss - - 16.2
Company owned life insurance - cash surrender value 3.2 2.1 11.5
Progress Energy tax allocation benefit (See Note 1K) (35.2) - -
Other 4.5 (0.8) 13.0
--------------- -------------- --------------
Effective income tax rates (304.8)% (186.4)% (1,181.7)%
=============== ============== ==============
FLORIDA POWER 2002 2001 2000
--------------- -------------- --------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefits 3.4 3.6 4.1
Amortization of investment tax credits (1.3) (1.6) (2.2)
Non-deductible acquisition costs - - 3.0
Progress Energy tax allocation benefit (See Note 1K) (3.8) - -
Other 0.3 - 1.6
--------------- -------------- --------------
Effective income tax rates 33.6% 37.0% 41.5%
=============== ============== ==============
The following summarizes the components of deferred tax liabilities and
assets at December 31 (in millions):
FLORIDA PROGRESS 2002 2001
--------------- --------------
Deferred tax liabilities:
Difference in tax basis of property,
plant and equipment $ 384.9 $ 436.4
Investment in partnerships (10.4) 1.8
Deferred book expenses 5.9 7.0
Other 93.0 80.6
--------------- --------------
Total deferred tax liabilities $ 473.4 $ 525.8
=============== ==============
Deferred tax assets:
Accrued book expenses $ 66.6 $ 71.4
Income tax credit carry forward 314.2 202.9
Unbilled revenues 17.8 17.7
State income tax loss carry forward 24.9 20.4
Valuation allowance (25.6) (20.4)
Other 108.5 100.3
--------------- --------------
Total deferred tax assets $ 506.4 $ 392.3
=============== ==============
73
FLORIDA POWER 2002 2001
--------------- --------------
Deferred tax liabilities:
Difference in tax basis of property,
plant and equipment $ 377.2 $ 413.7
Deferred book expenses 6.1 7.0
Other 21.2 10.4
--------------- --------------
Total deferred tax liabilities $ 404.5 $ 431.1
=============== ==============
Deferred tax assets:
Accrued book expenses $ 42.0 $ 40.4
Unbilled revenues 17.8 17.7
Other 9.8 10.5
--------------- --------------
Total deferred tax assets $ 69.6 $ 68.6
=============== ==============
At December 31, 2002 and 2001, Florida Progress had net non-current deferred
tax (assets)/liabilities of $(6.8) million and $165.8 million and net
current deferred tax assets of $26.2 million and $32.3 million,
respectively. The income tax credit carry forward at December 31, 2002,
consists of $301.6 million of alternative minimum tax credit with an
indefinite carry forward period, and $12.6 million of general business
credit with a carry forward period that will begin to expire in 2020. The
company had a valuation allowance of $20.4 million at December 31, 2001 and
established additional valuation allowances of $5.2 million during 2002 due
to the uncertainty of realizing certain future state income tax benefits.
The Company believes it is more likely than not that the results of future
operations will generate sufficient taxable income to allow for the
utilization of the remaining deferred tax assets.
At December 31, 2002 and 2001, Florida Power had net non-current deferred
tax liabilities of $361.1 million and $394.8 million and net current
deferred tax assets of $26.2 million and $32.3 million, respectively.
Florida Power expects the results of future operations will generate
sufficient taxable income to allow for the utilization of deferred tax
assets.
The Company, through its subsidiaries, is a majority owner in three entities
and a minority owner in three entities that own facilities that produce
synthetic fuel as defined under the Internal Revenue Service Code (Code).
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. Total Section 29 credits generated to
date are approximately $573.2 million. All three majority-owned entities and
all three minority-owned entities have received private letter rulings
(PLR's) from the Internal Revenue Service (IRS) with respect to their
synthetic fuel operations. The PLR's do not limit the production on which
synthetic fuel credits may be claimed. Should the tax credits be denied on
future audits, and the Company fails to prevail through the IRS or legal
process, there could be a significant tax liability owed for
previously-taken Section 29 credits, with a significant impact on earnings
and cash flows. The current Section 29 tax credit program will expire in
2007.
One of the Company's synthetic fuel entities, Colona Synfuel Limited
Partnership, L.L.L.P. (Colona), is being audited by the IRS. The audit of
Colona was expected. The Company is audited regularly in the normal course
of business as are most similarly situated companies. The Company has been
allocated approximately $225 million in tax credits to date for this
synthetic fuel entity. As provided for in contractual arrangements
pertaining to Progress Energy's purchase of Colona, the Company has begun
escrowing quarterly royalty payments owed to an unaffiliated entity until
final resolution of the audit.
In September 2002, all three of Florida Progress' majority-owned synthetic
fuel entities, including Colona, and two of the Company's minority 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. While the ultimate outcome is uncertain, the Company believes
that participation in the PFA program will likely shorten the tax exam
process.
74
In management's opinion, the Company is complying with all the necessary
requirements to be allowed such credits under Section 29 and believes it is
probable, although it cannot provide certainty, that it will prevail on any
credits taken.
17. Joint Ownership of Generating Facilities
Florida Power holds an undivided ownership interest in certain jointly-owned
generating facilities, CR3 and Intercessions Unit P-11 (P11). Florida Power
is entitled to shares of the generating capability and output of CR3 equal
to its ownership interest. Florida Power also pays its ownership share of
additional construction costs, fuel inventory purchases and operating
expenses. Florida Power's share of expenses for the jointly-owned facility
are included in the appropriate expense category. The co-owner of P11 has
exclusive rights to the output of the unit during the months of June through
September. Florida Power has that right for the remainder of the year.
Florida Power's ownership interest in CR3 and P11 is listed below with
related information as of December 31, 2002 and 2001 (dollars in thousands):
Company Unamortized Construction
Megawatt Ownership Plant Accumulated Accumulated Nuclear Work in
2002 Capability Interest Investment Depreciation Decommissioning Fuel Progress
---------- -------- ---------- ------------ --------------- ---- --------
CR3 834 91.78% $777,141 $504,417 $396,868 $40,260 $27,907
P11 143 66.67% 22,090 5,232 - - 3,897
Company Unamortized Construction
Megawatt Ownership Plant Accumulated Accumulated Nuclear Work in
2001 Capability Interest Investment Depreciation Decommissioning Fuel Progress
---------- -------- ---------- ------------ --------------- ---- --------
CR3 834 91.78% $773,835 $469,840 $416,995 $62,536 $25,723
P11 143 66.67% 22,302 4,583 - - 94
18. 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 Consolidated Statements of Income and Comprehensive Income for fiscal
years 2002, 2001 and 2000 are as follows (in thousands):
2002 2001 2000
--------------- ---------------- ----------------
Other income
Net energy purchased for resale gain (loss) $ 292 $ (287) $ 3,822
Net financial trading gain (loss) - (3,958) 128
Nonregulated energy and delivery services income 16,937 17,655 21,840
AFUDC equity 2,307 77 1,297
Other 3,513 1,372 155
--------------- ---------------- ----------------
Total other income - Florida Power $ 23,049 $ 14,859 $ 27,242
--------------- ---------------- ----------------
Income from equity investments 5,213 4,416 1,220
Other income - Florida Progress 5,937 2,896 7,691
--------------- ---------------- ----------------
Total other income - Florida Progress $ 34,199 $ 22,171 $ 36,153
--------------- ---------------- ----------------
Other expense
Nonregulated energy and delivery services expenses $ 15,141 $ 13,382 $ 19,561
Donations 10,464 6,902 5,508
Other 3,371 5,355 2,580
--------------- ---------------- ----------------
Total other expense - Florida Power $ 28,976 $ 25,639 $ 27,649
--------------- ---------------- ----------------
Loss from equity investments 4,707 11,891 9,388
Other expense - Florida Progress 14,192 10,726 25,448
--------------- ---------------- ----------------
Total other expense - Florida Progress $ 47,875 $ 48,256 $ 62,485
--------------- ---------------- ----------------
Other, net $ (13,676) $ (26,085) $ (26,332)
=============== ================ ================
75
Net financial trading gain (loss) represents non-asset-backed trades of
electricity. Nonregulated energy and delivery services include power
protection services and mass market programs (surge protection, appliance
services and area light sales) and delivery, transmission and substation
work for other utilities.
19. Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." This statement clarifies the criteria for
recording of other intangible assets separately from goodwill. Effective
January 1, 2002, goodwill is no longer subject to amortization over its
estimated useful life. Instead, goodwill is subject to at least an annual
assessment for impairment by applying a two-step fair-value based test. This
assessment could result in periodic impairment charges. The Company
completed the first step of the initial transitional goodwill impairment
test, which indicated that the Company's goodwill was not impaired as of
January 1, 2002. The Company's carrying amount of goodwill at December 31,
2002 and 2001, was $11.1 million in the Energy and Related Services segment.
Florida Power has no goodwill and no significant intangible assets as of
December 31, 2002 and 2001. The Company and Florida Power had no other
significant intangible assets as of December 31, 2002 and 2001.
As required by SFAS No. 142, the results for the prior years have not been
restated. A reconciliation of net income as if SFAS No. 142 had been adopted
is presented below for the years ended December 31 (in thousands).
2001 2000
------------------- ------------------
Reported net income $ 244,331 $ 144,241
Goodwill amortization 2,394 3,001
------------------- ------------------
Adjusted net income $ 246,725 $ 147,242
=================== ==================
20. Leases
The Company leases transportation equipment, office buildings, computer
equipment, and other property and equipment with various terms and
expiration dates. The Company generally requires the subsidiaries to pay all
executory costs such as maintenance and insurance. Some rental payments
include minimum rentals plus contingent rentals based on mileage. These
contingent rentals are not significant. Rent expense (under operating
leases) totaled $32.6 million, $25.3 million and $73.9 million during 2002,
2001 and 2000, respectively. In addition, Progress Telecom has entered into
capital leases for equipment. Assets recorded under capital leases totaled
$2.9 million and $12.2 million as of December 31, 2002 and 2001,
respectively. Accumulated amortization was not significant. These assets
were written down in conjunction with the impairments of Progress Telecom
recorded during the third quarter of 2002 (See Note 7).
Minimum annual rental payments, excluding executory costs such as property
taxes, insurance and maintenance, under long-term noncancelable leases as of
December 31, 2002 are (in thousands):
Capital Leases Operating Leases
-------------- ----------------
2003 $ 1,111 $ 53,089
2004 1,111 41,671
2005 1,111 23,706
2006 1,111 17,230
2007 1,111 12,780
Thereafter 8,740 53,990
--------------- ----------------
$ 14,295 $202,466
================
Less amount representing imputed interest (4,828)
---------------
Present value of net minimum lease payments
uner capital lease $ 9,467
===============
The Company expects to sell Railcar Ltd. during 2003 (See Note 4A). The
operating lease obligations above include $34.2 million, $24.0 million, $6.7
million, $1.5 million, and $1.4 million for the years 2003 through 2007,
respectively, which are attributable to Railcar Ltd. Upon the sale of the
related assets, the Company expects to be relieved of these obligations.
76
The Company is also a lessor of land, buildings, railcars and other types of
properties it owns under operating leases with various terms and expiration
dates. The leased buildings and railcars are depreciated under the same
terms as other buildings and railcars included in diversified business
property. Minimum rentals receivable under noncancelable leases as of
December 31, 2002, are (in thousands):
Amounts
-----------------
2003 $ 10,589
2004 7,213
2005 5,836
2006 4,681
2007 2,626
Thereafter 6,304
-----------------
$ 37,249
=================
The rentals receivable totals above include $10.3 million, $7.0 million,
$5.6 million, $4.5 million, and $2.6 million, for the years 2003 through
2007, respectively, and $4.4 million thereafter, which are attributable to
Railcar Ltd. Upon the sale of the related assets, the Company expects to no
longer receive this income.
Florida Power is the lessor of electric poles and streetlights. Rents
received are contingent upon usage and totaled $52.5 million, $47.5 million
and $47.7 million for 2002, 2001 and 2000, respectively.
In December 2000, Railcar Ltd., a subsidiary of Progress Fuels, sold a
portfolio of railcars to Railcar Asset Financing Trust (RAFT). Railcar Ltd.
made a $4.9 million (9.95%) investment in RAFT and will remain as servicer
of the portfolio. The RAFT term is five years at which time Railcar Ltd. has
the option to repurchase the railcars at fair value. As of December 31,
2002, the RAFT was accounted for as assets held for sale, which is presented
in other current assets on the accompanying Consolidated Balance Sheets.
21. Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss for Florida Progress and
Florida Power as of December 31, 2002 and 2001 are as follows (in
thousands):
FLORIDA PROGRESS 2002 2001
----------- ------------
Loss on cash flow hedges $ (6,665) $ -
Minimum pension liability adjustments (4,503) -
Foreign currency translation and other (4,569) (2,985)
----------- ------------
Total accumulated other comprehensive loss $ (15,737) $ (2,985)
=========== ============
FLORIDA POWER
2002 2001
----------- ------------
Loss on cash flow hedges $ (318) $ -
Minimum pension liability adjustments (2,366) -
----------- ------------
Total accumulated other comprehensive loss $ (2,684) $ -
=========== ============
22. Commitments and Contingencies
A. Fuel, Coal and Purchased Power Commitments
Florida Power has long-term contracts for approximately 473 megawatts of
purchased power with other utilities, including a contract with The Southern
Company for approximately 413 megawatts of purchased power annually through
2010. Florida Power can lower these purchases to approximately 200 MW
annually with a three-year notice. Total purchases, for both energy and
capacity, under these agreements amounted to $159.3 million, $111.7 million
and $104.5 million for 2002, 2001 and 2000, respectively. Total capacity
payments were $50.5 million, $54.1 million and $54.0 million for 2002, 2001
and 2000, respectively. Minimum purchases under these contracts,
representing capital-related capacity costs, are approximately $50 million
annually through 2005 and $30 million annually for 2006 and 2007.
Florida Power has ongoing purchased power contracts with certain
cogenerators (qualifying facilities) for 871 megawatts of capacity with
expiration dates ranging from 2003 to 2025. These purchased power contracts
provide for capacity and energy payments. Energy payments are based on the
actual power taken under these contracts. Capacity payments are subject to
the qualifying facilities meeting certain contract performance obligations.
In most cases, these contracts account for 100% of the generating capacity
of each of the facilities. Of the 871 megawatts under contract, 831
77
megawatts currently are available to Florida Power. All commitments have
been approved by the FPSC. Total capacity purchases under these contracts
amounted to $231.7 million, $225.8 million and $226.4 million for 2002, 2001
and 2000, respectively. Minimum expected future capacity payments under
these contracts as of December 31, 2002 are $246.8 million, $257.4 million,
$268.7 million, $279.7 million and $289.4 million for 2003 through 2007,
respectively.
Florida Power has entered into various long-term contracts for oil, gas and
coal requirements of its generating plants. Payments under these commitments
were $750.3 million, $641.6 million and $614.7 million in 2002, 2001 and
2000, respectively. Estimated annual payments for firm commitments of fuel
purchases and transportation costs under these contracts are approximately
$1.2 billion, $635.7 million, $562.8 million, $595.6 million and $651.7
million for 2003 through 2007, respectively.
Progress Fuels has two coal supply contracts with Florida Power, which
require Florida Power to buy and Progress Fuels to supply substantially all
of the coal requirements of four of Florida Power's generating units, two
through 2002 and two through 2004. In connection with these contracts,
Progress Fuels has entered into several contracts with outside parties for
the purchase of coal. The annual obligations for coal purchases and
transportation under these contracts are $188.3 million and $41.7 million
for 2003 and 2004, respectively, with no obligations thereafter. The total
cost incurred for these commitments in 2002, 2001 and 2000 was $207.4
million, $134.1 million and $110.6 million, respectively.
The FPSC allows the capacity payments to be recovered through a capacity
cost recovery clause, which is similar to, and works in conjunction with,
energy payments recovered through the fuel cost recovery clause.
B. Guarantees
As a part of normal business, Florida Progress and certain subsidiaries
enter into various agreements providing financial or performance assessments
to third parties. Such agreements include guarantees, stand-by letters of
credit and surety bonds. These agreements are entered into primarily to
support or enhance the creditworthiness otherwise attributed to a subsidiary
on a stand-alone basis, thereby facilitating the extension of sufficient
credit to accomplish the subsidiaries' intended commercial purposes.
At December 31, outstanding guarantees are as follows (in millions):
2002 2001
------------------- -----------------
Standby letters of credit $ 42.5 $ 24.3
Surety bonds 38.6 13.0
Other guarantees 5.1 33.9
------------------- -----------------
Total $ 86.2 $ 71.2
=================== =================
Standby Letters of Credit
The Company has issued stand-by letters of credit to financial institutions
for the benefit of third parties that have extended credit to the Company
and certain subsidiaries. These letters of credit have been issued primarily
for the purpose of supporting payments of trade payables, securing
performance under contracts and lease obligations and self insurance for
workers compensation. If a subsidiary does not pay amounts when due under a
covered contract, the counterparty may present its claim for payment to the
financial institution, which will in turn request payment from the Company.
Any amounts owed by the Company's subsidiaries are reflected in the
Consolidated Balance Sheets.
Surety Bonds
At December 31, 2002, the Company had $38.6 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.
Other Guarantees
The Company has other guarantees outstanding related primarily to prompt
performance payments, lease obligations, and other payments subject to
contingencies.
78
Progress Energy has issued approximately $7.5 million of financial
guarantees on behalf of Progress Rail Services Corporation for obligations
related to the purchase and sale of railcar parts, equipment and services.
As of December 31, 2002, management does not believe conditions are likely
for performance under these agreements.
C. Insurance
Florida Power is a member of Nuclear Electric Insurance Limited (NEIL),
which provides primary and excess insurance coverage against property damage
to members' nuclear generating facilities. Under the primary program,
Florida Power is insured for $500 million at its nuclear plant, CR3. In
addition to primary coverage, NEIL also provides decontamination, premature
decommissioning and excess property insurance with a limit of $1.1 billion.
Insurance coverage against incremental costs of replacement power resulting
from prolonged accidental outages at nuclear generating units is also
provided through membership in NEIL. Florida Power is insured thereunder,
following a twelve-week deductible period, for 52 weeks in the amount of
$3.5 million per week at CR3. An additional 110 weeks of coverage is
provided at 80% of the above weekly amount. For the current policy period,
Florida Power is subject to retrospective premium assessments of up to
approximately $7.3 million with respect to the primary coverage, $6.7
million with respect to the decontamination, decommissioning and excess
property coverage, and $4.7 million for the incremental replacement power
costs coverage, in the event covered losses at insured facilities exceed
premiums, reserves, reinsurance and other NEIL resources. Pursuant to
regulations of the U.S. Nuclear Regulatory Commission, Florida Power's
property damage insurance policies provide that all proceeds from such
insurance be applied, first, to place the plant in a safe and stable
condition after an accident and, second, to decontaminate, before any
proceeds can be used for decommissioning, plant repair or restoration.
Florida Power is responsible to the extent losses may exceed limits of the
coverage described above.
Florida Power is insured against public liability for a nuclear incident up
to $9.55 billion per occurrence. Under the current provisions of the Price
Anderson Act, which limits liability for accidents at nuclear power plants,
Florida Power, as an owner of a nuclear unit, can be assessed for 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), Florida Power would be
subject to pro rata assessments of up to $88.1 million for each reactor
owned per occurrence. Payment of such assessments would be made over time as
necessary to limit the payment in any one year to no more than $10 million
per reactor owned. Congress is expected to approve revisions to the Price
Anderson Act in the first quarter of 2003, that will include increased
limits and assessments per reactor owned. The final outcome of this matter
cannot be predicted at this time.
There have been recent revisions made to the nuclear property and nuclear
liability insurance policies regarding the maximum recoveries available for
multiple terrorism occurrences. Under the NEIL policies, if there were
multiple terrorism losses occurring within one year after the first loss
from terrorism, NEIL would make available one industry aggregate limit of
$3.2 billion, along with any amounts it recovers from reinsurance,
government indemnity or other sources up to the limits for each claimant. If
terrorism losses occurred beyond the one-year period, a new set of limits
and resources would apply. For nuclear liability claims arising out of
terrorist acts, the primary level available through commercial insurers is
now subject to an industry aggregate limit of $300 million. The second level
of coverage obtained through the assessments discussed above would continue
to apply to losses exceeding $300 million and would provide coverage in
excess of any diminished primary limits due to the terrorist acts aggregate.
Florida Power self-insures its transmission and distribution lines against
loss due to storm damage and other natural disasters. Pursuant to a
regulatory order, Florida Power is accruing $6 million annually to a storm
damage reserve and may defer any losses in excess of the reserve (See Note
12B). A reconciliation of the activity in the reserve for the years ended
December 31 is included in the table below (in thousands):
2002 2001 2000
------------- -------------- -----------
Reserve balance at beginning of year $ 35,527 $ 29,527 $ 25,629
Accruals made 6,000 6,000 6,000
Charges taken (5,896) - (2,102)
------------- -------------- -----------
Ending balance at end of year $ 35,631 $ 35,527 $ 29,527
============= ============== ===========
79
D. Other Commitments
Florida Progress has certain future commitments related to synthetic fuel
facilities purchased that provide for contingent payments (royalties) of up
to $25.2 million on sales from Florida Progress' interests in these plants
annually through 2007. The related agreements were amended in December 2001
to require the payment of minimum annual royalties of which Florida
Progress' share is approximately $14.5 million through 2007. As a result of
the amendment, Florida Progress recorded a liability (included in other
liabilities and deferred credits on the Consolidated Balance Sheets) and a
deferred cost asset (included in other assets and deferred debits in the
Consolidated Balance Sheets) of approximately $57.1 million and $67.0
million at December 31, 2002 and 2001, representing the minimum amounts due
through 2007, discounted at 6.05%. As of December 31, 2002 and 2001,
respectively, the portions of the asset and liability recorded that were
classified as current were $11.9 million and $12.9 million, respectively.
The deferred cost asset will be amortized to expense each year as synthetic
fuel sales are made. The maximum amounts payable under these agreements
remain unchanged. Actual amounts paid under these agreements were
approximately $24.1 million in 2002, $25.2 million in 2001, and $22.5
million in 2000.
E. 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. There are several MGP sites to which the
Company has some connection. In this regard, Florida Power and other
potentially responsible parties, are participating in investigating and, if
necessary, remediating former MGP sites with several regulatory agencies,
including, but not limited to, the U.S. Environmental Protection Agency
(EPA), and the Florida Department of Environmental Protection (FDEP). In
addition, Florida Power is periodically notified by regulators such as the
EPA and various state agencies of their involvement or potential involvement
in sites, other than MGP sites, that may require investigation and/or
remediation.
Florida Power. There are two former MGP sites and 11 other active sites
associated with Florida Power that have required or are anticipated to
require investigation and/or remediation costs. As of December 31, 2002 and
2001, Florida Power has accrued approximately $10.9 million and $8.5
million, respectively, for probable and reasonably estimable costs at these
sites. Florida Power does not believe that it can provide an estimate of the
reasonably possible total remediation costs beyond what is currently
accrued. In 2002, Florida Power filed a petition for recovery of
approximately $4.0 million in environmental cost through the Environmental
Cost Recovery Clause with the FPSC. Florida Power was successful with this
filing and will recover costs through rates for investigation and
remediation associated with transmission and distribution substations and
transformers. As more activity occurs at these sites, Florida Power will
assess the need to adjust the accruals. These accruals have been recorded on
an undiscounted basis. Florida Power measures its liability for these sites
based on available evidence including its experience in investigating and
remediating environmentally impaired sites. This process often includes
assessing and developing cost-sharing arrangements with other potentially
responsible parties. A rollforward of the balance in this liability is not
provided due to the immateriality of this activity in the periods presented.
Florida Progress. In 2001, Florida Progress sold Inland Marine
Transportation to AEP Resources, Inc (See Note 4B). Florida Progress
established an accrual to address indemnities and retained environmental
liability associated with the transaction. The balance in this accrual is
$9.9 million at December 31, 2002. Florida Progress estimates that its
maximum contractual liability to AEP Resources, Inc. associated with Inland
Marine Transportation is $60 million. This accrual has been determined on an
undiscounted basis. Florida Progress measures its liability for this site
based on estimable and probable remediation scenarios. The Company believes
that it is reasonably probable that additional costs, which cannot be
currently estimated, may be incurred related to the environmental
indemnification provision beyond the amount accrued. The Company cannot
predict the outcome of this matter.
80
Florida Power has 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 management cannot predict the outcome of these matters,
the outcome is not expected to have a material effect on the 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.
Air and Water Quality
There has been and may be further proposed federal legislation requiring
reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon
dioxide and mercury. Some of these proposals establish nationwide caps and
emission rates over an extended period of time. This national
multi-pollutant approach to air pollution control could involve significant
capital costs which could be material to the Company's consolidated
financial position or results of operations. Some companies may seek
recovery of the related cost through rate adjustments or similar mechanisms.
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.
Florida Power was asked to provide information to the EPA as part of this
initiative and cooperated in providing the requested information. The EPA
initiated civil enforcement actions against other unaffiliated utilities as
part of this initiative. Some of these actions resulted in settlement
agreements calling for expenditures, 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.
Certain historical waste sites exist that are being addressed voluntarily by
the Energy and Related Service segment. An 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. According to current information, these future costs are not expected
to be material to the Company's financial condition or results of
operations.
Rail Services is voluntarily addressing certain historical waste sites. An
accrual has been established to address estimable costs. The Company cannot
determine the total costs that may be incurred in connection with these
sites. According to current information, these future costs are not expected
to be material to the Company's financial condition or results of
operations.
The Kyoto Protocol was adopted in 1997 by the United Nations to address
global climate change by reducing emissions of carbon dioxide and other
greenhouse gases. The United States has not adopted the Kyoto Protocol,
however, a number of carbon dioxide emissions control proposals have been
advanced in Congress and by the Bush Administration. The Bush Administration
favors voluntary programs. Reductions in carbon dioxide emissions to the
levels specified by the Kyoto Protocol and some legislative proposals could
be materially adverse to the Company's financials and operations if
associated costs cannot be recovered from customers. The Company favors the
voluntary program approach recommended by the administration, and is
evaluating options for the reduction, avoidance, and sequestration of
greenhouse gases. However, the Company cannot predict the outcome of this
matter.
In 1997, the EPA's Mercury Study Report and Utility Report to Congress
conveyed that mercury is not a risk to the average American and expressed
uncertainty about whether reductions in mercury emissions from coal-fired
power plants would reduce human exposure. Nevertheless, the EPA determined
in 2000 that regulation of mercury emissions from coal-fired power plants
was appropriate. The EPA is currently developing a Maximum Available Control
Technology (MACT) standard, which is expected to become final in December
2004, with compliance in 2008. Achieving compliance with the MACT standard
could be materially adverse to the Company's financials and operations.
However, the Company cannot predict the outcome of this matter.
81
F. Legal Matters
1. Age Discrimination Suit. Florida Power and Florida Progress have
successfully resolved and settled the multi-party lawsuit served on the
companies in 1995. In 1995, Florida Power and Florida Progress were named
defendants in an age discrimination lawsuit. The number of plaintiffs was
116, but four of those plaintiffs have had their federal claims dismissed
and 74 others have had their state age claims dismissed. While no dollar
amount was requested, each plaintiff sought back pay, reinstatement or front
pay through their projected dates of normal retirement, costs and attorneys'
fees. In October 1996, the Federal Court approved an agreement between the
parties to provisionally certify this case as a class action suit under the
Age Discrimination in Employment Act. Florida Power filed a motion to
decertify the class and in August 1999, the Court granted Florida Power's
motion. In October 1999, the judge certified the question of whether the
case should be tried as a class action to the Eleventh Circuit Court of
Appeals for immediate appellate review. In December 1999, the Court of
Appeals agreed to review the judge's order decertifying the class. In
anticipation of a potential ruling decertifying the case as a class action,
plaintiffs filed a virtually identical lawsuit, which identified all opt-in
plaintiffs as named plaintiffs. On July 5, 2001, the Eleventh Circuit Court
of Appeals ruled that as a matter of law, disparate claims cannot be brought
under the Americans with Disabilities Act (ADEA). This ruling has the effect
of decertifying the case as a class action. On October 3, 2001, the
plaintiffs filed a petition in the United States Supreme Court, requesting a
hearing of the case, on the issue of whether disparate claims can be brought
under the ADEA. On December 3, 2001, the United States Supreme Court agreed
to hear the case. Oral arguments on the issue were held on March 20, 2002.
On April 1, 2002, the U.S. Supreme Court issued a per curiam affirmed order
in the case stating they had improvidently granted the oral argument and
they would uphold the ruling of the Eleventh Circuit Court of Appeals.
Therefore, the case will remain decertified. As a result of the
decertification, the trial court has grouped the plaintiffs cases to be
tried. The trial for the first set of twelve plaintiffs began on July 22,
2002. The jury entered a verdict in favor of Florida Power in that trial on
August 9, 2002. The next group of plaintiffs' to be tried was named, but no
trial date was set. The parties attended a second mediation on October 31
and November 1, 2002. The Company was able to reach a settlement of this
matter with all but one plaintiff, the details of which are subject to a
confidentiality agreement.
2. Advanced Separation Technologies (AST). In 1996, Florida Progress sold
its 80% interest in AST to Calgon Carbon Corporation (Calgon) for net
proceeds of $56 million in cash. In January 1998, Calgon filed a lawsuit
against Florida Progress and the other selling shareholder and amended it in
April 1998, alleging misstatement of AST's 1996 revenues, assets and
liabilities, seeking damages and granting Calgon the right to rescind the
sale. The lawsuit also accused the sellers of failing to disclose flaws in
AST's manufacturing process and a lack of quality control. Florida Progress
believes that the aggregate total of all legitimate warranty claims by
customers of AST for which it is probable that Florida Progress will be
responsible for under the Stock Purchase Agreement with Calgon is
approximately $3.2 million, and accordingly, accrued $3.2 million in the
third quarter of 1999 as an estimate of probable loss. Florida Progress
filed a motion for summary judgement, which is pending. On June 19 and 20,
2002, a hearing was held before a federal magistrate judge, on the sellers
objection to the report of Calgon's damages expert. The sellers argued that
the report and opinions of Calgon's expert, Arthur Andersen, are
inadmissible for a number of reasons. On January 14, 2003, the federal
magistrate judge issued a Report and Recommendation finding that part of
Andersen's expert report should be excluded from evidence. Specifically, the
Report recommended that Andersen's damages analysis using the discounted
cash flow methodology should be excluded, but did not recommend exclusion of
Andersen's damage analysis based on the guideline public traded company
("GPTC") method. On January 30, 2003, the sellers filed a Notice of Appeal
from the Report with the United States District Court for the Western
District of Pennsylvania on the grounds that Andersen's GPTC analysis should
also be excluded. Calgon also filed a Notice of Appeal from the Report
arguing that Andersen's discounted cash flow analysis should be admissible.
3. Easement Litigation. In December 1998, Florida Power was served with a
class action lawsuit seeking damages, declaratory and injunctive relief for
the alleged improper use of electric transmission easements. The plaintiffs
contend that the licensing of fiber optic telecommunications lines to third
parties or telecommunications companies for other than Florida Power's
internal use along the electric transmission line right-of-way exceeds the
authority granted in the easements. In June 1999, plaintiffs amended their
complaint to add Progress Telecom as a defendant and adding counts for
unjust enrichment and constructive trust. In January 2000, the trial court
conditionally certified the class statewide. In mediation held in March
2000, the parties reached a tentative settlement of this claim. In January
2001, the trial court preliminarily approved the amended settlement
agreement, certified the settlement class and approved the class notice. On
November 16, 2001, the trial court issued a final order approving the
settlement. Several objectors to the settlement appealed the order to the
1st District Court of Appeal. On February 12, 2003, the appellate court
issued an opinion upholding the trial court's subject matter jurisdiction
over the case, but reversing the trial court's order approving the mandatory
settlement class for purposes of declaratory and injunctive relief. The
appellate court remanded the case to the trial court for further
proceedings. The Company is considering whether to file a motion for
rehearing and/or a motion for rehearing en banc before the 1st District
Court of Appeal, and/or whether to seek discretionary review before the
Florida Supreme Court. The Company cannot predict the outcome of any future
proceedings in this case.
82
4. Franchise Litigation. Six cities, with a total of approximately 49,000
customers, have sued Florida Power in various circuit courts in Florida. The
lawsuits principally seek (1) a declaratory judgment that the cities have
the right to purchase Florida Power'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 Florida Power to continue
to collect from Florida Power's customers and remit to the cities, franchise
fees during the pending litigation, and as long as Florida Power continues
to occupy the cities' rights-of-way to provide electric service,
notwithstanding the expiration of the franchise ordinances under which
Florida Power had agreed to collect such fees. Five circuit courts have
entered orders requiring arbitration to establish the purchase price of
Florida Power's electric distribution system within five cities. Two
appellate courts have held those circuit court decisions and authorized
cities to determine the value of Florida Power's electric distribution
system within the cities through arbitration. To date, no city has attempted
to actually exercise the right to purchase any portion of Florida Power's
electric distribution system. An arbitration in one of the cases was held in
August 2002 and an award was issued in October 2002 setting the value of
Florida Power's distribution system within one city at approximately $22
million. At this time, whether and when there will be further proceedings
following this award cannot be determined. Additional arbitrations have been
scheduled to occur in the first and second quarters of 2003.
As part of the above litigation, two appellate courts have also reached
opposite conclusions regarding whether Florida Power must continue to
collect from its customers and remit to the cities "franchise fees" under
the expired franchise ordinances. Florida Power has filed an appeal with the
Florida Supreme Court to resolve the conflict between the two appellate
courts. The Florida Supreme Court has issued an order setting a briefing
schedule and reserving ruling on accepting jurisdiction. On January 12,
2003, Florida Power served its Initial Brief in the Supreme Court and its
request for oral argument. Three amicus curiae also filed motions seeking
leave to participate in support of Florida Power's position and filed amicus
briefs. No oral argument has yet been set. Florida Power cannot predict the
outcome of these matters at this time.
5. DOE Litigation. As required under the Nuclear Waste Policy Act of 1982,
Florida Power entered into a contract with the DOE under which the DOE
agreed to begin taking spent nuclear fuel by no later than January 31, 1998.
All similarly situated utilities were required to sign the same standard
contract.
In April 1995, the DOE issued a final interpretation that it did not have an
unconditional obligation to take spent nuclear fuel by January 31, 1998. In
Indiana & Michigan Power v. DOE, the Court of Appeals vacated the DOE's
final interpretation and ruled that the DOE had an unconditional obligation
to begin taking spent nuclear fuel. The Court did not specify a remedy
because the DOE was not yet in default.
After the DOE failed to comply with the decision in Indiana & Michigan Power
v. DOE, a group of utilities petitioned the Court of Appeals in Northern
States Power (NSP) v. DOE, seeking an order requiring the DOE to begin
taking spent nuclear fuel by January 31, 1998. The DOE took the position
that its delay was unavoidable, and the DOE was excused from performance
under the terms and conditions of the contract. The Court of Appeals 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. In a recent decision, 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. Florida Power is in the process of evaluating whether it
should file a similar action for damages.
Florida Power also continues to monitor legislation that has been introduced
in Congress, which might provide some limited relief. Florida Power cannot
predict the outcome of this matter.
83
6. Other Legal Matters. Florida Progress and Florida Power are involved in
various other claims and legal actions arising 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 ultimate disposition of these matters will not have a material adverse
effect upon either company's consolidated financial position, results of
operations or liquidity.
84
INDEPENDENT AUDITORS' REPORT
TO THE BOARDS OF DIRECTORS OF FLORIDA PROGRESS CORPORATION AND FLORIDA POWER
CORPORATION
We have audited the consolidated balance sheets and schedules of capitalization
of Florida Progress Corporation and its subsidiaries (Florida Progress) and the
balance sheets and schedules of capitalization of Florida Power Corporation
(Florida Power) as of December 31, 2002 and 2001, and the related Florida
Progress consolidated statements of income and comprehensive income, of common
equity, and of cash flows and the related Florida Power statements of income and
comprehensive income, of common equity, and of cash flows for each of the two
years in the period ended December 31, 2002 and have issued our report thereon
dated February 12, 2003; such financial statements and report are included
herein. Our audits also included the financial statement schedules of Florida
Progress and Florida Power for the years ended December 31, 2002 and 2001,
listed in Item 8. These financial statement schedules are the responsibility of
the respective company's management. Our responsibility is to express an opinion
based on our audits. In our opinion, such financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
February 12, 2003
85
Schedule II
FLORIDA PROGRESS CORPORATION
Valuation and Qualifying Accounts
For the Years Ended December 31, 2002, 2001 and 2000
(In millions)
Balance at Additions Balance at
Beginning Charged to Other End of
Description of Period Expense Additions Deductions Period
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002
Uncollectible accounts $ 25.7 $ 6.6 $ - $ (4.3) (a) $ 28.0
Fossil dismantlement reserve 140.5 1.1 - - 141.6
Nuclear refueling outage reserve 0.3 9.7 - (0.4) (b) 9.6
YEAR ENDED DECEMBER 31, 2001
Uncollectible accounts $ 26.2 $10.2 $ 0.5 $(11.2) (a) $ 25.7
Fossil dismantlement reserve 134.6 5.9 - - 140.5
Nuclear refueling outage reserve 10.8 17.3 - (27.8) (b) 0.3
YEAR ENDED DECEMBER 31, 2000
Uncollectible accounts $ 5.8 $25.1 $ - $ (4.7) (a) $ 26.2
Fossil dismantlement reserve 132.5 2.2 - (0.1) 134.6
Nuclear refueling outage reserve 0.5 10.9 - (0.6) (b) 10.8
(a) Represents write-off of uncollectible accounts, net of recoveries.
(b) Represents payments of actual expenditures related to outages.
86
Schedule II
FLORIDA POWER CORPORATION
Valuation and Qualifying Accounts
For the Years Ended December 31, 2002, 2001 and 2000
(In millions)
Balance at Additions Balance at
Beginning Charged to Other End of
Description Of Period Expense Additions Deductions Period
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002
Uncollectible accounts $ 2.5 $ 3.4 $ - $ (3.4) (a) $ 2.5
Fossil dismantlement reserve 140.5 1.1 - - 141.6
2001 Nuclear Refueling Outage Reserve (#12) (0.4) 0.8 - (0.4) (b) -
2003 Nuclear Refueling Outage Reserve (#13) 0.7 8.9 - - (b) 9.6
YEAR ENDED DECEMBER 31, 2001
Uncollectible accounts $ 5.2 $ 3.5 $ - $ (6.2) (a) $ 2.5
Fossil dismantlement reserve 134.6 5.9 - - 140.5
2001 Nuclear Refueling Outage Reserve (#12) 10.8 16.6 - (27.8) (b) (0.4)
2003 Nuclear Refueling Outage Reserve (#13) 0.7 - - 0.7
YEAR ENDED DECEMBER 31, 2000
Uncollectible accounts $ 4.0 $ 4.3 $ 0.1 $ (3.2) (a) $ 5.2
Fossil dismantlement reserve 132.5 2.2 - (0.1) 134.6
1999 Nuclear Refueling Outage Reserve (#11) (0.3) 0.3 - - -
2001 Nuclear Refueling Outage Reserve (#12) 0.8 10.6 - (0.6) (b) 10.8
(a) Represents write-off of uncollectible accounts, net of recoveries.
(b) Represents payments of actual expenditures related to outages.
87
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As a result of the acquisition of Florida Progress and Florida Power by Progress
Energy, management decided to retain Deloitte & Touche LLP (D&T) as its
independent public accountants. D&T has served as the independent public
accountants for Progress Energy for over fifty years. On March 21, 2001, the
Audit Committee of the Board of Directors approved this recommendation and
formally elected to (i) engage D&T as the independent accountants for FPC and
Florida Power and (ii) dismiss KPMG LLP (KPMG) as such independent accountants.
KPMG's reports on FPC's and Florida Power's financial statements for 2000 and
1999 (the last two fiscal years of KPMG's engagement) contained no adverse
opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles. D&T became FPC's and Florida
Power's independent accountants upon the completion of the 2000 audit and
issuance of the related financial statements.
During FPC's and Florida Power's last two fiscal years and the subsequent
interim period to the date of their dismissal, there were no disagreements
between FPC and Florida Power and KPMG on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
them to make reference to the subject matter of the disagreements in connection
with their report on the financial statements for such years.
KPMG furnished a letter addressed to the Securities and Exchange Commission
stating that it agreed with the above statements made by FPC and Florida Power
in this Form 10-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The information called for by ITEM 10 is omitted pursuant to Instruction I
(2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).
ITEM 11. EXECUTIVE COMPENSATION
The information called for by ITEM 11 is omitted pursuant to Instruction I
(2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by ITEM 12 is omitted pursuant to Instruction I
(2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by ITEM 13 is omitted pursuant to Instruction I
(2)(c) to Form 10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).
ITEM 14. CONTROLS AND PROCEDURES
Florida Progress Corporation
Within the 90 days prior to the filing date of this report, Florida Progress
carried out an evaluation, under the supervision and with the participation of
its management, including Florida Progress' chief executive officer and chief
financial officer, of the effectiveness of the design and operation of Florida
Progress' disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934. Based upon that evaluation, Florida Progress'
chief executive officer and chief financial officer concluded that its
disclosure controls and procedures are effective in timely alerting them to
material information relating to Florida Progress (including its consolidated
subsidiaries) required to be included in its periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in
Florida Progress' internal controls or in other factors that could significantly
affect these controls.
88
Florida Power Corporation
Within the 90 days prior to the filing date of this report, Florida Power
carried out an evaluation, under the supervision and with the participation of
its management, including Florida Power's chief executive officer and chief
financial officer, of the effectiveness of the design and operation of Florida
Power's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934. Based upon that evaluation, Florida Power's
chief executive officer and chief financial officer concluded that its
disclosure controls and procedures are effective in timely alerting them to
material information relating to Florida Power (including its consolidated
subsidiaries) required to be included in its periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in
Florida Power's internal controls or in other factors that could significantly
affect these controls.
89
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FOR
FLORIDA PROGRESS AND FLORIDA POWER
1. Financial Statements, notes to Financial Statements and
reports thereon of DELOITTE & TOUCHE LLP and KPMG LLP are
found in ITEM 8 "Financial Statements and Supplementary Data"
herein.
2. The following Financial Statement Schedules are included
herein:
Florida Progress
II-Valuation and Qualifying Accounts
for the years ended December 31, 2002, 2001 and 2000
Florida Power
II-Valuation and Qualifying Accounts
for the years ended December 31, 2002, 2001 and 2000
All other schedules are not submitted because they are not
applicable or not required or because the required information
is included in the financial statements or notes thereto.
3. Exhibits filed herewith:
Florida Florida
Number Exhibit Progress Power
*2 Amended and Restated Agreement and Plan of X
Exchange by and among Carolina Power & Light
Company, Florida Progress Corporation and CP&L
Energy, Inc., dated as of August 22, 1999, amended
and restated as of March 3, 2000. (Filed as Annex A
to the Florida Progress preliminary proxy statement
on Schedule 14A, as filed with the SEC on March 6,
2000).
*3.(a) Amended Articles of Incorporation, as X
amended, of Florida Power. (Filed as
Exhibit 3(a) to the Florida Power Form
10-K for the year ended December 31, 1991,
as filed with the SEC (File No. 1-3274)
on March 30, 1992.)
*3.(b) Restated Articles of Incorporation, as X
amended, of Florida Progress. (Filed as
Exhibit 3(a) to Florida Progress' Form
10-K for the year ended December 31,1991,
as filed with the SEC on March 30, 1992.)
*3.(c) Bylaws of Florida Progress, as amended November X
30, 2000. Filed as Exhibit 3(c) to the Florida
Progress Form 10-K for the year ended December 31,
2001, as filed with the SEC on March 28, 2002).
*3.(d) Bylaws of Florida Power, as amended October 1, X
2001. (Filed as Exhibit 3(d) to the Florida Power
Form 10-K for the year ended December 31, 2001, as
filed with the SEC on March 28, 2002).
90
*4.(a) Indenture, dated as of January 1, 1944 (the X X
"Indenture"), between Florida Power and
Guaranty Trust Company of New York and The
Florida National Bank of Jacksonville, as
Trustees. (Filed as Exhibit B-18 to Florida
Power's Registration Statement on Form A-2
(No. 2-5293) filed with the SEC on January
24, 1944.)
*4.(b) Twenty-Ninth Supplemental Indenture, dated as X X
of September 1, 1982, between Florida Power
and Morgan Guaranty Trust Company of New York
and Florida National Bank, as Trustees, with
reference to the modification and amendment
of the Indenture. (Filed as Exhibit 4(c) to
Florida Power's Registration Statement on
Form S-3 (No. 2-79832) filed with the SEC on
September 17, 1982.)
*4.(c) Seventh Supplemental Indenture, dated as of X X
July 1, 1956, between Florida Power and
Guaranty Trust Company of New York and The
Florida National Bank of Jacksonville, as
Trustees, with reference to the modification
and amendment of the Indenture. (Filed as
Exhibit 4(b) to Florida Power's Registration
Statement on Form S-3 (No. 33-16788) filed
with the SEC on September 27, 1991.)
*4.(d) Eighth Supplemental Indenture, dated as of X X
July 1, 1958, between Florida Power and
Guaranty Trust Company of New York and The
Florida National Bank of Jacksonville, as
Trustees, with reference to the modification
and amendment of the Indenture. (Filed as
Exhibit 4(c) to Florida Power's Registration
Statement on Form S-3 (No. 33-16788) filed
with the SEC on September 27, 1991.)
*4.(e) Sixteenth Supplemental Indenture, dated as of X X
February 1, 1970, between Florida Power and
Morgan Guaranty Trust Company of New York and
The Florida National Bank of Jacksonville, as
Trustees, with reference to the modification
and amendment of the Indenture. (Filed as
Exhibit 4(d) to Florida Power's Registration
Statement on Form S-3 (No. 33-16788) filed
with the SEC on September 27, 1991.)
*4.(f) Rights Agreement, dated as of November 21, X
1991, between Florida Progress and
Manufacturers Hanover Trust Company,
including as Exhibit A the form of Rights
Certificate. (Filed as Exhibit 4(a) to
Florida Progress' Form 8-K dated November
21, 1991, as filed with the SEC on November 27, 1991.)
91
*4.(g) Thirty-Eighth Supplemental Indenture dated as X X
of July 25, 1994, between Florida Power and
First Chicago Trust Company of New York, as
successor Trustee, Morgan Guaranty Trust
Company of New York, as resigning Trustee,
and First Union National Bank of Florida, as
resigning Co-Trustee, with reference to
confirmation of First Chicago Trust Company
of New York as successor Trustee under the
Indenture. (Filed as exhibit 4(f) to Florida
Power's Registration Statement on Form S-3
(No. 33-55273) as filed with the SEC on August
29, 1994.)
*4.(h) Thirty-Ninth Supplemental Indenture dated as of X
July 1, 2001 between Florida Power Corporation and
First Chicago Trust Company of New York,
as Trustee. (Filed as Exhibit 4 to Current Report
on Form 8-K filed with the SEC on July 23, 2001.)
*4.(i) Fortieth Supplemental Indenture dated as of July 1, X
2002 between Florida Power Corporation and First
Chicago Trust Company of New York. (Filed as
Exhibit 4 to Current Report on Form 8-K filed with
the SEC on February 18, 2003.)
*4.(j) Forty-First Supplemental Indenture, dated as of X
February 1, 2003 between Florida Power Corporation
and First Chicago Trust Company of New York,
as successor Trustee. (Filed as Exhibit 4 to
Current Report on Form 8-K filed with the SEC on
February 21, 2003.)
*4.(k) Amendment to Shareholder Rights X
Agreement dated February 20, 1997,
between Florida Progress and The First
National Bank of Boston. (Filed as Exhibit
4(a) to the Florida Progress Form 10-K
for the year ended December 31, 1996,
as filed with the SEC on March 27, 1997.)
*4.(l) Form of Certificate representing shares of X
Florida Progress Common Stock. (Filed as
Exhibit 4(b) to the Florida Progress Form
10-K for the year ended December 31, 1996,
as filed with the SEC on March 27, 1997.)
*4.(m) Second Amendment to Shareholder Rights X
Agreement dated as of August 22, 1999, between
Florida Progress and BankBoston, N.A. (Filed as
Exhibit 4 to the combined Florida Progress and
Florida Power Form 8-K dated August 22, 1999.)
*10.(a)(1) Second Amended and Restated Guaranty and X
Support Agreement dated as of August 7, 1996.
(Filed as Exhibit 4 to Florida Progress' Form 10-Q
for the quarter ended June 30, 1996.)
10.(a)(2) Florida Power Corporation $200,000,000 X
Third Amended and Restated 5-Year Credit Agreement
dated as of November 17, 1998.
*10.(a)(3) Florida Power Corporation $170,000,000 364-Day X
Revolving Credit Agreement dated as of December
18, 2001 (filed as Exhibit 10 a(2) to the combined
Florida Progress Florida Power Annual Report on
Form 10-K dated March 28, 2002, File No.1-8349
and 1-3274).
92
10.(a)(4) First Amendment to Credit Agreement between X
Florida Power Corporation and certain lenders
dated December 18, 2001, effective as of December
10, 2002.
+*10.(b)(1) Executive Optional Deferred Compensation X X
Plan. (Filed as Exhibit 10.(c) to the
Florida Progress Form 10-K for the year
ended December 31, 1996 as filed with the
SEC on March 27, 1997.)
+*10.(b)(2) Management Incentive Compensation Plan X X
of Florida Progress Corporation, as amended
December 14, 1999. (Filed as Exhibit 10.(a) to the
Florida Progress Form 10-K for the year ended
December 31, 1999, as filed with the SEC on
March 30, 2000.)
+*10.(b)(3) Florida Progress Supplemental Executive X X
Retirement Plan, as amended and restated
effective February 20, 1997. (Filed as Exhibit 10.(e)
to the Florida Progress Form 10-K for the year ended
December 31, 1999, as filed with the SEC on
March 30, 2000.)
-+*10.(b)(4) Resolutions of the Board of Directors of Carolina X
Power & Light Company dated May 8, 1991, amending
the Directors Deferred Compensation Plan (filed as
Exhibit 10(b), File No. 33-48607).
+*10.(b)(5) Carolina Power & Light Company Non-Employee X
Director Stock Unit Plan, effective January 1, 1998.
-+*10.(b)(6) Carolina Power & Light Company Restricted Stock X X
Agreement, as approved January 7, 1998, pursuant
to Carolina Power & Light Company's
1997 Equity Incentive Plan (filed as Exhibit No. 10
to Carolina Power & Light Company's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1998, File No. 1-3382.)
-+*10.(b)(7) Carolina Power & Light Company Restoration X X
Retirement Plan, as amended January 1, 2000
(filed as Exhibit No. 10c(9) to the Progress Energy, Inc.
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001).
-+*10.(b)(8) Amended and Restated Supplemental Senior X X
Executive Retirement Plan of Carolina Power & Light
Company, effective January 1,
1984, as last amended March 15, 2000 (filed as
Exhibit 10b(24) to Carolina Power & Light Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, File No. 1-3382).
93
+*10.(b)(9) Performance Share Pub-Plan of the Progress X X
Energy, Inc. 2002 Equity Incentive Plan, dated
July 9, 2002 (filed as Exhibit 10(ii) to Quarterly
Report on form 10-Q for the quarterly period ended
September 30, 2002, File No. 1-08349 and 1-03274).
-+*10.(b)(10) Performance Share Sub-Plan of the Carolina X X
Power & Light Company 1997 Equity
Incentive Plan, as amended January 1, 2001
(filed as Exhibit 10b(11) to the Progress Energy, Inc.
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001).
+*10.(b)(11) Progress Energy, Inc. 2002 Equity Incentive Plan, X X
dated July 10, 2002 (filed as Exhibit 10(i) to Quarterly
Report on form 10-Q for the quarterly period ended
September 30, 2002, File No. 1-08349 and 1-03274).
+*10.(b)(12) 1997 Equity Incentive Plan, Amended and Restated X X
as of September 26, 2001 (filed as Exhibit 4.3 to Progress
Energy, Inc. Form S-8 dated September 27, 2001,
File No. 1-3382).
+*10.(b)(13) Progress Energy, Inc. Form of Stock Option X X
Agreement (filed as Exhibit 4.4 to Form S-8
dated September 27, 2001,
File No. 333-70332.)
+*10.(b)(14) Progress Energy, Inc. Form of Stock Option Award X X
(filed as Exhibit 4.5 to Form S-8 dated September
27, 2001, File No. 333-70332.)
-+*10.(b)(15) Amended Management Incentive Compensation Plan X X
of Progress Energy, Inc., as amended and restated
January 1, 2002 (filed as Exhibit 10c(15) to the
Progress Energy, Inc.
Annual Report on Form 10-K for the fiscal year
ended December 31, 2001).
-+*10.(b)(16) Progress Energy, Inc. Management X X
Deferred Compensation Plan, amended
and restated as of January 1, 2002
(filed as Exhibit 10c(16) to the Progress Energy, Inc.
Annual Report on Form 10-K for the fiscal year
Ended December 31, 2001).
+*10.(b)(17) Employment Agreement dated August 1, 2000 X
between CP&L Service Company LLC and William
Cavanaugh III (filed as Exhibit 10(i) to Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 2000, File No. 1-15929 and No. 1-3382)
94
+*10.(b)(18) Employment Agreement dated August 1, 2000 X
between Carolina Power & Light Company and
William S. "Skip" Orser (filed as Exhibit 10(ii) to
Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000, File No. 1-15929
and No. 1-3382).
+*10.(b)(19) Employment Agreement dated August 1, 2000 X
between Carolina Power & Light Company
and Tom Kilgore (filed as Exhibit 10(iii) to
Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000, File No. 1-15929
and No. 1-3382.
+*10.(b)(20) Employment Agreement dated August 1, 2000 X
between CP&L Service Company LLC and Robert
McGehee (filed as Exhibit 10(iv) to Quarterly Report
on Form 10-Q for the quarterly period ended
September 30, 2000, File No. 1-15929 and No. 1-3382).
+*10.(b)(21) Form of Employment Agreement dated August 1, 2000 X X
(i) between Carolina Power & Light Company
and Don K. Davis; and (ii) between CP&L Service
Company LLC and Peter M. Scott III; and
(iii) between CP&L Service Company LLC and
William D. Johnson (filed as Exhibit 10(v) to
Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000, File No. 1-15929
and No. 1-3382).
+*10.(b)(22) Form of Employment Agreement dated August 1, 2000 X
between Carolina Power & Light Company and (i) Fred
Day IV, (ii) C.S. "Scotty" Hinnant, (iii) Cecil L.
Goodnight and (iv)E. Michael Williams (filed as
Exhibit 10(vi) to Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2000, File
No. 1-15929 and No. 1-3382.)
+*10.(b)(23) Employment Agreement dated November 30, 2000 X X
between Carolina Power & Light Company, Florida
Power Corporation and H. William Habermeyer (filed
as Exhibit 10.(b)(32) to Annual Report on Form 10-K for
the year ended December 31, 2000).
+*10.(b)(24) Florida Power Corporation Management Incentive X
Compensation Plan, effective January 1, 2001
(filed as Exhibit 10b(25) to Annual Report on
Form 10-K for the year ended December 31, 2000,
File No. 1-15929 and No. 1-3382.)
95
12 Statement of Computation of Ratios X
23.(a) Consent of Deloitte & Touche LLP X X
23.(b) Consent of KPMG LLP X
23.(c) Consent of KPMG LLP X
X Exhibit is filed for that respective company.
* Incorporated herein by reference as indicated.
+ Management contract or compensation plan or arrangement required
to be filed as an exhibit to this report pursuant to Item 14(c) of Form
10-K.
- Sponsorship of this management contract or compensation plan or
arrangement was transferred by Carolina Power & Light Company to
Progress Energy, Inc., effective August 1, 2000.
(b) Reports on Form 8-K filed during or with respect to the last quarter of
2002 and the portion of the first quarter of 2003 prior to the filing of
this Form 10-K:
Florida Progress Corporation
Financial
Item Statements
Reported Included Date of Event Date Filed
7 Yes February 18, 2003 February 18, 2003
Florida Power Corporation
Financial
Item Statements
Reported Included Date of Event Date Filed
5 No January 1, 2003 January 3, 2003
5 No February 7, 2003 February 12, 2003
7 Yes February 18, 2003 February 18, 2003
5 No February 18, 2003 February 18, 2003
5 No February 21, 2003 February 21, 2003
Supplementary Information to be Furnished With Reports filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act
No annual report or proxy materials have been sent to Florida Power's security
holders during the fiscal year ended December 31, 2002. No annual report or
proxy materials will be sent to security holders subsequent to the filing of
this annual report on Form 10-K.
96
Risk factors
In this section, unless the context indicates otherwise, the terms "our," "we,"
"us" or similar terms refer to Florida Power Corporation. The following section
is applicable most directly to Florida Power Corporation. However, the risk
factors discussed below are substantially applicable to our corporate parent,
Florida Progress.
Investing in our securities involves risks, including the risks described below,
that could affect the energy industry, as well as us and our business. Although
we have tried to discuss key factors, please be aware that other risks may prove
to be important in the future. New risks may emerge at any time and we cannot
predict such risks or estimate the extent to which they may affect our financial
performance. Before purchasing our securities, you should carefully consider the
following risks and the other information in this Annual Report, as well as the
documents we file with the SEC from time to time. Each of the risks described
below could result in a decrease in the value of our securities and your
investment therein.
Risks Related to the Energy Industry
- ------------------------------------
We are subject to fluid and complex government regulations that may have a
negative impact on our business and our results of operations.
We are subject to comprehensive regulation by several federal and state
regulatory agencies, which significantly influence our operating environment and
may affect our ability to recover costs from utility customers. We are required
to have numerous permits, approvals and certificates from the agencies that
regulate our business. We believe the necessary permits, approvals and
certificates have been obtained for our existing operations and that our
business is conducted in accordance with applicable laws.
The Federal Energy Regulatory Commission ("FERC"), the Nuclear Regulatory
Commission ("NRC"), the Environmental Protection Agency ("EPA") and the FPSC
regulate many aspects of our utility operations, including siting and
construction of facilities, customer service and the rates that we can charge
customers. Although we are not a registered holding company under the Public
Utility Holding Company Act of 1935, as amended ("PUHCA"), we are subject to
many of the regulatory provisions of PUHCA.
We are a wholly-owned subsidiary of Progress Energy, Inc., a registered public
utility holding company under PUHCA. Repeal of PUHCA has been proposed, but it
is unclear whether or when such a repeal would occur. It is also unclear to what
extent repeal of PUHCA would result in additional or new regulatory oversight or
action at the federal or state levels, or what the impact of those developments
might be on our business.
We are unable to predict the impact on our business and operating results from
future regulatory activities of these federal and state agencies. Changes in
regulations or the imposition of additional regulations could have a negative
impact on our business and results of operations.
We are subject to numerous environmental laws and regulations that may increase
our cost of operations, impact or limit our business plans, or expose us to
environmental liabilities.
We are subject to numerous environmental regulations affecting many aspects of
our present and future operations, including air emissions, water quality,
wastewater discharges, solid waste, and hazardous waste. These laws and
regulations can result in increased capital, operating and other costs,
particularly with regard to enforcement efforts focused on power plant emissions
obligations. These laws and regulations generally require us to obtain and
comply with a wide variety of environmental licenses, permits, inspections and
other approvals. Both public officials and private individuals may seek to
enforce applicable environmental laws and regulations. We cannot predict the
financial or operational outcome of any related litigation that may arise.
In addition, we may be a responsible party for environmental clean up at sites
identified by a regulatory body. We cannot predict with certainty the amount and
timing of all future expenditures related to environmental matters because of
the difficulty of estimating clean up costs. There is also uncertainty in
quantifying liabilities under environmental laws that impose joint and several
liability on all potentially responsible parties.
We cannot assure you that existing environmental regulations will not be revised
or that new regulations seeking to protect the environment will not be adopted
or become applicable to us. Revised or additional regulations, which result in
increased compliance costs or additional operating restrictions, particularly if
those costs are not fully recoverable from our customers, could have a material
adverse effect on our results of operations.
Recent events in the energy markets that are beyond our control have increased
the level of public and regulatory scrutiny in our industry and in the capital
markets and have resulted in increased regulation and new accounting standards.
The reaction to these events may have negative impacts on our business,
financial condition and access to capital.
97
As a result of the energy crisis in California during the summer of 2001, the
recent volatility of natural gas prices in North America, the bankruptcy filing
by the Enron Corporation and Worldcom, Inc., recently discovered accounting
irregularities of several public companies, and investigations by governmental
authorities into energy trading activities, companies in the regulated and
non-regulated utility businesses have been under a generally increased amount of
public and regulatory scrutiny. Recently discovered accounting irregularities
have caused regulators and legislators to review current accounting practices,
financial disclosures and companies' relationships with their independent
auditors. The capital markets and ratings agencies also have increased their
level of scrutiny. We believe that we are complying with all applicable laws,
and we have taken steps to avoid the occurrence of such events, but it is
difficult or impossible to predict or control what effect these types of
disruptions in the energy markets may have on our business, financial condition
or our access to the capital markets.
Additionally, it is unclear what laws or regulations may develop, and we cannot
predict the ultimate impact of any future changes in accounting regulations or
practices in general on public companies, the energy industry or our operations
specifically. Any such new accounting standards could impact the way we are
required to record revenues, assets and liabilities. These changes in accounting
standards could lead to negative impacts on reported earnings or increases in
liabilities that could, in turn, affect our reported results of operations.
Deregulation or restructuring in the electric utility industry may result in
increased competition and unrecovered costs that could adversely affect our
financial condition, results of operations and cash flows.
Increased competition resulting from deregulation or restructuring efforts could
have a significant adverse financial impact on our results of operations and
cash flows. Increased competition could also result in increased pressure to
lower rates. Retail competition and the unbundling of regulated energy and gas
service could have a significant adverse financial impact on us due to an
impairment of assets, a loss of retail customers, lower profit margins or
increased costs of capital. Because we have not previously operated in a
competitive retail environment, we cannot predict the extent and timing of entry
by additional competitors into the electric markets. Movement toward
deregulation in Florida has slowed as a result of recent developments, including
developments related to electric deregulation in California and other states. We
cannot predict when we will be subject to changes in legislation or regulation,
nor can we predict the impact of these changes on our financial condition,
results of operations or cash flows.
One of the major issues to be resolved from deregulation is who would pay for
stranded costs. Stranded costs are those costs and investments made by utilities
in order to meet their statutory obligation to provide electric service but
which could not be recovered through the market price of electricity following
industry restructuring. The amount of such stranded costs that we might
experience would depend on the timing of, and the extent to which, direct
competition is introduced, and the then-existing market price of energy. If we
were no longer subject to cost-based regulation and it was not possible to
recover stranded costs, our financial condition and results of operations could
be adversely affected.
Additionally, the electric utility industry has experienced a substantial
increase in competition at the wholesale level, caused by changes in federal law
and regulatory policy. As a result of the Public Utilities Regulatory Policies
Act of 1978 and the Energy Policy Act of 1992, competition in the wholesale
electricity market has greatly increased due to a greater participation by
traditional electricity suppliers, non-utility generators, independent power
producers, wholesale power marketers and brokers, as well as the trading of
energy futures contracts on various commodities exchanges. This increased
competition could affect our load forecasts, plans for power supply and
wholesale energy sales and related revenues. The impact could vary depending on
the extent to which additional generation is built to compete in the wholesale
market, new opportunities are created for us to expand our wholesale load, or
current wholesale customers elect to purchase from other suppliers after
existing contracts expire. In 1996, the FERC issued new rules on transmission
service to facilitate competition in the wholesale market on a nationwide basis.
The rules give greater flexibility and more choices to wholesale power
customers. As a result of the changing regulatory environment and the relatively
low barriers to entry, we expect competition to steadily increase. As
competition continues to increase, our financial condition, results of
operations and cash flows could be adversely affected.
The uncertain outcome regarding the timing, creation and structure of regional
transmission organizations, or RTOs, may materially impact our results of
operations, cash flows or financial condition.
On December 20, 1999, the FERC issued Order No. 2000 on RTOs. This order
required public utilities that own, operate or control interstate electricity
transmission facilities to file either a proposal to participate in an RTO or an
alternative filing describing efforts and plans to participate in an RTO. We,
along with other investor-owned utilities, filed applications with the FERC and
the FPSC for approval of an RTO, currently named GridFlorida.
On November 7, 2001, the FERC issued an order providing guidance on continued
processing of RTO filings. In this order, the FERC recognized that it would not
be possible for all RTOs to be operational by December 15, 2001 as set forth in
Order No. 2000; therefore, the FERC stated that its future orders would address
the establishment of a timeline for the RTO progress in each region of the
country.
98
On July 31, 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"). The proposed rules
set forth in the SMD NOPR would require, among other things, that 1) all
transmission owning utilities transfer control of their transmission facilities
to an independent third party; 2) transmission service to bundled retail
customers be provided under the FERC- regulated transmission tariff, rather than
state-mandated terms and conditions; and 3) new terms and conditions for
transmission service be adopted nationwide, including new provisions for pricing
transmission in the event of transmission congestion. 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. Progress Energy,
Inc. filed comments on the SMD NOPR on November 15, 2002 and January 10, 2003.
On January 15, 2003, the FERC announced the issuance of a White Paper on SMD to
be released in April 2003. Progress Energy, Inc. plans to file comments on the
White Paper as appropriate. The FERC has also indicated that it expects to issue
the final rules during the summer of 2003.
On October 15, 2002 the FPSC abated its proceedings regarding its review of the
proposed GridFlorida. The GridFlorida proposal includes the formation of a
not-for-profit ISO by the joint applicants -- us and two other investor-owned
utilities. Participation is expected from many of the other transmission owners
in the state of Florida. The FPSC previously found the applicants were prudent
in proactively forming GridFlorida but ordered the applicants to modify their
proposal. The modifications include but are not limited to addressing 1) pricing
structure that recognizes the FPSC's jurisdiction over retail transmission
rates, 2) pricing/rate structure of long-term transmission contracts, 3)
elimination of pancaking of short-term transmission revenues, 4) cost recovery
of incremental costs imposed on the applicants, 5) demarcation dates for new
facilities and long term transmission contracts, and 6) market design. The FPSC
action to abate the proceedings comes in response to the Florida Office of
Public Counsel appeal before the state Supreme Court requesting review of the
FPSC's order approving the transfer of operational control of electric
transmission assets to an RTO under the jurisdiction of the FERC. It is unknown
what the outcome of this appeal will be at this time.
We are continuing to make progress towards the development of the GridFlorida
RTO. The actual structure of GridFlorida, as well as the date it may become
operational, depends upon the resolution of all regulatory approvals and
technical issues. Given the regulatory uncertainty of the ultimate timing,
structure and operations of GridFlorida, we cannot predict whether its creation
or the creation of an alternate combined transmission structure will have any
material adverse effect on our future results of operations, cash flows or
financial condition.
Furthermore, the SMD NOPR presents several uncertainties, including what
percentage of our investments in GridFlorida will be recovered, how the
elimination of transmission charges, as proposed in the SMD NOPR, will impact
us, and what amount of capital expenditures will be necessary to create a new
wholesale market.
Since weather conditions directly influence the demand for electricity, as well
as the price of energy commodities, our results of operations, financial
condition and cash flows can be negatively affected by changes in weather
conditions and severe weather.
Our results of operation, financial condition and cash flows can be affected by
changing weather conditions. Weather conditions in our service territories
directly influence the demand for electricity and affect the price of energy
commodities. Furthermore, severe weather, such as hurricanes, tornadoes and
severe thunder storms, can be destructive, causing outages, downed power lines
and property damage and requiring us to incur additional and unexpected expenses
and causing us to lose generating revenues.
In 2002, drought conditions and related water restrictions affected numerous
electric utilities in the southeast United States. Drought conditions and any
mandated water restrictions that could be implemented in response thereto, could
impact a small percentage of our generating facilities. This may result in
additional expenses, such as higher fuel costs and/or purchased power expenses.
We continue to monitor weather patterns and will develop contingency plans, as
necessary, to mitigate the impact of drought conditions. We do not have any
reliability concerns with our generating facilities currently and do not expect
these developments to have a material impact on our results of operations.
Our revenues, operating results and financial condition may fluctuate with the
economy and its corresponding impact on our commercial and industrial customers,
and may also fluctuate on a seasonal or quarterly basis.
Our business is impacted by fluctuations in the macroeconomy. For the year ended
December 31, 2002, commercial and industrial customers represented approximately
23.9% and 6.9% of our electric revenues, respectively. As a result, changes in
the macroeconomy can have negative impacts on our revenues. As our commercial
and industrial customers experience economic hardships, our revenues can be
negatively impacted.
Electric power demand is generally a seasonal business. In many parts of the
country, demand for power peaks during the hot summer months, with market prices
also peaking at that time. In other areas, power demand peaks during the winter.
The pattern of this fluctuation may change depending on the nature and location
of facilities we acquire and the terms of power sale contracts into which we
enter. In addition, we have historically sold less power, and consequently
earned less income, when weather conditions are milder. As a result, our overall
operating results in the future may fluctuate substantially on a seasonal basis.
99
Risks Related to Us and Our Business
- ------------------------------------
Under a settlement agreement we entered into in 2002, we are required to reduce
our retail rates annually through 2005 and to operate under a revenue sharing
plan which provides for possible rate refunds to our retail customers. This
agreement could affect our profit margin if we do not control our costs.
In March 2002, we entered into a Stipulation and Settlement Agreement related to
retail rate matters. The agreement is generally effective from May 1, 2002
through December 31, 2005; provided, however, that if our base rate earnings
fall below a 10% return on equity, we may petition the FPSC to amend our base
rates. The agreement provided for a 9.25% rate reduction designed to result in a
reduction of our retail revenues from the sale of electricity by an annual
amount of $125 million. The agreement also provides that we will operate under a
revenue sharing incentive plan through 2005, and thereafter until terminated by
the FPSC, that establishes annual revenue caps and sharing thresholds.
The agreement provides that retail base rate revenues between the sharing
thresholds and the retail base rate revenue caps will be divided into two shares
- -- a 1/3 share to be received by our shareholder, and a 2/3 share to be refunded
to our retail customers. The agreement also provides that all retail base rate
revenues above the retail base rate revenue caps established for each year will
be refunded to retail customers on an annual basis. Any amounts above the retail
base revenue caps will be refunded 100 percent to customers. As of December 31,
2002, $4.7 million has been accrued and will be refunded to customers by March
2003. On February 24, 2003, the adverse parties to the agreement filed a motion
with the FPSC seeking an order finding that the proper amount of the revenue
refund should be $23.0 million.
Under the terms of the agreement, we agreed to continue the implementation of
our four-year Commitment to Excellence reliability plan and expect to achieve a
20% improvement in our annual system average interruption duration index by no
later than 2004. If this improvement level is not achieved for calendar years
2004 or 2005, we must provide a refund of $3 million for each year the level is
not achieved to 10% of our total retail customers served by our worst performing
distribution feeder lines.
Although the reduced revenues are partially offset by lower depreciation allowed
under the agreement, our cash costs are not frozen or reduced under the
agreement. Additionally, our Commitment to Excellence program will require
dedicated capital expenditures. Thus, our ability to maintain our profit margins
depends upon stable demand for electricity and our efforts to manage our costs.
The settlement agreement will also affect our ability to recover from our
customers costs associated with investments that we make in new transmission and
distribution facilities since we will not be able to increase rates to recover
those costs.
There are inherent potential risks in the operation of nuclear facilities,
including environmental, health, regulatory, terrorism, and financial risks that
could result in fines or the shutdown of our nuclear unit, which may present
potential exposures in excess of our insurance coverage.
We own and operate one nuclear unit that represents approximately 834 megawatts,
or 10%, of our generation capacity. Our nuclear facility is subject to
environmental, health and financial risks such as the ability to dispose of
spent nuclear fuel, the ability to maintain adequate capital reserves for
decommissioning, potential liabilities arising out of the operation of this
facility, and the costs of securing the facility against possible terrorist
attacks. We maintain a decommissioning trust and external insurance coverage to
minimize the financial exposure to these risks; however, it is possible that
damages could exceed the amount of our insurance coverage.
The NRC has broad authority under federal law to impose licensing and
safety-related requirements for the operation of nuclear generation facilities.
In the event of non-compliance, the NRC has the authority to impose fines or to
shut down our unit, or both, depending upon its assessment of the severity of
the situation, until compliance is achieved. Revised safety requirements
promulgated by the NRC could require us to make substantial capital expenditures
at our nuclear plant. In addition, although we have no reason to anticipate a
serious nuclear incident at our plant, if an incident did occur, it could
materially and adversely affect our results of operations or financial
condition. A major incident at a nuclear facility anywhere in the world could
cause the NRC to limit or prohibit the operation or licensing of any domestic
nuclear unit.
Our facility requires licenses that need to be renewed or extended in order to
continue operating. We do not anticipate any problems renewing these licenses.
However, as a result of potential terrorist threats and increased public
scrutiny of utilities, the licensing process could result in increased licensing
or compliance costs that are difficult or impossible to predict.
100
Our financial performance depends on the successful operation of our electric
generating facilities.
Operating electric generating facilities involves many risks, including:
o operator error and breakdown or failure of equipment or processes;
o operating limitations that may be imposed by environmental or other
regulatory requirements;
o labor disputes;
o fuel supply interruptions; and
o catastrophic events such as fires, earthquakes, explosions, floods,
terrorist attacks or other similar occurrences.
A decrease or elimination of revenues generated by our electric generating
facilities or an increase in the cost of operating the facilities could have an
adverse effect on our business and results of operations.
Our business is dependent on our ability to successfully access capital markets.
Our inability to access capital may limit our ability to execute our business
plan, or pursue improvements and make acquisitions that we may otherwise rely on
for future growth.
We rely on access to both short-term money markets and long-term capital markets
as a significant source of liquidity for capital requirements not satisfied by
the cash flow from our operations. Our net cash flow from operations funded
approximately 78% of our capital requirements for the year ended December 31,
2002. If we are not able to access capital at competitive rates, our ability to
implement our business operations will be adversely affected. We believe that we
will maintain sufficient access to these financial markets based upon current
credit ratings. However, certain market disruptions or a downgrade of our credit
rating may increase our cost of borrowing or adversely affect our ability to
access one or more financial markets. Such disruptions could include:
o an economic downturn;
o a ratings downgrade of Progress Energy, Inc.;
o the bankruptcy of an unrelated energy company;
o capital market conditions generally;
o market prices for electricity;
o terrorist attacks or threatened attacks on our facilities or those of
unrelated energy companies; or
o the overall health of the utility industry.
Restrictions on our ability to access financial markets may affect our ability
to execute our business plan as scheduled. An inability to access capital may
limit our ability to pursue improvements or acquisitions that we may otherwise
rely on for future growth.
Increases in our leverage could adversely affect our competitive position,
business planning and flexibility, financial condition, ability to service our
debt obligations and ability to access capital on favorable terms.
Our cash requirements arise primarily from the capital-intensive nature of our
business. In addition to operating cash flows, we rely heavily on our commercial
paper and long-term debt. As of December 31, 2002, our commercial paper balance
was approximately $257.1 million, our notes payable to affiliated companies
balance was $237.4 million and our long-term debt balances were approximately
$1.2 billion (net of current portion, which at December 31, 2002, was $216.9
million). In February 2003, we issued $650 million aggregate principal amount of
our first mortgage bonds, the proceeds from which were or will be used to
reduce, redeem, or retire our outstanding long- and short-term, secured and
unsecured, indebtedness.
We have two committed credit lines that support our commercial paper programs
totaling $290.5 million, each of which mature in 2003. As of December 31, 2002,
we had no outstanding borrowings under these lines. If we are unable to extend
or renew these credit lines on favorable terms, or at all, we may experience a
liquidity shortfall that could have a material adverse impact on us and our
financial condition. We also have an uncommitted credit line for up to $100
million. As of December 31, 2002, we had no outstanding borrowings under this
uncommitted line of credit. In addition, under our shelf registration statement
on file with the SEC, we may issue secured and unsecured debt securities up to
an additional $50 million. This amount may be increased from time to time, and
we expect to increase our shelf capacity in the second or third quarter of 2003.
101
Our credit lines impose various limitations that could impact our liquidity. Our
credit facilities include defined maximum total debt to total capital ratios. As
of December 31, 2002, the maximum and actual ratios, pursuant to the terms of
the credit facilities, were 65% and 48.6%, respectively. Indebtedness, as
defined under the credit facility agreements, includes certain letters of credit
and guarantees that are not recorded on our balance sheets.
In the event our capital structure changes such that we approach the permitted
ratios, our access to capital and additional liquidity could decrease. A
limitation in our liquidity could have a material adverse impact on our business
strategy and our ongoing financing needs. Furthermore, our credit lines include
provisions that preclude us from borrowing additional funds in the event of a
material adverse change in our financial condition.
Our indebtedness also includes cross-default provisions which could
significantly impact our financial condition. Our credit lines include
cross-default provisions for defaults of indebtedness in excess of $10 million.
Our cross-default provisions only apply to defaults on our indebtedness, but not
defaults by our affiliates. In the event that a cross-default provision were
triggered, our lenders could accelerate payment of any outstanding debt. Any
such acceleration would cause a material adverse change in our financial
condition.
Changes in economic conditions could result in higher interest rates, which
would increase our interest expense on our floating rate debt and reduce funds
available to us for our current plans. Additionally, an increase in our leverage
could adversely affect us by:
o increasing the cost of future debt financing;
o making it more difficult for us to satisfy our existing financial
obligations;
o limiting our ability to obtain additional financing, if we need it,
for working capital, acquisitions, debt service requirements or other
purposes;
o increasing our vulnerability to adverse economic and industry
conditions;
o requiring us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which would reduce funds available
to us for operations, future business opportunities or other purposes;
o limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we compete;
o placing us at a competitive disadvantage compared to our competitors
who have less debt; and
o causing a downgrade in our credit ratings.
Any reduction in our credit ratings could increase our borrowing costs and limit
our access to additional capital, which could materially and adversely affect
our business, results of operations and financial condition.
Our senior secured debt has been assigned a rating by Standard & Poor's Ratings
Group, a division of The McGraw Hill Companies, Inc., of "BBB+" (negative
outlook), and by Moody's Investors Service, Inc. of "A1" (negative outlook), and
our senior unsecured debt rating has been assigned a rating by S&P of "BBB+"
(negative outlook) and by Moody's of "A2" (stable outlook). On February 7, 2003,
Moody's changed the outlook on our senior secured debt from stable to negative,
noting its belief that a base rate reduction in 2002, higher capital
expenditures and increased leverage to finance such capital expenditures would
put pressure on our performance going forward. In addition, S&P's rating
philosophy links the ratings of a utility subsidiary to the credit rating of its
parent corporation. Accordingly, if S&P were to downgrade Progress Energy,
Inc.'s credit ratings, our credit rating would also likely be downgraded,
regardless of whether or not we had experienced any change in our business
operations or financial conditions.
We will seek to maintain a solid investment grade rating through prudent capital
management and financing structures. We cannot, however, assure you that our
current ratings will remain in effect for any given period of time or that our
ratings will not be lowered or withdrawn entirely by a rating agency if, in its
judgment, circumstances in the future so warrant. Any downgrade could increase
our borrowing costs and adversely affect our access to capital, which could
negatively impact our financial results. Further, we may be required to pay a
higher interest rate in future financings, and our potential pool of investors
and funding sources could decrease. Although we would have access to liquidity
under our committed and uncommitted credit lines, if our short-term rating were
to fall below "A-2" or "P-1," the current ratings assigned by S&P and Moody's,
respectively, it could significantly limit our access to the commercial paper
market. We note that the ratings from credit agencies are not recommendations to
buy, sell or hold our securities and that each rating should be evaluated
independently of any other rating.
102
The use of derivative contracts in the normal course of our business could
result in financial losses that negatively impact our results of operations.
We use derivatives, including futures, forwards and swaps, to manage our
commodity and financial market risks. In the future, we could recognize
financial losses on these contracts as a result of volatility in the market
values of the underlying commodities or if a counterparty fails to perform under
a contract. In the absence of actively quoted market prices and pricing
information from external sources, the valuation of these financial instruments
can involve management's judgment or use of estimates. As a result, changes in
the underlying assumptions or use of alternative valuation methods could affect
the value of the reported fair value of these contracts.
103
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FLORIDA PROGRESS CORPORATION
Date: March 21, 2003 (Registrant)
By: /s/ Peter M. Scott III
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
By: /s/ Robert H. Bazemore, Jr.
Robert H. Bazemore, Jr.
Vice President and Controller
(ChiefAccounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
/s/ William Cavanaugh III Principal Executive March 19, 2003
(William Cavanaugh III, Officer and Director
Chairman and Chief
Executive Officer)
/s/ Peter M. Scott III Principal Financial March 19, 2003
(Peter M. Scott III, Executive Officer
Vice President and
Chief Financial Officer)
/s/ Edwin B. Borden Director March 19, 2003
(Edwin B. Borden)
/s/ James E. Bostic, Jr. Director March 19, 2003
(James E. Bostic, Jr.)
/s/ David L. Burner Director March 19, 2003
(David L. Burner)
/s/ Charles W. Coker Director March 19, 2003
(Charles W. Coker)
/s/ Richard L. Daugherty Director March 19, 2003
(Richard L. Daugherty)
/s/ W.D. Frederick, Jr. Director March 19, 2003
(W.D. Frederick, Jr.)
104
/s/ William O. McCoy Director March 19, 2003
(William O. McCoy)
/s/ E. Marie McKee Director March 19, 2003
(E. Marie McKee)
/s/ John H. Mullin, III Director March 19, 2003
(John H. Mullin, III)
/s/ Richard A. Nunis Director March 19, 2003
(Richard A. Nunis)
/s/ Carlos A. Saladrigas Director March 19, 2003
(Carlos A. Saladrigas)
/s/ J. Tylee Wilson Director March 19, 2003
(J. Tylee Wilson)
/s/ Jean Giles Wittner Director March 19, 2003
(Jean Giles Wittner)
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FLORIDA POWER CORPORATION
Date: March 21, 2003 (Registrant)
By: /s/ Peter M. Scott III
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
By: /s/ Robert H. Bazemore, Jr.
Robert H. Bazemore, Jr.
Controller
(Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
/s/ William Cavanaugh III Principal Executive March 19, 2003
(William Cavanaugh III, Officer and Director
Chairman)
/s/ H. William Habermeyer, Jr. Principal Executive March 19, 2003
(H. William Habermeyer, Jr., Officer and Director
President and Chief Executive
Officer)
/s/ Peter M. Scott III Principal Financial March 19, 2003
(Peter M. Scott, Executive Officer and Director
Vice President and
Chief Financial Officer)
/s/ Robert B. McGehee Director March 19, 2003
(Robert B. McGehee)
/s/ William D. Johnson Director March 19, 2003
(William D. Johnson)
/s/ Fred N. Day, IV Director March 19, 2003
(Fred N. Day, IV)
/s/ William S. Orser Director March 19, 2003
(William S. Orser)
106
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William Cavanaugh III, certify that:
1. I have reviewed this annual report on Form 10-K of Florida Progress
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003 /s/ William Cavanaugh III
William Cavanaugh III
Chairman and Chief Executive Officer
107
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter M. Scott III, certify that:
1. I have reviewed this annual report on Form 10-K of Florida Progress
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003 /s/ Peter M. Scott III
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
108
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, H. William Habermeyer, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Florida Power
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003 /s/ H. William Habermeyer, Jr.
H. William Habermeyer, Jr.
President and Chief Executive Officer
109
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter M. Scott III, certify that:
1. I have reviewed this annual report on Form 10-K of Florida Power
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003 /s/ Peter M. Scott III
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
110
Exhibit 12
FLORIDA POWER CORPORATION
Statement of Computation of Ratios
(Dollars In Millions)
Ratio of Earnings to Fixed Charges:
2002 2001 2000 1999 1998
----------- ---------- ---------- ---------- ----------
Net Income $ 324.1 $ 311.1 $ 211.8 $ 267.0 $ 250.1
Income Taxes 163.3 182.6 150.5 151.3 141.0
----------- ---------- ---------- ---------- ----------
Income Before Taxes 487.4 493.7 362.3 418.3 391.1
Net Interest Charges 109.4 114.8 128.5 124.0 136.5
----------- ---------- ---------- ---------- ----------
Total Earnings (A) $ 596.8 $ 608.5 $ 490.8 $ 542.3 $ 527.6
----------- ---------- ---------- ---------- ----------
Fixed Charges (B) $ 109.4 $ 114.8 $ 128.5 $ 124.0 $ 136.5
----------- ---------- ---------- ---------- ----------
Preferred Dividends grossed
up for effective tax rate 2.4 2.4 2.6 2.3 2.3
Total Fixed Charges plus
Preferred Dividends (C) 111.8 117.2 131.1 126.3 138.8
----------- ---------- ---------- ---------- ----------
Ratio of Earnings to
Fixed Charges (A/B) 5.46 5.30 3.82 4.37 3.87
=========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges
and Preferred Dividends (A/C) 5.34 5.19 3.74 4.29 3.80
=========== ========== ========== ========== ==========
111
Exhibit 23.(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-53939 on Form S-8, Registration Statement No. 33-54972 on Form S-8,
Registration Statement No. 333-02169 on Form S-8, Registration Statement No.
333-19037 on Form S-8, Registration Statement No. 333-75373 on Form S-8,
Registration Statement No. 333-39232 on Form S-3, Registration Statement No.
33-51573 on Form S-3, Registration Statement No. 33-47623 on Form S-8,
Registration Statement No. 2-93111 on Form S-3, Registration Statement No.
333-94143 on Form S-8, Registration Statement No. 333-66161 on Form S-8, and
Registration Statement No. 333-07853 on Form S-3 of Florida Progress Corporation
of our reports dated February 12, 2003, appearing in this Annual Report on Form
10-K of Florida Progress Corporation for the year ended December 31, 2002.
We also consent to the incorporation by reference in Post-Effective Amendment 1
to Registration Statement No. 33-55273 on Form S-3, Post-Effective Amendment 1
to Registration Statement No. 333-29897 on Form S-3, Post-Effective Amendment 1
to Registration Statement No. 333-62210 on Form S-3, and Registration Statement
No. 333-63204 on Form S-3 of Florida Power Corporation of our reports dated
February 12, 2003, appearing in this Annual Report on Form 10-K of Florida Power
Corporation for the year ended December 31, 2002.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
March 19, 2003
Exhibit 23.(b)
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Florida Progress Corporation:
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 33-53939, 33-54972, 333-02169, 333-19037, 333-75373, 33-47623,
333-94143 and 333-66161) and Form S-3 (Nos. 333-39232, 33-51573, 2-93111 and
333-07853) of Florida Progress Corporation of our report dated February 15, 2001
relating to the statements of income and comprehensive income, cash flows and
common equity and the related financial statements schedules of Florida Progress
Corporation and subsidiaries, and of Florida Power Corporation for the year
ended December 31, 2000, which report appears in this report on Form 10-K of
Florida Progress Corporation.
/s/ KPMG LLP
KPMG LLP
Tampa, Florida
March 20, 2003
112
Exhibit 23.(c)
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Florida Power Corporation:
We consent to incorporation by reference in the registration statements on Form
S-3 (No. 333-63204 and Post Effective Amendment 1 to Nos. 33-55273, 333-29897,
and 33-62210) of Florida Power Corporation of our report dated February 15,
2001, relating to the statements of income and comprehensive income, cash flows
and common equity and the related financial statements schedules of Florida
Progress Corporation and subsidiaries, and of Florida Power Corporation for the
year ended December 31, 2000, which report appears in this report on Form 10-K
of Florida Power Corporation.
/s/ KPMG LLP
KPMG LLP
Tampa, Florida
March 20, 2003
113