UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
------- ------
Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer
File Number incorporation, address of principal executive offices, and telephone number Identification Number
1-8349 Florida Progress Corporation 59-2147112
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
State of Incorporation: Florida
1-3274 Florida Power Corporation 59-0247770
d/b/a Progress Energy Florida, Inc.
100 Central Avenue
St. Petersburg, Florida 33701
Telephone (727) 820-5151
State of Incorporation: Florida
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No X
This combined Form 10-Q is filed separately by two registrants: Florida Progress
Corporation and Florida Power Corporation d/b/a Progress Energy Florida.
Information contained herein relating to either individual registrant is filed
by such registrant solely on its own behalf. Each registrant makes no
representation as to information relating exclusively to the other registrant.
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date. As of July 31, 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 (all of which were
held by Progress Energy, Inc.)
Florida Power Corporation Common Stock, without par value 100 (all of which were held by
Florida Progress Corporation)
Florida Progress Corporation and Florida Power Corporation meet the conditions
set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore
filing this form with the reduced disclosure format.
FLORIDA PROGRESS CORPORATION AND PROGRESS ENERGY FLORIDA, INC.
FORM 10-Q - For the Quarter Ended June 30, 2003
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Florida Progress Corporation
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
Statements of Income
Balance Sheets
Statements of Cash Flows
Notes to Financial Statements
Florida Progress Corporation and Progress Energy Florida, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement
Bcf Billion cubic feet
Btu British thermal units
Code Internal Revenue Service Code
Colona Colona Synfuel Limited Partnership, L.L.L.P.
Company or Florida Progress Florida Progress Corporation
CPI Consumer Price Index
CP&L Energy CP&L Energy, Inc.
CR3 Florida Power's nuclear generating plant, Crystal River Unit No. 3
DIG Derivative Implementation Group
DOE United States Department of Energy
Dt Dekatherm
EITF Emerging Issues Task Force
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FDEP Florida Department of Environmental Protection
FERC Federal Energy Regulatory Commission
FIN No. 46 FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51"
Florida Progress or FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Funding Corp. Florida Progress Funding Corporation
Fuels Progress Fuels Corporation
GAAP Accounting principles generally accepted in the United States of America
IRS Internal Revenue Service
ISO Independent System Operator
KWh Kilowatt hour
MACT Maximum Available Control Technology
MGP Manufactured Gas Plant
MW Megawatts
NEIL Nuclear Electric Insurance Limited
NRC United States Nuclear Regulatory Commission
NSP Northern States Power
PEF or the utility Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation
PFA IRS Prefiling Agreement
the Plan Revenue Sharing Incentive Plan
PLR Private Letter Ruling
Preferred Securities 7.10% Cumulative Quarterly Income Preferred Securities, Series A, of FPC Capital
I, fully and unconditionally guaranteed by Florida Progress
Progress Capital Progress Capital Holdings, Inc.
Progress Energy or the Parent Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
PVI Progress Ventures, Inc., formerly referred to as Energy Ventures
PUHCA Public Utility Holding Company Act of 1935, as amended
RAFT Railcar Asset Financing Trust
Rail Rail Services
RTO Regional Transmission Organization
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
Service Company Progress Energy Service Company, LLC
SFAS Statement of Financial Accounting Standards
3
SFAS No. 5 Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies"
SFAS No. 71 Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation"
SFAS No. 133 Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
and Hedging Activities"
SFAS No. 142 Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets"
SFAS No. 143 Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations"
SFAS No. 148 Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123"
SFAS No. 149 Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities"
SFAS No. 150 Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
Discrimination through Open Access Transmission and Standard Market Design
the Trust FPC Capital I
Westchester Westchester Gas Company
4
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This combined report contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The matters discussed throughout this combined Form 10-Q that are not
historical facts are forward-looking and, accordingly, involve estimates,
projections, goals, forecasts, assumptions, risks and uncertainties that could
cause actual results or outcomes to differ materially from those expressed in
the forward-looking statements.
In addition, forward-looking statements are discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including, but not limited to, statements under the sub-heading "Liquidity and
Capital Resources" concerning operating cash flows and estimated capital
requirements.
Any forward-looking statement speaks only as of the date on which such statement
is made, and Florida Progress and Florida Power Corporation doing business as
Progress Energy Florida, Inc. (PEF) undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made.
Examples of factors that 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 the settlement
of PEF's rate case; 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 PEF's
energy commodities and purchased power; economic fluctuations and the
corresponding impact on PEF's commercial and industrial customers; the inherent
risks associated with operating 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
access capital markets on favorable terms; the impact that increases in leverage
may have on the Company and PEF; the ability of the Company and PEF to maintain
their current credit ratings; the impact of derivative contracts used in the
normal course of business; the outcome of the IRS's audit and inquiry into the
availability and use of Section 29 tax credits by synthetic fuel producers and
the Company's continued ability to use Section 29 tax credits related to its
coal and synthetic fuels businesses; the continued depressed state of the
telecommunications industry and the Company's ability to realize future returns
from Progress Telecommunications Corporation (Progress Telecom); the Company's
ability to successfully integrate newly acquired assets or properties into its
operations as quickly or as profitably as expected; the Company's ability to
obtain an extension of the Securities and Exchange Commission's order requiring
us to divest of Progress Rail Services Corporation by November 30, 2003; and
unanticipated changes in operating expenses and capital expenditures. Most of
these risks similarly impact the Company's subsidiaries, including PEF.
These and other risks are detailed from time to time in the SEC reports of the
Company and PEF. All such factors are difficult to predict, contain
uncertainties that may materially affect actual results, and may be beyond the
control of the Company and PEF. Many, but not all of the factors that may impact
actual results of the Company and PEF are discussed in the Risk Factors section
of PEF's annual report on Form 10-K for the year ended December 31, 2002 which
were filed with the SEC on March 21, 2003. You should carefully read these SEC
reports. 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 PEF.
5
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Florida Progress Corporation
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2003
CONSOLIDATED STATEMENTS of INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------
(In thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------
Operating Revenues
Utility $ 766,547 $ 765,923 $ 1,494,964 $ 1,452,364
Diversified business 403,279 344,300 719,016 636,638
- -----------------------------------------------------------------------------------------------------
Total Operating Revenues 1,169,826 1,110,223 2,213,980 2,089,002
- -----------------------------------------------------------------------------------------------------
Operating Expenses
Utility
Fuel used in electric generation 217,409 195,779 402,392 394,106
Purchased power 140,848 133,767 270,410 241,731
Operation and maintenance 153,885 153,327 294,733 286,626
Depreciation and amortization 79,367 75,284 158,796 144,577
Taxes other than on income 58,785 56,792 117,419 113,933
Diversified business
Cost of sales 350,948 326,290 620,258 601,664
Depreciation and amortization 21,444 16,199 40,150 32,589
Other 25,355 23,982 60,436 42,291
- -----------------------------------------------------------------------------------------------------
Total Operating Expenses 1,048,041 981,420 1,964,594 1,857,517
- -----------------------------------------------------------------------------------------------------
Operating Income 121,785 128,803 249,386 231,485
- -----------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 782 3,154 1,686 3,875
Other, net (744) (5,842) (5,997) (9,474)
- -----------------------------------------------------------------------------------------------------
Total Other Income (Expense) 38 (2,688) (4,311) (5,599)
- -----------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 47,877 47,779 94,692 95,310
Allowance for borrowed funds used during (1,565) (574) (3,526) (1,033)
construction
- -----------------------------------------------------------------------------------------------------
Total Interest Charges, Net 46,312 47,205 91,166 94,277
- -----------------------------------------------------------------------------------------------------
Income before Income Taxes 75,511 78,910 153,909 131,609
Income Tax Benefit (34,230) (11,446) (36,750) (34,520)
- -----------------------------------------------------------------------------------------------------
Net Income $ 109,741 $ 90,356 $ 190,659 $ 166,129
- -----------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
6
Florida Progress Corporation
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands) June 30, December 31,
Assets 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 7,724,994 $ 7,477,025
Accumulated depreciation (3,926,985) (4,123,947)
- ----------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,798,009 3,353,078
Held for future use 7,921 7,921
Construction work in progress 508,251 426,641
Nuclear fuel, net of amortization 66,367 40,260
- ----------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 4,380,548 3,827,900
- ----------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 21,925 33,601
Accounts receivable 476,826 385,431
Unbilled accounts receivable 67,064 60,481
Receivables from affiliated companies 57,373 42,418
Deferred income taxes 24,354 26,209
Inventory 460,328 492,273
Deferred fuel cost 140,179 37,503
Prepayments and other current assets 96,852 93,802
- ----------------------------------------------------------------------------------------------------------------
Total Current Assets 1,344,901 1,171,718
- ----------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 115,616 130,114
Unamortized debt expense 31,603 23,363
Nuclear decommissioning trust funds 396,710 373,551
Diversified business property, net 848,352 699,493
Miscellaneous other property and investments 80,486 83,222
Prepaid pension cost 227,023 226,413
Other assets and deferred debits 138,566 90,716
- ----------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,838,356 1,626,872
- ----------------------------------------------------------------------------------------------------------------
Total Assets $ 7,563,805 $ 6,626,490
- ----------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------------
Capitalization
- ----------------------------------------------------------------------------------------------------------------
Common stock $ 1,769,026 $ 1,628,951
Retained earnings 585,589 598,191
Accumulated other comprehensive loss (17,830) (15,737)
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 2,187,088 1,710,363
- ----------------------------------------------------------------------------------------------------------------
Total Capitalization 5,057,370 4,455,265
- ----------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 230,308 275,397
Accounts payable 368,888 348,842
Payables to affiliated companies 43,129 102,619
Notes payable to affiliated companies 301,214 379,677
Interest accrued 74,976 68,120
Short-term obligations 222,210 257,100
Customer deposits 124,013 121,998
Other current liabilities 291,138 167,164
- ----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,655,876 1,720,917
- ----------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred investment tax credits 44,892 47,914
Regulatory liabilities 152,974 61,004
Asset retirement obligations 320,267 -
Other liabilities and deferred credits 332,426 341,390
- ----------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 850,559 450,308
- ----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 14)
- ----------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 7,563,805 $ 6,626,490
- ----------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
7
Florida Progress Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
(In thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 190,659 $ 166,129
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 211,719 188,066
Deferred income taxes and investment tax credits, net (43,701) 22,950
Deferred fuel cost (credit) (102,676) 9,961
Net increase in accounts receivable (92,678) (25,236)
Net increase in affiliate accounts receivable (11,051) (12,995)
Net (increase) decrease in inventories 29,980 (29,626)
Net increase in prepayments and other current assets (1,622) (1,614)
Net increase (decrease) in accounts payable 36,857 (11,622)
Net increase (decrease) in affiliate accounts payable (57,791) 16,535
Net increase (decrease) in income taxes, net 38,403 (23,308)
Net increase in other current liabilities 73,860 48,393
Other 24,526 15,194
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 296,485 362,827
- ---------------------------------------------------------------------------------------------------------------
Investing Activities
Gross utility property additions (282,679) (187,564)
Diversified business property additions and acquisitions (214,410) (85,284)
Nuclear fuel additions (38,408) -
Other (6,169) (4,949)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (541,666) (277,797)
- ---------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 638,824 -
Net decrease in short-term obligations (35,939) (47,420)
Retirement of long-term debt (226,989) (58,626)
Net increase (decrease) in intercompany notes (78,463) 134,703
Equity contributions from parent 140,075 66,630
Dividends paid to parent (203,273) (159,599)
Other (730) (728)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 233,505 (65,040)
- ---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (11,676) 19,990
- ---------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period 33,601 5,201
- ---------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 21,925 $ 25,191
- ---------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the year - interest (net of amount capitalized) $ 84,309 $ 80,153
income taxes (net of refunds) $ (30,044) $ 15,175
See Notes to Interim Financial Statements.
8
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
INTERIM FINANCIAL STATEMENTS
June 30, 2003
STATEMENTS of INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------------
(In thousands) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Operating Revenues - Utility $ 766,547 $ 765,923 $ 1,494,964 $ 1,452,364
- -------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 217,409 195,779 402,392 394,106
Purchased power 140,848 133,767 270,410 241,731
Operation and maintenance 153,885 153,327 294,733 286,626
Depreciation and amortization 79,367 75,284 158,796 144,577
Taxes other than on income 58,785 56,792 117,419 113,933
- -------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 650,294 614,949 1,243,750 1,180,973
- -------------------------------------------------------------------------------------------------------------------------
Operating Income 116,253 150,974 251,214 271,391
- -------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 14 569 134 1,276
Other, net 1,378 (740) 896 (2,075)
- -------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) 1,392 (171) 1,030 (799)
- -------------------------------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 29,491 28,624 57,954 57,363
Allowance for borrowed funds used during (1,565) (574) (3,526) (1,033)
construction
- -------------------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 27,926 28,050 54,428 56,330
- -------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 89,719 122,753 197,816 214,262
Income Tax Expense 27,982 45,622 64,944 79,010
- -------------------------------------------------------------------------------------------------------------------------
Net Income $ 61,737 $ 77,131 $ 132,872 $ 135,252
Dividends on Preferred Stock 378 378 756 756
- -------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 61,359 $ 76,753 $ 132,116 $ 134,496
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
9
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
BALANCE SHEETS
(Unaudited)
(In thousands) June 30, December 31,
Assets 2003 2002
- ---------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 7,724,994 $ 7,477,025
Accumulated depreciation (3,926,985) (4,123,947)
- ---------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,798,009 3,353,078
Held for future use 7,921 7,921
Construction work in progress 508,251 426,641
Nuclear fuel, net of amortization 66,367 40,260
- ---------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 4,380,548 3,827,900
- ---------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 11,792 15,636
Accounts receivable 218,983 186,630
Unbilled accounts receivable 67,064 60,481
Receivables from affiliated companies 23,904 44,976
Deferred income taxes 24,354 26,209
Inventory 238,989 235,043
Deferred fuel cost 140,179 37,503
Prepayments and other current assets 4,268 5,339
- ---------------------------------------------------------------------------------------------------------
Total Current Assets 729,533 611,817
- ---------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 115,616 130,114
Unamortized debt expense 22,900 14,503
Nuclear decommissioning trust funds 396,710 373,551
Miscellaneous other property and investments 38,361 39,298
Prepaid pension cost 223,133 222,543
Other assets and deferred debits 5,351 6,517
- ---------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 802,071 786,526
- ---------------------------------------------------------------------------------------------------------
Total Assets $ 5,912,152 $ 5,226,243
- ---------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ---------------------------------------------------------------------------------------------------------
Capitalization
- ---------------------------------------------------------------------------------------------------------
Common stock $ 1,081,257 $ 1,081,257
Retained earnings 898,638 969,795
Accumulated other comprehensive loss (2,449) (2,684)
Preferred stock - not subject to mandatory redemption 33,497 33,497
Long-term debt, net 1,746,132 1,244,411
- ---------------------------------------------------------------------------------------------------------
Total Capitalization 3,757,075 3,326,276
- ---------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 147,000 216,921
Accounts payable 159,630 147,978
Payables to affiliated companies 32,970 88,661
Notes payable to affiliated companies 112,356 237,425
Taxes accrued 73,394 24,472
Interest accrued 62,353 55,675
Short-term obligations 222,210 257,100
Customer deposits 124,013 121,998
Other current liabilities 119,837 55,323
- ---------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,053,763 1,205,553
- ---------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 368,033 361,133
Accumulated deferred investment tax credits 44,411 47,423
Regulatory liabilities 152,974 61,004
Asset retirement obligations 310,932 -
Other liabilities and deferred credits 224,964 224,854
- ---------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 1,101,314 694,414
- ---------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 14)
- ---------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 5,912,152 $ 5,226,243
- ---------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
10
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 132,872 $ 135,252
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 171,726 155,660
Deferred income taxes and investment tax credits, net 1,228 16,073
Deferred fuel cost (credit) (102,676) 9,961
Net increase in accounts receivable (38,935) (31,312)
Net decrease in affiliate accounts receivable 21,072 1,235
Net increase in inventories (3,946) (16,616)
Net (increase) decrease in prepayments and other current assets 1,071 (4,606)
Net increase in accounts payable 11,652 10,083
Net decrease in affiliate accounts payable (55,691) (63,261)
Net increase in customer deposits 2,015 4,775
Net increase in income taxes, net 48,922 27,997
Net increase in other current liabilities 71,570 51,098
Other 8,630 (2,339)
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 269,510 294,000
- --------------------------------------------------------------------------------------------------------------
Investing Activities
Gross utility property additions (282,679) (187,564)
Nuclear fuel additions (38,408) -
Other 771 383
- --------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (320,316) (187,181)
- --------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 638,824 -
Net decrease in short-term obligations (35,939) (47,420)
Retirement of long-term debt (226,825) (1,100)
Net increase (decrease) in intercompany notes (125,069) 110,076
Dividends paid to parent (203,273) (159,599)
Dividends paid on preferred stock (756) (756)
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 46,962 (98,799)
- --------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (3,844) 8,020
- --------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period 15,636 -
- --------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period $ 11,792 $ 8,020
- --------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 47,751 $ 56,387
income taxes (net of refunds) $ 14,794 $ 34,940
See Notes to Interim Financial Statements.
11
Florida Progress Corporation and Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
1. 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), as
amended. The Company became subject to the regulations of PUHCA when CP&L
Energy, Inc. acquired it on November 30, 2000. CP&L Energy, Inc.
subsequently changed its name to Progress Energy, Inc. (Progress Energy or
the Parent). Effective January 1, 2003, Florida Power Corporation began
doing business under the assumed name Progress Energy Florida, Inc. The
legal name of the entity has not changed and there was no restructuring of
any kind related to the name change. The current corporate and business
unit structure remains unchanged. Florida Progress' two primary
subsidiaries are Progress Energy Florida, Inc. (PEF) and Progress Fuels
Corporation (Progress Fuels).
PEF is a regulated public utility engaged in the generation, purchase,
transmission, distribution and sale of electricity primarily in Florida.
PEF is regulated by the Florida Public Service Commission (FPSC) and the
Federal Energy Regulatory Commission (FERC).
Progress Fuels Corporation is a diversified non-utility energy company,
whose principal business segments are Fuels and Rail Services. Progress
Fuels' Rail Services and the non-Florida portion of its Fuels operations
report their results one month in arrears.
B. Basis of Presentation
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. Because the
accompanying consolidated interim financial statements do not include all
of the information and footnotes required by GAAP, they should be read in
conjunction with the audited financial statements and notes thereto
included in Florida Progress' and PEF's Form 10-K for the year ended
December 31, 2002.
In accordance with the provisions of APB 28, GAAP requires companies to
apply a levelized effective tax rate to interim periods that is consistent
with the estimated annual effective tax rate.
The amounts included in the consolidated interim financial statements are
unaudited but, in the opinion of management, reflect all normal recurring
adjustments necessary to fairly present Florida Progress' and PEF's
financial position and results of operations for the interim periods. Due
to seasonal weather variations and the timing of outages of electric
generating units, especially the nuclear-fueled unit, the results of
operations for interim periods are not necessarily indicative of amounts
expected for the entire year or future periods.
The financial statements include the financial results of the Company and
its majority-owned operations. Investments in 20% to 50% owned joint
ventures are accounted for using the equity method. Other investments are
stated principally at cost.
In preparing financial statements that conform with GAAP, management must
make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and amounts of revenues and expenses
reflected during the reporting period. Actual results could differ from
those estimates. Certain reclassifications have been made to prior-year
amounts to conform to the 2003 presentation.
2. ACQUISITION OF NATURAL GAS RESERVES
During the first quarter of 2003, Progress Fuels, a wholly owned subsidiary
of Florida Progress, entered into three independent transactions to acquire
approximately 162 natural gas-producing wells with proven reserves of
approximately 195 billion cubic feet (Bcf) from Republic Energy, Inc. and
two other privately-owned companies, all headquartered in Texas. The
primary assets in the acquisition have been contributed to Progress Fuels
North Texas Gas, L.P., a wholly owned subsidiary of Progress Fuels. The
total cash purchase price for the transactions was $148 million.
12
3. 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. A series of sales transactions is
expected to take place throughout 2003. An estimated impairment on assets
held for sale was recognized in December 2002 for the write-down of the
assets to be sold to fair value less the costs to sell.
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 June 30, 2003.
On March 12, 2003, the Company signed a letter of intent to sell the
majority of Railcar Ltd. assets to The Andersons, Inc. The majority of the
proceeds from the sale will be used to pay off certain Railcar Ltd. off
balance sheet lease obligations for railcars that will be transferred to
The Andersons as part of the sales transaction. The transaction is subject
to various closing conditions including financing, due diligence and the
completion of a definitive purchase agreement.
4. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company currently has the following business segments: PEF, Fuels, Rail
Services (Rail) and Other Businesses (Other).
The PEF segment is engaged in the generation, transmission, distribution
and sale of electric energy primarily in portions of Florida.
Fuels' operations include natural gas drilling and production, coal mining
and terminals and the production of synthetic fuels. Fuels sells coal to
Progress Ventures, Inc. a subsidiary of Progress Energy. These related
party sales are included in the revenues that follow and are $43.9 million
and $54.1 million for the second quarter of 2003 and 2002, respectively,
and $75.7 million and $112.0 million for the first half of 2003 and 2002,
respectively.
Rail segment operations include railcar repair, rail parts reconditioning
and sales, railcar leasing (primarily through Railcar Ltd.) and sales, and
scrap metal recycling. These activities include maintenance and
reconditioning of salvageable scrap components of railcars, locomotive
repair and right-of-way maintenance.
Other primarily includes the operations 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's significant operations are geographically located in the
United States with limited operations in Mexico and Canada. Intersegment
sales and transfers consist primarily of coal sales from the Fuels segment
to PEF. The price that Fuels charges PEF is based on market rates for coal
procurement and for water-borne transportation under a methodology approved
by the FPSC.
The following summarizes the revenues, net income and assets for the
business segments. The amounts indicated for the net income of PEF below
represent its earnings for common stock.
13
(In thousands) PEF Fuels Rail Other Consolidated
--------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2003:
Revenues $ 766,547 $ 182,679 $ 213,740 $ 6,860 $ 1,169,826
Intersegment revenues - 87,762 - (87,762) -
Total revenues 766,547 270,441 213,740 (80,902) 1,169,826
Net income (loss) 61,359 38,239 2,192 7,951 109,741
PEF Fuels Rail Other Consolidated
--------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002:
Revenues $ 765,923 $ 138,416 $ 196,489 $ 9,395 $ 1,110,223
Intersegment revenues - 72,907 - (72,907) -
Total revenues 765,923 211,323 196,489 (63,512) 1,110,223
Net income (loss) 76,753 34,077 2,947 (23,421) 90,356
==============================================================================================================
(In thousands) PEF Fuels Rail Other Consolidated
--------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2003:
Revenues $ 1,494,964 $ 313,998 $ 391,549 $ 13,469 $ 2,213,980
Intersegment revenues - 169,390 - (169,390) -
Total revenues 1,494,964 483,388 391,549 (155,921) 2,213,980
Net income (loss) 132,116 51,795 (1,204) 7,952 190,659
Total segment assets 5,912,152 1,003,300 503,897 144,456 7,563,805
==============================================================================================================
PEF Fuels Rail Other Consolidated
--------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002:
Revenues $ 1,452,364 $ 266,796 $ 351,456 $ 18,386 $ 2,089,002
Intersegment revenues - 145,976 - (145,976) -
Total revenues 1,452,364 412,772 351,456 (127,590) 2,089,002
Net income (loss) 134,496 61,725 2,246 (32,338) 166,129
Total segment assets 4,967,998 811,198 607,617 270,996 6,657,809
==============================================================================================================
5. IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 148, "Accounting for Stock-Based Compensation"
The Company measures compensation expense for stock options as the
difference between the market price of its common stock and the exercise
price of the option at the grant date. Accordingly, no compensation expense
has been recognized for stock option grants.
For purposes of the pro forma disclosures required by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," the estimated fair value of Progress
Energy's stock options is amortized to expense over the options' vesting
period. The Company's information related to the pro forma impact on
earnings assuming stock options were expensed for the second quarter and
first half of 2003 and 2002 is as follows:
14
(in thousands)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
FLORIDA PROGRESS CORPORATION 2003 2002 2003 2002
--------------- ------------- -------------- ----------------
Net income, as reported $ 109,741 $ 90,356 $ 190,659 $ 166,129
Deduct: Total stock option expense determined under
fair value method for all awards, net of related
tax effects 275 194 693 504
--------------- ------------- -------------- ----------------
Pro forma net income $ 109,466 $ 90,162 $ 189,966 $ 165,625
=============== ============= ============== ================
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
PROGRESS ENERGY FLORIDA, INC. 2003 2002 2003 2002
--------------- ------------- -------------- ----------------
Earnings for common stock, as reported $ 61,359 $ 76,753 $ 132,116 $ 134,496
Deduct: Total stock option expense determined under
fair value method for all awards, net of related
tax effects 252 167 635 462
--------------- ------------- -------------- ----------------
Pro forma earnings for common stock $ 61,107 $ 76,586 $ 131,481 $ 134,034
=============== ============= ============== ================
In April 2003, the Financial Accounting Standards Board (FASB) approved
certain decisions on its stock-based compensation project. Some of the key
decisions reached by the FASB were that stock-based compensation should be
recognized in the income statement as an expense and that the expense
should be measured as of the grant date at fair value. A significant issue
yet to be resolved by the FASB is the determination of the appropriate fair
value measure. The FASB continues to deliberate additional issues in this
project; however, the FASB plans to issue an exposure draft in 2003 that
could become effective in 2004.
Derivative Instruments and Hedging Activities
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies SFAS No. 133 on accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The new guidance incorporates decisions made as part of the
Derivatives Implementation Group (DIG) process, as well as decisions
regarding implementation issues raised in relation to the application of
the definition of a derivative. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003. The Company is
currently evaluating what effects, if any, this statement will have on its
results of operations and financial position.
In connection with the January 2003 FASB Emerging Issues Task Force (EITF)
meeting, the FASB was requested to reconsider an interpretation of SFAS No.
133. The interpretation, which is contained in the Derivatives
Implementation Group's C11 guidance, relates to the pricing of contracts
that include broad market indices (e.g., CPI). In particular, that guidance
discusses whether the pricing in a contract that contains broad market
indices could qualify as a normal purchase or sale (the normal purchase or
sale term is a defined accounting term, and may not, in all cases, indicate
whether the contract would be "normal" from an operating entity viewpoint).
In late June 2003, the FASB issued final superseding guidance (DIG Issue
C20) on this issue, which is significantly different from the tentative
superseding guidance that was issued in April 2003. The new guidance is
effective October 1, 2003 for the Company. DIG Issue C20 specifies new
pricing-related criteria for qualifying as a normal purchase or sale, and
it requires a special transition adjustment as of October 1, 2003. The
Company has no current contracts affected by this revised guidance.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity"
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. The financial instruments within the scope of SFAS
No. 150 include mandatorily redeemable stock, obligations to repurchase the
issuer's equity shares by transferring assets, and certain obligations to
issue a variable number of shares. SFAS No. 150 is effective immediately
for such instruments entered into or modified after May 31, 2003, and is
effective for previously issued financial instruments within its scope on
July 1, 2003.
Upon the Company's adoption of FIN No. 46, Consolidation of Variable
Interest Entities (see below), the FPC Capital I Preferred Securities, as
discussed in Note 8, are anticipated to be deconsolidated from the
Company's financial statements effective July 1, 2003. Therefore, the
Company does not expect the adoption of SFAS No. 150 to have a material
impact on its results of operations or 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 know as special purpose entities or SPEs) and
15
determining whether such entities should be consolidated. Certain
disclosures are required 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. During the first six months of 2003, the Company did not
participate in the creation of, or obtain a new variable interest in, any
variable interest entity. 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 is currently evaluating what effects, if any, this
interpretation will have on its results of operations and financial
position. During this evaluation process, several arrangements through its
Railcar Ltd. subsidiary have been identified to which this interpretation
may apply. These arrangements include an agreement with Railcar Asset
Financing Trust (RAFT), a receivables securitization trust, and seven
synthetic leases. Because the Company expects to sell the majority of
Railcar Ltd. during 2003 (See Note 3) and divest of its interests in these
arrangements, the application of FIN No. 46 is not expected to have a
material impact with respect to these arrangements. If these interests are
not divested as currently expected, the maximum cash obligations under
these arrangements total approximately $54 million. However, management
believes the maximum loss exposure would be significantly reduced based on
the current fair values of the underlying assets related to these
arrangements.
The implementation of FIN No. 46 may require deconsolidation of certain
previously consolidated entities. Upon adoption, the company anticipates
deconsolidating the FPC Capital I Trust, which holds FPC-obligated
mandatorily redeemable preferred securities. The Company will reflect its
subordinate note obligation to the Trust as detailed in Note 8. Therefore,
the deconsolidation is not expected to have a material effect.
The Company is in the final stages of completing the adoption of FIN No.
46, but having considered the facts described herein, does not expect the
results to have a material impact on its consolidated financial position,
results of operations or liquidity.
EITF Issue No. 03-04, "Accounting for 'Cash Balance' Pension Plans"
In May 2003, the EITF reached consensus in EITF Issue No. 03-04 to
specifically address the accounting for certain cash balance pension plans.
The consensus reached in EITF Issue No. 03-04 requires certain cash balance
pension plans to be accounted for as defined benefit plans. For cash
balance plans described in the consensus, the consensus also requires the
use of the traditional unit credit method for purposes of measuring the
benefit obligation and annual cost of benefits earned as opposed to the
projected unit credit method. The Company has historically accounted for
its cash balance plans as defined benefit plans; however, the Company is
required to adopt the measurement provisions of EITF 03-04 at its cash
balance plans' next measurement date of December 31, 2003. Any differences
in the measurement of the obligations as a result of applying the consensus
will be reported as a component of actuarial gain or loss. The Company is
currently evaluating what effects EITF 03-04 will have on its results of
operations and financial position.
6. ASSET RETIREMENT OBLIGATIONS
SFAS No. 143, "Accounting for Asset Retirement Obligations," provides
accounting and disclosure requirements for retirement obligations
associated with long-lived assets and was adopted by the Company effective
January 1, 2003. This statement requires that the present value of
retirement costs for which the Company has a legal obligation be recorded
as 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 were recognized for the
time period from the date the liability would have been recognized had the
provisions of this statement been in effect, to the date of adoption of
this statement.
Upon adoption of SFAS No. 143, PEF recorded asset retirement obligations
(AROs) totaling $302.8 million for nuclear decommissioning of radiated
plant. PEF used an expected cash flow approach to measure these
obligations. This amount includes accruals recorded prior to adoption
totaling $283.9 million, which were previously recorded in accumulated
depreciation. The related asset retirement costs, net of accumulated
depreciation, recorded upon adoption totaled $38.5 million for regulated
operations. The adoption of this statement had no impact on the income of
PEF, as the effects were offset by the establishment of a regulatory
liability in the amount of $19.6 million, pursuant to SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." The regulatory
liability represents the amount by which previously recorded accruals
exceeded the cumulative accretion and accumulated depreciation for the time
period from the date the liability would have been recognized had the
provisions of this statement been in effect to the date of adoption.
Funds set aside in PEF's nuclear decommissioning trust fund for the nuclear
decommissioning liability totaled $396.7 million at June 30, 2003 and
$373.6 million at December 31, 2002.
The Company also recorded AROs totaling $9.6 million for coal mine
operations, synthetic fuel operations and gas production of Progress Fuels
Corporation. The Company used an expected cash flow approach to measure
these obligations. This amount includes accruals recorded prior to adoption
totaling $4.6 million, which were previously recorded in other liabilities
and deferred credits. The related asset retirement costs, net of
accumulated depreciation, recorded upon adoption totaled $3.4 million for
nonregulated operations. The cumulative effect of initial adoption of this
statement related to nonregulated operations was $1.6 million of pre-tax
expense. The ongoing impact on earnings related to accretion and
depreciation was not significant for the three or six months ended June 30,
2003.
Pro forma net income has not been presented for prior years because the pro
forma application of SFAS No. 143 to prior years would result in pro forma
net income not materially different from the actual amounts reported.
16
The Company has identified but not recognized 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.
PEF has previously recognized removal costs as a component of depreciation
in accordance with regulatory treatment. As of June 30, 2003, the portion
of such costs not representing AROs under SFAS No. 143 was $940.1 million.
This amount is included in accumulated depreciation on the accompanying
Balance Sheets. PEF has collected amounts for non-radiated areas at nuclear
facilities, which do not represent AROs. These amounts as of June 30, 2003
totaled $61.5 million, which is included in accumulated depreciation on the
accompanying Balance Sheets. PEF previously collected amounts for
dismantlement of its fossil generation plants. As of June 30, 2003, this
amounted to $142.2, which is included in accumulated depreciation on the
accompanying Balance Sheets. This collection was suspended pursuant to the
rate case settlement discussed in Note 9.
On January 23, 2003, the Staff of the FPSC issued a notice of proposed rule
development to adopt provisions relating to accounting for AROs under SFAS
No. 143. Accompanying the notice was a draft rule presented by the Staff
which adopts the provisions of SFAS No. 143 along with the requirement to
record the difference between amounts prescribed by the FPSC and those used
in the application of SFAS No. 143 as regulatory assets or regulatory
liabilities, which was accepted by all parties. The Commission has approved
this draft rule and a final order is expected in the third quarter of 2003.
7. 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 was 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.
During 2002, the Company acquired Westchester Gas Company. The purchase
price was finalized during the first quarter 2003 with the purchase price
being primarily allocated to fixed assets including oil and gas properties.
No goodwill was recorded and a contract for $9.2 million was identified as
an intangible.
The Company's carrying amount of goodwill at June 30, 2003 and December 31,
2002, was $9.9 million and $11.1 million, respectively, in the Fuels
segment. The Company has $9.2 million of intangible assets as of June 30,
2003 and no significant intangible assets as of December 31, 2002. The $9.2
million relates to a contract acquired as part of the Westchester Gas
Company acquisition, which was identified as an intangible in the final
purchase price allocation. PEF has no significant intangible assets and no
goodwill as of June 30, 2003 and December 31, 2002.
8. 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.
17
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. Upon adoption of FIN No. 46, the
Company anticipates deconsolidating the FPC Capital I Trust which is not
expected to have a material effect on the consolidated financial position,
results of operations or liquidity (see Note 5).
9. REGULATORY MATTERS
A. Retail Rate Matters
On March 27, 2002, the parties in PEF's rate case entered into a
Stipulation and Settlement Agreement (the Agreement) related to retail rate
matters. The Agreement was approved by the FPSC on April 23, 2002. The
Agreement provides that PEF will operate under a Revenue Sharing Incentive
Plan (the Plan) through 2005, and thereafter until terminated by the FPSC.
The Plan provides that all retail base revenues between an established
threshold and cap will be shared - a 2/3 share to be refunded to PEF's
retail customers, and a 1/3 share to be received by PEF's shareholders. All
retail base rate revenues above the retail base rate revenue caps
established for each year will be refunded 100% to retail customers on an
annual basis. The retail base revenue cap for 2003 is $1.393 billion and
will increase $37 million each year thereafter. As of December 31, 2002,
$4.7 million was accrued and was refunded to customers in March 2003. On
February 24, 2003, the parties to the Agreement filed a motion seeking an
order from the FPSC to enforce the Agreement. In this motion, the parties
disputed PEF's calculation of retail revenue subject to refund and
contended that the refund should be approximately $23 million. On July 9,
2003, the FPSC ruled that PEF must provide an additional refund of $18.4
million to its retail customers related to the 2002 revenue sharing
calculation. PEF recorded this refund in the second quarter of 2003 as a
charge against electric operating revenue and will refund this amount by no
later than October 31, 2003. In the second quarter of 2003, PEF also
recorded an additional accrual of $9.5 million related to estimated 2003
revenue sharing.
On March 4, 2003, the FPSC approved PEF's petition to increase its fuel
factors due to continuing increases in oil and natural gas commodity
prices. 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 the Company when fuel factors for 2003 were approved by the
FPSC in November 2002. New rates became effective on March 28, 2003.
B. Regional Transmission Organizations
In early 2000, the FERC issued Order 2000 regarding regional transmission
organizations (RTOs). This Order set minimum characteristics and functions
that RTOs must meet, including independent transmission service. As a
result of Order 2000, PEF, along with Florida Power & Light Company and
Tampa Electric Company, filed with the FERC, in October 2000, an
application for approval of a GridFlorida RTO. In March 2001, the FERC
issued an order provisionally approving GridFlorida. However, in July 2001,
the FERC issued orders recommending that companies in the Southeast engage
in a mediation to develop a plan for a single RTO for the Southeast. PEF
participated in the mediation. The FERC has not issued an order
specifically on this mediation. In July 2002, the FERC issued its Notice of
Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
Discrimination through Open Access Transmission Service and Standard
Electricity Market Design (SMD NOPR). If adopted as proposed, the rules set
forth in the SMD NOPR would materially alter the manner in which
transmission and generation services are provided and paid for. PEF, as a
subsidiary of Progress Energy, filed comments on November 15, 2002 and
supplemental comments on January 10, 2003. On April 28, 2003, the FERC
released a White Paper on the Wholesale Market Platform. The White Paper
provides an overview of what the FERC currently intends to include in a
final rule in the SMD NOPR docket. The White Paper retains the fundamental
and most protested aspects of SMD NOPR, including mandatory RTOs and the
FERC's assertion of jurisdiction over certain aspects of retail service.
PEF, as a subsidiary of Progress Energy, plans to file comments on the
18
White Paper. The FERC has also indicated that it expects to issue a final
rule after Congress votes this fall on the proposed House and Senate Energy
Bills. The Company cannot predict the outcome of these matters or the
effect that they may have on the GridFlorida proceedings currently ongoing
before the FERC.
The Company has actively participated in the RTO formation in Florida. The
three peninsular Florida investor-owned utilities, PEF, Florida Power and
Light Company, and Tampa Electric Company, (the Applicants) have proposed
the formation of GridFlorida, a single ISO (Independent System Operator)
for peninsular Florida. Participation is expected from many of the other
transmission owners in the state of Florida. The GridFlorida proposal is
pending before both the FERC and the FPSC. The FERC provisionally approved
the structure and governance of GridFlorida in May 2001. 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 to status as a not-for-profit 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 pancaking
revenues; 3) cost recovery of incremental costs; 4) demarcation dates for
new facilities and long-term transmission contracts; 5) market design. The
Florida Office of Public Counsel appealed the September order to the
Florida Supreme Court and in October 2002 the FPSC abated its proceedings
pending the outcome of the appeal. On June 2, 2003 the Florida Supreme
Court dismissed the appeal without prejudice on the ground that certain
portions of the Commission's order constituted non-final action. The
dismissal is without prejudice to any party to challenge the Commission's
order after all portions are final. A technical conference for the state of
Florida to be conducted by the FERC is scheduled for September 15, 2003. It
is unknown what the outcome of this appeal will be at this time. At June
30, 2003, the Company had an immaterial amount invested in GridFlorida. 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 or PEF's earnings, revenues or prices.
10. COMPREHENSIVE INCOME
Comprehensive income for Florida Progress for the three and six months
ended June 30, 2003 was $108.7 million and $188.6 million, respectively.
Comprehensive income for Florida Progress for the three and six months
ended June 30, 2002 was $91.1 million and $166.4 million, respectively.
Comprehensive income for PEF for the three and six months ended June 30,
2003 was $61.7 million and $133.1 million, respectively. PEF did not have
any items of other comprehensive income for the three or six months ended
June 30, 2002. Items of other comprehensive income consisted primarily of
changes in fair value of derivatives used to hedge cash flows related to
interest on long-term debt and gas sales, and to foreign currency
translation adjustments.
11. FINANCING ACTIVITIES
On February 21, 2003, PEF issued $425 million of First Mortgage Bonds,
4.80% Series Due March 1, 2013 and $225 million of First Mortgage Bonds,
5.90% Series Due March 1, 2033. Proceeds from this issuance were used and
will be used to repay the balance of its outstanding commercial paper, to
refinance its secured and unsecured indebtedness including $70 million of
First Mortgage Bonds, 6.125% Series and to redeem the aggregate outstanding
balance of its 8% First Mortgage Bonds Due 2022.
On March 1, 2003, $70 million of PEF First Mortgage Bonds, 6.125% Series,
matured and were retired. PEF funded this maturity through the First
Mortgage Bonds issued in February 2003.
On March 24, 2003, PEF redeemed $150 million of First Mortgage Bonds, 8%
Series Due December 1, 2022 at 103.75% of the principal amount of such
bonds. PEF funded this maturity through the First Mortgage Bonds issued in
February 2003.
On April 1, 2003, PEF entered into a new $200 million 364-day credit
agreement and a new $200 million three-year credit agreement replacing its
prior credit facilities (which had been a $90 million 364-day facility and
a $200 million five-year facility). The new PEF credit facilities contain a
defined maximum total debt to total capital ratio of 65%; as of June 30,
2003 the calculated ratio was 52.6%. The new credit facilities also contain
a requirement that the ratio of EBITDA, as defined in the facilities, to
interest expense to be at least 3 to 1; as of June 30, 2003 the calculated
ratio was 8.7 to 1.
19
12. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
Progress Energy and its subsidiaries, including the Company and PEF, are
exposed to various risks related to changes in market conditions. The
Company has a risk management committee that is chaired by the Chief
Financial Officer and includes senior executives from various business
groups. The risk management committee is responsible for administering risk
management policies and monitoring compliance with those policies by all
subsidiaries.
The Company manages its market risk in accordance with its established risk
management policies, which may include entering into various derivative
transactions.
The Company uses interest rate derivative instruments to adjust the fixed
and variable rate debt components of its debt portfolio and to hedge
interest rates with regard to future fixed rate debt issuances.
Progress Fuels Corporation periodically enters into derivative instruments
to hedge its exposure to price fluctuations on natural gas sales. As of
June 30, 2003, Progress Fuels Corporation has executed cash flow hedges on
approximately 16.6 Bcf of natural gas sales through December 2004. These
instruments did not have a material impact on the Company's consolidated
financial position or results of operations.
13. 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 for second quarter and first half of
2003 and 2002 are as follows:
(in thousands) Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ----------- -------------
Other income
Net energy brokered for resale gain (loss) (1,301) 214 (112) 306
Nonregulated energy and delivery services 3,600 2,846 6,903 6,893
income
AFUDC equity 3,261 231 4,049 415
Other 45 (54) 125 (82)
------------ ------------ ----------- -------------
Total other income - PEF and Florida Progress 5,605 3,237 10,965 7,532
------------ ------------ ----------- -------------
Other expense
Nonregulated energy and delivery services
expenses 3,457 2,616 5,700 4,115
Donations 2,026 1,550 4,053 4,448
Other (1,256) (189) 316 1,044
------------ ------------ ----------- -------------
Total other expense - PEF 4,227 3,977 10,069 9,607
Other expense - Florida Progress 2,122 5,102 6,893 7,399
------------ ------------ ----------- -------------
Total other expense - PEF and Florida Progress 6,349 9,079 16,962 17,006
------------ ------------ ----------- -------------
Other, net (744) (5,842) (5,997) (9,474)
============ ============ =========== =============
Net energy brokered for resale gain (loss) represents electricity purchased
for sale to a third party. Nonregulated energy and delivery services
include power protection services and mass market programs (surge
protection, appliance services and area light sales) and delivery,
transmission and substation work for other utilities.
14. COMMITMENTS AND CONTINGENCIES
Contingencies and significant changes to the commitments discussed in Note
22 of the financial statements included in the Company's 2002 Annual Report
on Form 10-K are described below.
A. Guarantees
As a part of normal business, Florida Progress and certain subsidiaries
including PEF enter into various agreements providing financial or
performance assessments to third parties. Such agreements include
guarantees, standby letters of credit and surety bonds. These agreements
are entered into primarily to support or enhance the creditworthiness
otherwise attributed to a subsidiary on a stand-alone basis, thereby
facilitating the extension of sufficient credit to accomplish the
subsidiaries' intended commercial purposes.
20
Guarantees as of June 30, 2003, are summarized in the table below and
discussed more fully in the subsequent paragraphs:
(in millions)
Guarantees issued on behalf of the Company and
affiliates
Standby letters of credit $ 35.3
Surety bonds 41.1
Other guarantees 30.6
Guarantees issued on behalf of third parties
Other guarantees 16.4
---------------
Total $123.4
================
Standby Letters of Credit
The Company has issued standby letters of credit to financial institutions
for the benefit of third parties that have extended credit to the Company
and certain subsidiaries. Of the total standby letters of credit issued,
PEF has issued commitments totaling $11.1 million. Letters of credit have
decreased approximately $7 million over the first half of the year. 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 June 30, 2003, the Company had $41.1 million in surety bonds, of which
PEF accounted for $5.2 million, 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 of approximately $47.0 million
related primarily to prompt performance payments, lease obligations, and
other payments subject to contingencies. Approximately $25.5 million in
additional guarantees were issued during the year to date.
Guarantees Issued by the Parent
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
which are not included in the table above.
As of June 30, 2003, management does not believe conditions are likely for
performance under these agreements.
B. Insurance
PEF is insured against public liability for a nuclear incident. Under the
current provisions of the Price Anderson Act, which limits liability for
accidents at nuclear power plants, PEF, as owner of a nuclear unit, can be
assessed a portion of any third-party liability claims arising from an
accident at any commercial nuclear power plant in the United States. In the
event that public liability claims from an insured nuclear incident exceed
$300 million (currently available through commercial insurers), each
company would be subject to pro rata assessments for each reactor owned per
occurrence. Effective August 20, 2003, the retroactive premium assessments
will increase to $100.6 million per reactor from the current amount of
$88.1 million. The total limit available to cover nuclear liability losses
will increase as well from $9.6 billion to $10.6 billion. The annual
retroactive premium limit of $10 million per reactor owned will not change.
C. Claims and Uncertainties
The Company is subject to federal, state and local regulations addressing
hazardous and solid waste management, air and water quality and other
environmental matters.
Hazardous and Solid Waste Management
Various organic materials associated with the production of manufactured
gas, generally referred to as coal tar, are regulated under federal and
state laws. The principal regulatory agency that is responsible for a
specific former manufactured gas plant (MGP) site depends largely upon the
21
state in which the site is located. There are several MGP sites to which
the Company has some connection. In this regard, PEF 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, PEF 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.
PEF
There are two former MGP sites and 11 other active sites associated with
PEF that have required or are anticipated to require investigation and/or
remediation costs. As of June 30, 2003, PEF has accrued approximately $9.4
million, for probable and reasonably estimable costs at these sites. PEF
does not believe that it can provide an estimate of the reasonably possible
total remediation costs beyond what is currently accrued. In 2002, PEF
filed a petition for annual recovery of approximately $4.0 million in
environmental cost through the Environmental Cost Recovery Clause with the
FPSC. PEF 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, PEF will assess the need to adjust the accruals. These accruals have
been recorded on an undiscounted basis. PEF measures its liability for
these sites based on available evidence including its experience in
investigating and remediating environmentally impaired sites. This process
often includes assessing and developing cost-sharing arrangements with
other potentially responsible parties. Presently, PEF cannot determine the
total costs that may be incurred in connection with the remediation of all
sites.
Florida Progress
In 2001, Florida Progress sold Inland Marine Transportation to AEP
Resources, Inc. Florida Progress established an accrual to address
indemnities and retained environmental liability associated with the
transaction. Florida Progress estimates that its maximum contractual
liability to AEP Resources, Inc. associated with Inland Marine
Transportation is $60 million. The balance in this accrual is $9.9 million
at June 30, 2003. 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.
PEF 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.
The Company cannot predict the outcome of this matter.
Certain historical waste sites exist that are being addressed voluntarily
by the Fuels segment. The Company cannot determine the total costs that may
be incurred in connection with these sites. The Company cannot predict the
outcome of this matter.
Rail Services is voluntarily addressing certain historical waste sites. The
Company cannot determine the total costs that may be incurred in connection
with these sites. The Company cannot predict the outcome of this matter.
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 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.
PEF was asked to provide information to the EPA as part of this initiative
and cooperated in providing the requested information. During the first
quarter of 2003, PEF received a supplemental information request from the
22
EPA and responded to it in the second quarter. The EPA initiated civil
enforcement actions against other unaffiliated utilities as part of this
initiative. Some of these actions resulted in settlement agreements calling
for expenditures, ranging from $1.0 billion to $1.4 billion. A utility that
was not subject to a civil enforcement action settled its New Source Review
issues with the EPA for $300 million. These settlement agreements have
generally called for expenditures to be made over extended time periods,
and some of the companies may seek recovery of the related cost through
rate adjustments or similar mechanisms. The Company cannot predict the
outcome of the EPA's initiative or its impact, if any, on the Company.
Other Environmental Matters
The Kyoto Protocol was adopted in 1997 by the United Nations to address
global climate change by reducing emissions of carbon dioxide and other
greenhouse gases. The United States has not adopted the Kyoto Protocol;
however, a number of carbon dioxide emissions control proposals have been
advanced in Congress and by the Bush Administration. The Bush
Administration favors voluntary programs. Reductions in carbon dioxide
emissions to the levels specified by the Kyoto Protocol and some
legislative proposals could be materially adverse to the Company's
financials and operations if associated costs cannot be recovered from
customers. The Company favors the voluntary program approach recommended by
the administration, and is evaluating options for the reduction, avoidance
and sequestration of greenhouse gases. However, the Company cannot predict
the outcome of this matter.
In 1997, the EPA's Mercury Study Report and Utility Report to Congress
conveyed that mercury is not a risk to the average American and expressed
uncertainty about whether reductions in mercury emissions from coal-fired
power plants would reduce human exposure. Nevertheless, the EPA determined
in 2000 that regulation of mercury emissions from coal-fired power plants
was appropriate. Pursuant to a Court Order, the EPA is developing a Maximum
Available Control Technology (MACT) standard, which is expected to become
final in December 2004, with compliance in 2008. Achieving compliance with
the MACT standard could be materially adverse to the Company's financial
condition and results of operations. However, the Company cannot predict
the outcome of this matter.
Legal Matters
1) Franchise Litigation
Six cities, with a total of approximately 49,000 customers, have sued PEF
in various circuit courts in Florida. As discussed below, two of the six
cities, with a total of approximately 21,000 customers, have subsequently
settled their lawsuits with PEF and signed new, 30-year franchise
agreements. The lawsuits principally seek (1) a declaratory judgment that
the cities have the right to purchase PEF's electric distribution system
located within the municipal boundaries of the cities, (2) a declaratory
judgment that the value of the distribution system must be determined
through arbitration, and (3) injunctive relief requiring PEF to continue to
collect from PEF's customers and remit to the cities, franchise fees during
the pending litigation, and as long as PEF continues to occupy the cities'
rights-of-way to provide electric service, notwithstanding the expiration
of the franchise ordinances under which PEF had agreed to collect such
fees. Five circuit courts have entered orders requiring arbitration to
establish the purchase price of PEF's electric distribution system within
five cities. Two appellate courts have upheld those circuit court decisions
and authorized cities to determine the value of PEF's electric distribution
system within the cities through arbitration. To date, no city has
attempted to actually exercise the option to purchase any portion of PEF's
electric distribution system. An arbitration in one of the cases (the City
of Casselberry) was held in August 2002 and an award was issued in October
2002 setting the value of PEF's distribution system within that city at
approximately $22 million. On April 2, 2003, PEF filed a rate filing with
the FERC to recover $10.6 million in stranded costs from the City of
Casselberry in the event the city ultimately chooses and is allowed to form
a municipal electric utility. PEF's rate filing has been abated pending
settlement discussions between the parties. On July 28, the City approved a
settlement agreement and a new, 30-year franchise agreement with PEF. The
settlement resolves all pending litigation with that City. A second
arbitration (with the City of Winter Park) was completed in February 2003.
That arbitration panel issued an award on May 29, 2003 setting the value of
PEF's distribution system within the City of Winter Park at approximately
$31.5 million, not including separation and reintegration and construction
work in progress, which could add several million dollars to the award. The
panel also awarded PEF approximately $10.7 million in stranded costs. The
City of Winter Park has scheduled a September 9, 2003 referendum where
citizens will decide whether to issue bonds of up to approximately $50
million to acquire PEF's electric distribution system. At this time,
whether and when there will be further proceedings regarding the City of
Winter Park cannot be determined. A third arbitration (with the Town of
Belleair) was completed on June 16, 2003. A decision from the arbitration
panel has not yet been issued in that case. A fourth arbitration (with the
City of Apopka) has been scheduled for January 2004. On August 4, 2003, the
23
City of Longwood approved a 30-year franchise and a settlement agreement
with PEF, which will resolve all pending litigation with the City of
Longwood. Arbitration in the remaining city's litigation (the City of
Edgewood) has not yet been scheduled.
As part of the above litigation, two appellate courts have also reached
opposite conclusions regarding whether PEF must continue to collect from
its customers and remit to the cities "franchise fees" under the expired
franchise ordinances. PEF has filed an appeal with the Florida Supreme
Court to resolve the conflict between the two appellate courts. The Florida
Supreme Court has set oral argument for August 27, 2003. PEF cannot predict
the outcome of these matters at this time.
2) DOE Litigation
As required under the Nuclear Waste Policy Act of 1982, PEF entered into a
contract with the U.S. Department of Energy (DOE) under which the DOE
agreed to begin taking spent nuclear fuel by no later than January 31,
1998. All similarly situated utilities were required to sign the same
standard contract.
In April 1995, the DOE issued a final interpretation that it did not have
an unconditional obligation to take spent nuclear fuel by January 31, 1998.
In Indiana & Michigan Power v. DOE, the Court of Appeals vacated the DOE's
final interpretation and ruled that the DOE had an unconditional obligation
to begin taking spent nuclear fuel. The Court did not specify a remedy
because the DOE was not yet in default.
After the DOE failed to comply with the decision in Indiana & Michigan
Power v. DOE, a group of utilities petitioned the Court of Appeals in
Northern States Power (NSP) v. DOE, seeking an order requiring the DOE to
begin taking spent nuclear fuel by January 31, 1998. The DOE took the
position that 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. The U.S. Circuit Court of Appeals (Federal
Circuit) has ruled that utilities may sue the DOE for damages in the
Federal Court of Claims instead of having to file an administrative claim
with DOE. PEF is in the process of evaluating whether it should file a
similar action for damages.
On July 9, 2002, Congress passed an override resolution to Nevada's veto of
DOE's proposal to locate a permanent underground nuclear waste storage
facility at Yucca Mountain, Nevada. DOE plans to submit a license
application for the Yucca Mountain facility by the end of 2004. PEF cannot
predict the outcome of this matter.
3) Easement Litigation
In December 1998, PEF 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 PEF'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 First 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 to seek discretionary review before the Florida Supreme
Court. Other parties filed similar motions as well as motions for rehearing
before the First District Court of Appeal. Subsequent to filing these
motions, the Company and the appellants reached a settlement resolving the
24
appellants' dispute. The settlement was contingent upon the trial court
approving a mandatory class settlement consistent with the First District
Court of Appeal's February 12, 2003 opinion. On May 29, 2003 the trial
court entered an Amended Final Judgment again approving the mandatory class
settlement, consistent with the First District Court of Appeals' February
12, 2003 opinion. No appeals have been taken from that judgment, and the
time to appeal has expired. On July 1, 2003, PEF, the class representatives
and the appellants filed a joint withdrawal of all pending motions with the
First District Court of Appeal. The First District Court of Appeal
acknowledged the withdrawal of all pending motions and issued a mandate on
July 14, 2003. Under the terms of the mandatory class settlement, PEF will
make settlement payments to class members in August 2003. The settlement
payments will not have a material adverse effect upon PEF's financial
condition or results of operations.
4) Synthetic Fuel Tax Credits
The Company, through its subsidiaries, produces synthetic fuel from coal
fines. The production and sale of the synthetic fuel from these facilities
qualifies for tax credits under Section 29 of the Code (Section 29) if
certain requirements are satisfied, including a requirement that the
synthetic fuel differs significantly in chemical composition from the coal
used to produce such synthetic fuel. Any synthetic fuel tax credit amounts
not utilized are carried forward indefinitely. All of Progress Energy's
synthetic fuel facilities have received private letter rulings (PLRs) from
the Internal Revenue Service (IRS) with respect to their synthetic fuel
operations. These tax credits are subject to review by the IRS, and if
Progress Energy fails to prevail through the administrative or legal
process, there could be a significant tax liability owed for previously
taken Section 29 credits, with a significant impact on earnings and cash
flows. Additionally, the ability to use tax credits currently being carried
forward could be denied. Total Section 29 credits generated to date at FPC
are approximately $642.3 million, of which $271.7 million have been used
and $340.6 million are being carried forward as of June 30, 2003. The
current Section 29 tax credit program expires in 2007.
One synthetic fuel entity, Colona Synfuel Limited Partnership, L.L.L.P.
(Colona), from which the Company (and FPC prior to its acquisition by the
Company) has been allocated approximately $269.5 million in tax credits to
date, is being audited by the IRS. The audit of Colona was expected. The
Company is audited regularly in the normal course of business, as are most
similarly situated companies.
In September 2002, all of the Company's majority-owned synthetic fuel
entities, including Colona, were accepted into the IRS Prefiling Agreement
(PFA) program. The PFA program allows taxpayers to voluntarily accelerate
the IRS exam process in order to seek resolution of specific issues. Either
the Company or the IRS can withdraw from the program at any time, and
issues not resolved through the program may proceed to the next level of
the IRS exam process.
In late June 2003, the Company was informed that IRS field auditors have
raised questions regarding the chemical change associated with coal-based
synthetic fuel manufactured at its Colona facility and the testing process
by which the chemical change is verified. (The questions arose in
connection with the Company's participation in the PFA program.) The
chemical change and the associated testing process were described as part
of the PLR request for Colona. Based on that application, the IRS ruled in
Colona's PLR that the synthetic fuel produced at Colona undergoes a
significant chemical change and thus qualifies for tax credits under
Section 29 of the Internal Revenue Code. While the IRS has announced that
they may revoke PLRs if test procedures and results do not demonstrate that
a significant chemical change has occurred, based on the information
received to date, the Company does not believe the issues warrant reversal
by the IRS National Office of its prior position in the Colona PLR.
The information provided by the IRS field auditors addresses only Progress
Energy's Colona facility. The Company, however, applies essentially the
same chemical process and uses the same independent laboratories to confirm
chemical change in the synthetic fuel manufactured at each of its four
other facilities. The independent laboratories used by the Company to
determine significant chemical change are the leading experts in their
field and are used by many other industry participants. The Company
believes that the laboratories' work and the chemical change process are
consistent with the bases upon which the PLRs were issued.
The Company is working to resolve this matter as quickly as possible. At
this time, the Company cannot predict how long the IRS process will take;
however, the Company intends to continue working cooperatively with the
IRS. The Company firmly believes that it is operating the Colona facility
and its other plants in compliance with its PLRs and Section 29 of the
Internal Revenue Code. Accordingly, the Company has no current plans to
alter its synthetic fuel production schedules as a result of these matters.
In addition, the Company has retained an advisor to assist in selling an
interest in one or more synthetic fuel entities. The Company is pursuing
the sale of a portion of its synthetic fuel production capacity that is
underutilized due to limits on the amount of credits that can be generated
25
and utilized by the Company. The Company would expect to retain an
ownership interest and to operate any sold facility for a management fee.
However, the IRS has suspended issuance of PLRs relating to synthetic fuel
production (typically a closing condition to the sale of an interest in a
synthetic fuel entity). Unless that suspension on new PLRs is lifted, it
will be difficult to consummate the successful sale of interests in the
Company's synthetic fuel facilities. The Company cannot predict when or if
the IRS will recommence issuing such PLRs. The final outcome and timing of
the Company's efforts to sell interests in synthetic fuel facilities is
uncertain and while the Company cannot predict the outcome of this matter,
the outcome is not expected to have a material effect on the consolidated
financial position, cash flows or results of operations.
5) Other Legal Matters
Florida Progress and PEF are involved in various other claims and legal
actions arising in the ordinary course of business, some of which involve
claims for substantial amounts. Where appropriate, accruals have been made
in accordance with SFAS No. 5, "Accounting for Contingencies," to provide
for such matters. Florida Progress and PEF believe the ultimate disposition
of these matters will not have a material adverse effect upon either
company's consolidated financial position, results of operation or
liquidity.
26
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements that involve estimates, projections, goals, forecasts, assumptions,
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Please review
"SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion of the factors
that may impact any such forward-looking statements made herein.
Amounts reported in the interim Consolidated Statements of Income for Florida
Progress Corporation (Florida Progress) and the interim Statements of Income for
Progress Energy Florida, Inc. (PEF) are not necessarily indicative of amounts
expected for the respective annual or future periods due to the effects of
seasonal temperature variations on energy consumption and the timing of
maintenance on electric generating units, among other factors.
This discussion should be read in conjunction with the accompanying financial
statements found elsewhere in this report and in conjunction with the 2002 Form
10-K.
OPERATING RESULTS
Florida Progress' net income for the second quarter of 2003 and 2002 was $109.7
million and $90.4 million, respectively. Net income for the first half of 2003
and 2002 was $190.7 million and $166.1 million, respectively.
Business segment results and the factors affecting them are discussed below.
Progress Energy Florida
PEF contributed earnings for common stock of $61.4 million and $76.8 million in
the second quarter of 2003 and 2002, respectively, and $132.1 million and $134.5
million in the first half of 2003 and 2002, respectively. These decreases are
primarily attributed to impacts of the 2002 rate case and are partially offset
by favorable retail customer growth and usage and the impact of the tax benefit
reallocation.
In March 2002, PEF settled a rate case which provided for a one-time retroactive
rate refund, decreased future retail rates by 9.25% (effective May 1, 2002),
provided for lower depreciation and amortization, provided for increases in
certain service revenue rates and provided for revenue sharing with the retail
customers if certain revenue thresholds were met. The impacts of the settlement
agreement are included below.
PEF's electric revenues for the second quarter and first half of 2003 and 2002
and the amount and percentage change by quarter and by customer class are as
follows:
- ------------------------------------------------------------------------------------------------------------------------
(in millions of $) Three Months Ended June 30, Six Months Ended June 30,
- ------------------------------------------------------------------------------------------------------------------------
Customer Class 2003 Change % Change 2002 2003 Change % Change 2002
- ------------------------------------------------------------------------------------------------------------------------
Residential $ 413.5 $ 17.9 4.5 $ 395.6 $ 798.5 $ 23.7 3.1 $ 774.8
Commercial 192.1 8.7 4.7 183.4 342.5 (7.7) (2.2) 350.2
Industrial 56.1 1.0 1.8 55.1 103.5 (1.6) (1.5) 105.1
Governmental 45.8 2.3 5.3 43.5 83.8 0.3 0.4 83.5
Retroactive rate refund - - - - - 35.0 100.0 (35.0)
Revenue sharing/rate
refund (28.1) (28.1) - - (28.1) (28.1) - -
------------------------ -------------------------------- ----------
Total retail revenues 679.4 1.8 0.3 677.6 1,300.2 21.6 1.7 1,278.6
Wholesale 49.8 (6.0) (10.8) 55.8 121.1 12.8 11.8 108.3
Unbilled 7.3 1.9 - 5.4 6.6 (5.2) - 11.8
Miscellaneous 30.0 2.9 10.7 27.1 67.1 13.4 25.0 53.7
------------------------ -------------------------------- ----------
Total electric revenues $ 766.5 $ 0.6 0.1 $ 765.9 $ 1,495.0 $ 42.6 2.9 $ 1,452.4
- ------------------------------------------------------------------------------------------------------------------------
27
PEF's electric energy sales for the second quarter and first half of 2003 and
2002 and the amount and percentage change by quarter and by customer class are
as follows:
- -----------------------------------------------------------------------------------------------------------------------
(in thousands of mWh) Three Months Ended June 30, Six Months Ended June 30,
- -----------------------------------------------------------------------------------------------------------------------
Customer Class 2003 Change % Change 2002 2003 Change % Change 2002
- -----------------------------------------------------------------------------------------------------------------------
Residential 4,703 188 4.2 4,515 9,256 681 7.9 8,575
Commercial 2,951 94 3.3 2,857 5,393 80 1.5 5,313
Industrial 1,008 14 1.4 994 1,924 48 2.6 1,876
Governmental 726 11 1.5 715 1,383 48 3.6 1,335
--------------------- -------------------------------- ----------
Total retail energy 9,388 307 3.4 9,081 17,956 857 5.0 17,099
sales
Wholesale 890 (86) (8.8) 976 2,166 210 10.7 1,956
Unbilled 498 55 - 443 553 79 - 474
--------------------- -------------------------------- ----------
Total mWh sales 10,776 276 2.6 10,500 20,675 1,146 5.9 19,529
- -----------------------------------------------------------------------------------------------------------------------
Second Quarter of 2003 Compared to Second Quarter of 2002
Retail revenues, excluding fuel revenues of $286.3 million and $259.8 million
for the second quarter of 2003 and 2002, respectively, decreased as a result of
the impact of the final resolution of the revenue sharing provisions in the 2002
rate settlement agreement. Fuel revenues increased compared to the prior year
primarily due to increased fuel prices and generation. On July 9, 2003, the FPSC
issued an order that required PEF to refund an additional $18.4 million related
to 2002 revenue sharing. In the second quarter of 2003, PEF also recorded an
additional accrual of $9.5 million related to estimated 2003 revenue sharing.
This accrual will be reviewed and adjusted, if necessary, on a quarterly basis.
Revenues were further reduced due to the impact of the 9.25% rate reduction that
went into effect in May 2002, as part of the settlement agreement.
These decreases were partially offset by additional retail revenues of $11.4
million related to customer growth and usage.
Operation and maintenance costs increased $0.6 million, compared to the $153.3
million incurred during the second quarter of 2002. A decrease in the pension
credit of $5.4 million, due to continued weak market performance, is offset by
lower spending by PEF's business units.
Income tax expense was $28.0 million for the second quarter of 2003, compared to
$45.6 million during the second quarter of 2002. Fluctuations in income tax
expense result from the tax benefit reallocation and changes in pre-tax income.
In accordance with an SEC order, tax benefits not related to acquisition
interest expense that were previously held unallocated at Progress Energy
Holding Company are now allocated to the profitable subsidiaries.
First Half of 2003 Compared to First Half of 2002
Retail revenues, excluding fuel revenues of $529.3 million and $498.1 million
for the first half of 2003 and 2002, respectively, decreased due to the impact
of the 9.25% rate reduction, 2002 revenue sharing resolution, and the 2003
revenue sharing accrual, all of which are discussed previously. Fuel revenues,
which have no earnings impact, increased compared to the prior year primarily
due to increased fuel prices and generation. Partially offsetting these items
was the absence of the impact of the $35.0 million rate refund that was
recognized in 2002 as part of the settlement agreement.
Strong customer growth and usage and favorable weather positively impacted
revenues in 2003. The average number of customers during the first half of the
year increased by approximately 34,000 or 2.3% in 2003 as compared to the same
period in 2002.
Operation and maintenance costs increased $8.1 million, compared to the $286.6
million incurred during the first half of 2002. The higher operation and
maintenance costs were primarily due to a $10.7 million decrease in the pension
credit.
Income tax expense was $64.9 million for the first half of 2003, compared to
$79.0 million during the first half of 2002. Fluctuations in income tax expense
result from the tax benefit reallocation and changes in pre-tax income.
FUELS
The Fuels segment, which includes coal and synthetic fuel operations, natural
gas operations and other fuel related operations, earned $38.2 million and $34.1
million in the second quarter of 2003 and 2002, respectively, and $51.8 million
and $61.7 million for the first half of 2003 and 2002, respectively. The
increase in earnings was due primarily to increased gas production and sales
offset partially by a lower synthetic fuels contribution.
28
The Fuels segment produced 1.7 million and 2.1 million tons of synthetic fuel
for the second quarter of 2003 and 2002, respectively, that resulted in tax
credits of $45.9 million and $55.8 million, respectively. Synthetic fuel
production in the first half of 2003 and 2002 was 2.6 million tons and 3.6
million tons, respectively, which generated tax credits of $69.0 million and
$99.7 million, respectively. These tax credits more than offset the pre-tax
credit operating losses of $19.7 million and $24.1 million for the second
quarters of 2003 and 2002, respectively, and $30.0 million and $43.2 million for
the first half of 2003 and 2002, respectively.
In late June 2003, the IRS announced that field auditors have raised questions
associated with synthetic fuel manufactured at the Colona facility regarding the
scientific validity of test procedures and results used to verify a significant
chemical change, which is a requirement of the synthetic fuel program. The
impact of this review on the Company's synthetic fuel tax credits previously
taken or expected to be taken in the future cannot be predicted at this time
(See Synthetic Fuel Tax Credits section of Note 14).
Gas operations generated net income of $9.8 million and $0.9 million in the
second quarter of 2003 and 2002, respectively, and of $14.7 million and $1.2
million in the first half of 2003 and 2002, respectively. The increase in
production resulting from the acquisitions of Westchester Gas (in 2002) and
North Texas Gas (in first quarter 2003) drove the increased revenue and
earnings. Although the Mesa operations continue to produce gas, no additional
wells are being drilled by Mesa as various divestiture options are being
explored. The following summarizes the gas sales for the second quarter and
first half of 2003 and 2002 by production facility.
- ------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(in millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------
Mesa $ 4.0 $ 3.5 $ 8.7 $ 6.6
Westchester Gas 13.4 1.6 28.6 1.6
North Texas Gas 10.4 - 10.4 -
Other 2.7 0.8 2.6 0.8
-----------------------------------------------------
Total gas sales $ 30.5 $ 5.9 $ 50.3 $ 9.0
- ------------------------------------------------------------------------------
Rail Services
Rail Service's (Rail) operations include railcar and locomotive repair,
trackwork, rail parts reconditioning and sales, scrap metal recycling, railcar
leasing and other rail related services. The Company intends to sell the assets
of Railcar Ltd., a leasing subsidiary, in 2003 and has classified these assets
as assets held for sale at June 30, 2003. See Note 3 for further discussion of
this planned divestiture.
Progress Rail contributed net income of $2.2 million and $2.9 million for the
second quarter of 2003 and 2002, respectively, and a loss of $1.2 million and
gain of $2.2 million for the first half of 2003 and 2002, respectively. As a
result of the SEC order, Rail incurred additional Service Company allocations of
$1.2 and $6.9 million in the first quarter and first half of 2003, respectively.
These increased costs were partially offset by improvements in the recycling
business and reduced operating costs.
An SEC order approving the merger of Florida Progress with Progress Energy, Inc.
requires the Progress Energy to divest Rail 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 has sought a
three year extension from the SEC.
OTHER
The Other group, which includes telecommunications, holding company and
financing expenses, generated earnings of $8.0 million and a loss of $23.4
million for the second quarter of 2003 and 2002, respectively, and earnings of
$8.0 million and a loss of $32.3 million for the first half of 2003 and 2002,
respectively. The improvement in the second quarter is due primarily to the
recording of an intra-period income tax allocation adjustment which GAAP
requires in order to apply a levelized effective tax rate to interim periods
that is consistent with the estimated annual rate. This resulted in a tax
benefit being allocated from Progress Energy of $10.5 million and a tax expense
of $19.0 million for the second quarters of 2003 and 2002, respectively. The
allocation resulted in a tax benefit of $14.9 million and tax expense of $21.8
million in the first half of 2003 and 2002, respectively.
Additional favorability is related to Progress Telecom which contributed net
income of $0.3 million and a net loss of $5.7 million in the second quarter of
2003 and 2002, respectively, and net losses of $0.8 million and $9.7 million for
the first half of 2003 and 2002, respectively. The improvement in earnings is
primarily related to lower depreciation resulting from the impairment of assets
in the third quarter of 2002.
29
LIQUIDITY AND CAPITAL RESOURCES
Statements of Cash Flows and Financing Activities
Cash provided by operating activities decreased $66.3 million for the six months
ended June 30, 2003, when compared to the corresponding period in the prior
year. The decrease in operating cash flow was due primarily to the underrecovery
of fuel costs at PEF. The cash flow impact of an underrecovery of fuel costs is
temporary as PEF should subsequently recover these costs along with interest in
the next fuel clause recovery period.
Net cash used in investing activities increased $263.9 million for the six
months ended June 30, 2003, when compared to the corresponding period in the
prior year. The increase is primarily due to construction expenditures
associated with PEF's Hines II generating unit, nuclear fuel purchases and the
acquisition of gas reserves by Progress Fuels Corporation (See Note 2).
Lower operating cash flow, higher investing activity and the retirement of
long-term debt resulted in the new financing needs of approximately $300 million
during the first six months of 2003.
On February 21, 2003, PEF issued $425 million of First Mortgage Bonds, 4.80%
Series Due March 1, 2013 and $225 million of First Mortgage Bonds, 5.90% Series
Due March 1, 2033. Proceeds from this issuance were used and will be used to
repay the balance of its outstanding commercial paper, to refinance its secured
and unsecured indebtedness, including $70 million of First Mortgage Bonds,
6.125% Series and to redeem the aggregate outstanding balance of its 8% First
Mortgage Bonds due 2022.
On April 1, 2003, PEF entered into a new $200 million 364-day credit agreement
and a new $200 million three-year credit agreement, replacing its prior credit
facilities (which had been a $90 million 364-day facility and a $200 million
five-year facility).
On March 24, 2003, PEF redeemed $150 million of First Mortgage Bonds, 8% Series,
Due December 1, 2022 at 103.75% of the principal amount of such bonds. PEF
funded this maturity through the First Mortgage Bonds issued in February 2003.
The new PEF credit facilities contain a defined maximum total debt to total
capital ratio of 65%; as of June 30, 2003 the calculated ratio was 52.6%. The
new credit facilities also contain a requirement that the ratio of EBITDA, as
defined in the facilities, to interest expense to be at least 3 to 1; as of June
30, 2003 the calculated ratio was 8.7 to 1.
Future Commitments
As of June 30, 2003, both Florida Progress' and PEF's contractual cash
obligations and other commercial commitments has not changed materially from
what was reported in the 2002 Annual Report on Form 10-K.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 3 is omitted pursuant to Instruction H(2)(c)
to Form 10-Q (Omission of Information by Certain Wholly Owned Subsidiaries).
Item 4. CONTROLS AND PROCEDURES
Florida Progress Corporation
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, Florida
Progress carried out an evaluation, with the participation of Florida Progress'
management, including Florida Progress' Chairman and Chief Executive Officer,
and Chief Financial Officer, of the effectiveness of Florida Progress'
disclosure controls and procedures (as defined under Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, Florida Progress' Chairman and Chief
Executive Officer, and Chief Financial Officer concluded that Florida Progress'
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 Florida Progress' periodic SEC filings.
There has been no change in Florida Progress' internal control over financial
reporting during the quarter ended June 30, 2003 that has materially affected,
or is reasonably likely to materially affect, Florida Progress' internal control
over financial reporting.
Progress Energy Florida, Inc.
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, PEF
carried out an evaluation, with the participation of PEF's management, including
PEF's Chairman and Chief Executive Officer, and Chief Financial Officer, of the
effectiveness of PEF's disclosure controls and procedures (as defined under Rule
13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by this report. Based upon that evaluation, PEF's Chairman and Chief
30
Executive Officer, and Chief Financial Officer concluded that PEF's disclosure
controls and procedures are effective in timely alerting them to material
information relating to PEF (including its consolidated subsidiaries) required
to be included in PEF's periodic SEC filings. There has been no change in PEF's
internal control over financial reporting during the quarter ended June 30, 2003
that has materially affected, or is reasonably likely to materially affect,
PEF's internal control over financial reporting.
31
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Florida Progress Energy
Number Description Progress Corporation Florida, Inc.
- ------- ----------- -------------------- -------------
4 Forty-second Supplemental Indenture, dated as of April X
1, 2003, from Florida Power Corporation d/b/a Progress
Energy Florida, Inc. to First Chicago Trust Company of
New York (Resigning Trustee) and Bank One, N.A.
(Successor Trustee), supplement to Indenture dated as
of January 1, 1944, as supplemented
10(i) Amended and Restated Progress Energy, Inc. Restoration X X
Retirement plan, effective as of July 10, 2002
10(ii) Progress Energy, Inc. Non-Employee Director Stock Unit X
Plan, amended and restated effective July 10, 2002
10(iii) Amended and Restated Supplemental Senior Executive X X
Retirement Plan of Progress Energy, Inc., effective
January 1, 1984 (As last amended effective July 10,
2002)
10(iv) Amended Management Incentive Compensation Plan of X X
Progress Energy, Inc., as amended January 1, 2003
31(a) Certifications pursuant to Section 302 of the X X
Sarbanes-Oxley Action of 2002 - Chairman and Chief
Executive Officer
31(b) Certifications pursuant to Section 302 of the X X
Sarbanes-Oxley Action of 2002 - Executive Vice
President and Chief Financial Officer
32(a) Certifications pursuant to Section 906 of the X X
Sarbanes-Oxley Action of 2002 - Chairman and Chief
Executive Officer
32(b) Certifications pursuant to Section 906 of the X X
Sarbanes-Oxley Action of 2002 - Chief Financial Officer
32
(b) Reports on Form 8-K since the beginning of the quarter:
Florida Progress Corporation
Financial
Item Statements
Reported Included Date of Event Date Filed
5 No April 1, 2003 April 1, 2003
9, 12 Yes April 23, 2003 April 23, 2003
5 No June 24, 2003 June 25, 2003
9, 12 Yes July 23, 2003 July 23, 2003
Progress Energy Florida, Inc.
Financial
Item Statements
Reported Included Date of Event Date Filed
5 No April 1, 2003 April 1, 2003
9, 12 Yes April 23, 2003 April 23, 2003
9, 12 Yes July 23, 2003 July 23, 2003
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLORIDA PROGRESS CORPORATION
FLORIDA POWER CORPORATION
(Registrants)
Date: August 11, 2003 By: /s/ Peter M. Scott III
------------------------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
By: /s/ Robert H. Bazemore, Jr.
-----------------------------------
Robert H. Bazemore, Jr.
Vice President and Controller
Chief Accounting Officer
34