UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Exact name of each Registrant as specified in I.R.S. Employer
Commission its charter, state of incorporation, address of Identification
File No. principal executive offices and telephone number Number
1-8349 Florida Progress Corporation 59-2147112
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class Name of each exchange on which registered
Florida Progress Corporation:
7.10% Cumulative Quarterly Income Preferred Securities, New York Stock Exchange
Series A, of FPC Capital I (and the Guarantee of Florida
Progress with respect thereto)
Progress Energy Florida, Inc.: None
1
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Florida Progress Corporation: None
Florida Power Corporation: None
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
As of June 30, 2003, the aggregate market value of the voting and non-voting
common equity of each of the registrants held by non-affiliates was $0. All of
the common stock of Florida Progress Corporation is owned by Progress Energy,
Inc., its corporate parent. All of the common stock of Florida Power Corporation
is owned by Florida Progress Corporation.
As of February 29, 2004, each registrant had the following shares of common
stock outstanding:
Registrant Description Shares
Florida Progress Corporation Common Stock (without par value) 98,616,658
Florida Power Corporation Common Stock (without par value) 100
Florida Progress Corporation and Florida Power Corporation meet the conditions
set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore
filing this Form 10-K with the reduced disclosure format permitted by General
Instruction I(2) to such Form 10-K.
This combined Form 10-K is filed separately by two registrants: Florida Progress
Corporation and Florida Power Corporation. Information contained herein relating
to either individual registrant is filed by such registrant solely on its own
behalf. Each registrant makes no representation as to information relating
exclusively to the other registrant.
2
TABLE OF CONTENTS
GLOSSARY
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
RISK FACTORS
3
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined FORM
10-K are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement related to retail rate matters
APB No. 28 Accounting Principles Board Opinion No. 28, "Interim Financial Reporting"
ARO Asset retirement obligation
Bcf Billion cubic feet
Btu British thermal units
CERCLA or Superfund Comprehensive Environmental Response Compensation & Liability Act
the Code Internal Revenue Code
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company, Florida Progress or FPC Florida Progress Corporation
CP&L Energy CP&L Energy, Inc.
CPI Consumer Price Index
CR3 PEF's nuclear generating plant, Crystal River Unit No. 3
CVO Contingent Value Obligation
DIG Derivatives Implementation Group
DOE United States Department of Energy
Dt Dekatherm
EITF Emerging Issues Task Force
EPA United States Environmental Protection Agency
ERISA Employee Retirement Income Security Act of 1974
FASB Financial Accounting Standards Board
FDEP Florida Department of Environmental Protection
Federal Circuit United States Circuit Court of Appeals
FERC Federal Energy Regulatory Commission
FIN No. 45 FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of
FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34"
FIN No. 46 FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51"
FIN No. 46R December 2003 revision of FIN No. 46
Financial Statements Florida Progress' Financial Statements and
Progress Energy Florida's Financial Statements, for the year
ended December 31, 2003 contained under ITEM 8 herein
Florida Power or the Utility Florida Power Corporation d/b/a Progress Energy Florida, Inc.
FPSC Florida Public Service Commission
Funding Corp. Florida Progress Funding Corporation
GAAP Accounting principles generally accepted in the United States of America
Georgia Power Georgia Power Company
IRS Internal Revenue Service
ISO Independent System Operator
kV Kilovolt
kVA Kilovolt-ampere
LTIP Long-Term Incentive Plan
MACT Maximum Available Control Technology
MGP Manufactured Gas Plant
MW Megawatts
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
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
PLRs Private Letter Rulings
4
Preferred Securities FPC-obligated mandatorily redeemable preferred securities of FPC Capital I
Preferred Stock Progress Energy Florida Preferred Stock, $100 par value
Progress Capital Progress Capital Holdings, Inc.
Progress Energy or the Parent Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly Electric Fuels Corporation
Progress Rail Progress Rail Services Corporation
PTC Progress Telecommunications Corporation
PTC LLC Progress Telecom LLC
PVI Progress Ventures, Inc., formerly referred to as Energy Ventures, a business unit of
Progress Energy
PUHCA Public Utility Holding Company Act of 1935, as amended
PURPA Public Utility Regulatory Policies Act of 1978
PWR Pressurized Water Reactors
QFs Qualifying facilities
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 No. 4 Statement of Financial Accounting Standards No. 4, "Reporting Gains and Losses from
Extinguishment of Debt (an amendment of Accounting Principles Board (APB) Opinion No. 30)"
SFAS No. 5 Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies"
SFAS No. 71 Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation"
SFAS No. 87 Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions"
SFAS No. 106 Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions"
SFAS No. 121 Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
SFAS No. 123 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"
SFAS No. 133 Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and
Hedging Activities"
SFAS No. 138 Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133"
SFAS No. 142 Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets"
SFAS No. 143 Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations"
SFAS No. 144 Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"
SFAS No. 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 Instrument sand 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
5
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This combined report contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The matters discussed throughout this report that are not historical facts
are forward-looking and, accordingly, involve estimates, projections, goals,
forecasts, assumptions, risks and uncertainties that could cause actual results
or outcomes to differ materially from those expressed in the forward-looking
statements.
In addition, examples of forward-looking statements discussed in this report
include, but are not limited to, statements under the following headings: 1)
"Liquidity and Capital Resources" about operating cash flows, estimated capital
requirements through the year 2006 and future financing plans, and 2) "Risk
Factors."
Any forward-looking statement speaks only as of the date on which such statement
is made, and neither Florida Progress nor Progress Energy Florida (PEF)
undertakes any obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is
made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: the impact of fluid and complex government laws and regulations,
including those relating to the environment; the impact of recent events in the
energy markets that have increased the level of public and regulatory scrutiny
in the energy industry and in the capital markets; the impact of PEF's rate case
settlement; deregulation or restructuring in the electric industry that may
result in increased competition and 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 the PEF's
commercial and industrial customers; the inherent risks associated with the
operation of nuclear facilities, including environmental, health, regulatory and
financial risks; the impact of any terrorist acts generally and on our
generating facilities and other properties; the ability to successfully access
capital markets on favorable terms; the impact that increases in leverage may
have on the Company and 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; investment performance of pension and benefit plans
and the ability to control costs; the Company's continued ability to use
Internal Revenue Code Section 29 (Section 29) tax credits related to its coal
and synthetic fuel businesses; the Company's ability to successfully integrate
newly acquired assets or properties into its operations as quickly or as
profitably as expected; and unanticipated changes in operating expenses and
capital expenditures. Many of these risks similarly impact the Company's
subsidiaries.
These and other risk factors are detailed from time to time in Florida Progress'
and PEF's SEC reports. All such factors are difficult to predict, contain
uncertainties that may materially affect actual results and may be beyond the
control of Florida Progress and PEF. Many, but not all of the factors that may
impact actual results are discussed under the heading "Risk Factors". You should
carefully read the "Risk Factors" section of this report. New factors emerge
from time to time, and it is not possible for management to predict all such
factors, nor can it assess the effect of each such factor on Florida Progress
and PEF.
6
PART I
ITEM 1. BUSINESS
GENERAL
COMPANY
Florida Progress Corporation (Florida Progress or the Company, which term
includes consolidated subsidiaries unless otherwise indicated) is a wholly-owned
subsidiary of Progress Energy, Inc. (Progress Energy), a registered holding
company under the Public Utility Holding Company Act (PUHCA) of 1935. Progress
Energy and its subsidiaries, including Florida Progress, are subject to the
regulatory provisions of PUHCA. Florida Progress was incorporated in Florida on
January 21, 1982. Florida Progress is the parent company of Florida Power
Corporation (Florida Power or the Utility) and certain other subsidiaries.
Progress Energy controls Florida Power Corporation and the other Florida
Progress subsidiaries through its ownership of Florida Progress.
On November 30, 2000, the acquisition of Florida Progress by CP&L Energy, Inc.
(CP&L Energy) became effective. In December 2000, CP&L Energy was renamed
Progress Energy, Inc.
Effective January 1, 2003, Florida Power began doing business under the name
Progress Energy Florida, Inc. (PEF). The legal name of the entity has not been
changed and there is no restructuring of any kind related to the name change.
The current corporate and business unit structure remains unchanged.
Florida Progress' revenues for the year ended December 31, 2003, were $5
billion, and assets at year-end were $9 billion. Its principal executive offices
are located at 410 South Wilmington Street, Raleigh, North Carolina 27601-1748,
telephone number (919) 546-6111. Information about Florida Progress and its
subsidiaries can be found at Progress Energy's home page on the Internet at
http://www.progress-energy.com, the contents of which are not and shall not be
deemed to be a part of this document or any other Securities and Exchange
Commission (SEC) filing. The Company makes available free of charge on its
website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to these reports as soon as reasonably
practicable after such material is electronically filed or furnished to the SEC.
Florida Progress' principal business segment is PEF, which encompasses all
regulated public utility operations (See ITEM 1 "Business - Utility Operations -
PEF") and accounts for approximately 63% and 80% of Florida Progress' revenues
and assets, respectively, at year end in 2003. Florida Progress' other business
segments, including Energy and Related Services, Rail Services, and Other,
represent its diversified operations (See ITEM 1 "Business - Diversified
Operations").
Progress Capital Holdings, Inc. (Progress Capital) is the downstream holding
company for Florida Progress' diversified subsidiaries and provides a portion of
the financing for the non-utility operations. Diversified operations include
Progress Fuels Corporation (Progress Fuels), formerly Electric Fuels Corporation
(Electric Fuels), and Progress Telecommunications Corporation (PTC). In January
2002, Electric Fuels changed its name to Progress Fuels. Progress Fuels is a
diversified non-utility energy company, whose principal business segments are
Energy and Related Services and Rail Services. Florida Progress' Other category
consists primarily of PTC, the Company's Investment in FPC Capital I, and the
holding company, Florida Progress. PTC is a provider of wholesale
telecommunications services.
After the acquisition of Florida Progress, Progress Energy hired a financial
adviser to assist Florida Progress in evaluating its strategic alternatives with
respect to Progress Fuels' Inland Marine Transportation and Rail Services
segments. In November 2001, the Inland Marine Transportation segment was sold to
AEP Resources, Inc. During 2001, Progress Energy decided to retain the Rail
Services segment in the near term. An SEC order approving the merger of Florida
Progress with Progress Energy required Progress Energy to divest of Rail
Services and certain immaterial, non-regulated investments of Florida Progress
by November 30, 2003. Progress Energy pursued alternatives, but did not find the
right divestiture opportunity by that date. Therefore, Progress Energy applied
for and was granted a three-year extension from the SEC until 2006. In December
2002, the Progress Energy Board of Directors adopted a resolution approving the
sale of Railcar Ltd., a subsidiary included in the Rail Services segment. In
March 2003, Progress Energy signed a letter of intent to sell the majority of
Railcar Ltd. assets to The Andersons, Inc. The asset purchase agreement was
signed in November 2003, and the transaction closed in February 2004.
7
ACQUISITIONS
Progress Telecommunications Corporation
In December 2003, PTC and Caronet, both indirectly wholly-owned subsidiaries of
Progress Energy, and EPIK Communications, Inc. (EPIK), a wholly-owned subsidiary
of Odyssey Telecorp, Inc. (Odyssey), contributed substantially all of their
assets and transferred certain liabilities to Progress Telecom, LLC (PTC LLC), a
subsidiary of PTC. Subsequently, the stock of Caronet was sold to an affiliate
of Odyssey for $2 million in cash and Caronet became an indirect wholly-owned
subsidiary of Odyssey. Following consummation of all the transactions described
above, PTC holds a 55 percent ownership interest in, and is the parent of, PTC
LLC. Odyssey holds a combined 45 percent ownership interest in PTC LLC through
EPIK and Caronet. See Note 4A to the financial statements for additional
discussion of this transaction.
Acquisition of Natural Gas Reserves
During 2003, Progress Fuels entered into several independent transactions to
acquire approximately 200 natural gas-producing wells with proven reserves of
approximately 190 billion cubic feet (Bcf) from Republic Energy, Inc. and three
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 Corporation. The total cash
purchase price for the transactions was approximately $168 million. See Note 4B
to the financial statements for additional discussion of this transaction.
Westchester Acquisition
In April 2002, Progress Fuels acquired 100% of Westchester Gas Company
(Westchester). The acquisition included approximately 215 natural gas-producing
wells, 52 miles of intrastate gas pipeline and 170 miles of gas-gathering
systems. The aggregate purchase price was approximately $153 million. See Note
4C to the financial statements for additional discussion of this transaction.
DIVESTITURES
Mesa Hydrocarbons, Inc. Divestiture
In September 2003, the Finance Committee as authorized by the Progress Energy
Board of Directors adopted a resolution approving the sale of certain
gas-producing properties owned by Mesa Hydrocarbons, LLC, a wholly-owned
subsidiary of Progress Fuels. In October 2003, the Company completed the sale of
these assets. The primary components of the assets sold were oil and gas leases
and wells. Net proceeds from the sale were approximately $97 million. The
Company recorded this transaction in the fourth quarter of 2003. See Note 3A to
the financial statements for additional discussion of this transaction.
Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a resolution
authorizing the sale of the majority of the assets of Railcar Ltd., a leasing
subsidiary included in the Rail Services segment. An estimated impairment on
assets held for sale was recognized in December 2002 to write-down the assets to
be sold to fair value less the costs to sell.
In March 2003, the Company signed a letter of intent to sell the majority of
Railcar Ltd. assets to The Andersons, Inc. The asset purchase agreement was
signed in November 2003, and the transaction closed in February 2004. Net
proceeds from the sale were approximately $82 million. See Note 3B to the
financial statements.
Sale of MEMCO Barge Line, Inc.
In July 2001, Progress Energy announced the disposition of the Inland Marine
Transportation segment of FPC, which was operated by MEMCO Barge Line, Inc.
Inland Marine provided transportation of coal, agricultural and other dry-bulk
commodities as well as fleet management services. In November 2001, Progress
Energy completed the sale of the Inland Marine Transportation segment to AEP
Resources, Inc., a wholly-owned subsidiary of American Electric Power. See Note
3C to the financial statements.
8
UTILITY OPERATIONS - PEF
GENERAL
PEF was incorporated in Florida in 1899, and is an operating public utility
primarily engaged in the generation, purchase, transmission, distribution and
sale of electricity. At December 31, 2003, PEF had a total summer generating
capacity (including jointly-owned capacity) of approximately 8,544 megawatts
(MW).
PEF provided electric service during 2003 to an average of 1.5 million customers
in west central Florida. Its service area covers approximately 20,000 square
miles and includes the densely populated areas around Orlando, as well as the
cities of St. Petersburg and Clearwater. PEF is interconnected with 20 municipal
and nine rural electric cooperative systems. Major wholesale power sales
customers include Seminole Electric Cooperative, Inc., Florida Municipal Power
Agency, Florida Power & Light Company and Tampa Electric Company. PEF is subject
to the rules and regulations of the Federal Energy Regulatory Commission (FERC)
and the Florida Public Service Commission (FPSC).
BILLED ELECTRIC REVENUES
PEF's electric revenues billed by customer class, for the last three years, are
shown as a percentage of total electric revenues in the table below:
BILLED ELECTRIC REVENUES
Revenue Class 2003 2002 2001
------------- ---- ---- ----
Residential 55% 55% 54%
Commercial 24% 24% 24%
Industrial 7% 7% 7%
Others 6% 6% 6%
Wholesale 8% 8% 9%
Important industries in the territory include phosphate rock mining and
processing, electronics design and manufacturing, and citrus and other food
processing. Other important commercial activities are tourism, health care,
construction and agriculture.
FUEL AND PURCHASED POWER
General
PEF's consumption of various types of fuel depends on several factors, the most
important of which are the demand for electricity by PEF's customers, the
availability of various generating units, the availability and cost of fuel and
the requirements of federal and state regulatory agencies. PEF's energy mix for
the last three years is presented in the following table:
ENERGY MIX PERCENTAGES
Fuel Type 2003 2002 2001
--------- ---- ---- ----
Coal (a) 36% 33% 33%
Oil 16% 16% 16%
Nuclear 14% 15% 15%
Gas 13% 15% 14%
Purchased Power 21% 21% 22%
(a) Includes synthetic fuel from unrelated third parties and petroleum coke.
PEF is generally permitted to pass the cost of recoverable fuel and purchased
power to its customers through fuel adjustment clauses. The future prices for
and availability of various fuels discussed in this report cannot be predicted
with complete certainty. However, PEF believes that its fuel supply contracts,
as described below, will be adequate to meet its fuel supply needs.
9
PEF's average fuel costs per million British thermal units (Btu) for the last
three years were as follows:
AVERAGE FUEL COST
(per million Btu)
2003 2002 2001
---- ---- ----
Coal (a) $ 2.42 $ 2.43 $ 2.16
Oil 4.38 3.77 3.81
Nuclear 0.50 0.46 0.47
Gas 5.98 4.06 4.52
Weighted-average 3.07 2.60 2.59
(a) Includes synthetic fuel from unrelated third parties and petroleum coke.
Changes in the unit price for coal, oil and gas are due to market conditions.
Since these costs are primarily recovered through recovery clauses established
by regulators, the fluctuation does not materially affect net income.
Purchased Power
PEF, along with other Florida utilities, buys and sells power in the wholesale
market on a short-term and long-term basis. At December 31, 2003, PEF had a
variety of purchase power agreements for the purchase of approximately 1,313 MW
of firm power. These agreements include (1) long-term contracts for the purchase
of about 474 MW of purchased power with other investor-owned utilities,
including a contract with The Southern Company for approximately 414 MWs, and
(2) approximately 839 MWs of capacity under contract with certain qualifying
facilities (QFs). The capacity currently available from QFs represents about 10%
of PEF's total installed system capacity.
REGULATORY MATTERS
General
PEF is subject to the jurisdiction of the FPSC with respect to, among other
things, rates and service for electric energy sold at retail, retail service
territory and issuances of securities. In addition, PEF is subject to regulation
by the FERC with respect to transmission and sales of wholesale power,
accounting and certain other matters. The underlying concept of utility
ratemaking is to set rates at a level that allows the utility to collect
revenues equal to its cost of providing service including a reasonable rate of
return on its equity. Increased competition as a result of industry
restructuring may affect the ratemaking process.
Retail Rate Matters
The FPSC authorizes retail "base rates" that are designed to provide a utility
with the opportunity to earn a specific rate of return on its "rate base," or
average investment in utility plant. These rates are intended to cover all
reasonable and prudent expenses of utility operations and to provide investors
with a fair rate of return.
In March 2002, the parties in PEF's rate case entered into a Stipulation and
Settlement Agreement (the Agreement) related to retail rate matters. The
Agreement was approved by the FPSC and is generally effective from May 1, 2002
through December 31, 2005. The Agreement eliminates the authorized Return on
Equity (ROE) range normally used by the FPSC for the purpose of addressing
earning levels; provided, however, that if PEF's base rate earnings fall below a
10% return on equity, PEF may petition the FPSC to amend its base rates. The
Agreement is described in more detail in Note 7B to the financial statements.
Fuel and Other Cost Recovery
PEF's operating costs not covered by the utility's base rates include fuel,
purchased power, energy conservation expenses and specific environmental costs.
The state commission allows electric utilities to recover certain of these costs
through various cost recovery clauses, to the extent the respective commission
determines in an annual hearing that such costs are prudent. In addition, in
December 2002, the FPSC approved an Environmental Cost Recovery Clause (ECRC)
which permits the Company to recover the costs of specified environmental
projects to the extent these expenses are found to be prudent in an annual
hearing and not otherwise included in base rates. Costs are recovered through
this recovery clause in the same manner as the other existing clause mechanisms.
10
The state commission's determination results in the addition of a rider to a
utility's base rates to reflect the approval of these costs and to reflect any
past over- or under-recovery. Due to the regulatory treatment of these costs and
the method allowed for recovery, changes from year to year have no material
impact on operating results.
NUCLEAR MATTERS
PEF owns and operates one nuclear generating plant, Crystal River Unit No. 3
(CR3), which is subject to regulation by the Nuclear Regulatory Commission
(NRC). The NRC's jurisdiction encompasses broad supervisory and regulatory
powers over the construction and operation of nuclear reactors, including
matters of health and safety, antitrust considerations and environmental impact.
PEF has a license to operate its nuclear generating plant through December 3,
2016. PEF currently has a 91.8% ownership interest in CR3. In February 2003, PEF
notified the NRC of its intent to submit an application to extend the plant
license in the first quarter of 2009. A condition of the operating license for
each unit requires an approved plan for decontamination and decommissioning. The
nuclear unit is periodically removed from service to accommodate normal
refueling and maintenance outages, repairs and certain other modifications.
The nuclear power industry faces uncertainties with respect to the cost and
long-term availability of sites for disposal of spent nuclear fuel and other
radioactive waste, compliance with changing regulatory requirements, nuclear
plant operations, increased capital outlays for modifications, the technological
and financial aspects of decommissioning plants at the end of their licensed
lives and requirements relating to nuclear insurance.
During 2002, the NRC issued bulletins to companies that hold licenses for
pressurized water reactors (PWRs) requiring information on the structural
integrity of the reactor vessel head and requiring additional inspection
standards. The Company filed responses as required. Inspection of the vessel
head at the Company's PWR plant was performed during the previous outage. In
October 2001, at CR3, one nozzle was found to have a crack and was repaired;
however, no degradation of the reactor vessel head was identified. The vessel
head at CR3 was replaced during its regularly scheduled refueling outage in
2003.
OTHER MATTERS
Regional Transmission Organizations
As a result of Order 2000, PEF, along with Florida Power & Light Company and
Tampa Electric Company (the Applicants) filed with the FERC in October 2000 an
application for approval of a GridFlorida RTO. The GridFlorida proposal is
pending before both the FERC and the FPSC. See Note 7C to the financial
statements for further discussion of RTOs.
Standard Market Design
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). The proposed rules
set forth in the SMD NOPR would require, among other things, that all
transmission owning utilities transfer control of their transmission facilities
to an independent third party.
Franchise Agreements
PEF holds franchises with varying expiration dates in 107 of the municipalities
in which it distributes electric energy. PEF also serves 14 other municipalities
and in all its unincorporated areas without franchise agreements. The general
effect of these franchises is to provide for the manner in which PEF occupies
rights-of-way in incorporated areas of municipalities for the purpose of
constructing, operating and maintaining an energy transmission and distribution
system. See Note 19 to the financial statements for further discussion of
franchise agreements.
Stranded Costs
An important issue encompassed by industry restructuring is the recovery of
"stranded costs." Stranded costs primarily include the generation assets of
utilities whose value in a competitive marketplace would be less than their
current book value, as well as above-market purchased power commitments to QFs.
Thus far, all states that have passed restructuring legislation have provided
for the opportunity to recover a substantial portion of stranded costs.
11
Assessing the amount of stranded costs for a utility requires various
assumptions about future market conditions, including the future price of
electricity. The single largest stranded cost exposure for PEF is its commitment
to QFs. PEF has taken a proactive approach to this industry issue. PEF continues
to seek ways to address the impact of escalating payments from contracts it was
obligated to sign under provisions of Public Utility Regulatory Policies Act of
1978 (PURPA).
DIVERSIFIED OPERATIONS
GENERAL
Florida Progress' diversified operations are owned directly or indirectly
through Progress Capital, a Florida corporation and wholly-owned subsidiary of
Florida Progress. Progress Capital holds the capital stock of, and provides the
financing for, Florida Progress' non-utility subsidiaries. Its primary
subsidiary is Progress Fuels, formerly Electric Fuels. In January 2002, Electric
Fuels changed its name to Progress Fuels.
Formed in 1976, Progress Fuels is an energy and transportation company. When the
Inland Marine Transportation unit was sold in November 2001, Progress Fuels was
reorganized into two business units, Energy and Related Services and Rail
Services. Progress Fuels' energy and related services business unit supplies
coal to Florida Power's Crystal River Energy Complex and other utility and
industrial customers. This business unit also produces and sells natural gas and
synthetic fuel along with operating terminal services and offshore marine
transportation.
The Rail Services business segment, led by Progress Rail Services Corporation
(Progress Rail), is one of the largest integrated and diversified suppliers of
railroad and transit system products and services in North America and is
headquartered in Albertville, Alabama. Rail Services' principal business
functions include two business units: the Locomotive and Railcar Services (LRS)
and Engineering and Trackwork (E&TW).
The LRS unit is primarily focused on railroad rolling stock that includes
freight cars, transit cars and locomotives, the repair and maintenance of these
units, the manufacturing or reconditioning of major components for these units
and scrap metal recycling. The E&TW unit focuses on rail and other track
components, the infrastructure which supports the operation of rolling stock, as
well as the equipment used in maintaining the railroad infrastructure and
right-of-way. The Recycling division of the LRS unit supports both business
units through its reclamation of reconditionable material and is a major
supplier of recyclable scrap metal to North American steel mills and foundries
through its processing locations as well as its scrap brokerage operations.
In March 2003, the Company signed a letter of intent to sell Railcar Ltd. to The
Andersons, Inc. The asset purchase agreement was signed in November 2003, and
the transaction closed in February 2004.
With operations in 23 states, Canada and Mexico, Progress Rail offers a full
range of railcar parts, maintenance-of-way equipment, rail and other track
material, railcar repair facilities, railcar scrapping and metal recycling as
well as railcar sales and leasing.
PROGRESS TELECOM LLC
In December 2003, PTC and Caronet, both indirectly wholly-owned subsidiaries of
Progress Energy, and EPIK Communications, Inc. (EPIK), a wholly-owned subsidiary
of Odyssey Telecorp, Inc. (Odyssey) contributed substantially all of their
assets and transferred certain liabilities to PTC LLC, a subsidiary of PTC.
Subsequently, the stock of Caronet, a Progress Energy Carolinas subsidiary, was
sold to an affiliate of Odyssey for $2 million in cash and Caronet became an
indirect wholly-owned subsidiary of Odyssey. Following consummation of all the
transactions described above, PTC holds a 55 percent ownership interest in, and
is the parent, of PTC LLC. The accounts of PTC LLC are included in the Company's
financial statements since the transaction date.
PTC LLC has data fiber network transport capabilities that stretch from New York
to Miami, Florida, with gateways to Latin America and conducts primarily a
carrier's carrier business. PTC LLC markets wholesale fiber-optic-based capacity
service in the Eastern United States to long-distance carriers, internet service
providers and other telecommunications companies. PTC LLC also markets wireless
structure attachments to wireless communication companies and governmental
entities. At December 31, 2003, PTC LLC owned and managed approximately 8,500
route miles and more than 420,000 fiber miles of fiber-optic cable.
PTC LLC competes with other providers of fiber-optic telecommunications
services, including local exchange carriers and competitive access providers, in
the Eastern United States.
12
Lease revenue for dedicated transport and data services is generally billed in
advance on a fixed rate basis and recognized over the period the services are
provided. Revenues relating to design and construction of wireless
infrastructure are recognized upon completion of services (i.e., as the revenue
is earned) for each completed phase of design and construction.
For additional information regarding asset and investment impairments related to
the Company's investments in the telecommunications industry, See Note 9 to the
financial statements.
COMPETITION
Florida Progress' non-utility subsidiaries compete in their respective
marketplaces in terms of price, quality of service, location and other factors.
Progress Fuels competes in several distinct markets. Its coal and synthetic fuel
operations compete in the eastern United States industrial coal markets, and its
rail operations compete in the railcar repair, parts and associated services
markets primarily in the eastern United States, but also in the midwest, west,
Canada and Mexico. Factors contributing to Progress Fuels' success in these
markets include a competitive cost structure and strategic locations. There are,
however, numerous competitors in each of these markets, although no one
competitor is dominant in any industry.
Progress Fuels' gas production operations compete in the East Texas/North
Louisiana region. Factors contributing to success include a competitive cost
structure. Although there are numerous small, independent competitors in this
market, the major oil and gas producers dominate this industry.
13
ITEM 2. PROPERTIES
GENERAL
Florida Progress believes that its physical properties and those of its
subsidiaries are adequate to carry their businesses as currently conducted.
Florida Progress and its subsidiaries maintain property insurance against loss
or damage by fire or other perils to the extent that such property is usually
insured.
UTILITY OPERATIONS
At December 31, 2003, PEF's fourteen generating plants represent a flexible mix
of fossil, nuclear, combustion turbine and combined cycle resources with a total
summer generating capacity (including jointly-owned capacity) of 8,544 MW. At
December 31, 2003, PEF had the following generating facilities:
- ----------------------------------------------------------------------------------------------------------
PEF Summer Net
No. of In-Service Ownership Capability (a)
Facility Location Units Date Fuel (in %) (in MW)
- ----------------------------------------------------------------------------------------------------------
STEAM TURBINES
Anclote Holiday, FL 2 1974-1978 Gas/Oil 100 993
Bartow St. Petersburg, FL 3 1958-1963 Gas/Oil 100 444
Crystal River Crystal River, FL 4 1966-1984 Coal 100 2,302
Suwannee River Live Oak, FL 3 1953-1956 Gas/Oil 100 143
------- ---------------
Total 12 3,882
COMBINED CYCLE
Hines Bartow, FL 2 1999-2003 Gas/Oil 100 998
Tiger Bay Fort Meade, FL 1 1997 Gas 100 207
------- ---------------
Total 3 1,205
COMBUSTION TURBINES
Avon Park Avon Park, FL 2 1968 Gas/Oil 100 52
Bartow St. Petersburg, FL 4 1958-1972 Gas/Oil 100 187
Bayboro St. Petersburg, FL 4 1973 Oil 100 184
DeBary DeBary, FL 10 1975-1992 Gas/Oil 100 667
Higgins Oldsmar, FL 4 1969-1970 Gas/Oil 100 122
Intercession City Intercession City, FL 14 1974-2000 Gas/Oil 100 (c) 1,041 (b)
Rio Pinar Rio Pinar, FL 1 1970 Oil 100 13
Suwannee River Live Oak, FL 3 1980 Gas/Oil 100 164
Turner Enterprise, FL 4 1970-1974 Oil 100 154
University of
Florida Cogeneration Gainesville, FL 1 1994 Gas 100 35
------- ---------------
Total 47 2,619
NUCLEAR
Crystal River Crystal River, FL 1 1977 Uranium 91.78 838 (b)(d)
------- ---------------
Total 1 838
TOTAL 63 8,544
- ----------------------------------------------------------------------------------------------------------
(a) Amounts represent PEF's net summer peak rating, gross of co-ownership
interest in plant capacity.
(b) Facilities are jointly-owned. The capacities shown include joint owners'
share.
(c) PEF and Georgia Power Company (Georgia Power) are co-owners of a 143 MW
advanced combustion turbine located at PEF's Intercession City site (P11).
Georgia Power has the exclusive right to the output of this unit during the
months of June through September. PEF has that right for the remainder of
the year.
(d) During 2003, a power uprate increased the net summer capability of this
unit to 838 MWs. The Maximum Dependable Capability (MDC) was restated in
January 2004.
At December 31, 2003, including both the total generating capacity of 8,544 MWs
and the total firm contracts for purchased power of 1,313 MWs, PEF had total
capacity resources of approximately 9,857 MWs.
Several entities have acquired undivided ownership interests in CR3 in the
aggregate amount of 8.22%. PEF and Georgia Power are co-owners of a 143 MW
advance combustion turbine located at PEF's Intercession City site (P11).
Georgia Power has the exclusive right to the output of this unit during the
months of June through September. PEF has that right for the remainder of the
year. Otherwise, PEF has good and marketable title to its principal plants and
important units, subject to the lien of its mortgage and deed of trust, with
minor exceptions, restrictions and reservations in conveyances, as well as minor
defects of the nature ordinarily found in properties of similar character and
magnitude. PEF also owns certain easements over private property on which
transmission and distribution lines are located.
At December 31, 2003, PEF had approximately 5,000 circuit miles of transmission
lines.
14
DIVERSIFIED OPERATIONS
Progress Fuels controls, either directly or through subsidiaries, coal reserves
located in eastern Kentucky and southeastern Virginia of approximately 60
million tons and controls, through mineral leases, additional estimated coal
reserves of approximately 18 million tons. The reserves controlled include
substantial quantities of high quality, low sulfur coal that is appropriate for
use at PEF's existing generating units. Progress Fuels' total production of coal
during 2003 was approximately 3.5 million tons.
In connection with its coal operations, Progress Fuel's business units own and
operate an underground mining complex located in southeastern Kentucky and
southwestern Virginia. Other subsidiaries own and operate surface and
underground mines, coal processing and loadout facilities, a river terminal
facility in eastern Kentucky, a railcar-to-barge loading facility in West
Virginia, and two bulk commodity terminals on the Kanawha River near Charleston,
West Virginia. Progress Fuels and its subsidiaries employ both Company and
contract miners in their mining activities.
Progress Fuels has oil and gas leases in East Texas, North Texas and Louisiana
with total proven natural gas and oil reserves of approximately 358 billion
cubic feet equivalent. Progress Fuels' natural gas and oil production in 2003
was 25.4 billion cubic feet equivalent.
Progress Rail, a Progress Fuels subsidiary, is one of the largest integrated
processors of railroad materials in the United States, and is a leading supplier
of new and reconditioned freight car parts; rail, rail welding and track work
components; railcar repair facilities; railcar and locomotive leasing;
maintenance-of-way equipment and scrap metal recycling. It has facilities and
offices in 23 states, Mexico and Canada.
Progress Rail owns and/or operates approximately 5,300 railcars and 100
locomotives that are used for the transportation and shipping of coal, steel,
and other bulk products.
PTC provides wholesale telecommunications services throughout the Eastern United
States. PTC LLC incorporates more than 420,000 fiber miles in its network,
including over 185 Points-of-Presence, or physical locations where a presence
for network access exists.
15
ITEM 3. LEGAL PROCEEDINGS
1. Wallace Bentley, et al. v. City of Tallahassee, Interstate Fibernet, Inc.
and Florida Power Corporation, Circuit Court for Leon County, Florida. Case
No. 98-7107.
In December 1998, 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, the plaintiffs amended their complaint to add
PTC 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. In November 2001, the trial court issued a
final order approving the settlement. Several objectors to the settlement
appealed the order to the 1st District Court of Appeal. In February 2003,
the appellate court issued an opinion upholding the trial court's subject
matter jurisdiction over the case, but reversing the trial court's order
approving the mandatory settlement class for purposes of declaratory and
injunctive relief. The appellate court remanded the case to the trial court
for further proceedings. The Company filed a motion requesting
discretionary review before the Florida Supreme Court, which was pending
before the First District Court of Appeal. Subsequent to filing these
motions, the Company and the appellants reached a settlement resolving the
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 2003 opinion. In May 2003 the trial court
entered an Amended Final Judgment again approving the mandatory class
settlement, consistent with the First District Court of Appeals' February
2003 opinion. No appeals have been taken from that judgment, and the time
to appeal has expired. In July 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 in July 2003.
Under the terms of the mandatory class settlement, PEF made settlement
payments to class members in August 2003. The settlement payments did not
have a material adverse effect upon PEF's financial condition or results of
operations. (See Note 19 to the Financial Statements -Legal Matters.)
2. Calgon Carbon Corporation v. Potomac Capital Investment Corporation,
Potomac Electric Power Company, Progress Capital Holdings, Inc., and
Florida Progress Corporation, United States District Court for the Western
District of Pennsylvania, Civil Action No. 98-0072.
Calgon Carbon corporation (Calgon) filed a complaint in January 1998,
asserting securities fraud, breach of contract and other claims in
connection with the sale to it by two of the defendants in December 1996 of
their interests in Advanced Separation Technologies, Incorporated (AST), a
corporation engaged in the business of designing and assembling proprietary
separation equipment. Prior to closing, Progress Capital, a wholly-owned
subsidiary of Florida Progress, owned 80% of the outstanding stock of AST
and Potomac Capital Investment Corporation (an entity unaffiliated with
Progress Capital or Florida Progress) owned 20%. Calgon paid Progress
Capital an aggregate of approximately $58 million (producing net proceeds
of approximately $56 million after certain fees and expenses) in respect of
Progress Capital's share of AST's stock. Calgon claims that AST's assets
and revenues were overstated and liabilities and expenses were understated
for 1996. Calgon also alleges undisclosed facts relating to accounting
methodology, poor products, manufacturing and quality control problems and
undisclosed warranty claims. Calgon seeks damages, punitive damages and the
right to rescind the purchase. All parties filed motions for summary
judgment in July 2001. The summary judgment motions of Calgon and the other
selling shareholder were denied in April of 2002. The summary judgment
motion of Florida Progress was withdrawn pending a legal challenge to
portions of the report of Calgon's expert, Arthur Andersen, which had been
used to oppose summary judgment. In September 2003, the United States
District Court for the Western District of Pennsylvania issued final orders
excluding from evidence in the case that portion of Arthur Andersen's
damage analysis based on the discounted cash flow methodology of valuation.
The Court did not exclude Arthur Andersen's use of the guideline publicly
traded company methodology in its damage analysis. Florida Progress filed a
renewed motion for summary judgment in October 2003, which is pending. The
Company cannot predict the outcome of this matter, but will present a
vigorous defense. (See Note 19 to the Financial Statements.)
16
3. U.S. Global, LLC v. Progress Energy, Inc. et al, Case No. 03004028-03
Progress Synfuel Holdings, Inc. et al. v. U.S. Global, LLC, Case No.
03004028-03
A number of Progress Energy, Inc. subsidiaries and affiliates are parties
to two lawsuits arising out of an Asset Purchase Agreement dated as of
October 19, 1999, by and among U.S. Global LLC (Global), EARTHCO, certain
affiliates of EARTHCO (collectively the EARTHCO Sellers), EFC Synfuel LLC
(which is owned indirectly by Progress Energy, Inc.) and certain of its
affiliates, including Solid Energy LLC, Solid Fuel LLC, Ceredo Synfuel LLC,
Gulf Coast Synfuel LLC (currently named Sandy River Synfuel LLC)
(collectively the Progress Affiliates), as amended by an Amendment to
Purchase Agreement as of August 23, 2000 (the Asset Purchase Agreement).
Global has asserted that pursuant to the Asset Purchase Agreement it is
entitled to (1) interests in two synthetic fuel facilities currently owned
by the Progress Affiliates, and (2) an option to purchase additional
interests in the two synthetic fuel facilities.
The first suit was filed in the Circuit Court for Broward County, Florida
on March 4, 2003 (the Florida Global Case). The Florida Global Case asserts
claims for breach of the Asset Purchase Agreement and other contract and
tort claims related to the Progress Affiliates' alleged interference with
Global's rights under the Asset Purchase Agreement. The Florida Global Case
requests an unspecified amount of compensatory damages, as well as
declaratory relief. On December 15, 2003, the Progress Affiliates filed a
motion to dismiss the Third Amended Complaint in the Florida Global Case.
The second suit was filed by the Progress Affiliates in the Superior Court
for Wake County, North Carolina seeking declaratory relief consistent with
the Company's interpretation of the Asset Purchase Agreement (the North
Carolina Global Case). Global was served with the North Carolina Global
Case in April 2003.
In May 2003, Global moved to dismiss the North Carolina Global Case for
lack of personal jurisdiction over Global. In the alternative, Global
requested that the court decline to exercise its discretion to hear the
Progress Affiliates' declaratory judgment action. In August 2003, the Wake
County Superior Court denied Global's motion to dismiss and entered an
order staying the North Carolina Global Case, pending the outcome of the
Florida Global Case. The Progress Affiliates have appealed the Superior
Court's order staying the case; Global has cross appealed the denial of its
motion to dismiss for lack of personal jurisdiction. The North Carolina
Court of Appeals has not set a hearing date for the Progress Affiliates'
Appeal or Global's cross appeal. The Company cannot predict the outcome of
these matters, but will vigorously defend against all allegations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by ITEM 4 is omitted pursuant to Instruction I (2)
(c) to Form 10-K (Omission of Information by Certain Wholly-owned Subsidiaries).
17
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
FLORIDA PROGRESS
All of Florida Progress' common stock is owned by Progress Energy, and as a
result there is no established public trading market for the stock.
Florida Progress receives dividends from PEF. PEF's Amended Articles of
Incorporation and its Indenture dated as of January 1, 1944, under which it
issues first mortgage bonds, contain provisions restricting dividends in certain
circumstances. At December 31, 2003, PEF's ability to pay dividends was not
limited by these restrictions.
Florida Progress and Progress Capital have entered into a Second Amended and
Restated Guaranty and Support Agreement dated as of August 7, 1996, pursuant to
which Florida Progress has unconditionally guaranteed the payment of Progress
Capital's debt (as defined in the agreement).
Florida Progress did not issue any equity securities during 2003 that were not
registered under the Securities Act.
Florida Progress does not have any equity compensation plans under which its
equity securities are issued.
PEF
All of PEF's common stock is owned by Florida Progress, and as a result there is
no established public trading market for the stock. For the past three years,
PEF has paid quarterly dividends to Florida Progress totaling the amounts shown
in the Statements of Common Equity in the Financial Statements. PEF's Amended
Articles of Incorporation, and its Indenture dated as of January 1, 1944, as
supplemented, under which it issues first mortgage bonds, contain provisions
restricting dividends in certain circumstances. At December 31, 2003, PEF's
ability to pay dividends was not limited by these restrictions.
PEF did not issue any equity securities during 2003 that were not registered
under the Securities Act.
PEF does not have any equity compensation plans under which its equity
securities are issued.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by ITEM 6 is omitted pursuant to Instruction I (2)
(a) to Form 10-K (Omission of Information by Certain Wholly-owned Subsidiaries).
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements that involve estimates, projections, goals, forecasts, assumptions,
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Please review
"Risk Factors" and "SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion
of the factors that may impact any such forward-looking statements made herein.
OVERVIEW
Florida Progress' income from continuing operations for the years ended December
31, 2003 and 2002 were $443 million and $230 million, respectively. The increase
in income from continuing operations in 2003 is primarily due to:
o Impairments recognized in 2002 related to the telecommunications and
railcar business operations.
o An increase in retail growth at PEF in 2003.
o Growth in natural gas production and sales.
o Higher synthetic fuel sales.
o Lower interest charges.
Partially offsetting these items were the:
o Net impact of the 2002 Florida Rate settlement.
o Increased benefit-related expenses.
o Higher depreciation expense at both PEF and the Energy and Related Services
segment.
These and other key operating results are discussed by segment below.
PEF
PEF's operating results are primarily influenced by customer demand for
electricity, its ability to control costs and its regulatory return on equity.
Annual demand for electricity is based on the number of customers, their annual
usage and the impact of weather. Since PEF serves a predominately retail
customer base, operating results are primarily influenced by the level of retail
sales and the costs associated with those sales. In addition, the current
economic conditions in the service territories may impact the annual demand for
electricity.
The FPSC oversees the retail sales of the state's investor-owned electric
utilities and authorizes retail base rates. Base rates and the resulting base
revenues are intended to cover all reasonable and prudent expenses of utility
operations and provide investors with a fair rate of return.
Costs not covered by base rates include fuel, purchased power, energy
conservation expenses and certain environmental costs. The FPSC allows electric
utilities to recover these costs, referred to as "pass-through" costs, through
various cost recovery clauses to the extent those costs are prudent. Due to the
regulatory treatment of these expenses and the method allows for recovery,
changes from year to year have no material impact on operating results.
PEF contributed segment profits of $295 million and $323 million in 2003 and
2002, respectively. The decrease in profits in 2003, when compared to 2002, was
primarily due to the impact of the 2002 rate case stipulation, higher benefit
costs primarily related to higher pension expense, higher depreciation and the
impact of unfavorable weather. These amounts were partially offset by continued
customer growth and lower interest charges.
PEF's profits in 2003 and 2002 were affected by the outcome of the Florida Power
rate case stipulation, which included a one-time retroactive revenue refund in
2002, a decrease in retail rates of 9.25% (effective May 1, 2002), provisions
for revenue sharing with the retail customer base, lower depreciation and
amortization and increased service revenue rates. See Note 7B to the Financial
Statements for further discussion of the rate case settlement.
A comparison of the results of operations of PEF for the past two years follows:
19
Revenues
PEF's electric revenues for the years ended December 31, 2003 and 2002 and the
percentage change by year and by customer class, as well as the impact of the
rate case settlement on revenue, are as follows:
- ---------------------------------------------------------------------------------------
(in millions)
- ---------------------------------------------------------------------------------------
Customer Class 2003 % Change 2002
- ---------------------------------------------------------------------------------------
Residential $ 1,691 2.8% $ 1,645
Commercial 740 1.2 731
Industrial 219 3.8 211
Governmental 181 4.6 173
Revenue Sharing Refund (35) - (5)
Retroactive Retail Rate Refund - - (35)
--------------- ----------------
Total Retail Revenues 2,796 2.8 2,720
Wholesale 227 (1.3) 230
Unbilled (2) - (3)
Miscellaneous 131 13.9 115
--------------- ----------------
Total Electric Revenues $ 3,152 2.9% $ 3,062
- ---------------------------------------------------------------------------------------
PEF's electric energy sales for the years ended December 31, 2003 and 2002 and
the percentage change by year and by customer class are as follows:
- --------------------------------------------------------------------------------------
(in thousands of mWh)
- --------------------------------------------------------------------------------------
Customer Class 2003 % Change 2002
- --------------------------------------------------------------------------------------
Residential 19,429 3.6% 18,754
Commercial 11,553 1.2 11,420
Industrial 4,000 4.3 3,835
Governmental 2,974 4.4 2,850
------------ ------------
Total Retail Energy Sales 37,956 3.0 36,859
Wholesale 4,323 3.4 4,180
Unbilled 233 - 5
------------ ------------
Total mWh Sales 42,512 3.6% 41,044
- --------------------------------------------------------------------------------------
PEF's revenues, excluding fuel revenues of $1,487 million and $1,402 million in
2003 and 2002, respectively, increased $5 million from 2002 to 2003. Revenues
were favorably impacted in 2003 by $49 million, primarily as a result of
customer growth (approximately 36,000 additional customers). In addition, other
operating revenues were favorable $16 million due primarily to higher wheeling
and transmission revenues and higher service charge revenues (resulting from
increased rates allowed under the 2002 rate settlement). These increases were
partially offset by the negative impact of the rate settlement, lower wholesale
sales and the impact of unfavorable weather. The provision for revenue sharing
increased $12 million in 2003 compared to the $5 million provision recorded in
2002. Revenues in 2003 were also impacted by the final resolution of the 2002
revenue sharing provisions as the FPSC issued an order in July 2003 that
required PEF to refund an additional $18 million to customers related to 2002.
The 9.25% rate reduction from the settlement accounted for an additional $46
million decline in revenues. The 2003 impact of the rate settlement was
partially offset by the absence of the prior year interim rate refund of $35
million. Lower wholesale revenues (excluding fuel revenues) of $17 million and
the $8 million impact of milder weather also reduced base revenues during 2003.
Expenses
Fuel and Purchased Power
Fuel used in generation and purchased power increased $87 million in 2003 when
compared to $1,349 million in 2002. The increase is due to higher costs to
generate electricity and higher purchased power costs as a result of an increase
in volume due to system requirements and higher natural gas prices.
20
Operations and Maintenance (O&M)
O&M expense increased $49 million in 2003, when compared to $591 million in
2002. The increase is largely related to increases in certain benefit-related
expenses of $36 million which was primarily due to higher pension expense of $27
million during the year. Additionally higher operational costs related to the
CR3 nuclear outage and plant maintenance contributed to the increase.
Depreciation and Amortization
Depreciation and amortization increased $12 million in 2003 when compared to
$295 million in 2002. Depreciation increased primarily as a result of additional
assets being placed into service which was partially offset by lower
amortization of the Tiger Bay regulatory asset of $2 million, which was fully
amortized in September 2003.
Interest Expense
Interest charges decreased $15 million in 2003 compared to $106 million in 2002
primarily due to the reversal of a regulatory liability for accrued interest
related to previously resolved tax matters.
Income Tax Expense
In 2003 and 2002 $13 million and $20 million, respectively, of the tax benefit
that was previously held at the Company's holding company was allocated to PEF.
As required by an SEC order issued in 2002, holding company tax benefits are
allocated to profitable subsidiaries. Other fluctuations in income taxes are
primarily due to changes in pretax income.
PROGRESS FUELS CORPORATION
Progress Fuels makes up the majority of Florida Progress' diversified
operations. The results of operations for Progress Fuels' Energy and Related
Services and Rail Services units are discussed below.
Energy and Related Services - Income from continuing operations for Energy and
Related Services were $166 million and $122 million for 2003 and 2002,
respectively. The following summarizes Energy and Related Services' segment
profits for the years ended 2003 and 2002:
- ----------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------
(in millions)
- ----------------------------------------------------------------------
Synthetic fuel operations $ 134 $ 102
Natural gas operations 34 10
Coal fuel and other operations (2) 10
-----------------------------
Segment profits $ 166 $ 122
- ----------------------------------------------------------------------
Synthetic Fuel Operations
Synthetic fuel operations generated profits of $134 million and $102 million for
the years ended December 31, 2003 and 2002, respectively. The production and
sale of the synthetic fuel generate operating losses, but qualify for tax
credits under Section 29 of the Internal Revenue Code, which more than offset
the effects of such losses. The operations resulted in the following losses
(prior to tax credits) and tax credits for 2003 and 2002.
- ---------------------------------------------------------------------------
(in millions) 2003 2002
- ---------------------------------------------------------------------------
Tons sold 7.5 6.5
After-tax losses (excluding tax credits) $ (79) $ (68)
Tax credits 213 170
--------------------------------
Net Profit $ 134 $ 102
- ---------------------------------------------------------------------------
Synthetic fuels net profits for 2003 increased as compared to 2002 due to higher
sales, improved margins and a higher tax credit per ton. The 2003 tax credits
also include a $7.5 million favorable true-up from 2002. Additionally, synthetic
fuels results in 2003 include 13 months of operations for some facilities. Prior
to the fourth quarter of 2003, results of these synthetic fuels operations had
been recognized one month in arrears. The net impact of this action increased
net income by $2 million for the year.
21
Natural Gas Operations
Natural gas operations generated profits of $34 million and $10 million for the
years ended December 31, 2003 and 2002, respectively. The increase in production
and price resulting from the acquisitions of Westchester Gas in 2002 and North
Texas Gas in the first quarter of 2003 drove increased revenue and earnings in
2003 compared to 2002. In October 2003, the Company completed the sale of
certain gas-producing properties owned by Mesa Hydrocarbons, LLC. See Notes 4B,
4C and 3A to the Financial Statements for discussions of the Westchester Gas
Company and the North Texas Gas acquisitions and the Mesa disposition. The
following summarizes the production and revenues of the natural gas and oil
operations for 2003 and 2002 by facility.
- ----------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------
Production in billion cubic feet equivalent
Mesa 4.8 6.0
Westchester 13.5 5.8
NTG 7.1 -
-------------------------
Total Production 25.4 11.8
-------------------------
Revenues in millions
Mesa $ 13 $ 15
Westchester 65 24
NTG 38 -
-------------------------
Total Revenues $ 116 $ 39
-------------------------
Gross Margin
In millions of $ $ 91 $ 29
As a % 78% 74%
- ----------------------------------------------------------------------------
Coal Fuel and Other Operations
Coal fuel and other operations generated losses of $2 million and profits of $10
million for the years ended December 31, 2003 and 2002, respectively. Coal
segment profits decreased $12 million from 2002 to 2003. This decrease is due
primarily to the recording of an impairment on certain assets at the Kentucky
May Coal Mine for $10 million after-tax. See Note 9 to the financial statements.
Rail Services
Rail's operations represent the activities of Progress Rail Services Corporation
(Progress Rail) and include railcar and locomotive repair, trackwork, rail parts
reconditioning and sales, scrap metal recycling, railcar leasing and other
rail-related services.
Rail contributed losses of $1 million and $47 million for the years ended
December 31, 2003 and 2002, respectively. The net loss in 2002 includes a $45
million after-tax impairment on assets held for sale related to Railcar Ltd., a
leasing subsidiary of Progress Rail. In March 2003, the Company signed a letter
of intent to sell the majority of Railcar Ltd. assets to the Andersons, Inc. The
asset purchase agreement was signed in November 2003, and the transaction closed
on February 12, 2004. As such assets of Railcar Ltd. have been reported as
assets held for sale. See Note 3B to the Financial Statements for discussion of
this planned divestiture. Excluding the impairment loss recorded in 2002,
profits for Rail were flat year over year 2003 compared to 2002. Rail Services'
results for both years were affected by a downturn in the overall economy,
decreases in rail service procurement by major railroads and a downturn in the
domestic scrap market.
An SEC order approving the merger of FPC and CP&L Energy required the Company to
divest of Progress Rail by November 30, 2003. However, the SEC has granted an
extension until 2006.
OTHER
The Other segment includes telecommunications, holding company and financing
expenses and had net losses from continuing operations of $17 million and $168
million in 2003 and 2002, respectively. The decrease in the net loss is due
primarily to the absence of asset impairments and related charges in the
telecommunications business unit that were recorded in the prior year.
22
PTC had net losses of $3 million and $156 million for 2003 and 2002,
respectively. The increase in earnings in 2003, when compared to 2002, is
primarily due to asset impairments and after-tax charges of $144 million. See
Note 9 to the Financial Statements for further discussion of these charges. In
December 2003, PTC and Caronet, Inc., both indirectly wholly-owned subsidiaries
of Progress Energy, and EPIK Communications, Inc., a wholly-owned subsidiary of
Odyssey Telecorp, Inc., contributed substantially all of their assets and
transferred certain liabilities to PTC LLC, a subsidiary of PTC. Subsequently,
the stock of Caronet, a subsidiary of Progress Energy Carolinas, was sold to an
affiliate of Odyssey for $2 million in cash and Caronet became an indirect
wholly-owned subsidiary of Odyssey. Following consummation of all the
transactions described above, PTC holds a 55 percent ownership interest in, and
is the parent of PTC LLC. Odyssey holds a combined 45 percent ownership interest
in PTC LLC through EPIK and Caronet. The accounts of PTC LLC are included in the
Company's Consolidated Financial Statements since the transaction date.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Florida Progress and PEF prepared their financial statements in accordance with
accounting principles generally accepted in the United States. In doing so,
certain estimates were made that were critical in nature to the results of
operations. The following discusses those significant estimates that may have a
material impact on its financial results and are subject to the greatest amount
of subjectivity. Senior management has discussed the development and selection
of these critical accounting policies with the Audit Committee of Progress
Energy's Board of Directors.
Utility Regulation
PEF is subject to regulation that sets the prices (rates) it is permitted to
charge customers based on the costs that regulatory agencies determine PEF is
permitted to recover. At times, regulators permit the future recovery through
rates of costs that would be currently charged to expense by a nonregulated
company. This ratemaking process results in deferral of expense recognition and
the recording of regulatory assets based on anticipated future cash inflows. As
a result of the changing regulatory framework, a significant amount of
regulatory assets has been recorded. PEF continually reviews these assets to
assess their ultimate recoverability within the approved regulatory guidelines.
Impairment risk associated with these assets relates to potentially adverse
legislative, judicial or regulatory actions in the future. Additionally, the
state regulatory agency often provides flexibility in the manner and timing of
the depreciation of property, nuclear decommissioning costs and amortization of
the regulatory assets. Note 7 to the financial statements provides additional
information related to the impact of utility regulation on PEF.
Asset Impairments
Florida Progress evaluates the carrying value of long-lived assets for
impairment whenever indicators exist. Examples of these indicators include
current period losses combined with a history of losses, or a projection of
continuing losses, or a significant decrease in the market price of a long-lived
asset group. If an indicator exists, the asset group held and used is tested for
recoverability by comparing the carrying value to the sum of undiscounted
expected future cash flows directly attributable to the asset group. If the
asset group is not recoverable through undiscounted cash flows or if the asset
group is to be disposed of, an impairment loss is recognized for the difference
between the carrying value and the fair value of the asset group. A high degree
of judgment is required in developing estimates related to these evaluations and
various factors are considered, including projected revenues and cost and market
conditions.
Due to the reduction in coal production at the Kentucky May Coal Mine, the
Company evaluated its long-lived assets in 2003 and recorded an impairment of
$15 million on a pre-tax basis during the fourth quarter of 2003. See Note 9 to
the financial statements for further information on this impairment. Fair value
was determined based on discounted cash flows.
During 2002, Florida Progress recorded pre-tax long-lived asset impairments of
$215 million related to its telecommunications business. See Note 9 to the
financial statements for further information on this impairment and other
charges. The fair value of these assets was determined using an external
valuation study heavily weighted on a discounted cash flow methodology and using
market approaches as supporting information.
23
Synthetic Fuels Tax Credits
Florida Progress, through the Energy and Related Services business unit,
produces coal-based solid synthetic fuel from coal fines. The production and
sale of the synthetic fuel qualifies for tax credits under Section 29 of the
Internal Revenue Code (Section 29) if certain requirements are satisfied,
including a requirement that the synthetic fuel differs significantly in
chemical composition from the feedstock used to produce such synthetic fuel and
that the fuel was produced from a facility that was placed in service before
July 1, 1998. Any synthetic fuel tax credit amounts not utilized due to the
imposition of the alternative minimum tax are carried forward indefinitely. See
Note 13 to the financial statements for further information on the synthetic
fuel tax credits. All of Florida Progress's synthetic fuel facilities have
received private letter rulings from the Internal Revenue Service (IRS) with
respect to their operations. These tax credits are subject to review by the IRS,
and if Progress Energy fails to prevail through the administrative or legal
process, there could be a significant tax liability owed for previously taken
Section 29 credits, with a significant impact on earnings and cash flows.
Pension Costs
As discussed in Note 14 to the financial statements, Florida Progress and PEF
maintains qualified non-contributory defined benefit retirement (pension) plans.
The reported costs of providing pension benefits are dependent on numerous
factors resulting from actual plan experience and assumptions of future
experience. For example, such costs are impacted by employee demographics,
changes made to plan provisions, actual plan asset returns and key actuarial
assumptions such as rates of return on plan assets and discount rates used in
determining benefit obligations and annual costs.
Due to a decline in market interest rates for high-quality (AAA/AA) debt
securities, which are used as the benchmark for setting the discount rate,
Florida Progress lowered the discount rate to 6.3% at December 31, 2003, which
will increase the 2004 benefit costs recognized, all other factors remaining
constant. However, after a few years of negative asset returns due to equity
market declines, plan assets performed very well in 2003, with returns of
approximately 30%. That positive asset performance will result in decreased
pension cost in 2004. Evaluations of the effects of these factors have not been
completed, but Florida Progress estimates that 2004 total cost recognized for
pension will decrease by approximately $12 million from the amount recorded in
2003, due in large part to these factors.
Florida Progress has pension plan assets, with a fair value of approximately
$849 million at December 31, 2003. Florida Progress' expected rate of return on
pension plan assets is 9.25%. The Company reviews this rate on a regular basis.
Under SFAS No. 87, the expected rate of return used in pension cost recognition
is a long-term rate of return; therefore, Florida Progress would only adjust
that return if its fundamental assessment of the debt and equity markets changes
or its investment policy changes significantly. Florida Progress believes that
its pension plans' asset investment mix and historical performance support the
long-term rate of 9.25% being used. Florida Progress does not adjust the rate in
response to short-term market fluctuations such as the abnormally high market
return levels of the latter 1990's, recent years' market declines and the market
rebound in 2003. A 0.25% change in the expected rate of return for 2003 would
have changed 2003 pension cost by approximately $2 million. Approximately 95% of
Florida Progress' pension assets and obligations are attributable to PEF.
Another factor affecting Florida Progress' and PEF's pension cost, and
sensitivity of the cost to plan asset performance, is its selection of a method
to determine the market-related value of assets, i.e., the asset value to which
the 9.25% long-term expected rate of return is applied. SFAS No. 87 specifies
that entities may use either fair value or an averaging method that recognizes
changes in fair value over a period not to exceed five years, with the method
selected applied on a consistent basis from year to year. Florida Progress uses
the fair value method of determining market-related value. Changes in plan asset
performance are reflected in pension cost sooner under the fair value method
than the five-year averaging method and, therefore, pension cost tends to be
more volatile using the fair value method.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Florida Progress' utility and diversified operations are capital-intensive
businesses. Florida Progress relies upon its operating cash flow, commercial
paper facilities and its ability to access long-term capital markets for its
liquidity needs. Since a substantial majority of Florida Progress' operating
costs are related to its regulated electric utility, a significant portion of
these costs are recovered from customers through fuel and energy cost recovery
clauses.
24
The Company and its subsidiaries participate in two internal money pools,
operated by Progress Energy, to more effectively utilize cash resources and to
reduce outside short-term borrowings. Short-term borrowing needs are met first
by available funds of the money pool participants. Borrowing companies pay
interest at a rate designed to approximate the cost of outside short-term
borrowings. Subsidiaries, which invest in the money pool, earn interest on a
basis proportionate to their average monthly investment. Funds may be withdrawn
from or repaid to the pool at any time without prior notice.
At PEF, cash from operations is the primary source of cash for the utility's
construction expenditures. PEF's estimated capital requirements for 2004, 2005
and 2006 are approximately $430 million, $490 million and $450 million,
respectively.
In addition to funding its construction commitments with cash from operations,
the companies access the capital markets through the issuance of commercial
paper, secured and unsecured notes, preferred securities and equity through
Progress Energy, which can offer issuances of common stock. Risk factors
associated with commercial paper back up credit facilities and credit ratings
are discussed below under "Risk Factors".
PEF's interim financing needs are funded primarily through its commercial paper
program. In addition, PEF has an uncommitted bank bid facility that authorizes
them to borrow and re-borrow. The facility was established to temporarily
supplement commercial paper borrowings, as needed.
In addition to funding the working capital needs of its diversified businesses
primarily through its commercial paper program, Progress Energy can issue
long-term debt to fund the capital requirements of Progress Fuels.
CASH FLOW FROM OPERATING ACTIVITIES
Florida Progress' cash provided by operations of $664 million decreased $17
million compared with 2002 due primarily to a change in deferred taxes. The
utility's operating cash flow increased by $36 million, due primarily to changes
in working capital, partially offset by increased deferred fuel costs as a
result of rising prices.
CASH FLOW FROM INVESTING ACTIVITIES
Cash requirements for investing activities during 2003 of $938 million increased
$281 million when compared with 2002. The increase was due primarily to
diversified property additions in 2003.
PEF's construction expenditures, including nuclear fuel, totaled $599 million
and $550 million for 2003 and 2002, respectively. These expenditures are
primarily for transmission and distribution assets and generating facilities
necessary to meet the needs of the utility's growing customer base.
In planning for its future generation needs, PEF develops a forecast of annual
demand for electricity, including a forecast of the level and duration of peak
demands during the year. These forecasts have historically been developed using
a 15% reserve margin. The reserve margin is the difference between a company's
net system generating capacity and the maximum demand on the system. In December
1999, the FPSC approved a joint proposal by PEF, Florida Power & Light and Tampa
Electric Company to increase the reserve margin to 20% by 2004.
In response, PEF constructed a second generating unit at the Hines site. Hines
Unit 2 was placed into service in December 2003. Hines Unit 2 is the same
combined-cycle technology as Hines Unit 1 and has a summer generating capacity
of approximately 516 MW. In addition, PEF has begun construction of a third unit
at the Hines Energy Complex.
Progress Fuels' capital expenditures for 2003 and 2002 were $313 million and
$102 million, respectively. These capital expenditures have been primarily for
the expansion of its natural gas operations.
The Company received net proceeds of approximately $97 million in October 2003
for the sale of its Mesa gas properties located in Colorado. Proceeds were
primarily used to reduce short-term debt.
CASH FLOW FROM FINANCING ACTIVITIES
During 2003, PEF took advantage of low interest rates and refinanced several
issues of debt. Long-term debt financing activity was limited to refinancing of
PEF's debt discussed below.
In February 2003 PEF issued $425 million of 4.80% First Mortgage Bonds, Due
March 1, 2013 and $225 million of 5.90% First Mortgage Bonds Due March 1, 2033.
Proceeds from the bond issue were used to redeem the aggregate outstanding
balance ($150 million) of 8% First Mortgage Bonds Due December 1, 2022, to
25
refinance PEF's secured and unsecured indebtedness, $70 million of which matured
on March 1, 2003, and $145 million of which matured on July 1, 2003 and to repay
the balance of PEF's outstanding commercial paper, with the remaining proceeds
used to reduce the outstanding balance of notes payable to affiliated companies.
PEF's 8% First Mortgage Bonds due December 1, 2022 were redeemed at a price of
103.75% of the principal amount outstanding ($150 million) plus accrued interest
to the redemption date of March 24, 2003.
In July 2003, $110 million of PEF's First Mortgage Bonds, 6.0% Series and $35
million of medium-term notes, 6.62% Series, matured.
In November 2003, PEF issued $300 million of First Mortgage Bonds, 5.10% Series,
Due December 1, 2015. Proceeds from this issuance were used to redeem in
December 2003 the $100 million aggregate outstanding balance of its 7% First
Mortgage Bonds, Due 2023 at 103.19% of the principal amount of such bonds and to
reduce the outstanding balance of its notes payable to affiliated companies.
The amount of debt issued by PEF in November took into consideration debt
maturities and other financing needs for 2004. As such, PEF does not anticipate
the need to issue long-term debt in 2004.
The Company's financial policy precludes issuing commercial paper in excess of
its supporting lines of credit. At December 31, 2003, the total amount of
commercial paper outstanding was zero. The Company is required to pay minimal
annual commitment fees to maintain its credit facilities.
In April 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%; at December 31, 2003 the calculated
ratio, as defined, was 51.5%. 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; at December 31, 2003 the calculated ratio, as
defined, was 9.22 to 1.
PEF's credit facilities include a provision under which lender could refuse to
advance funds in the event of a material adverse change in the borrower's
financial condition.
Each of these credit agreements contains a cross-default provision for defaults
of indebtedness in excess of $10 million. Under these provisions, if the
applicable borrower or certain affiliates fail to pay various debt obligations
in excess of $10 million the lenders could accelerate payment of any outstanding
borrowing and terminate their commitments to the credit facility.
PEF has an uncommitted bank bid facility authorizing it to borrow and re-borrow,
and have loans outstanding at any time, up to $100 million. At December 31,
2003, there were no outstanding loans against these facilities. PEF currently
has filed registration statements under which it can issue an aggregate of $50
million of various long-term debt securities.
Credit Rating Matters
The major credit rating agencies have currently rated the Company's securities
as follows:
Moody's
Investors Service Standard & Poor's
Progress Energy Florida, Inc.
Corporate Credit/Issuer Rating Not Applicable BBB
Commercial Paper P-1 A-2
Senior Secured Debt A1 BBB
Senior Unsecured Debt A2 BBB
FPC Capital I
Preferred Stock* Baa1 BB+
Progress Capital Holdings, Inc.
Senior Unsecured Debt* A3 BBB-
*Guaranteed by Florida Progress Corporation
26
These ratings reflect the current views of these rating agencies and no
assurances can be given that these ratings will continue for any given period of
time. However, the Company monitors its financial condition as well as market
conditions that could ultimately affect its credit ratings.
The Company and its subsidiaries' debt indentures and credit agreements do not
contain any "ratings trigger" which would cause the acceleration of interest and
principal payments in the event of a ratings downgrade. However, a ratings
downgrade could increase our borrowing costs. See the "Risk factors" section of
this Form 10-K.
In February 2003, Moody's Investors Service lowered the outlook of PEF (A1
senior secured) and Progress Capital Holdings Inc. (A3 senior unsecured) from
stable to negative and lowered the trust preferred rating of FPC Capital I from
A3 to Baa1 with a negative outlook.
In February 2003, Fitch Ratings Service downgraded the ratings of PEF. The
ratings outlook is stable. PEF's senior secured rating was changed to A- from
AA- and its senior unsecured rating was changed to BBB+ from A+. PEF's
short-term rating was changed to F-2 from F-1+.
In August 2003, Standard & Poor's Ratings Services (S&P) credit rating agency
lowered its corporate credit rating on PEF and Florida Progress to BBB from
BBB+. The outlook of the Companies' ratings was changed from negative to stable.
These credit rating changes have not had a material impact on the companies'
access to capital or their financial results.
Interest Rate Derivatives
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 periodically enters into derivative instruments to hedge its
exposure to price fluctuations on natural gas sales. At December 31, 2003,
Progress Fuels had approximately 19 Bcf of cash flow hedges in place for its
natural gas production. These positions extend through December 2005.
NEW ACCOUNTING STANDARDS
See Note 2 to the financial statements for a discussion of the anticipated
impact of new accounting standards.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FLORIDA PROGRESS
Market risk represents the potential loss arising from adverse changes in market
rates and prices. Florida Progress is exposed to certain market risks, including
changes in interest rates with respect to its long-term debt and fluctuations in
the return on marketable securities with respect to its nuclear decommissioning
trust funds. The Company manages its market risk in accordance with its
established risk management policies, which may include entering into various
derivative transactions.
These financial instruments are held for purposes other than trading. The risks
discussed below do not include the price risks associated with non-financial
instrument transactions and positions associated with Florida Progress'
operations, such as sales commitments and inventory.
INTEREST RATE RISK
The Company manages its interest rate risks through the use of a combination of
fixed and variable rate debt. Variable rate debt has rates that adjust in
periods ranging from daily to monthly. Interest rate derivative instruments may
be used to adjust interest rate exposures and to protect against adverse
movements in rates.
The following tables provide information at December 31, 2003 and 2002, about
the Company's interest rate risk sensitive instruments. The tables present
principal cash flows and weighted-average interest rates by expected maturity
dates for the fixed long-term debt and the FPC obligated mandatorily redeemable
securities of trust. The tables also include estimates of the fair value of the
Company's interest rate risk sensitive instruments based on quoted market prices
for these or similar issues.
- -------------------------------------------------------------------------------------------------------------------
Fair Value
December
December 31, 2003 2004 2005 2006 2007 2008 Thereafter Total 31, 2003
- -------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 68 $ 49 $ 109 $ 124 $ 127 $ 1,398 $ 1,875 $ 2,007
Average interest rate 6.61% 6.66% 6.96% 6.78% 6.72% 5.65% 5.93% -
Variable rate long-
term debt - - - - - $ 241 $ 241 $ 241
Average interest rate - - - - - 1.04% 1.04% -
FPC mandatorily redeemable
securities
of Trust - - - - - $ 309 $ 309 $ 313
Fixed rate - - - - - 7.10% 7.10% -
Unsecured note with parent - - - - - $ 500 $ 500 $ 544
Average interest rate - - - - - 6.43% 6.43% -
- -------------------------------------------------------------------------------------------------------------------
28
- ----------------------------------------------------------------------------------------------------------------
Fair Value
December 31,
December 31, 2002 2003 2004 2005 2006 2007 Thereafter Total 2002
- ----------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 275 $ 68 $ 49 $ 109 $ 124 $ 826 $ 1,451 $ 1,598
Average interest rate 6.42% 6.57% 6.66% 6.98% 6.79% 6.97% 6.82% -
Variable rate long-
term debt - - - - - $ 241 $ 241 $ 241
Average interest rate - - - - - 1.11% 1.11% -
FPC mandatorily
redeemable securities
of Trust - - - - - $ 300 $ 300 $ 303
Fixed rate 7.10% 7.10% -
Unsecured note with
parent - - - - - $ 500 $ 500 $ 512
Average interest rate - - - - - 6.43% 6.43% -
Interest rate forward
contracts (a) $ 35 - - - - - $ 35 $ (0.5)
(a) Treasury Rate Lock agreement on $35 million designed as cash flow hedge of
anticipated fixed-rate debt issuance.
PEF
The information required by this item is incorporated herein by reference to the
Florida Progress Quantitative and Qualitative Disclosures About Market Risk
insofar as it relates to PEF.
The following tables provide information at December 31, 2003 and 2002, about
PEF's interest rate risk sensitive instruments.
- ----------------------------------------------------------------------------------------------------------------
Fair Value
December 31, 2003 December 31
2004 2005 2006 2007 2008 Thereafter Total 2003
- ----------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 43 $ 48 $ 48 $ 89 $ 82 $ 1,399 $ 1,709 $ 1,820
Average interest rate 6.69% 6.72% 6.76% 6.80% 6.87% 5.65% 5.85% -
Variable rate long-
term debt - - - - - $ 241 $ 241 $ 241
Average interest rate - - - - - 1.04% 1.04% -
- ----------------------------------------------------------------------------------------------------------------
29
Fair Value
December 31,
December 31, 2002 2003 2004 2005 2006 2007 Thereafter Total 2002
- ----------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Fixed rate long-term debt $ 217 $ 43 $ 48 $ 48 $ 89 $ 782 $ 1,227 $ 1,351
Average interest rate 6.15% 6.69% 6.72% 6.76% 6.80% 7.00% 6.80% -
Variable rate long-
term debt - - - - - $ 241 $ 241 $ 241
Average interest rate - - - - - 1.11% 1.11% -
Interest rate forward $ 35 - - - - - $ 35 $ (0.5)
contracts (a)
(a) Treasury Rate Lock agreement on $35 million designed as cash flow hedge of
anticipated fixed-rate debt issuance.
MARKETABLE SECURITIES PRICE RISK
PEF maintains trust funds, as required by the Nuclear Regulatory Commission, to
fund certain costs of decommissioning its nuclear plants. These funds are
primarily invested in stocks, bonds and cash equivalents, which are exposed to
price fluctuations in equity markets and to changes in interest rates. At
December 31, 2003 and 2002, the fair values of these funds were approximately
$433 million and $374 million, respectively. The Company actively monitors its
portfolio by benchmarking the performance of its investments against certain
indices and by maintaining, and periodically reviewing, target allocation
percentages for various asset classes. The accounting for nuclear
decommissioning recognizes that the Company's regulated electric rates provide
for recovery of these costs, net of any trust fund earnings, and therefore,
fluctuations in trust fund marketable security returns do not affect the
earnings of the Company.
COMMODITY PRICE RISK
The Company is exposed to the effects of market fluctuations in the price of
natural gas, electricity and other energy-related products marketed and
purchased as a result of its ownership of energy-related assets. The Company's
exposure to these fluctuations is significantly limited by the cost-based
regulation of PEF.
Progress Fuels uses natural gas hedging instruments to manage a portion of the
market risk associated with fluctuations in the future sales price of Progress
Fuels' natural gas. In addition, the Company may from time to time engage in
limited economic hedging and trading activity using natural gas and electricity
financial instruments. Refer to Note 15 to the financial statements for
additional information with regard to the Company's commodity contracts and use
of derivative financial instruments.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements, supplementary data and
consolidated financial statement schedules are included herein:
Page
Independent Auditors' Report - Deloitte and Touche LLP 32
Consolidated Financial Statements - Florida Progress Corporation:
Consolidated Statements of Income and Comprehensive Income for the Years Ended
December 31, 2003, 2002 and 2001 33
Consolidated Balance Sheets at December 31, 2003 and 2002 34
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 35
Consolidated Statements of Common Equity for the Years Ended December 31, 2003, 2002
and 2001 36
Consolidated Quarterly Financial Data (Unaudited) 36
Financial Statements - Florida Power Corporation d/b/a Progress Energy Florida:
Statements of Income and Comprehensive Income for the Years Ended
December 31, 2003, 2002 and 2001 37
Balance Sheets at December 31, 2003 and 2002 38
Statements of Cash Flows for the Years Ended December 31, 2003, 2002
and 2001 39
Statements of Common Equity for the Years Ended December 31, 2003, 2002
and 2001 40
Quarterly Financial Data (Unaudited) 40
Notes to Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies 41
Note 2 - Impact of New Accounting Standards 45
Note 3 - Divestitures 46
Note 4 - Acquisitions and Business Combinations 47
Note 5 - Property, Plant and Equipment 48
Note 6 - Inventory 52
Note 7 - Regulatory Matters 52
Note 8 - Goodwill and Other Intangible Assets 54
Note 9 - Impairment of Long-Lived Assets and Investments 55
Note 10 - Equity 55
Note 11 - Debt and Credit Facilities 57
Note 12 - Fair Value of Financial Instruments 60
Note 13 - Income Taxes 60
Note 14 - Postretirement Benefits 63
Note 15 - Risk Management Activities and Derivatives Transactions 66
Note 16 - Related Party Transactions 67
Note 17 - Financial Information by Business Segment 68
Note 18 - Other Income and Other Expense 70
Note 19 - Commitments and Contingencies 70
Independent Auditors' Report on Financial Statement Schedules 79
Financial Statement Schedules for the Years Ended December 31, 2003, 2002 and
2001:
II-Valuation and Qualifying Accounts - Florida Progress Corporation 80
II-Valuation and Qualifying Accounts - Florida Power Corporation
d/b/a Progress Energy Florida 81
All other schedules have been omitted as not applicable or not required or
because the information required to be shown is included in the Financial
Statements or the accompanying Notes to the Financial Statements.
31
INDEPENDENT AUDITORS' REPORT
TO THE BOARDS OF DIRECTORS OF FLORIDA PROGRESS CORPORATION AND FLORIDA POWER
CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC.:
We have audited the accompanying consolidated balance sheets of Florida Progress
Corporation and its subsidiaries (Florida Progress) and the accompanying balance
sheets of Florida Power Corporation d/b/a Progress Energy Florida, Inc. (PEF) at
December 31, 2003 and 2002, and the related Florida Progress consolidated
statements of income and comprehensive income, of common equity, and of cash
flows and the related PEF statements of income and comprehensive income, of
common equity, and of cash flows for each of the three years in the period ended
December 31, 2003. These financial statements are the responsibility of the
respective company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Florida Progress and of PEF, respectively,
at December 31, 2003 and 2002, and the results of their respective operations
and cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 5F to the financial statements, in 2003, the Companies
adopted Statement of Financial Accounting Standards No. 143.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
February 20, 2004
32
FLORIDA PROGRESS CORPORATION
CONSOLIDATED STATEMENTS of INCOME AND COMPREHENSIVE INCOME
Years ended December 31
(In millions) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------
Operating Revenues
Utility $ 3,152 $ 3,062 $ 3,213
Diversified business 1,856 1,438 1,367
- -----------------------------------------------------------------------------------------------------
Total Operating Revenues 5,008 4,500 4,580
- -----------------------------------------------------------------------------------------------------
Operating Expenses
Utility
Fuel used in electric generation 870 834 905
Purchased power 566 515 515
Operation and maintenance 640 591 495
Depreciation and amortization 307 295 453
Taxes other than on income 241 228 230
Diversified business
Cost of sales 1,635 1,343 1,351
Depreciation and amortization 92 66 69
Impairment of long-lived assets 15 281 161
Other 137 94 92
- -----------------------------------------------------------------------------------------------------
Total Operating Expenses 4,503 4,247 4,271
- -----------------------------------------------------------------------------------------------------
Operating Income 505 253 309
- -----------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 3 7 9
Other, net (12) (20) (32)
- -----------------------------------------------------------------------------------------------------
Total Other Income (Expense) (9) (13) (23)
- -----------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 169 186 195
Allowance for borrowed funds used during construction (6) (3) (1)
- -----------------------------------------------------------------------------------------------------
Total Interest Charges, Net 163 183 194
- -----------------------------------------------------------------------------------------------------
Income before Income Taxes 333 57 92
Income Tax Benefit (110) (173) (173)
- -----------------------------------------------------------------------------------------------------
Income from Continuing Operations 443 230 265
Discontinued Operations, Net of Tax:
Income from discontinued operations - - 3
Net gain (loss) on disposal of discontinued operations,
(net of applicable income tax expenses and benefit of
$2, $3 and $8, respectively) 4 5 (24)
- -----------------------------------------------------------------------------------------------------
Net Income $ 447 $ 235 $ 244
- -----------------------------------------------------------------------------------------------------
Change in net unrealized losses on cash flow hedges
(net of tax of $7 and $4, respectively) (13) (6) -
Reclassification adjustment for amounts included in net
income (net of tax of $(6) and $-, respectively) 11 (1) -
Minimum pension liability adjustment (net of tax
of $(3) and $3, respectively) (3) (5) -
Foreign currency and other 4 (1) (1)
- -----------------------------------------------------------------------------------------------------
Comprehensive Income $ 446 $ 222 $ 243
- -----------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
33
FLORIDA PROGRESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions) December 31
Assets 2003 2002
- --------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 8,150 $ 7,477
Accumulated depreciation (2,845) (2,672)
- --------------------------------------------------------------------------------------------------------
Utility plant in service, net 5,305 4,805
Held for future use 8 8
Construction work in progress 328 427
Nuclear fuel, net of amortization 69 40
- --------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 5,710 5,280
- --------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 27 34
Accounts receivable 554 385
Unbilled accounts receivable 59 60
Receivables from affiliated companies 27 42
Deferred income taxes 39 26
Inventory 422 492
Deferred fuel cost 204 38
Assets held for sale 75 24
Prepayments and other current assets 70 71
- --------------------------------------------------------------------------------------------------------
Total Current Assets 1,477 1,172
--------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 126 130
Unamortized debt expense 33 23
Nuclear decommissioning trust funds 433 374
Diversified business property, net 841 699
Miscellaneous other property and investments 90 83
Prepaid pension cost 223 226
Deferred tax asset 204 67
Other assets and deferred debits 99 84
- --------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 2,049 1,686
- --------------------------------------------------------------------------------------------------------
Total Assets $ 9,236 $ 8,138
- --------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- --------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value $ 1,699 $ 1,629
Retained earnings 842 598
Accumulated other comprehensive loss (17) (16)
- --------------------------------------------------------------------------------------------------------
Total Common Stock Equity 2,524 2,211
- --------------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiaries - Not Subject to Mandatory Redemption 34 34
Long-Term Debt, Affiliate 809 500
Long-Term Debt, Net 2,045 1,710
- --------------------------------------------------------------------------------------------------------
Total Capitalization 5,412 4,455
- --------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 68 275
Accounts payable 456 331
Payables to affiliated companies 68 103
Notes payable to affiliated companies 636 380
Short-term obligations - 257
Customer deposits 127 122
Other current liabilities 287 235
- --------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,642 1,703
--------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes and investment tax credits 99 108
Regulatory liabilities 1,348 61
Cost of removal - 1,452
Asset retirement obligations 339 -
Other liabilities and deferred credits 396 359
- --------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,182 1,980
- --------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 19)
- --------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 9,236 $ 8,138
- --------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
34
FLORIDA PROGRESS CORPORATION
CONSOLIDATED STATEMENTS of CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------
Years ended December 31
(In millions) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 447 $ 235 $ 244
Adjustments to reconcile net income to net cash provided by operating
activities:
Income from discontinued operations - - (3)
Net (gain) loss on disposal of discontinued operations (4) (5) 24
Impairment of long-lived assets 15 281 161
Depreciation and amortization 405 386 538
Deferred income taxes and investment tax credits, net (134) (239) (202)
Deferred fuel cost (credit) (167) (22) 75
Cash provided/(used) by changes in operating assets and liabilities:
Accounts receivable (128) (34) 40
Inventories 72 (40) (132)
Prepayments and other current assets 1 (12) (11)
Accounts payable 101 39 56
Other current liabilities 59 29 217
Other (3) 63 (56)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 664 681 951
- -----------------------------------------------------------------------------------------------------------------
Investing Activities
Utility property additions (548) (550) (353)
Diversified business property additions (424) (154) (133)
Nuclear fuel additions (51) - (43)
Net contributions to nuclear decommissioning trust - 12 (20)
Acquisition, net of cash acquired - (17) -
Proceeds from sale of discontinued operations - 8 28
Proceeds from sale of subsidiaries and assets 100 35 25
Other (15) 9 (7)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (938) (657) (503)
- -----------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 935 236 299
Proceeds from issuance of long-term debt to parent - - 500
Net increase (decrease) in short-term obligations (258) 103 (813)
Retirement of long-term debt (534) (350) (191)
Net increase (decrease) in intercompany notes 258 233 (102)
Equity contributions from parent 168 87 90
Dividends paid to parent (301) (303) (249)
Other (1) (1) (1)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 267 5 (467)
- -----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (7) 29 (19)
- -----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 34 5 24
- -----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 27 $ 34 $ 5
- -----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 159 $ 180 $ 170
income taxes (net of refunds) $ 32 $ 60 $ (4)
- -----------------------------------------------------------------------------------------------------------------
Noncash Activities
o In April 2002 Progress Fuels Corporation received an equity contribution
from Progress Energy, Inc., with which it acquired 100% of Westchester Gas
Company. In conjunction with the purchase, Progress Energy, Inc. issued
approximately $129 million in common stock (See Note 4C).
o In December 2003, Progress Telecommunications Corporation (PTC) and
Caronet, Inc. both indirectly wholly-owned subsidiaries of Progress Energy,
and EPIK Communications, Inc., a wholly-owned subsidiary of Odyssey
Telecorp, Inc., contributed substantially all of their assets and
transferred certain liabilities to Progress Telecom, LLC, a subsidiary of
PTC (See Note 4A).
See Notes to Financial Statements.
35
FLORIDA PROGRESS CORPORATION
CONSOLIDATED STATEMENTS of COMMON EQUITY
Years ended December 31
(In millions) 2003 2002 2001
- ------------------------------------------------------------------------------------
Beginning Balance $ 2,211 $ 2,072 $ 1,988
Net income 447 235 244
Other comprehensive income (loss) (1) (13) (1)
Equity contribution from parent, net 168 220 90
Dividend to parent (301) (303) (249)
- ------------------------------------------------------------------------------------
Ending Balance $ 2,524 $ 2,211 $ 2,072
- ------------------------------------------------------------------------------------
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In millions) First Quarter Second Quarter Third Quarter Fourth Quarter
- ----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003
Operating revenues $ 1,214 $ 1,207 $ 1,392 $ 1,195
Operating income 126 122 193 64
Net income 92 114 174 67
- ----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
Operating revenues $ 1,005 $ 1,145 $ 1,226 $ 1,124
Operating income (loss) 105 130 (42) 60
Net income (loss) 76 90 (52) 121
o In the opinion of management, all adjustments necessary to fairly present
amounts shown for interim periods have been made. Results of operations for
an interim period may not give a true indication of results for the year.
Certain reclassifications have been made to previously reported amounts to
conform to the current year's presentation. Amounts for 2003 were restated
for the removal of reporting results for certain Energy and Related Service
segment operations one month in arrears (See Note 1B).
o Fourth quarter 2003 includes impairment related to Kentucky May of $15
million ($10 million after-tax) (See Note 9).
o Third quarter 2002 includes impairment and other charges related to
Progress Telecommunications Corporation, of $233 million ($137 million
after-tax) (See Note 9).
o Fourth quarter 2002 includes estimated impairment on assets held for sale
of Railcar Ltd. of $67 million ($45 million after-tax) (See Note 3B).
See Notes to Financial Statements.
36
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA
STATEMENTS of INCOME AND COMPREHENSIVE INCOME
Years ended December 31
(In millions) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Operating Revenues - Utility $ 3,152 $ 3,062 $ 3,213
Operating Expenses
Fuel used in electric generation 870 834 905
Purchased power 566 515 515
Operation and maintenance 640 591 495
Depreciation and amortization 307 295 453
Taxes other than on income 241 228 230
- ----------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,624 2,463 2,598
- ----------------------------------------------------------------------------------------------------------
Operating Income 528 599 615
- ----------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income - 2 3
Other, net 7 (7) (11)
- ----------------------------------------------------------------------------------------------------------
Total Other Income (Expense) 7 (5) (8)
- ----------------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 97 109 114
Allowance for borrowed funds used during construction (6) (3) (1)
- ----------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 91 106 113
- ----------------------------------------------------------------------------------------------------------
Income before Income Taxes 444 488 494
Income Tax Expense 147 163 183
- ----------------------------------------------------------------------------------------------------------
Net Income 297 325 311
Dividends on Preferred Stock 2 2 2
- ----------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 295 $ 323 $ 309
- ----------------------------------------------------------------------------------------------------------
Comprehensive Income, Net of Tax:
Net Income $ 297 $ 325 $ 311
Minimum pension liability adjustment
(net of tax of $1 and $1, respectively) (1) (3) -
- ----------------------------------------------------------------------------------------------------------
Comprehensive Income $ 296 $ 322 $ 311
- ----------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
37
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA
BALANCE SHEETS
(In millions) December 31
Assets 2003 2002
- --------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 8,150 $ 7,477
Accumulated depreciation (2,845) (2,672)
- --------------------------------------------------------------------------------------------
Utility plant in service, net 5,305 4,805
Held for future use 8 8
Construction work in progress 328 427
Nuclear fuel, net of amortization 69 40
- --------------------------------------------------------------------------------------------
Total Utility Plant, Net 5,710 5,280
- --------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 10 16
Accounts receivable 191 187
Unbilled accounts receivable 59 60
Receivables from affiliated companies 7 45
Deferred income taxes 39 26
Inventory 230 235
Deferred fuel cost 204 38
Prepayments and other current assets 6 5
- --------------------------------------------------------------------------------------------
Total Current Assets 746 612
- --------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 126 130
Unamortized debt expense 25 14
Nuclear decommissioning trust funds 433 374
Miscellaneous other property and investments 40 39
Prepaid pension cost 220 223
Other assets and deferred debits 6 6
- --------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 850 786
- --------------------------------------------------------------------------------------------
Total Assets $ 7,306 $ 6,678
- --------------------------------------------------------------------------------------------
Capitalization and Liabilities
- --------------------------------------------------------------------------------------------
Common Stock Equity
- --------------------------------------------------------------------------------------------
Common stock without par value $ 1,081 $ 1,081
Retained earnings 1,062 970
Accumulated other comprehensive loss (4) (3)
- --------------------------------------------------------------------------------------------
Total Common Stock Equity 2,139 2,048
- --------------------------------------------------------------------------------------------
Preferred stock - not subject to mandatory redemption 34 34
Long-term debt, net 1,904 1,244
- --------------------------------------------------------------------------------------------
Total Capitalization 4,077 3,326
- --------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 43 217
Accounts payable 161 148
Payables to affiliated companies 75 89
Notes payable to affiliated companies 363 237
Short-term obligations - 257
Customer deposits 127 122
Other current liabilities 147 136
- --------------------------------------------------------------------------------------------
Total Current Liabilities 916 1,206
- --------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 363 361
Accumulated deferred investment tax credits 41 47
Regulatory liabilities 1,348 61
Cost of removal - 1,452
Asset retirement obligations 319 -
Other liabilities and deferred credits 242 225
- --------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,313 2,146
- --------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 19)
- --------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 7,306 $ 6,678
- --------------------------------------------------------------------------------------------
See Notes to Financial Statements.
38
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA
STATEMENTS of CASH FLOWS
Years ended December 31
(In millions) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 297 $ 325 $ 311
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 314 321 467
Deferred income taxes and investment tax credits, net (25) (38) (41)
Deferred fuel (credit) cost (167) (22) 75
Cash provided/(used) by changes in operating assets and liabilities:
Accounts receivable 34 (27) 32
Inventories 5 (46) (50)
Prepayments and other current assets - (1) 5
Accounts payable (10) (104) 131
Other current liabilities 29 15 108
Other (7) 11 (110)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 470 434 928
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Property additions (548) (550) (353)
Nuclear fuel additions (51) - (43)
Net contributions to nuclear decommissioning trust - 12 (20)
Other (1) 6 7
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (600) (532) (409)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 935 236 298
Net increase (decrease) in short-term obligations (258) 103 (238)
Retirement of long-term debt (476) (278) (82)
Net increase (decrease) in intercompany notes 126 358 (109)
Advances to parent - - (140)
Dividends paid to parent (203) (303) (249)
Dividends paid on preferred stock (2) (2) (2)
Other 2 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 124 114 (522)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (6) 16 (3)
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 16 - 3
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 10 $ 16 $ -
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 85 $ 106 $ 106
income taxes (net of refunds) $ 177 $ 173 $ 211
See Notes to Financial Statements.
39
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA
STATEMENTS of COMMON EQUITY
Years ended December 31
(In millions) 2003 2002 2001
- ------------------------------------------------------------------------------
Beginning Balance $ 2,048 $ 2,031 $ 1,965
Net income 297 325 311
Preferred stock dividends at stated rates (2) (2) (2)
Other comprehensive loss (1) (3) -
Equity contribution from parent - - 6
Dividends paid to parent (203) (303) (249)
- ------------------------------------------------------------------------------
Ending Balance $ 2,139 $ 2,048 $ 2,031
- ------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA (UNAUDITED)
(In millions) First Quarter Second Quarter Third Quarter Fourth Quarter
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003
Operating revenues $728 $767 $904 $753
Operating income 135 116 184 93
Net income 71 62 115 49
Year ended December 31, 2002
Operating revenues $686 $766 $864 $746
Operating income 120 151 207 121
Net income 58 77 124 66
In the opinion of management, all adjustments necessary to fairly present
amounts shown for interim periods have been made. Results of operations for an
interim period may not give a true indication of results for the year. Certain
reclassifications have been made to previously reported amounts to conform to
the current year's presentation.
See Notes to Financial Statements.
40
FLORIDA PROGRESS CORPORATION AND PROGRESS ENERGY FLORIDA
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
A. Organization
Florida Progress Corporation (the Company or Florida Progress) is a holding
company under the Public Utility Holding Company Act of 1935 (PUHCA). The
Company became subject to the regulations of PUHCA when it was acquired by
CP&L Energy, Inc. in November 2000. CP&L Energy, Inc. subsequently changed
its name to Progress Energy, Inc. (Progress Energy or the Parent). Florida
Progress' two primary subsidiaries are Florida Power Corporation (Progress
Energy Florida or PEF) and Progress Fuels Corporation (Progress Fuels).
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. The current corporate and business unit structure
remains unchanged. Throughout the report, the terms utility and regulated
will be used to discuss items pertaining to Progress Energy Florida.
Diversified business and nonregulated will be used to discuss the
subsidiaries of Florida Progress excluding Progress Energy Florida.
B. Basis of Presentation
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). The
financial statements include the financial results of the Company and its
majority-owned subsidiaries. Significant intercompany balances and
transactions have been eliminated in consolidation except as permitted by
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation," which provides that profits on
intercompany sales to regulated affiliates are not eliminated if the sales
price is reasonable and the future recovery of the sales price through the
ratemaking process is probable.
Unconsolidated investments in companies over which the Company does not
have control, but has the ability to exercise significant influence over
operating and financial policies (generally 20% - 50% ownership), are
accounted for under the equity method of accounting. Other investments are
stated principally at cost. These equity and cost investments, which total
approximately $22 and $14 million at December 31, 2003 and 2002,
respectively, are included in miscellaneous property and investments on the
Company's Consolidated Balance Sheets. The primary components of this
balance are the Company's investment in FPC Capital I of $9 million in 2003
and the Company's investment in affordable housing of $8 and $9 million at
December 31, 2003 and 2002, respectively.
The results of operations of the Rail Services segment are reported one
month in arrears. During 2003, the Company ceased recording portions of the
Energy and Related Services segment operations one month in arrears. The
net impact of this action increased net income by $2 million for the year.
Certain amounts for 2002 and 2001 have been reclassified to conform to the
2003 presentation.
C. Significant Accounting Policies
Use of Estimates and Assumptions
In preparing financial statements that conform with GAAP, management must
make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and amounts of revenues and expenses
reflected during the reporting period. Actual results could differ from
those estimates.
41
Revenue Recognition
The Company recognizes electric utility revenues as service is rendered to
customers. Operating revenues include unbilled electric utility revenues
earned when service has been delivered but not billed by the end of the
accounting period. Diversified business revenues are recognized at the time
products are shipped or as services are rendered. Leasing activities are
accounted for in accordance with SFAS No. 13, "Accounting for Leases."
Revenues relating to design and construction of wireless infrastructure are
recognized upon completion of services for each completed phase of design
and construction. Revenues from the sale of oil and gas production are
recognized when title passes, net of royalties.
Fuel Cost Deferrals
Fuel expense includes fuel costs or recoveries that are deferred through
fuel clauses established by the regulators of PEF. Those clauses allow PEF
to recover fuel costs and portions of purchased power costs through
surcharges on customer rates.
Excise Taxes
The Company collects from customers certain excise taxes levied by the
state or local government upon the customer. PEF accounts for excise taxes
on a gross basis. For the years ended December 31, 2003, 2002 and 2001,
gross receipts tax and franchise taxes of approximately $136 million, $132
million and $133 million, respectively, are included in taxes other than on
income on the accompanying Statements of Income and Comprehensive Income.
These approximate amounts are also included in electric operating revenues.
Income Taxes
Progress Energy and its affiliates file a consolidated federal income tax
return. The consolidated income tax of Progress Energy is allocated to
Florida Progress and PEF in accordance with the Intercompany Income Tax
Allocation Agreement (Tax Agreement). The Tax Agreement provides an
allocation that recognizes positive and negative corporate taxable income.
The Tax Agreement provides for an equitable method of apportioning the
carry over of uncompensated tax benefits. Progress Energy tax benefits not
related to acquisition interest expense are allocated to profitable
subsidiaries, beginning in 2002, in accordance with a PUHCA order. Income
taxes are provided as if Florida Progress and PEF filed separate returns.
Deferred income taxes have been provided for temporary differences. These
occur when there are differences between the book and tax bases of assets
and liabilities. Investment tax credits related to regulated operations
have been deferred and are being amortized over the estimated service life
of the related properties. Credits for the production and sale of synthetic
fuel are deferred to the extent they cannot be or have not been utilized in
the annual consolidated federal income tax returns (See Note 13).
Stock-Based Compensation
The Company measures compensation expense for stock options as the
difference between the market price of its common stock and the exercise
price of the option at the grant date. The exercise price at which options
are granted by the Company equals the market price at the grant date, and
accordingly, no compensation expense has been recognized for stock option
grants. For purposes of the pro forma disclosures required by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123," the estimated fair value of Progress
Energy's stock options is amortized to expense over the options' vesting
period. The following table illustrates the effect on net income for
Florida Progress Corporation and PEF if the fair value method had been
applied to all outstanding and unvested awards in each period:
(in millions)
Florida Progress 2003 2002 2001
---------------- ---------------- --------------
Net income, as reported $ 447 $ 235 $ 244
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 3 3 -
---------------- ---------------- --------------
Pro forma net income $ 444 $ 232 $ 244
================ ================ ==============
42
(in millions)
Progress Energy Florida 2003 2002 2001
---------------- ---------------- --------------
Net income, as reported $ 297 $ 325 $ 311
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 2 2 -
---------------- ---------------- --------------
Pro forma net income $ 295 $ 323 $ 311
================ ================ ==============
Utility Plant
Utility plant in service is stated at historical cost less accumulated
depreciation. The Company capitalizes all construction-related direct labor
and material costs of units of property as well as indirect construction
costs. The cost of renewals and betterments is also capitalized.
Maintenance and repairs of property, and replacements and renewals of items
determined to be less than units of property, are charged to maintenance
expense as incurred. The cost of units of property replaced or retired,
less salvage, is charged to accumulated depreciation. Removal, disposal and
decommission costs were charged to regulatory liabilities in 2003 and cost
of removal in 2002. The Company follows the guidance in SFAS No. 143,
"Accounting for Asset Retirement Obligations," to account for legal
obligations associated with the retirement of certain tangible long-lived
assets.
Depreciation and Amortization - Utility Plant
For financial reporting purposes, substantially all depreciation of utility
plant other than nuclear fuel is computed on the straight-line method based
on the estimated remaining useful life of the property, adjusted for
estimated salvage (See Note 5A). The Florida Public Service Commission
(FPSC) can also grant approval to accelerate or reduce depreciation and
amortization of utility assets (See Note 7).
Amortization of nuclear fuel costs, including disposal costs associated
with obligations to the U.S. Department of Energy (DOE) and costs
associated with obligations to the DOE for the decommissioning and
decontamination of enrichment facilities is computed primarily on the
units-of-production method and charged to fuel used in electric generation
in the accompanying Statements of Income and Comprehensive Income. In the
Company's retail jurisdictions, provisions for nuclear decommissioning
costs are approved by the FPSC and are based on site-specific estimates
that include the costs for removal of all radioactive and other structures
at the site. In the wholesale jurisdictions, the provisions for nuclear
decommissioning costs are approved by the Federal Energy Regulatory
Commission (FERC).
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include cash on hand,
cash in banks and temporary investments purchased with a maturity of three
months or less.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts receivable, which
totaled approximately $15 million and $28 million at December 31, 2003 and
2002, respectively, and is included in the accounts receivable balance in
the accompanying Consolidated Balance Sheets. PEF's allowance for doubtful
accounts receivable totaled $2 million at December 31, 2003 and 2002 and is
included in the accounts receivable balance in the Balance Sheets.
Inventory
The Company accounts for inventory using the average-cost method.
Regulatory Assets and Liabilities
PEF's regulated operations are subject to SFAS No. 71, which allows a
regulated company to record costs that have been or are expected to be
allowed in the ratemaking process in a period different from the period in
which the costs would be charged to expense by a nonregulated enterprise.
Accordingly, PEF records assets and liabilities that result from the
regulated ratemaking process that would not be recorded under GAAP for
nonregulated entities. These regulatory assets and liabilities represent
expenses deferred for future recovery from customers or obligations to be
refunded to customers and are primarily classified in the Balance Sheets as
regulatory assets and regulatory liabilities (See Note 7A).
43
Diversified Business Property
Diversified business property is stated at cost less accumulated
depreciation. If an impairment loss is recognized on an asset, the fair
value becomes its new cost basis. The costs of renewals and betterments are
capitalized. The cost of repairs and maintenance is charged to expense as
incurred. Depreciation is computed on a straight-line basis over the
estimated useful lives as indicated in Note 5B. Depletion of mineral rights
is provided on the units-of-production method based upon the estimates of
recoverable amounts of clean mineral.
The Company uses the full cost method to account for its natural gas and
oil properties. Under the full cost method, substantially all productive
and nonproductive costs incurred in connection with the acquisition,
exploration and development of natural gas and oil reserves are
capitalized. These capitalized costs include the costs of all unproved
properties and internal costs directly related to acquisition and
exploration activities. The amortization base also includes the estimated
future costs to develop proved reserves. Except for costs on unproved
properties and major development projects in progress, all costs are
amortized using the units-of-production method over the life of the
Company's proved reserves.
Goodwill and Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142), and no longer amortizes goodwill.
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. Prior to the adoption of SFAS
No. 142, the Company amortized goodwill on a straight-line basis over a
period not exceeding 40 years. Intangible assets are being amortized based
on the economic benefit of their respective lives.
Unamortized Debt Premiums, Discounts and Expenses
Long-term debt premiums, discounts and issuance expenses of PEF are
amortized over the life of the related debt using the straight-line method.
Any expenses or call premiums associated with the reacquisition of debt
obligations by PEF are amortized over the applicable life using the
straight-line method consistent with ratemaking treatment.
Derivatives
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No.
138 and SFAS No. 149. SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives
as assets or liabilities in the balance sheet and measure those instruments
at fair value (See Note 15).
Environmental
The Company accrues environmental remediation liabilities when the criteria
for SFAS No. 5, "Accounting for Contingencies," have been met.
Environmental expenditures are expensed as incurred or capitalized
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that have no future
economic benefits are expensed. Accruals for estimated losses from
environmental remediation obligations generally are recognized no later
than completion of the remedial feasibility study. Such accruals are
adjusted as additional information develops or circumstances change. Costs
of future expenditures for environmental remediation obligations are not
discounted to their present value. Recoveries of environmental remediation
costs from other parties are recognized when their receipt is deemed
probable.
Impairment of Long-lived Assets and Investments
The Company reviews the recoverability of long-lived tangible and
intangible assets whenever indicators exist. Examples of these indicators
include current period losses, combined with a history of losses or a
projection of continuing losses, or a significant decrease in the market
price of a long-lived asset group. If an indicator exists, then the asset
group is tested for recoverability by comparing the carrying value to the
sum of undiscounted expected future cash flows directly attributable to the
asset group. If the asset group is not recoverable through undiscounted
cash flows, then an impairment loss is recognized for the difference
between the carrying value and the fair value of the asset group. The
accounting for impairment of long-lived assets is based on SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which was
adopted by the Company effective January 1, 2002. Prior to the adoption of
this standard, impairments were accounted for under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which was superceded by SFAS No. 144.
44
The Company reviews its investments to evaluate whether or not a decline in
fair value below the carrying value is an other-than-temporary decline. The
Company considers various factors, such as the investee's cash position,
earnings and revenue outlook, liquidity and management's ability to raise
capital in determining whether the decline is other-than-temporary. If the
Company determines that other-than-temporary decline exists in the value of
its investments, it is the Company's policy to write-down these investments
to fair value. See Note 9 for a discussion of impairment evaluations
performed and charges taken.
Under the full cost method of accounting for natural gas and oil
properties, total capitalized costs are limited to a ceiling based on the
present value of discounted (at 10%) future net revenues using current
prices, plus the lower of cost or fair market value of unproved properties.
If the ceiling (discounted revenues) is not equal to or greater than total
capitalized costs, the Company is required to write-down capitalized costs
to this level. The Company performs this ceiling test calculation every
quarter. No write-downs were required in 2003, 2002 or 2001.
Subsidiary Stock Transactions
Gains and losses realized as a result of common stock sales by the
Company's subsidiaries are recorded in the Company's Consolidated
Statements of Income and Comprehensive Income, except for any transactions
that must be credited directly to equity in accordance with the provisions
of SAB No. 51, "Accounting for Sales of Stock by a Subsidiary".
2. Impact of New Accounting Standards
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity"
In May 2003, the Financial Accounting Standard Board (FASB) issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity." The adoption of SFAS No. 150 did not have an
impact on the Company's financial position or results of operations as of
and for the periods ended December 31, 2003.
EITF Issue No. 03-04, "Accounting for `Cash Balance' Pension Plans"
In May 2003, the FASB Emerging Issues Task Force (EITF) reached consensus
in EITF Issue No. 03-04, "Accounting for `Cash Balance' Pension Plans"
(EITF 03-04), to specifically address the accounting for certain cash
balance pension plans. The consensus reached in EITF 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 plan as a defined benefit plan; however, the
Company was required to adopt the measurement provisions of EITF 03-04 at
its cash balance plan's measurement date of December 31, 2003. Any
differences in the measurement of the obligations as a result of applying
the consensus were reported as a component of actuarial gain or loss. The
on-going effects of this standard are dependent on other factors that also
affect the determination of actuarial gains and losses and the subsequent
amortization of such gains and losses. However, the adoption of EITF 03-04
is not expected to have a material effect on the Company's results of
operations or financial position.
SFAS No. 149, "Amendment of Statement 133 on 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. Interpretations and
implementation issues with regard to SFAS No. 149 continue to evolve. The
statement had no significant impact on the Company's accounting for
contracts entered into subsequent to the statement's effective date (See
Note 15). Future effects, if any, on the Company's results of operations
and financial condition will be dependent on the specifics of future
contracts entered into with regard to guidance provided by the statement.
FIN No. 46, "Consolidation of Variable Interest Entities"
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46).
This interpretation provides guidance related to identifying variable
interest entities and determining whether such entities should be
consolidated. FIN No. 46 requires an enterprise to consolidate a variable
interest entity when the enterprise (a) absorbs a majority of the variable
45
interest entity's expected losses, (b) receives a majority of the entity's
expected residual returns, or both, as a result of ownership, contractual
or other financial interests in the entity. Prior to the effective date of
FIN No. 46, entities were generally consolidated by an enterprise that had
control through ownership of a majority voting interest in the entity. FIN
No. 46 originally applied immediately to variable interest entities created
or obtained after January 31, 2003. During 2003, the Company did not
participate in the creation of, or obtain a new variable interest in, any
variable interest entity. In December 2003, the FASB issued a revision to
FIN No. 46 (FIN No. 46R), which modified certain requirements of FIN No. 46
and allowed for the optional deferral of the effective date of FIN No. 46R
until March 31, 2004. However, entities subject to FIN No. 46R that are
deemed to be special-purpose entities (as defined in FIN No. 46R) must
implement either FIN No. 46 or FIN No. 46R at December 31, 2003. The
Company has elected to apply FIN No. 46 to special-purpose entities as of
December 31, 2003. Because the Company expects additional transitional
guidance to be issued, it has elected to apply FIN No. 46R to
non-special-purpose entities as of March 31, 2004.
Prior to the adoption of FIN No. 46, the Company consolidated the FPC
Capital I trust (the Trust), which holds FPC-obligated mandatorily
redeemable preferred securities (See Note 11F). The Trust is a
special-purpose entity as defined in FIN No. 46R, and therefore the Company
applied FIN No. 46 to the Trust at December 31, 2003. The Trust is a
variable interest entity, but the Company does not absorb a majority of the
Trust's expected losses and therefore is not its primary beneficiary.
Therefore, the Company deconsolidated the Trust at December 31, 2003. This
deconsolidation resulted in recording an additional equity investment in
the Trust of approximately $9 million and an increase in outstanding debt
of $9 million. See Note 11F for a discussion of the Company's guarantees
with the Trust.
The Company also has interests in several other variable interest entities
created before January 31, 2003, for which the Company is not the primary
beneficiary. These arrangements include equity investments in approximately
six limited partnerships, limited liability corporations and venture
capital funds. The aggregate maximum loss exposure at December 31, 2003
under these arrangements totals approximately $11 million. The creditors of
these variable interest entities do not have recourse to the general credit
of the Company in excess of the aggregate maximum loss exposure.
In February 2004, the Company became aware that certain long-term purchase
power and tolling contracts may be considered variable interests under FIN
No. 46R. The Company has various long-term purchase power and tolling
contracts with other utilities and certain qualifying facility plants. The
Company believes the counterparties to these contracts are not
special-purpose entities and, therefore, FIN No. 46R would not apply to
these contracts until March 31, 2004. The Company has not yet completed its
evaluation of these contracts to determine if the Company needs to
consolidate these counterparties under FIN No. 46R and will continue to
monitor developing practice in this area.
3. Divestitures
A. Mesa Hydrocarbons, Inc. Divestiture
In October 2003, the Company sold certain gas-producing properties owned by
Mesa Hydrocarbons, LLC, a wholly-owned subsidiary of Progress Fuels
Corporation, which is included in the Fuels segment. Net proceeds of
approximately $97 million were used to reduce debt. Because the Company
utilizes the full cost method of accounting for its oil and gas operations,
the pre-tax gain of approximately $18 million was applied to reduce the
basis of the Company's other U.S. oil and gas investments and will
prospectively result in a reduction of the amortization rate applied to
those investments as production occurs.
B. Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a
resolution approving the sale of Railcar Ltd., a subsidiary included in the
Rail Services segment. In accordance with SFAS No. 144, an estimated
pre-tax impairment of $67 million on assets held for sale was recognized in
December 2002 to write-down the assets to fair value less costs to sell.
This impairment has been included in impairment of long-lived assets in the
Company's Consolidated Statements of Income and Comprehensive Income (See
Note 9).
The assets of Railcar Ltd. have been grouped as assets held for sale and
are included in other current assets on the Company's Consolidated Balance
Sheets at December 31, 2003 and 2002. The assets are recorded at
approximately $75 million and $24 million at December 31, 2003 and 2002,
respectively, which reflects the Company's estimates of the fair value
expected to be realized from the sale of these assets less costs to sell.
The primary component of assets held for sale at December 31, 2003 was
property and equipment of $74 million. The primary component of assets held
for sale at December 31, 2002 was current assets of $22 million. The net
46
increase in assets held for sale from December 31, 2002 to December 31,
2003 was primarily attributable to the purchase of railcars in 2003 that
were subject to off-balance sheet obligations at December 31, 2002. In
addition to the assets held for sale, the Company is subject to certain
commitments under operating leases (See Note 19).
In March 2003, the Company signed a letter of intent to sell the majority
of Railcar Ltd. assets to The Andersons, Inc. In November 2003, the asset
purchase agreement was signed, and the transaction closed in February 2004.
Proceeds from the sale were approximately $82 million. The Company was
relieved of the majority of the operating lease commitments when the assets
were sold.
C. Inland Marine Transportation Divestiture
In July 2001, Progress Energy announced the disposition of the Inland
Marine Transportation segment of the Company, which was operated by MEMCO
Barge Line, Inc. Inland Marine provided transportation of coal,
agricultural and other dry-bulk commodities as well as fleet management
services. Progress Energy entered into a contract to sell MEMCO Barge Line,
Inc., to AEP Resources, Inc., a wholly-owned subsidiary of American
Electric Power. In November 2001, the Company completed the sale of the
Inland Marine Transportation segment. The results of operations for 2001
have been restated for the discontinued operations of the Inland Marine
Transportation segment. The net income of these operations is reported in
the Company's Consolidated Statements of Income and Comprehensive Income as
discontinued operations.
Results of discontinued operations for year ended December 31, 2001, were
as follows in millions:
Revenues $ 143
Earnings before income taxes 5
Income taxes 2
-----------
Net earnings 3
Loss on disposal of discontinued operations,
including provision of $5 for pre-tax operating
income during phase-out period (net of applicable
income tax benefit of $8) (24)
-----------
Loss from discontinued operations $ (21)
===========
The net gain on disposal of discontinued operations in the Company's
Consolidated Statements of Income and Comprehensive Income for year ended
December 31, 2002, represents the after-tax gain from the resolution of
approximately $5 million of contingencies in the purchase agreement of the
Inland Marine Transportation segment. In connection with the sale, the
Company entered into environmental indemnification provisions covering both
unknown and known sites. In 2003, the Company reduced the estimate for the
environmental accrual by $6 million, which is included as discontinued
operations in the Company's Consolidated Statements of Income and
Comprehensive Income (See Note 19E).
4. Acquisitions and Business Combinations
A. Progress Telecommunications Corporation
In December 2003, Progress Telecommunications Corporation (PTC) and
Caronet, Inc. (Caronet), both wholly-owned subsidiaries of Progress Energy,
and EPIK Communications, Inc. (EPIK), a wholly-owned subsidiary of Odyssey
Telecorp, Inc. (Odyssey), contributed substantially all of their assets and
transferred certain liabilities to Progress Telecom, LLC (PTC LLC), a
subsidiary of PTC. Subsequently, the stock of Caronet was sold to an
affiliate of Odyssey for $2 million in cash and Caronet become a
wholly-owned subsidiary of Odyssey. Following consummation of all the
transactions described above, PTC holds a 55% ownership interest in, and is
the parent of PTC LLC. Odyssey holds a combined 45% ownership interest in
PTC LLC through EPIK and Caronet. The accounts of PTC LLC are included in
the Company's Consolidated Financial Statements since the transaction date.
The minority interest is included in other liabilities and deferred credits
in the Company's Consolidated Balance Sheets.
The transaction was accounted for as a partial acquisition of EPIK through
the issuance of the stock of a consolidated subsidiary. The contributions
of PTC's and Caronet's net assets were recorded at their carrying values of
approximately $31 million. EPIK's contribution was recorded at its
estimated fair value of $22 million using the purchase method, and was
initially allocated as follows: property and equipment - $27 million; other
current assets - $9 million; current liabilities - $21 million; and
goodwill - $7 million. The goodwill was assigned to the Company's Other
business segment and will not be deductible for tax purposes. The purchase
price allocation is a preliminary estimate, based on available information,
47
internal estimates and certain assumptions management believes are
reasonable. Accordingly, the purchase price allocation is subject to
finalization in 2004 pending the completion of internal and external
appraisals of assets acquired. No gain or loss was recognized on the
transaction. The pro forma results of operations reflecting the acquisition
would not be materially different than the reported results of operations
for the years ended December 31, 2003 or 2002.
B. Acquisition of Natural Gas Reserves
During 2003, Progress Fuels Corporation entered into several independent
transactions to acquire approximately 200 natural gas-producing wells with
proven reserves of approximately 190 billion cubic feet (Bcf) from Republic
Energy, Inc. and three other privately-owned companies, all headquartered
in Texas. The total cash purchase price for the transactions was $168
million.
C. Westchester Acquisition
In April 2002, Progress Fuels acquired 100% of Westchester Gas Company
(Westchester). The acquisition included approximately 215 natural
gas-producing wells, 52 miles of intrastate gas pipeline and 170 miles of
gas-gathering systems located within a 25-miles radius of Jonesville,
Texas, on the Texas-Louisiana border.
The aggregate purchase price of approximately $153 million consisted of
cash consideration of approximately $22 million and the issuance of 2.5
million shares of Progress Energy common stock valued at approximately $129
million. The purchase price included approximately $2 million of direct
transaction costs. The final purchase price was allocated to oil and gas
properties, intangible assets, diversified business property, net working
capital and deferred tax liabilities for approximately $152 million, $9
million, $32 million, $5 million and $45 million, respectively. The $9
million intangible asset recorded relates to customer contracts acquired as
part of the acquisition and are being amortized over their respective lives
(See Note 8).
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations for Westchester have been
included in the Company's Consolidated Financial Statements since the date
of acquisition. The pro forma results of operations reflecting the
acquisition would not be materially different than the reported results of
operations for the years ended December 31, 2002 or 2001.
5. Property, Plant and Equipment
A. Utility Plant
The balances of utility plant in service at December 31 are listed below,
with a range of depreciable lives for each:
(in millions) 2003 2002
--------------- ------------
Production plant (7-33 years) $ 3,821 $ 3,433
Transmission plant (30-75 years) 1,012 976
Distribution plant (12-50 years) 2,894 2,728
General plant and other (8-75 years) 423 340
--------------- ------------
Utility plant in service $ 8,150 $ 7,477
=============== ============
Substantially all of the electric utility plant is pledged as collateral
for the first mortgage bonds of PEF (See Note 11).
Allowance for funds used during construction (AFUDC) represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated assets. As prescribed in the regulatory
uniform systems of accounts, AFUDC is charged to the cost of the plant. The
equity funds portion of AFUDC is credited to other income and the borrowed
funds portion is credited to interest charges. Regulatory authorities
consider AFUDC an appropriate charge for inclusion in the rates charged to
customers by the utilities over the service life of the property. The
composite AFUDC rate for PEF's electric utility plant was 7.8% in 2003,
2002 and 2001.
Depreciation provisions on utility plant, as a percent of average
depreciable property other than nuclear fuel, were 2.3% in 2003 and 2002
and 3.2% in 2001, respectively. The depreciation provisions related to
utility plant were $172 million, $162 million and $225 million in 2003,
2002 and 2001, respectively. In addition to utility plant depreciation
provisions, depreciation and amortization expense also includes
decommissioning cost provisions, ARO accretion, cost of removal provisions
(See Note 5D) and regulatory approved expenses (See Note 7).
Amortization of nuclear fuel costs, for the years ended December 31, 2003,
2002 and 2001 were $31 million, $32 million and $29 million, respectively.
48
B. Diversified Business Property
The following is a summary of diversified business property at December 31,
with a range of depreciable lives for each:
(in millions) 2003 2002
------------- --------------
Equipment (3 - 25 years) $ 283 $ 329
Land and mineral rights 80 76
Buildings and plants (5 - 40 years) 99 91
Oil and gas properties (units-of-production) 412 265
Telecommunications equipment (5 - 20 years) 63 41
Rail equipment (3 - 20 years) 131 54
Marine equipment (3 - 35 years) 83 81
Computers, office equipment and software (3 - 10 years) 33 30
Construction work in progress 18 34
Accumulated depreciation (361) (302)
------------- --------------
Diversified business property, net $ 841 $ 699
============= ==============
Diversified business depreciation expense was $92 million, $66 million and
$69 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The synthetic fuel facilities are being depreciated through
2007 when the Section 29 tax credits will expire.
C. Joint Ownership of Generating Facilities
PEF is entitled to shares of the generating capability and output of
Crystal River Unit No. 3 (CR3) equal to its ownership interest. PEF also
pays its ownership share of additional construction costs, fuel inventory
purchases and operating expenses. PEF's share of expenses for the
jointly-owned facility is included in the appropriate expense category. The
co-owner of Intercession City Unit P-11 (P11) has exclusive rights to the
output of the unit during the months of June through September. PEF has
that right for the remainder of the year. PEF's ownership interest in CR3
and P11 is listed below with related information at December 31, ($ in
millions):
----------------------------------------------------------------------------------------------------
Construction
Company Ownership Plant Accumulated Work in
Facility Interest Investment Depreciation Progress
----------------------------------------------------------------------------------------------------
2003
----------------------------------------------------------------------------------------------------
Crystal River Unit No. 3 91.78% $ 875 $ 441 $ 49
Intercession City Unit P-11 66.67% 22 6 6
2002
----------------------------------------------------------------------------------------------------
Crystal River Unit No. 3 91.78% $ 777 $ 375 $ 28
Intercession City Unit P-11 66.67% 22 5 4
D. Decommissioning, Dismantlement and Cost of Removal Provisions
PEF's nuclear plant depreciation expenses include a provision for future
decommissioning costs, which are recoverable through rates charged to
customers. In January 2002, PEF received regulatory approval from the FPSC
to decrease its retail provision for nuclear decommissioning from
approximately $21 million annually to approximately $8 million annually,
effective January 2001. As a result of the settlement in the PEF rate case,
PEF suspended accruals on its reserves for retail nuclear decommissioning
through December 2005.
The provision for retail fossil plant dismantlement was previously
suspended per a 1997 FPSC settlement agreement, but resumed mid-2001. The
annual provision, approved by the FPSC in 2001, was $9 million. The accrual
for retail fossil dismantlement reserves was suspended again in 2002 by the
Florida Rate Case settlement (See Note 7B).
PEF's cost of removal provisions, which are included in depreciation and
amortization expense, were $72 million, $68 million and $66 million in
2003, 2002 and 2001, respectively. These amounts represent the expense
recognized for the disposal or removal of utility assets. The FASB issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143),
that changed the accounting for the decommissioning, dismantlement and cost
of removal provisions (See Note 5F).
49
E. Insurance
PEF is a member of Nuclear Electric Insurance Limited (NEIL), which
provides primary and excess insurance coverage against property damage to
members' nuclear generating facilities. Under the primary program, PEF is
insured for $500 million at its nuclear plant, CR3. In addition to primary
coverage, NEIL also provides decontamination, premature decommissioning and
excess property insurance with a limit of $1.1 billion.
Insurance coverage against incremental costs of replacement power resulting
from prolonged accidental outages at nuclear generating units is also
provided through membership in NEIL. PEF is insured thereunder, following a
twelve-week deductible period, for 52 weeks in the amount of $4.5 million
per week at CR3. An additional 110 weeks of coverage is provided at 80% of
the above weekly amount. For the current policy period, PEF is subject to
retrospective premium assessments of up to approximately $6 million with
respect to the primary coverage, $6 million with respect to the
decontamination, decommissioning and excess property coverage, and $5
million for the incremental replacement power costs coverage, in the event
covered losses at insured facilities exceed premiums, reserves, reinsurance
and other NEIL resources. Pursuant to regulations of the U.S. Nuclear
Regulatory Commission, PEF's property damage insurance policies provide
that all proceeds from such insurance be applied, first, to place the plant
in a safe and stable condition after an accident and, second, to
decontaminate, before any proceeds can be used for decommissioning, plant
repair or restoration. PEF is responsible to the extent losses may exceed
limits of the coverage described above.
PEF is insured against public liability for a nuclear incident up to $10.9
billion per occurrence. Under the current provisions of the Price Anderson
Act, which limits liability for accidents at nuclear power plants, PEF, as
an owner of a nuclear unit, can be assessed for a portion of any
third-party liability claims arising from an accident at any commercial
nuclear power plant in the United States. In the event that public
liability claims from an insured nuclear incident exceed $300 million
(currently available through commercial insurers), PEF would be subject to
pro rata assessments of up to $101 million for each reactor owned per
occurrence. Payment of such assessments would be made over time as
necessary to limit the payment in any one year to no more than $10 million
per reactor owned. Congress is expected to approve revisions to the Price
Anderson Act during 2004, that could include increased limits and
assessments per reactor owned. The final outcome of this matter cannot be
predicted at this time.
Under the NEIL policies, if there were multiple terrorism losses occurring
within one year, NEIL would make available one industry aggregate limit of
$3.2 billion, along with any amounts it recovers from reinsurance,
government indemnity or other sources up to the limits for each claimant.
If terrorism losses occurred beyond the one-year period, a new set of
limits and resources would apply. For nuclear liability claims arising out
of terrorist acts, the primary level available through commercial insurers
is now subject to an industry aggregate limit of $300 million. The second
level of coverage obtained through the assessments discussed above would
continue to apply to losses exceeding $300 million and would provide
coverage in excess of any diminished primary limits due to the terrorist
acts aggregate.
PEF self-insures its transmission and distribution lines against loss due
to storm damage and other natural disasters. Pursuant to a regulatory
order, PEF is accruing $6 million annually to a storm damage reserve and
may defer any losses in excess of the reserve (See Note 7A).
F. 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 $303 million for nuclear decommissioning of irradiated
plant. PEF used an expected cash flow approach to measure these
obligations. This amount includes accruals recorded prior to adoption
totaling $284 million, which were previously recorded in cost of removal.
The related asset retirement costs, net of accumulated depreciation,
recorded upon adoption totaled $39 million for regulated operations. The
cumulative effect of 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 $20 million, pursuant to SFAS No. 71. The
50
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.
The asset retirement costs related to nuclear decommissioning of irradiated
plant, net of accumulated depreciation, totaled $37 million for regulated
operations at December 31, 2003. The ongoing expense differences between
SFAS No. 143 and regulatory cost recovery are being deferred to the
regulatory liability.
Funds set aside in PEF's nuclear decommissioning trust fund for the nuclear
decommissioning liability totaled $433 million at December 31, 2003 and
$374 million at December 31, 2002. Net unrealized gains on the nuclear
decommissioning trust fund were included in regulatory liabilities in 2003
and cost of removal in 2002.
The Company also recorded AROs totaling $10 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 $5 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 million for
nonregulated operations. The cumulative effect of initial adoption of this
statement related to nonregulated operations was $2 million of pre-tax
expense, which is included in other, net on the Company's Consolidated
Statements of Income and Comprehensive Income for the year ended December
31, 2003.
The Company's AROs for coal mine operations, synthetic fuel operations and
gas production of Progress Fuels Corporation totaled $20 million at
December 31, 2003. The related asset retirement costs, net of accumulated
depreciation, totaled $4 million for nonregulated operations at December
31, 2003. The following table shows the changes to the asset retirement
obligations during the year ended December 31, 2003. Additions relate
primarily to additional reclamation obligations at coal mine operations of
Progress Fuels Corporation.
(in millions) Regulated Nonregulated
------------- ----------------
Asset retirement obligations as of January 1, 2003 $ 303 $ 10
Additions - 11
Accretion Expense 16 1
Deductions - (2)
------------- ----------------
Asset retirement obligations as of December 31, 2003 $ 319 $ 20
============= ================
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.
The Company has identified but not recognized ARO liabilities related to
electric transmission and 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 previously recognized removal, decommissioning and dismantlement costs
as a component of accumulated depreciation in accordance with regulatory
treatment. At December 31, 2003, such costs totaling $1,175 million were
included in regulatory liabilities on the Balance Sheets and consist of
removal costs of $970 million, decommissioning costs for non-irradiated
areas at nuclear facilities of $62 million and amounts previously collected
for dismantlement of fossil generation plants of $143 million. At December
31, 2002, such costs totaling $1,452 million were included in cost of
removal on the Balance Sheets and consist of removal costs of $913 million,
removal costs for both the irradiated and non-irradiated areas at nuclear
facilities of $397 million and amounts previously collected for
dismantlement of fossil generation plants of $142 million. With the
adoption of SFAS No. 143 in 2003, removal costs related to the irradiated
areas at nuclear facilities are reported as asset retirement obligations on
the 2003 Balance Sheets.
In January 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 approved
this draft rule and a final order was issued in the third quarter of 2003.
Therefore, the adoption of the statement had no impact on the income of PEF
due to the establishment of a regulatory liability pursuant to SFAS No. 71.
51
6. Inventory
At December 31, inventory was comprised of the following:
Florida Progress Progress Energy Florida
------------------------------------ --------------------------------------
(in millions) 2003 2002 2003 2002
-------------- ----------------- ---------------- -----------------
Fuel $ 126 $ 183 $ 90 $ 111
Rail equipment and parts 132 155 - -
Materials and supplies 154 134 140 124
Other 10 20 - -
-------------- ----------------- ---------------- -----------------
Total inventory $ 422 $ 492 $ 230 $ 235
============== ================= ================ =================
7. Regulatory Matters
A. Regulatory Assets and Liabilities
As a regulated entity, PEF is subject to the provisions of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly,
PEF records certain assets and liabilities resulting from the effects of
the ratemaking process, which would not be recorded under GAAP for
nonregulated entities. The utility's ability to continue to meet the
criteria for application of SFAS No. 71 may be affected in the future by
competitive forces and restructuring in the electric utility industry. In
the event that SFAS No. 71 no longer applied to PEF's operations, related
regulatory assets and liabilities would be eliminated unless an appropriate
regulatory recovery mechanism was provided. Additionally, these factors
could result in an impairment of utility plant assets as determined
pursuant to SFAS No. 144.
PEF has regulatory assets (liabilities) at December 31 as follows:
(in millions) 2003 2002
-------------- -----------------
Deferred fuel cost $ 204 $ 38
-------------- -----------------
Income taxes recoverable through future rates (Note 13) 42 33
Deferred purchased power contract termination costs - 47
Loss on reacquired debt (Note 1C) 33 20
Other 51 30
-------------- -----------------
Total long-term regulatory assets 126 130
-------------- -----------------
Non-ARO cost of removal (Note 5F) (1,175) -
Deferred impact of ARO (Note 5F) (8) -
Net nuclear decommissioning trust unrealized gains (Note 5F) (105) -
Storm reserve (Note 5E) (41) (36)
Other (19) (25)
-------------- -----------------
Total long-term regulatory liabilities (1,348) (61)
-------------- -----------------
Net regulatory assets (liabilities) $ (1,018) $ 107
============== =================
Except for portions of deferred fuel, all assets earn a return or the cash
has not yet been expended, in which case the assets are offset by
liabilities that do not incur a carrying cost. The utility expects to fully
recover these assets and refund the liabilities through customer rates
under current regulatory practice.
The Tiger Bay regulatory asset, for contract termination costs, is
recovered pursuant to an agreement between PEF and several intervening
parties, which was approved by the FPSC in June 1997. The amortization of
the regulatory asset is calculated using revenues collected under the fuel
adjustment clause as if the purchased power agreements related to the
facility were still in effect, less the actual fuel costs and the related
debt interest expense. Under the plan, PEF had the option to accelerate the
amortization at its discretion. During 2001 PEF received approval from the
FPSC to apply deferred revenues from the prior year towards the
acceleration of the Tiger Bay regulatory asset amortization $63 million
plus interest. Including accelerated amounts, PEF recorded amortization
expense of $47 million, $49 million and $131 million in 2003, 2002 and
2001, respectively. By fourth quarter 2003 the regulatory asset was fully
amortized.
52
In compliance with a regulatory order, PEF accrues a reserve for
maintenance and refueling expenses anticipated to be incurred during
scheduled nuclear plant outages.
B. Retail Rate Matters
PEF's retail rates are set by the FPSC, while its wholesale rates are
governed by the FERC. PEF's last general retail rate case was approved in
1992 and allowed a 12% regulatory return on equity with an allowed range
between 11% and 13%. PEF previously operated under an agreement committing
several parties not to seek any reduction in its base rates or authorized
return on equity. That agreement expired in June 2001. The FPSC initiated a
rate proceeding in 2001 regarding PEF's future base rates. In March 2002,
the parties in PEF's rate case entered into a Stipulation and Settlement
Agreement (the Agreement) related to retail rate matters. The Agreement was
approved by the FPSC in April 2002. The Agreement is generally effective
from May 2002 through December 2005; provided, however, that if PEF's base
rate earnings fall below a 10% return on equity, PEF may petition the FPSC
to amend its base rates.
The Agreement provides that PEF will reduce its retail revenues from the
sale of electricity by an annual amount of $125 million. The Agreement also
provides that PEF will operate under a Revenue Sharing Incentive Plan (the
Plan) through 2005, and thereafter until terminated by the FPSC, that
establishes annual revenue caps and sharing thresholds. The Plan provides
that retail base rate revenues between the sharing thresholds and the
retail base rate revenue caps will be divided into two shares - a 1/3 share
to be received by PEF's shareholders, and a 2/3 share to be refunded to
PEF's retail customers; provided, however, that for the year 2002 only, the
refund to customers was limited to 67.1% of the 2/3 customer share. The
retail base rate revenue sharing threshold amounts for 2003 and 2002 were
$1,333 million and $1,296 million, respectively, and will increase $37
million each year thereafter. The Plan also provides that all retail base
rate revenues above the retail base rate revenue caps established for each
year will be refunded to retail customers on an annual basis. For 2002, the
refund to customers was limited to 67.1% of the retail base rate revenues
that exceeded the 2002 cap. The retail base revenue cap for 2003 and 2002
was $1,393 million and $1,356 million, respectively, and will increase $37
million each year thereafter. Any amounts above the retail base revenue
caps will be refunded 100% to customers. At December 31, 2003, $17 million
has been accrued and will be refunded to customers by March 2004.
Approximately $5 million was originally returned in March 2003 related to
2002 revenue sharing. However, in February 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. In July 2003, the FPSC ruled that PEF must
provide an additional $18 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 refunded
this amount by October 2003.
The Agreement also provides that beginning with the in-service date of
PEF's Hines Unit 2 and continuing through December 2005, PEF will be
allowed to recover through the fuel cost recovery clause a return on
average investment and depreciation expense for Hines Unit 2, to the extent
such costs do not exceed the Unit's cumulative fuel savings over the
recovery period. Hines Unit 2 is a 516 MW combined-cycle unit that was
placed in service in December 2003.
PEF suspended retail accruals on its reserves for nuclear decommissioning
and fossil dismantlement through December 2005. Additionally, for each
calendar year during the term of the Agreement, PEF will record a $63
million depreciation expense reduction, and may, at its option, record up
to an equal annual amount as an offsetting accelerated depreciation
expense. In addition, PEF is authorized, at its discretion, to accelerate
the amortization of certain regulatory assets over the term of the
Agreement. In 2003, PEF recorded $16 million of accelerated amortization of
a regulatory liability related to a settled tax matter. There was no
accelerated depreciation or amortization expense recorded for the year
ended December 31, 2002.
Under the terms of the Agreement, PEF agreed to continue the implementation
of its four-year Commitment to Excellence Reliability Plan and expects to
achieve a 20% improvement in its annual System Average Interruption
Duration Index by no later than 2004. If this improvement level is not
achieved for calendar years 2004 or 2005, PEF will provide a refund of $3
million for each year the level is not achieved to 10% of its total retail
customers served by its worst performing distribution feeder lines.
The Agreement also provided that PEF was required to refund to customers
$35 million of revenues PEF collected during the interim period since March
2001. This one-time retroactive revenue refund was recorded in the first
quarter of 2002 and was returned to retail customers by December 2002. Any
additional refunds under the Agreement are recorded when they become
probable.
53
In February 2003, PEF petitioned the FPSC to increase its fuel factors due
to continuing increases in oil and natural gas commodity prices. In March
2003, the FPSC approved PEF's petition and new rates became effective. In
September 2003, PEF asked the FPSC to approve a cost adjustment in its
annual fuel filing, primarily related to rising costs of fuel that will
increase retail customer bills beginning January 2004. The total amount of
the fuel adjustment requested above current levels was $322 million. In
November 2003 the FPSC approved PEF's request and new rates became
effective January 2004.
C. Regional Transmission Organizations and Standard Market Design
In 2000, the FERC issued Order No. 2000 on Regional Transmission
Organizations (RTOs), which set minimum characteristics and eight functions
for transmission entities, including independent system operators and
transmission companies that are required to become FERC-approved RTOs. As a
result of Order 2000, PEF, along with Florida Power & Light Company and
Tampa Electric Company, filed and received provisional approval from the
FERC, for a GridFlorida RTO. However, in July 2001, the FERC issued orders
recommending that companies in the Southeast engage in 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, 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 filed comments in November 2002 and supplement comments
in January 2003. In April 2003, the FERC released a White Paper on the
Wholesale Market Platform. The White Paper provides an overview of what the
FERC currently intends to include in a final rule in the SMD NOPR docket.
The White Paper retains the fundamental and most protested aspects of SMD
NOPR, including mandatory RTOs and the FERC's assertion of jurisdiction
over certain aspects of retail service. FERC has not yet issued a final
rule on SMD NOPR.
PEF has $4 million invested GridFlorida at December 31, 2003. Given the
regulatory uncertainty of the ultimate timing, structure and operations of
GridFlorida or an alternate combined transmission structure, PEF cannot
predict the effect on future results of operations, cash flows or financial
condition. Furthermore, the SMD NOPR presents several uncertainties,
including what percentage of the investment in GridFlorida will be
recovered, how the elimination of transmission charges, as proposed in the
SMD NOPR, will impact PEF, and what amount of capital expenditures will be
necessary to create a new wholesale market
8. 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 which could result in periodic impairment
charges. As required by SFAS No. 142, the results for the prior years have
not been restated. A reconciliation of net income as if SFAS No. 142 had
been adopted is presented below for the year ended December 31, 2001.
(in millions)
Reported net income $ 244
Goodwill amortization 2
-------------------
Adjusted net income $ 246
===================
The Company's carrying amount of goodwill at December 31, 2003 was $10
million and at December 31, 2002 and 2001 was $11 million, in the Fuels
segment. In December 2003, $7 million in goodwill was acquired as part of
the PTC business combination and is in the Other segment (See Note 4A). The
Company completed the annual goodwill impairment test for the Fuels segment
in the second quarter of 2003, which indicated that the Company's goodwill
was not impaired. The first annual test for the Other segment will be
performed in 2004, since the goodwill was acquired in 2003. PEF has no
goodwill at December 31, 2003 or 2002 or 2001.
The Company has $9 million of net intangible assets at December 31, 2003
and no significant intangible assets at December 31, 2002. The $9 million
arose from the final purchase price allocation for a contract acquired as
part of the Westchester acquisition net of amortization to date (See Note
4C). PEF has no significant intangible assets at December 31, 2003 or 2002.
54
9. Impairment of Long-Lived Assets and Investments
Effective January 1, 2002, the Company adopted SFAS No. 144, which provides
guidance for the accounting and reporting of impairment or disposal of
long-lived assets. The statement supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." In 2003, 2002 and 2001, the Company recorded impairments and
other charges of approximately $15 million, $300 million and $170 million,
respectively.
Due to the reduction in coal production at the Kentucky May Coal Mine, the
Company evaluated its long-lived assets in 2003. Fair value was determined
based on discounted cash flows. As a result of this review, the Company
recorded asset impairments of $15 million on a pre-tax basis during the
fourth quarter of 2003.
The 2002 amount includes an estimated impairment of assets held for sale of
$67 million related to Railcar, Ltd. (See Note 3B). In 2002, the Company
also initiated an independent valuation study to assess the recoverability
of the long-lived assets of PTC. Based on this assessment, the Company
recorded asset impairments of $215 million on a pre-tax basis and other
charges of $18 million on a pre-tax basis in the third quarter of 2002.
This write-down constitutes a significant reduction in the book value of
these long-lived assets. The long-lived asset impairments include an
impairment of property, plant and equipment, construction work in process
and intangible assets. The impairment charge represents the difference
between the fair value and carrying amount of these long-lived assets. The
fair value of these assets was determined using a valuation study heavily
weighted on the discounted cash flow methodology, using market approaches
as supporting information.
Due to results of divestiture efforts and the decision to retain the Rail
Services business segment in the near term, coupled with prior and current
year losses and a continued decline in the rail services industry, the
Company evaluated the recoverability of rail long-lived assets and
associated goodwill. Fair value was generally determined based on
discounted cash flows. As a result of this review, the Company recorded
asset impairments, primarily goodwill, of $161 million pre-tax ($108
million after-tax) during the fourth quarter of 2001.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other-than-temporary. During
the fourth quarter of 2001, the Company determined that the decline in fair
value of its affordable housing investments, held by Progress International
Holdings, a subsidiary of Progress Capital Holdings, Inc. (Progress
Capital) was other-than-temporary. As a result, the Company has recorded
investment impairments for other-than-temporary declines in the fair value
of its affordable housing investments. Investment write-downs of $9 million
pre-tax are included in other, net on the Company's Consolidated Statements
of Income and Comprehensive Income.
10. Equity
A. Common and Preferred Stock
Common stock at December 31, 2003 and 2002 consisted of the following
(in millions except share data) 2003 2002
--------------- ---------------
Florida Progress
Common stock without par value, 250,000,000 shares authorized; $ 1,699 $ 1,629
98,616,658 shares outstanding in 2003 and 2002
Progress Energy Florida
Common stock without par value, 60,000,000 shares authorized; 100 $ 1,081 $ 1,081
shares outstanding in 2003 and 2002
From time-to-time the Company and its subsidiaries may receive equity
contributions from and pay dividends to Progress Energy. The Company
received equity contributions from Progress Energy of $168 million, $220
million and $90 million during 2003, 2002 and 2001, respectively. The
Company paid dividends to Progress Energy of $301 million, $303 million and
$249 million during 2003, 2002 and 2001, respectively.
The authorized capital stock of the Company includes 10 million shares of
preferred stock, without par value, including 2 million shares designated
as Series A Junior Participating Preferred Stock. No shares of the
Company's preferred stock are issued or outstanding.
55
The authorized capital stock of PEF includes three classes of preferred
stock: 4 million shares of Cumulative Preferred Stock, $100 par value; 5
million shares of Cumulative Preferred Stock, without par value; and 1
million shares of Preference Stock, $100 par value. No shares of PEF's
Cumulative Preferred Stock, without par value, or Preference Stock are
issued or outstanding. All Cumulative Preferred Stock series are without
sinking funds and are not subject to mandatory redemption. Preferred stock
outstanding at December 31, 2003 and 2002 consisted of the following (in
millions):
4.00% - 39,980 shares outstanding (redemption price $104.25) $ 4
4.40% - 75,000 shares outstanding (redemption price $102.00) 8
4.58% - 99,990 shares outstanding (redemption price $101.00) 10
4.60% - 39,997 shares outstanding (redemption price $103.25) 4
4.75% - 80,000 shares outstanding (redemption price $102.00) 8
---------------------------------------------------------------------------------
Total Preferred Stock of Florida Power Corporation $ 34
---------------------------------------------------------------------------------
B. Stock-Based Compensation
Employee Stock Ownership Plan
Progress Energy sponsors the Progress Energy 401(k) Savings and Stock
Ownership Plan (401(k)) for which substantially all full-time
non-bargaining unit employees and certain part-time non-bargaining
employees within participating subsidiaries are eligible. Effective January
1, 2002, Florida Progress is a participating subsidiary of the 401(k),
which has matching and incentive goal features, encourages systematic
savings by employees and provides a method of acquiring Progress Energy
common stock and other diverse investments. The 401(k), as amended in 1989,
is an Employee Stock Ownership Plan (ESOP) that can enter into acquisition
loans to acquire Progress Energy common stock to satisfy 401(k) common
stock needs. Qualification as an ESOP did not change the level of benefits
received by employees under the 401(k). Common stock acquired with the
proceeds of an ESOP loan is held by the 401(k) Trustee in a suspense
account. The common stock is released from the suspense account and made
available for allocation to participants as the ESOP loan is repaid. Such
allocations are used to partially meet common stock needs related to
Progress Energy matching and incentive contributions and/or reinvested
dividends.
Florida Progress' matching and incentive goal compensation cost under the
401(k) is determined based on matching percentages and incentive goal
attainment as defined in the plan. Such compensation cost is allocated to
participants' accounts in the form of Progress Energy common stock, with
the number of shares determined by dividing compensation cost by the common
stock market value at the time of allocation. The 401(k) common stock share
needs are met with open market purchases, with shares released from the
ESOP suspense account and with newly issued shares. Costs for incentive
goal compensation are accrued during the fiscal year and typically paid in
shares in the following year; while costs for the matching component are
typically met with shares in the same year incurred. Florida Progress'
matching and incentive cost which was and will be met with shares released
from the suspense account totaled approximately $4 million and $2 million
for the year ended December 31, 2003 and 2002, respectively. Matching and
incentive costs totaled approximately $11 million, $10 million and $9
million for the years ended December 31, 2003, 2002 and 2001, respectively,
including 2001 amounts incurred under the previous Florida Progress Plan.
Stock Option Agreements
Pursuant to the Progress Energy's 1997 Equity Incentive Plan and 2002
Equity Incentive Plans as amended and restated as of July 10, 2002,
Progress Energy may grant options to purchase shares of common stock to
directors, officers and eligible employees. For the years ended December
31, 2003, 2002 and 2001 approximately 3.0 million, 2.9 million and 2.4
million common stock options were granted, respectively. Of these amounts,
approximately 1.0 million and 0.8 million options, respectively, were
granted to officers and eligible employees of Florida Progress and PEF in
2003, approximately 0.5 million and 0.4 million options, respectively, were
granted in 2002 and approximately 0.4 million were granted to both
companies in 2001.
Other Stock-Based Compensation Plans
Progress Energy has additional compensation plans for officers and key
employees that are stock-based in whole or in part. The Company
participates in these plans. The two primary active stock-based
compensation programs are the Performance Share Sub-Plan (PSSP) and the
Restricted Stock Awards program (RSA), both of which were established
pursuant to Progress Energy's 1997 Equity Incentive Plan and were continued
under the 2002 Equity Incentive Plan, as amended and restated as of July
10, 2002.
56
Under the terms of the PSSP, officers and key employees are granted
performance shares on an annual basis that vest over a three-year
consecutive period. Each performance share has a value that is equal to,
and changes with, the value of a share of Progress Energy's common stock,
and dividend equivalents are accrued on, and reinvested in, the performance
shares. The PSSP has two equally weighted performance measures, both of
which are based on Progress Energy's results as compared to a peer group of
utilities. Compensation expense is recognized over the vesting period based
on the expected ultimate cash payout and is reduced by any forfeitures.
The RSA program allows Progress Energy to grant shares of restricted common
stock to officers and key employees of Progress Energy. The restricted
shares generally vest on a graded vesting schedule over a minimum of three
years. Compensation expense, which is based on the fair value of common
stock at the grant date, is recognized over the applicable vesting period
and is reduced by any forfeitures.
The total amount expensed by the Company for other stock-based compensation
under these plans was $9 million, $5 million and $3 million in 2003, 2002
and 2001, respectively.
C. Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss for Florida Progress and
PEF at December 31, 2003 and 2002 are as follows:
(in millions) Florida Progress Progress Energy Florida
------------------------------ -------------------------------
2003 2002 2003 2002
----------- -------------- ----------- -------------
Loss on cash flow hedges $ (8) $ (6) $ - $ -
Minimum pension liability adjustments (8) (5) (4) (3)
Foreign currency translation and other (1) (5) - -
----------- -------------- ----------- -------------
Total accumulated other comprehensive loss $ (17) $ (16) $ (4) $ (3)
=========== ============== =========== =============
11. Debt and Credit Facilities
A. Debt and Credit
At December 31, the Company's (including PEF) long-term debt consisted of
the following (maturities and weighted-average interest rates at December
31, 2003):
(in millions) 2003 2002
-------------- -----------
Progress Energy Florida, Inc.
First mortgage bonds, maturing 2004-2033 5.60% $ 1,330 $ 810
Pollution control revenue bonds, maturing 2018-2027 1.04% 241 241
Medium-term notes, maturing 2004-2028 6.75% 379 417
Unamortized premium and discount, net (3) (7)
-------------- -----------
1,947 1,461
-------------- -----------
Florida Progress Funding Corporation
Debt to affiliated trust, maturing 2039 7.10% 309 -
Mandatorily redeemable preferred securities, maturing 2039 - 300
-------------- -----------
309 300
-------------- -----------
Progress Capital Holdings, Inc.
Medium-term notes, maturing 2004-2008 6.78% 165 223
Unsecured note with parent, maturing 2011 6.43% 500 500
Miscellaneous notes 1 1
-------------- -----------
666 724
-------------- -----------
Less: Current portion of long-term debt (68) (275)
-------------- -----------
Total Long-Term Debt, Net $ 2,854 $ 2,210
============== ===========
At December 31, 2003, PEF had committed lines of credit which are used to
support its commercial paper borrowings and had no outstanding loans. PEF
is required to pay minimal annual commitment fees to maintain its credit
facilities. The following table summarizes PEF's credit facilities (in
millions):
57
Description Total
------------------------------------------------------
364-Day (expiring 3/31/04) $ 200
3-Year (expiring 4/1/06) 200
------------------
$ 400
==================
At December 31, 2003, PEF had no outstanding commercial paper and other
short-term debt classified as short-term obligations. At December 31, 2002,
PEF had $257 million of outstanding commercial paper and other short-term
debt classified as short-term obligations. The weighted-average interest
rate of such short-term obligations at December 31, 2002 was 1.55%.
The combined aggregate maturities of Florida Progress long-term debt for
2004 through 2008 are approximately, in millions, $68, $49, $109, $124 and
$127, respectively. PEF's aggregate maturities of long-term debt for 2004
through 2008 are approximately, in millions, $43, $48, $48, $89 and $82,
respectively.
B. Covenants and Default Provisions
Financial Covenants
PEF's credit line contains various terms and conditions that could affect
PEF's ability to borrow under these facilities. These include a maximum
debt to total capital ratio, an interest test, a material adverse change
clause and a cross-default provision.
PEF's credit line requires a maximum total debt to total capital ratio of
65.0%. Indebtedness as defined by the bank agreement includes certain
letters of credit and guarantees which are not recorded on the Balance
Sheets. At December 31, 2003, PEF's total debt to total capital ratio was
51.5%.
PEF's 364-day and 3-year credit facility have a financial covenant for
interest coverage. The covenant requires PEF's EBITDA to interest expense
to be at least 3 to 1. For the year ended December 31, 2003, this ratio was
9.22 to 1.
Material Adverse Change Clause
The credit facility of PEF includes a provision under which lenders could
refuse to advance funds in the event of a material adverse change in the
borrower's financial condition.
Default Provisions
PEF's credit lines include cross-default provisions for defaults of
indebtedness in excess of $10 million. PEF's cross-default provisions only
apply to defaults of indebtedness by PEF and not to other affiliates of
PEF. The credit lines of Progress Energy include a similar provision.
Progress Energy's cross-default provisions only apply to defaults of
indebtedness by Progress Energy and its significant subsidiaries, which
includes PEF, Florida Progress, Progress Fuels and Progress Capital.
In the event that either of these cross-default provisions were triggered,
the lenders could accelerate payment of any outstanding debt. Any such
acceleration would cause a material adverse change in the respective
company's financial condition. Certain agreements underlying the Company's
indebtedness also limit the Company's ability to incur additional liens or
engage in certain types of sale and leaseback transactions.
Other Restrictions
PEF's mortgage indenture provides that it will not pay any cash dividends
upon its common stock, or make any other distribution to the stockholders,
except a payment or distribution out of net income of PEF subsequent to
December 31, 1943.
In addition, PEF's Articles of Incorporation provide that no cash dividends
or distributions on common stock shall be paid, if the aggregate amount
thereof since April 30, 1944, including the amount then proposed to be
expended, plus all other charges to retained earnings since April 30, 1944,
exceed (a) all credits to retained earnings since April 30, 1944, plus (b)
all amounts credited to capital surplus after April 30, 1944, arising from
the donation to PEF of cash or securities or transfers amounts from
retained earnings to capital surplus. At December 31, 2003, none of PEF's
retained earnings was restricted.
58
PEF's Articles of Incorporation also provide that cash dividends on common
stock shall be limited to 75% of net income available for dividends if
common stock equity falls below 25% of total capitalization, and to 50% if
common stock equity falls below 20%. On December 31, 2003, PEF's common
stock equity was approximately 52.5% of total capitalization.
C. Secured Obligations
PEF's first mortgage bonds are secured by their respective mortgage
indentures. PEF's mortgage constitutes a first lien on substantially all of
its fixed properties, subject to certain permitted encumbrances and
exceptions. The PEF mortgage also constitutes a lien on subsequently
acquired property. At December 31, 2003, PEF had approximately $1,571
million in aggregate principal amount of first mortgage bonds outstanding
including those related to pollution control obligations. The PEF mortgage
allows the issuance of additional mortgage bonds upon the satisfaction of
certain conditions.
D. Guarantees of Subsidiary Debt
Florida Progress has fully guaranteed the outstanding debt obligations for
Progress Capital, a wholly-owned subsidiary of Florida Progress. At
December 31, 2003 and 2002, Progress Capital had $165 million and $223
million, respectively; in medium term notes outstanding which are recorded
on the Company's Consolidated Balance Sheets.
E. Hedging Activities
PEF uses interest rate derivatives to adjust the fixed and variable rate
components of its debt portfolio and to hedge cash flow risk of fixed rate
debt to be issued in the future. See discussion of risk management and
derivative transactions at Note 15.
F. Company-Obligated Mandatorily Redeemable Cumulative Quarterly Income
Preferred Securities of an Unconsolidated 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 FPC, issued 12 million shares of $25 par cumulative
FPC-obligated mandatorily redeemable preferred securities (Preferred
Securities) due 2039, with an aggregate liquidation value of $300 million
and an annual distribution rate of 7.10%. Prior to the adoption of FIN No.
46, the Company consolidated the Trust, which holds the Preferred
Securities. The Trust is a special-purpose entity, and therefore the
Company applied FIN No. 46 to the Trust at December 31, 2003 (See Note 2).
The adoption of FIN No. 46 required the Company to deconsolidate the Trust
at December 31, 2003.
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 Florida Progress Funding Corporation (Funding Corp.) its
7.10% Junior Subordinated Deferrable Interest Notes (subordinated notes)
due 2039, for a principal amount of $309 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.
FPC has fully and unconditionally guaranteed the obligations of Funding
Corp. under the subordinated notes (the Notes Guarantee). In addition, FPC
has guaranteed the payment of all distributions related to the $300 million
Preferred Securities 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 FPC 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.
59
Prior to December 2003, these Preferred Securities were classified as
long-term debt on the Company's Consolidated Balance Sheets. After
deconsolidation of the Trust at December 31, 2003, FPC's subordinated notes
payable to the Trust are classified as affiliate long-term debt on the
Company's December 31, 2003 Consolidated Balance Sheet.
12. Fair Value of Financial Instruments
At December 31, 2003 and 2002, there were miscellaneous investments,
consisting primarily of investments in company-owned life insurance and
other benefit plan assets, with carrying amounts of approximately $66
million and $64 million, respectively, included in miscellaneous other
property and investments. At PEF, these investments had carrying amounts of
$33 million at December 31, 2003 and 2002. The carrying amount of these
investments approximates fair value due to the short maturity. The carrying
amount of the Company's long-term debt, including current maturities, was
$2,922 million and $2,485 million at December 31, 2003 and 2002,
respectively. The estimated fair value of this debt, as obtained from
quoted market prices for the same or similar issues, was $3,105 million and
$2,654 million at December 31, 2003 and 2002, respectively. The carrying
amount of PEF's long-term debt, including current maturities, was $1,947
million and $1,461 million at December 31, 2003 and 2002, respectively. The
estimated fair value of this debt, as obtained from quoted market prices
for the same or similar issues, was $2,061 million and $1,592 million at
December 31, 2003 and 2002, respectively.
External trust funds have been established to fund certain costs of nuclear
decommissioning. These nuclear decommissioning trust funds are invested in
stocks, bonds and cash equivalents. Nuclear decommissioning trust funds are
presented on the Balance Sheets at amounts that approximate fair value.
Fair value is obtained from quoted market prices for the same or similar
investments.
13. Income Taxes
Deferred income taxes are provided for temporary differences between book
and tax bases of assets and liabilities. Investment tax credits related to
regulated operations are amortized over the service life of the related
property. To the extent that the establishment of deferred income taxes
under SFAS No. 109 is different from the recovery of taxes by PEF through
the ratemaking process, the differences are deferred pursuant to SFAS No.
71. A regulatory asset or liability has been recognized for the impact of
tax expenses or benefits that are recovered or refunded in different
periods by the utilities pursuant to rate orders.
Net Accumulated deferred income tax assets (liabilities) at December 31 are
(in millions):
Florida Progress 2003 2002
------------ -----------
Accumulated depreciation and property cost differences $ (349) $(385)
Deferred costs, net 2 5
Federal income tax credit carry forward 436 314
Miscellaneous other temporary differences, net 125 125
Valuation allowance (29) (26)
------------ -----------
Net accumulated deferred income tax asset $ 185 $ 33
============ ===========
Progress Energy Florida 2003 2002
------------ -----------
Accumulated depreciation and property cost differences $ (354) $(377)
Deferred costs, net (22) (6)
Miscellaneous other temporary differences, net 52 48
------------ -----------
Net accumulated deferred income tax liability $ (324) $(335)
============ ===========
Florida Progress's total deferred income tax liabilities were $467 million
and $484 million at December 31, 2003 and 2002, respectively. Total
deferred income tax assets were $652 million and $517 million at December
31, 2003 and 2002, respectively. PEF's total deferred income tax
liabilities were $396 million and $361 million at December 31, 2003 and
2002, respectively. Total deferred income tax assets were $72 million and
$26 million at December 31, 2003 and 2002, respectively.
60
Florida Progress's federal income tax credit carry forward at December 31,
2003 consists of $429 million of alternative minimum tax credit with an
indefinite carry forward period and $7 million of general business credit
with a carry forward period that will begin to expire in 2022.
Florida Progress established additional valuation allowances of $3 million,
$5 million and $10 million during 2003, 2002 and 2001, respectively, due to
the uncertainty of realizing certain future state tax benefits. The Company
believes it is more likely than not that the results of future operations
will generate sufficient taxable income to allow for the utilization of the
remaining deferred tax assets.
Reconciliations of the Company's effective income tax rate to the statutory
federal income tax rate are:
Florida Progress 2003 2002 2001
------------- -------------- --------------
Effective income tax rate (32.7)% (304.8)% (186.4)%
State income taxes, net of federal benefit (2.5) (10.3) (12.8)
AFUDC amortization (0.7) (4.1) -
Federal tax credits 63.8 311.3 236.8
Goodwill amortization and write-offs (0.5) - (9.7)
Investment tax credit amortization 1.8 11.3 8.4
Progress Energy tax allocation benefit 3.8 35.2 -
Other differences, net 2.0 (3.6) (1.3)
------------- -------------- --------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
============= ============== ==============
Progress Energy Florida 2003 2002 2001
------------- -------------- --------------
Effective income tax rate 33.1% 33.6% 37.0%
State income taxes, net of federal benefit (3.5) (3.4) (3.6)
Investment tax credit amortization 1.4 1.3 1.6
Progress Energy tax allocation benefit 2.7 3.8 -
Other differences, net 1.3 (0.3) -
------------- -------------- --------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
============= ============== ==============
Income tax expense (benefit) applicable to continuing operations is
comprised of (in millions):
Florida Progress 2003 2002 2001
------------- ------------- -------------
Current - federal $ 6 $ 43 $ 3
state 18 23 26
Deferred - federal (123) (220) (187)
state (5) (13) (7)
Investment tax credit (6) (6) (8)
------------- ------------- -------------
Total income tax expense (benefit) $ (110) $ (173) $ (173)
============= ============= =============
Progress Energy Florida 2003 2002 2001
------------- ------------- -------------
Current - federal $ 145 $ 172 $ 193
state 27 29 31
Deferred - federal (16) (29) (30)
state (3) (3) (3)
Investment tax credit (6) (6) (8)
------------- ------------- -------------
Total income tax expense (benefit) $ 147 $ 163 $ 183
============= ============= =============
The Company and each of its wholly-owned subsidiaries have entered into a
Tax Agreement with Progress Energy (See Note 1C). The Company's
intercompany tax payable was approximately $22 million and $33 million at
December 31, 2003 and 2002, respectively. Progress Energy Florida's
intercompany tax payable was approximately $20 million and $25 million at
December 31, 2003 and 2002, respectively.
Florida Progress through its subsidiaries is a majority owner in three
entities and a minority owner in three entities that own facilities that
produce synthetic fuel as defined under the Internal Revenue Service Code
61
(Code). The production and sale of the synthetic fuel from these facilities
qualifies for tax credits under Section 29 of the Code (Section 29) if
certain requirements are satisfied, including a requirement that the
synthetic fuel differs significantly in chemical composition from the coal
used to produce such synthetic fuel and that the fuel was produced from a
facility that was placed in service before July 1, 1998. Total Section 29
credits generated to date are approximately $787 million. All three
majority-owned entities and all three minority-owned entities have received
private letter rulings (PLRs) from the Internal Revenue Service (IRS) with
respect to their synthetic fuel operations. The PLRs do not limit the
production on which synthetic fuel credits may be claimed. Should the tax
credits be denied on future audits, and the Company fails to prevail
through the IRS or legal process, there could be a significant tax
liability owed for previously taken Section 29 credits, with a significant
impact on earnings and cash flows.
One of the Company's synthetic fuel entities, Colona Synfuel Limited
Partnership, L.L.L.P. (Colona), is being audited by the IRS. The audit of
Colona was expected. The Company is audited regularly in the normal course
of business as are most similarly situated companies. The Company has been
allocated approximately $279 million in tax credits to date for this
synthetic fuel entity.
In September 2002, all three of Florida Progress' majority-owned synthetic
fuel entities, including Colona, and two of the Company's minority owned
synthetic fuel entities were accepted into the IRS's Pre-Filing Agreement
(PFA) program. The PFA program allows taxpayers to voluntarily accelerate
the IRS exam process in order to seek resolution of specific issues. Either
the Company or the IRS can withdraw from the program at any time, and
issues not resolved through the program may proceed to the next level of
the IRS exam process. While the ultimate outcome is uncertain, the Company
believes that participation in the PFA program will likely shorten the tax
exam process.
In June 2003, the Company was informed that IRS field auditors had 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.
In October 2003, the National Office of the IRS informed the Company that
it had rejected the IRS field auditors' challenges regarding whether the
synthetic fuel produced at the Company's Colona facility was the result of
a significant chemical change. The National Office had concluded that the
experts, engaged by Colona who test the synthetic fuel for chemical change,
used reasonable scientific methods to reach their conclusions. Accordingly,
the National Office will not take any adverse action on the PLR that has
been issued for the Colona facility.
Although this ruling applies only to the Colona facility, the Company
believes that the National Office's reasoning would be equally applicable
to the other Progress Energy facilities. The Company 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
other facilities.
In February 2004, subsidiaries of the Company finalized execution of the
Colona Closing Agreement with the Internal Revenue Service concerning their
Colona synthetic fuel facilities. The Closing Agreement provided that the
Colona facilities were placed in service before July 1, 1998, which is one
of the qualification requirements for tax credits under Section 29 of the
Internal Revenue Code. The Closing Agreement further provides that the fuel
produced by the Colona facilities in 2001 is a "qualified fuel" for
purposes of the Section 29 tax credits. This action concludes the IRS PFA
program with respect to Colona.
Although the execution of the Colona Closing Agreement is a significant
event, the audits of the Company's facilities are not yet completed and the
PFA process continues with respect to the four synthetic fuel facilities
owned by other affiliates of Progress Energy and FPC. Currently, the focus
of that process is to determine that the facilities were placed in service
before July 1, 1998. In management's opinion, Progress Energy is complying
with all the necessary requirements to be allowed such credits under
Section 29, although it cannot provide certainty, that it will prevail if
challenged by the IRS on credits taken. Accordingly, the Company has no
current plans to alter its synthetic fuel production schedule as a result
of these matters.
62
In October 2003, the United States Senate Permanent Subcommittee on
Investigations began a general investigation concerning synthetic fuel tax
credits claimed under Section 29 of the Internal Revenue Code. The
investigation is examining the utilization of the credits, the nature of
the technologies and fuels created, the use of the synthetic fuel, and
other aspects of Section 29 and is not specific to the Company's synthetic
fuel operations. Progress Energy is providing information in connection
with this investigation. The Company cannot predict the outcome of this
matter.
14. Benefit Plans
The Company and some of its subsidiaries (including PEF) have a
non-contributory defined benefit retirement (pension) plan for
substantially all full-time employees. The Company also has supplementary
defined benefit pension plans that provide benefits to higher-level
employees. In addition to pension benefits, the Company and some of its
subsidiaries (including PEF) provide contributory other postretirement
benefits (OPEB), including certain health care and life insurance benefits,
for retired employees who meet specified criteria. The Company uses a
measurement date of December 31 for its pension and OPEB plans.
The components of the net periodic benefit cost for the years ended
December 31 are:
Pension Benefits Other Postretirement Benefits
--------------------------------- ---------------------------
(in millions) 2003 2002 2001 2003 2002 2001
--------------------------------- ---------------------------
Service cost $ 21 $ 19 $ 11 $ 5 $ 5 $ 4
Interest cost 46 44 42 16 15 13
Expected return on plan assets (62) (76) (86) (1) (1) (1)
Net amortization 3 (7) (19) 5 4 4
--------------------------------- ---------------------------
Net cost/(benefit) recognized by Florida Progress $ 8 $ (20) $ (52) $ 25 $ 23 $ 20
--------------------------------- ---------------------------
Net cost/(benefit) recognized by PEF $ 5 $ (22) $ (50) $ 24 $ 22 $ 18
================================= ===========================
Prior service costs and benefits are amortized on a straight-line basis
over the average remaining service period of active participants. Actuarial
gains and losses in excess of 10% of the greater of the obligation or the
market-related value of assets are amortized over the average remaining
service period of active participants. The Company uses fair value for the
market-related value of assets.
Reconciliations of the changes in the plans' benefit obligations and the
plans' funded status are:
Pension Benefits Other Postretirement Benefits
------------------------ ---------------------------------
(in millions) 2003 2002 2003 2002
------------------------ ---------------------------------
Obligation at January 1 $ 714 $ 588 $ 236 $ 180
Service cost 21 19 5 5
Interest cost 46 44 15 15
Benefit payments (41) (39) (15) (14)
Actuarial loss 32 119 19 55
Transfers - (18) - (5)
--------- ---------- ----------- ------------
Obligation at December 31 772 713 260 236
Fair value of plan assets at December 31 849 687 18 16
-------- ---------- ---------- ------------
Funded status 77 (26) (242) (220)
Unrecognized transition obligation - (1) 31 35
Unrecognized prior service cost (benefit) (18) (20) 7 7
Unrecognized net actuarial (gain) loss 103 213 51 33
Minimum pension liability adjustment (11) (7) - -
------------------------ ---------------------------------
Prepaid (accrued) cost at December 31, net - $ 151 $ 159 $ (153) $ (145)
Florida Progress
======================== =================================
Prepaid (accrued) cost at December 31, net - PEF $ 183 $ 188 $ (148) $ (139)
======================== =================================
63
The Florida Progress net prepaid pension cost of $151 million and $159
million at December 31, 2003 and 2002, respectively, is included in the
Company's Consolidated Balance Sheets as prepaid pension cost of $223
million and $226 million, respectively, and accrued benefit cost of $72
million and $67 million, respectively, which is included in other
liabilities and deferred credits. The PEF net prepaid pension cost of $183
million and $188 million at December 31, 2003 and 2002, respectively, is
included in the Balance Sheets as prepaid pension cost of $220 million and
$223 million, respectively, and accrued benefit cost of $37 million and $35
million, respectively, which is included in other liabilities and deferred
credits. For Florida Progress, the defined benefit pension plans with
accumulated benefit obligations in excess of plan assets had projected
benefit obligations totaling $74 million and $68 million at December 31,
2003 and 2002, respectively. Those plans had accumulated benefit
obligations totaling $73 million and $67 million, respectively, and no plan
assets. For PEF, the defined benefit pension plans with accumulated benefit
obligations in excess of plan assets had projected benefit obligations
totaling $38 million and $35 million at December 31, 2003 and 2002,
respectively. Those plans had accumulated benefit obligations totaling $37
million and $35 million, respectively, and no plan assets. For Florida
Progress, the total accumulated benefit obligation for pension plans was
$729 million and $662 million at December 31, 2003 and 2002, respectively.
For PEF, the total accumulated benefit obligation for pension plans was
$653 million and $592 million at December 31, 2003 and 2002, respectively.
Accrued other postretirement benefit cost is included in other liabilities
and deferred credits in the respective Balance Sheets of Florida Progress
and PEF.
Florida Progress and PEF recorded a minimum pension liability adjustment of
$11 million and $6 million, respectively, at December 31, 2003, with a
corresponding pre-tax charge to accumulated other comprehensive loss, a
component of common stock equity. Florida Progress and PEF recorded a
minimum pension liability adjustment of $7 million and $4 million,
respectively, at December 31, 2002, with a corresponding pre-tax charge to
accumulated other comprehensive loss, a component of common stock equity.
Reconciliations of the fair value of plan assets are:
Pension Benefits Other Postretirement Benefits
----------------------- ---------------------------------
(in millions) 2003 2002 2003 2002
----------------------- ---------------------------------
Fair value of plan assets January 1 $ 687 $ 854 $ 16 $ 13
Actual return on plan assets 199 (114) 1 1
Benefit payments (41) (39) (15) (14)
Employer contributions 4 4 16 16
Transfers - (18) - -
---------- ----------- --------------- ---------------
Fair value of plan assets at December 31 $ 849 $ 687 $ 18 $ 16
========== =========== =============== ===============
In the table above, substantially all employer contributions represent
benefit payments made directly from Company assets. The remaining benefits
payments were made directly from plan assets. The OPEB benefit payments
represent the net Company cost after participant contributions. Participant
contributions represent approximately 10% of gross benefit payments.
The asset allocation for the Company's plans at the end of 2003 and 2002
and the target allocation for the plans, by asset category, are as follows:
Pension Benefits Other Postretirement Benefits
----------------------------------------- ------------------------------------------
Target Percentage of Plan Target Percentage of Plan
Allocations Assets at Year End Allocations Assets at Year End
------------- --------------------- --------------- ----------------------
Asset Category 2004 2003 2002 2004 2003 2002
------------- --------------------- --------------- ----------------------
Equity - domestic 50% 49% 47% - - -
Equity - international 15% 22% 20% - - -
Debt - domestic 15% 11% 15% 100% 100% 100%
Debt - international 10% 11% 10% - - -
Other 10% 7% 8% - - -
------------- --------------------- --------------- ----------------------
Total 100% 100% 100% 100% 100% 100%
============= ===================== =============== ======================
64
With regard to its pension assets, the Company sets strategic allocations
among asset classes to provide broad diversification to protect against
large investment losses and excessive volatility, while recognizing the
importance of offsetting the impacts of benefit cost escalation. In
addition, the Company employs external investment managers who have
complementary investment philosophies and approaches. Tactical shifts (plus
or minus five percent) in asset allocation from the strategic allocations
are made based on the near-term view of the risk and return tradeoffs of
the asset classes. The Company's OPEB assets are invested solely in fixed
income securities.
In 2004, the Company expects to make required contributions of $1 million
directly to pension plan assets and $1 million of discretionary
contributions to OPEB plan assets. The expected benefit payments for the
pension benefit plan for 2004 through 2008 and in total for 2009-2013, in
millions, are approximately $40, $41, $42, $44, $46 and $269, respectively.
The expected benefit payments for the OPEB plan for 2004 through 2008 and
in total for 2009-2013, in millions, are approximately $14, $15, $17, $18,
$19 and $116, respectively. The expected benefit payments include benefit
payments directly from plan assets and benefit payments directly from
Company assets. The benefit payment amounts reflect the net cost to the
Company after any participant contributions.
The following weighted-average actuarial assumptions were used in the
calculation of the year-end obligation:
Pension Benefits Other Postretirement Benefits
------------------------- -------------------------------
2003 2002 2003 2002
------------- ----------- --------------- ---------------
Discount rate 6.30% 6.60% 6.30% 6.60%
Rate of increase in future compensation
Bargaining 3.50% 3.50% - -
Non-bargaining - 4.00% - -
Supplementary plans 5.00% 4.00% - -
Initial medical cost trend rate for pre-Medicare benefits - - 7.25% 7.50%
Initial medical cost trend rate for post-Medicare benefits - - 7.25% 7.50%
Ultimate medical cost trend rate - - 5.25% 5.25%
Year ultimate medical cost trend rate is achieved - - 2009 2009
The Company's primary defined benefit retirement plan for non-bargaining
employees is a "cash balance" pension plan as defined in EITF Issue No.
03-4. Therefore, effective December 31, 2003, the Company began to use the
traditional unit credit method for purposes of measuring the benefit
obligation of this plan and will use that method to measure future benefit
costs. Under the traditional unit credit method, no assumptions are
included about future changes in compensation and the accumulated benefit
obligation and projected benefit obligation are the same.
The following weighted-average actuarial assumptions were used in the
calculation of the net periodic cost:
Pension Benefits Other Postretirement Benefits
----------------------------- -----------------------------------
2003 2002 2001 2003 2002 2001
----------------------------- -----------------------------------
Discount rate 6.60% 7.50% 7.50% 6.60% 7.50% 7.50%
Rate of increase in future compensation
Bargaining 3.50% 3.50% 3.50% - - -
Non-bargaining and supplementary 4.00% 4.00% 4.00% - - -
Expected long-term rate of return on plan assets 9.25% 9.25% 9.25% 5.00% 5.00% 5.00%
Initial medical cost trend rate for pre-Medicare
benefits - - - 7.50% 7.50% 7.20%
Initial medical cost trend rate for post-Medicare
benefits - - - 7.50% 7.50% 6.20%
Ultimate medical cost trend rate - - - 5.25% 5.00% 5.30%
Year ultimate medical cost trend rate is achieved - - - 2009 2008 2005
65
The expected long-term rates of return on plan assets were determined by
considering long-term historical returns for the plans and long-term
projected returns based on the plans' target asset allocation. For pension
plan assets, those benchmarks support an expected long-term rate of return
between 9.5% and 10.0%. The Company has chosen to use an expected long-term
rate of 9.25% due to the uncertainties of future returns. The OPEB expected
long-term rate of return of 5.0% reflects that the OPEB assets are invested
solely in fixed income securities.
The medical cost trend rates were assumed to decrease gradually from the
initial rates to the ultimate rates. Assuming a 1% increase in the medical
cost trend rates, the aggregate of the service and interest cost components
of the net periodic OPEB cost for 2003 would increase by $1 million, and
the OPEB obligation at December 31, 2003, would increase by $18 million.
Assuming a 1% decrease in the medical cost trend rates, the aggregate of
the service and interest cost components of the net periodic OPEB cost for
2003 would decrease by $1 million and the OPEB obligation at December 31,
2003, would decrease by $15 million.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. In accordance with
guidance issued by the FASB in FASB Staff Position FAS 106-1, the Company
has elected to defer accounting for the effects of the Act due to
uncertainties regarding the effects of the implementation of the Act and
the accounting for certain provisions of the Act. Therefore, OPEB
information presented above and in the financial statements does not
reflect the effects of the Act. When specific authoritative accounting
guidance is issued, it could require plan sponsors to change previously
reported information. The Company is in the early stages of reviewing the
Act and determining its potential effects on the Company.
15. Risk Management Activities and Derivatives Transactions
Under its risk management policy, the Company may use a variety of
instruments, including swaps, options and forward contracts, to manage
exposure to fluctuations in commodity prices and interest rates. Such
instruments contain credit risk if the counterparty fails to perform under
the contract. The Company minimizes such risk by performing credit reviews
using, among other things, publicly available credit ratings of such
counterparties. Potential non-performance by counterparties is not expected
to have a material effect on the consolidated financial position or
consolidated results of operations of the Company.
A. Commodity Contracts - General
Most of the Company's commodity contracts either are not derivatives or
qualify as normal purchases or sales pursuant to SFAS No. 133. Therefore,
such contracts are not recorded at fair value.
B. Commodity Derivatives - Cash Flow Hedges
Progress Fuels held natural gas cash flow hedging instruments at December
31, 2003 and 2002. The objective for holding these instruments is to manage
a portion of the market risk associated with fluctuations in the price of
natural gas for Progress Fuel's forecasted sales. At December 31, 2003,
Progress Fuels is hedging exposures to the price variability of natural gas
through December 2005.
The total fair value of these instruments at December 31, 2003 and 2002 was
a $14 million and a $10 million liability position, respectively. The
ineffective portion of commodity cash flow hedges was not material in 2003
and 2002. At December 31, 2003, $8 million of after-tax deferred losses in
accumulated other comprehensive income (OCI) are expected to be
reclassified to earnings during the next 12 months as the hedged
transactions occur. Due to the volatility of the commodities markets, the
value in OCI is subject to change prior to its reclassification into
earnings.
C. Commodity Derivatives
Nonhedging derivatives, primarily electricity forward contracts, may be
entered into for trading purposes and for economic hedging purposes. While
management believes these derivatives mitigate exposures to fluctuations in
commodity prices, these instruments are not designated as hedges for
accounting purposes and are monitored consistent with trading positions.
The Company manages open positions with strict policies that limit its
exposure to market risk and require daily reporting to management of
potential financial exposures. Gains and losses from such contracts were
not material during 2003, 2002 or 2001, and the Company did not have
material outstanding positions in such contracts at December 31, 2003 or
2002.
66
D. Interest Rate Derivatives - Fair Value or Cash Flow Hedges
The Company manages its interest rate exposure in part by maintaining its
variable-rate and fixed rate-exposures within defined limits. In addition,
the Company also enters into financial derivative instruments, including,
but not limited to, interest rate swaps and lock agreements to manage and
mitigate interest rate risk exposure.
The Company uses cash flow hedging strategies to hedge variable interest
rates on long-term debt and to hedge interest rates with regard to future
fixed-rate debt issuances. PEF held no interest rate cash flow hedges at
December 31, 2003. At December 31, 2002, PEF held an interest rate cash
flow hedge, with a notional amount of $35 million, related to an
anticipated 2003 issuance of long-term debt. The hedge was settled at the
time of issuing the related debt. At December 31, 2003, an immaterial
amount of after-tax deferred losses in OCI is expected to be reclassified
to earnings during the next 12 months as the hedged interest payments
occur.
The Company uses fair value hedging strategies to manage its exposure to
fixed interest rates on long-term debt. At December 31, 2003 and 2002, the
Company had no open interest rate fair value hedges.
The notional amounts of interest rate derivatives are not exchanged and do
not represent exposure to credit loss. In the event of default by a
counterparty, the risk in these transactions is the cost of replacing the
agreements at current market rates.
16. Related Party Transactions
The Company and its subsidiaries participate in money pools, operated by
Progress Energy, to more effectively utilize cash resources and to reduce
outside short-term borrowings. The money pools are also used to settle
intercompany balances. The weighted-average interest rate for the money
pools was 1.47%, 2.18% and 4.47% at December 31, 2003, 2002 and 2001,
respectively. At December 31, 2003 and 2002, Florida Progress had $602
million and $380 million, respectively, and PEF had $363 million and $237
million, respectively, of amounts payable to the money pool that are
included in notes payable to affiliated companies on the Balance Sheets.
Net interest expense related to money pool borrowings was $5 million, $5
million, and $6 million for Florida Progress in 2003, 2002 and 2001
respectively. PEF recorded net interest expense of $2 million, $1 million
and interest income of $2 million related to the money pool for 2003, 2002
and 2001, respectively.
Progress Energy formed Progress Energy Service Company, LLC (PESC) to
provide specialized services, at cost, to the Company and its subsidiaries,
as approved by the U.S. Securities and Exchange Commission (SEC). The
Company and its subsidiaries have an agreement with PESC under which
services, including purchasing, information technology, telecommunications,
marketing, treasury, human resources, accounting, real estate, legal and
tax are rendered at cost. Amounts billed by PESC for these services during
2003, 2002 and 2001 to Florida Progress amounted to $190 million, $173
million and $116 million, respectively, and amounts billed to PEF were $153
million, $161 million and $111 million, respectively. At December 31, 2003
and 2002, Florida Progress had a net payable to PESC of $32 and $43
million, respectively. PEF had a net payable to PESC of $23 million and $37
million, respectively, at December 31, 2003 and 2002. During 2002, the
Office of Public Utility Regulation within the SEC completed an audit
examination of Progress Energy's books and records. This examination is a
standard process for all PUHCA registrants. Based on the review, the method
for allocating PESC costs to the Parent and its affiliates changed for 2003
and retroactive reallocations of 2002 and 2001 charges were made during the
first quarter. The net after-tax impact of the reallocation of costs for
2002 and 2001 was an increase in expenses of $5 million at Florida Progress
and a reduction of expenses at PEF by $1 million.
Progress Fuels has an outstanding note due to the Parent. The principal
outstanding on this note was $500 million at December 31, 2003 and 2002.
Progress Fuels recorded interest expense related to this note of $32
million for 2003 and 2002.
The Company has an outstanding note due to a related trust. The principal
outstanding on this note was $309 million at December 31, 2003 (See Note
11F).
Progress Fuels sells coal to PEF which are eliminated from revenues in
Florida Progress' Consolidated Financial Statements. In accordance with
SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation,"
profits on intercompany sales between Progress Fuels and PEF are not
eliminated if the sales price is reasonable and the future recovery of
sales price through the ratemaking process is probable. The profits for all
the years presented were not significant.
67
In April 2000, Progress Ventures, Inc. (PVI), a wholly-owned subsidiary of
Progress Energy, purchased a 90% interest in an affiliate of Progress Fuels
that owns a synthetic fuel facility located at the Company-owned mine site
in Virginia. In May 2000, PVI purchased a 90% ownership interest in another
synthetic fuel facility located in West Virginia. The purchase agreements
contained a provision that would require PVI to sell, and the respective
Progress Fuels affiliate to repurchase, the 90% interest had the share
exchange among Florida Progress, Progress Energy and CP&L not occurred.
Progress Fuels has accounted for the transactions as a sale for tax
purposes and, because of the repurchase obligation, as a financing for
financial reporting purposes in the pre-acquisition period and as a
transfer of assets within a controlled group as of the acquisition date. At
the date of acquisition, assets of $8 million were transferred to Progress
Energy. At December 31, 2003 and 2002, the Company has a note receivable of
$38 million and $47 million from PVI that has been recorded as a reduction
to equity for financial reporting purposes. Payments on the note during
2003 and 2002 totaled $12 million and $17 million, respectively,
representing $9 million and $3 million in principal and interest,
respectively, in 2003 and $13 million and $4 million in principal and
interest, respectively, in 2002.
Progress Fuels sells coal feedstock to PVI to be used in its two synthetic
fuel operations and is also the sales agent and operator of the facilities.
The amount of revenue for sales and services during 2003, 2002 and 2001 was
$181 million, $197 million and $96 million, respectively. Amounts due from
PVI at December 31, 2003 and 2002 were $19 million and $12 million,
respectively. During 2003, in order to more effectively utilize cash
resources, PFC and the two PVI synthetic fuel operations began to
participate in a money pool with cash management functions provided by PFC.
At December 31, 2003, Progress Fuels has a payable of $34 million to PVI.
The Company and each of its wholly-owned subsidiaries have entered into a
Tax Agreement with Progress Energy (See Note 13).
In August 2002, PEC transferred reservation payments for the manufacture of
two combustion turbines to PEF at PEC's original cost of $20 million. In
December 2002, PVI transferred reservation payments for the manufacture of
one combustion turbine and exhaust stack to PEF at PVI's original cost of
$16 million. At December 31, 2002, PEF had a $14 million payable to PVI
related to these transfers.
17. Financial Information by Business Segment
The Company's principal business segment is PEF, a utility engaged in the
generation, purchase, transmission, distribution and sale of electricity
primarily in Florida. The other reportable business segments are Progress
Fuels' Energy & Related Services and Rail Services. The Inland Marine
Transportation business, formerly a business segment, was sold in November
2001 (See Note 3C). The Energy & Related Services segment includes coal and
synthetic fuel operations, natural gas production and sales, river terminal
services and off-shore marine transportation. Rail Services' operations
include railcar repair, rail parts reconditioning and sales, railcar
leasing and sales, providing rail and track material, and scrap metal
recycling. The Other category consists primarily of PTC, the Company's
telecommunications subsidiary and the holding company, Florida Progress
Corporation. PTC markets wholesale fiber-optic based capacity service in
the Eastern United States and also markets wireless structure attachments
to wireless communication companies and governmental entities. The Company
allocates a portion of its operating expenses to business segments.
The Company's significant operations are geographically located in the
United States with limited operations in Mexico and Canada. The Company's
segments are based on differences in products and services, and therefore
no additional disclosures are presented. Intersegment sales and transfers
consist primarily of coal sales from the Energy and Related Services
segment of Progress Fuels to PEF. The price Progress Fuels charges PEF is
based on market rates for coal procurement and for water-borne
transportation under a methodology approved by the FPSC. Rail
transportation is also based on market rates plus a return allowed by the
FPSC on equity in transportation equipment utilized in transporting coal to
PEF. The allowed rate of return is currently 12%. No single customer
accounted for 10% or more of unaffiliated revenues.
Segment net income (loss) for 2003 includes a long-lived asset impairment
on certain assets at Kentucky May Mining Company of $15 million ($10
million after-tax) included in the Energy and Related Services segment.
Segment net income (loss) for 2002 includes an estimated impairment on the
assets held for sale of Railcar Ltd. of $67 million pre-tax ($45 million
after-tax) included in the Rail Services segment and an asset impairment
and other charges related to PTC totaling $233 million on a pre-tax basis
($144 million after-tax) included in the Other segment. Segment net income
(loss) for 2001 includes a long-lived asset impairment pre-tax loss of $161
million (after-tax $108 million) included in the Rail Services segment. The
Company's business segment information for 2003, 2002 and 2001 is
summarized below.
68
Energy
and
Related Rail
(in millions) Utility Services Services Other Consolidated
-------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 2003
Unaffiliated revenues $ 3,152 $ 982 $ 846 $ 28 $ 5,008
Intersegment revenues - 346 1 (347) -
-------------------------------------------------------------------------------------------------------------
Total revenues 3,152 1,328 847 (319) 5,008
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization 307 66 20 6 399
Total interest charges, net 91 22 29 21 163
Impairment of long-lived assets and
investments - 15 - - 15
Income tax expense (benefit) 147 (246) 2 (13) (110)
Income (loss) from continuing
operations 295 166 (1) (17) 443
Total segment assets 7,306 1,009 586 335 9,236
Capital and investment expenditures 548 310 103 11 972
-------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 2002
Unaffiliated revenues $ 3,062 $ 690 $ 714 $ 34 $ 4,500
Intersegment revenues - 329 5 (334) -
-------------------------------------------------------------------------------------------------------------
Total revenues 3,062 1,019 719 (300) 4,500
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization 295 34 20 12 361
Total interest charges, net 106 22 33 22 183
Impairment of long-lived assets and
investments - - 67 214 281
Income tax expense (benefit) 163 (207) (19) (110) (173)
Income (loss) from continuing
operations 323 122 (47) (168) 230
Total segment assets 6,678 794 529 137 8,138
Capital and investment expenditures 550 121 8 42 721
-------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 2001
Unaffiliated revenues $ 3,213 $ 512 $ 820 $ 35 $ 4,580
Intersegment revenues - 299 1 (300) -
-------------------------------------------------------------------------------------------------------------
Total revenues 3,213 811 821 (265) 4,580
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization 453 24 34 11 522
Total interest charges, net 113 18 36 27 194
Impairment of long-lived assets and
investments - - 161 9 170
Income tax expense (benefit) 183 (254) (75) (27) (173)
Income (loss) from continuing
operations 309 129 (144) (29) 265
Capital and investment expenditures 353 44 18 71 486
69
18. Other Income and Other Expense
Other income and expense includes interest income and other income and
expense items as discussed below. The components of other, net as shown on
the Statements of Income and Comprehensive Income for fiscal years 2003,
2002 and 2001 are as follows:
(in millions) 2003 2002 2001
-------- ------- -------
Other income
Net financial trading gain (loss) $ (1) $ - $ (4)
Nonregulated energy and delivery services income 14 17 18
AFUDC equity 12 2 -
Other 2 4 1
-------- ------- -------
Total other income - Progress Energy Florida $ 27 $ 23 $ 15
-------- ------- -------
Other income - Florida Progress 5 6 3
-------- ------- -------
Total other income - Florida Progress $ 32 $ 29 $ 18
-------- ------- -------
Other expense
Nonregulated energy and delivery services expenses $ 11 $ 15 $ 13
Donations 9 10 7
Other - 5 6
-------- ------- -------
Total other expense - Progress Energy Florida $ 20 $ 30 $ 26
-------- ------- -------
Loss from equity investments 15 5 12
Other expense - Florida Progress 9 14 12
-------- ------- -------
Total other expense - Florida Progress $ 44 $ 49 $ 50
-------- ------- -------
Other, net $ (12) $ (20) $ (32)
======== ======= =======
Net financial trading gain (loss) represents non-asset-backed trades of
electricity. Nonregulated energy and delivery services include power
protection services and mass market programs (surge protection, appliance
services and area light sales) and delivery, transmission and substation
work for other utilities.
19. Commitments and Contingencies
A. Purchase Obligations
The following table reflects FPC's contractual cash obligations and other
commercial commitments in the respective periods in which they are due.
(in millions)
-------------------------------------------------------------------------------------------------------
Contractual Cash Obligations 2004 2005 2006 2007 2008 Thereafter
-------------------------------------------------------------------------------------------------------
Fuel $ 796 $ 368 $ 248 $ 159 $ 102 $ 790
Purchased power 317 329 340 349 357 4,237
Construction obligations 99 49 - - - -
Other purchase obligations 16 5 18 11 16 107
---------------------------------------------------------------------
Total $ 1,228 $ 751 $ 606 $ 519 $ 475 $ 5,134
=====================================================================
Fuel and Purchased Power
FPC has entered into various long-term contracts for oil, gas and coal.
Payments under these commitments were $703 million, $830 million and $761
million in 2003, 2002 and 2001, respectively. Estimated annual payments for
firm commitments of fuel purchases and transportation costs under these
contracts are approximately $796 million, $368 million, $248 million, $159
million and $102 million for 2004 through 2008, respectively, with
approximately $790 payable thereafter.
Progress Fuels has two coal supply contracts with PEF through 2004, which
require PEF to buy and Progress Fuels to supply substantially all of the
coal and transportation requirements of four of PEF's generating units. In
connection with these contracts, Progress Fuels has entered into several
contracts with outside parties for the purchase of coal. The annual
obligations for coal purchases and transportation under these contracts are
$172 million, $52 million and $42 million for 2004, 2005 and 2006,
respectively, with no obligations thereafter. The total cost incurred for
these commitments in 2003, 2002 and 2001 was $284 million, $289 million and
$173 million, respectively.
70
PEF has long-term contracts for approximately 474 MW of purchased power
with other utilities, including a contract with The Southern Company for
approximately 414 MW of purchased power annually through 2010. PEF can
lower these purchases to approximately 200 MW annually with a three-year
notice. Total purchases, for both energy and capacity, under these
agreements amounted to $141 million, $159 million and $112 million for
2003, 2002 and 2001, respectively. Total capacity payments were $57
million, $51 million and $54 million for 2003, 2002 and 2001, respectively.
Minimum purchases under these contracts, representing capital-related
capacity costs, are approximately $60 million annually through 2009 and $30
million annually for 2010.
PEF has ongoing purchased power contracts with certain cogenerators
(qualifying facilities) for 871 MW of capacity with expiration dates
ranging from 2004 to 2025. These purchased power contracts provide for
capacity and energy payments. Energy payments are based on the actual power
taken under these contracts. Capacity payments are subject to the
qualifying facilities meeting certain contract performance obligations. In
most cases, these contracts account for 100% of the generating capacity of
each of the facilities. Of the 871 MW under contract, 831 MW currently are
available to PEF. All commitments have been approved by the FPSC. Total
capacity purchases under these contracts amounted to $241 million, $232
million and $226 million for 2003, 2002 and 2001, respectively. Minimum
expected future capacity payments under these contracts at December 31,
2003 are $257 million, $269 million, $280 million, $289 million and $297
million for 2004 through 2008, respectively.
The FPSC allows the capacity payments to be recovered through a capacity
cost recovery clause, which is similar to, and works in conjunction with,
energy payments recovered through the fuel cost recovery clause.
Construction Obligations
PEF has purchase obligations related to various plant capital projects at
the Hines Complex. Total payments under these contracts were $159 million,
$110 million, and $18 million for 2003, 2002, and 2001 respectively. Future
obligations under these contracts are $99 million and $49 million for 2004
and 2005, respectively.
Other
PEF has long-term service agreements for the Hines Complex. Total payments
under these contracts were $3 million, $1 million and $6 million for 2003,
2002 and 2001, respectively. Future obligations under these contracts are
$16 million, $5 million, $18 million, $11 million and $16 million for 2004
through 2008, respectively, with approximately $107 million payable
thereafter.
B. Other Commitments
Florida Progress has certain future commitments related to synthetic fuel
facilities purchased that provide for contingent payments (royalties) of up
to $25 million on synthetic fuel sales from Florida Progress' interests in
these plants annually through 2007. The related agreements were amended in
December 2001 to require the payment of minimum annual royalties of which
Florida Progress' share is approximately $15 million through 2007. As a
result of the amendment, Florida Progress recorded a liability (included in
other liabilities and deferred credits on the Consolidated Balance Sheets)
and a deferred asset (included in other assets and deferred debits in the
Consolidated Balance Sheets) of approximately $52 million and $63 million
at December 31, 2003 and 2002, representing the minimum amounts due through
2007, discounted at 6.05%. At December 31, 2003 and 2002, respectively, the
portions of the asset and liability recorded that were classified as
current were approximately $13 million and $13 million, respectively. The
deferred asset will be amortized to expense each year as synthetic fuel
sales are made. The maximum amounts payable under these agreements remain
unchanged. Actual amounts paid under these agreements were approximately $1
million in 2003, $24 million in 2002 and $25 million in 2001. Future
expected royalty payments are approximately $15 million for 2004 through
2007 and $4 million for 2008. The large decline in amount paid from 2002 to
2003 is due to the Company's right in the related agreements and their
amendments that allows the Company to escrow those payments if certain
conditions in the agreements are met. The Company has exercised that right
and retained 2003 royalty payments of approximately $25 million pending the
establishment of the necessary escrow accounts. Once established, these
funds will be placed into escrow.
C. Leases
The Company leases transportation equipment, office buildings, computer
equipment, and other property and equipment with various terms and
expiration dates. The Company generally requires the subsidiaries to pay
all executory costs such as maintenance and insurance. Some rental payments
71
include minimum rentals plus contingent rentals based on mileage. These
contingent rentals are not significant. Rent expense under operating leases
totaled $42 million, $33 million and $25 million during 2003, 2002 and
2001, respectively. In addition, PTC has entered into capital leases for
equipment. Assets recorded under capital leases totaled $4 million and $3
million at December 31, 2003 and 2002, respectively. Accumulated
amortization was not significant. These assets were written down in
conjunction with the impairments of PTC recorded during the third quarter
of 2002 (See Note 9).
Minimum annual rental payments, excluding executory costs such as property
taxes, insurance and maintenance, under long-term noncancelable leases at
December 31, 2003 are:
(in millions) Capital Operating
Leases Leases
------------- ----------------
2004 $ 1 $ 20
2005 1 18
2006 1 16
2007 1 12
2008 1 9
Thereafter 9 54
------------- ----------------
$ 14 $ 129
================
Less amount representing imputed interest (4)
-------------
Present value of net minimum lease payments under capital lease $ 10
=============
The Company is also a lessor of land, buildings, railcars and other types
of properties it owns under operating leases with various terms and
expiration dates. The leased buildings and railcars are depreciated under
the same terms as other buildings and railcars included in diversified
business property. Minimum rentals receivable under noncancelable leases
for 2004 through 2008, in millions is $4, $4, $3, $1, and $1, respectively
and $18 million thereafter. These rental receivable totals exclude all
leases attributable to Railcar Ltd. which was sold during the first quarter
of 2004 (See Note 3B).
PEF is the lessor of electric poles, streetlights and other facilities.
Rents received are contingent upon usage and totaled $56 million, $53
million and $48 million for 2003, 2002 and 2001, respectively.
D. Guarantees
As a part of normal business, Florida Progress and certain subsidiaries
including PEF enter into various agreements providing financial or
performance assurances to third parties. Such agreements include
guarantees, standby letters of credit and surety bonds. These agreements
are entered into primarily to support or enhance the creditworthiness
otherwise attributed to a subsidiary on a stand-alone basis, thereby
facilitating the extension of sufficient credit to accomplish the
subsidiaries' intended commercial purposes. At December 31, 2003,
management does not believe conditions are likely for performance under
these agreements.
Guarantees at December 31, 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 $ 33
Surety bonds -
Other guarantees 21
Guarantees issued on behalf of third parties
Securities of affiliated trust 300
Other guarantees 13
------------------
Total $ 367
==================
72
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 $2 million. 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 Company's Consolidated Balance Sheets.
Surety Bonds
At December 31, 2003, the Company had $0.2 million in surety bonds, of
which PEF accounted for the entire amount, 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 Balance Sheets.
Other Guarantees
The Company has total other guarantees outstanding of approximately $34
million. Included in the $34 million are $3 million of guarantees issued on
behalf of third parties related to obligations on leasing arrangements and
$10 million in support of synthetic fuel operations at a third party plant.
The Company estimates it will have to perform under the third party
guarantees related to the leasing agreements and as such $3 million has
been accrued and is reflected in the Company's Consolidated Balance Sheets.
The remaining $21 million in other guarantees is related primarily to
prompt performance payments and other payments subject to contingencies.
Securities of Affiliated Trust
The Company has guaranteed certain payments of an affiliated company, FPC
Capital I (the Trust). Due to the nature of the relationship between the
Trust and Florida Progress Funding Corporation, the Company has guaranteed
the payment of all distributions related to the Trust's outstanding
mandatorily redeemable preferred securities. At December 31, 2003, the
Trust had outstanding 12 million shares of the securities with a
liquidation value of $300 million. See discussion at Note 11F for further
discussion of the guarantee.
Guarantees Issued by Progress Energy
Progress Energy has issued approximately $27 million of guarantees on
behalf of Progress Fuels and its subsidiaries for obligations under coal
trading operations.
E. Claims and Uncertainties
The Company is subject to federal, state and local regulations addressing
hazardous and solid waste management, air and water quality and other
environmental matters.
Hazardous and Solid Waste Management
Various organic materials associated with the production of manufactured
gas, generally referred to as coal tar, are regulated under federal and
state laws. The principal regulatory agency that is responsible for a
specific former manufactured gas plant (MGP) site depends largely upon the
state in which the site is located. There are several MGP sites to which
the Company has some connection. In this regard, 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 its involvement or potential involvement in sites, other than
MGP sites, that may require investigation and/or remediation.
PEF At December 31, 2003, PEF has accrued $18 million for probable and
estimable costs related to various environmental sites. Of this accrual,
$12 million is for costs associated with the remediation of distribution
transformers which are more fully discussed below. The remaining $6 million
is related to two former MGP sites and other sites associated with PEF that
have required or are anticipated to require investigation and/or
remediation costs. PEF does not believe that it can provide an estimate of
the reasonably possible total remediation costs beyond what is currently
accrued.
In 2002, PEF accrued approximately $3 million for investigation and
remediation costs associated with distribution transformers and received
approval from the FPSC for annual recovery of these environmental costs
through the Environmental Cost Recovery Clause (ECRC). In September 2003,
73
PEF accrued an additional $15 million for similar environmental costs as a
result of increased sites and estimated costs per site. PEF has received
approval from the FPSC to recover these costs through the ECRC. As more
activity occurs at these sites, PEF will assess the need to adjust the
accruals.
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, Progress Fuels sold its Inland Marine
Transportation business to AEP Resources, Inc. Progress Fuels established
an accrual to address indemnities and retained environmental liability
associated with the transaction. Progress Fuels estimates that its
contractual liability to AEP Resources, Inc. associated with Inland Marine
Transportation is $4 million at December 31, 2003 and has accrued such
amount. The previous accrual of $10 million was reduced in 2003 based on a
change in estimate. This accrual has been determined on an undiscounted
basis. Progress Fuels measures its liability for this site based on
estimable and probable remediation scenarios. The Company believes that it
is not reasonably probable that additional costs will 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 sites exist that are being addressed voluntarily by
Progress Fuels and FPC. 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 2003, PEF
received a supplemental information request from the EPA and responded to
it. 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.
74
In 2003, the EPA published a final rule addressing routine equipment
replacement under the New Source Review program. The rule defines routine
equipment replacement and the types of activities that are not subject to
New Source Review requirements or New Source Performance Standards under
the Clean Air Act. The rule was challenged in the Federal Appeals Court and
its implementation stayed. The Company cannot predict the outcome of this
matter.
In 1997, the EPA's Mercury Study Report and Utility Report to Congress
conveyed that mercury is not a risk to the average American and expressed
uncertainty about whether reductions in mercury emissions from coal-fired
power plants would reduce human exposure. Nevertheless, the EPA determined
in 2000 that regulation of mercury emissions from coal-fired power plants
was appropriate. In 2003, the EPA proposed, and solicited comment on, two
alternative control plans that would limit mercury emissions from
coal-fired power plants. The agency has indicated that it will choose one
of the alternatives as the final rule, which is expected to be promulgated
in December 2004. Achieving compliance with either proposal could involve
significant capital costs which could be material to the Company's
financial condition or results of operations. However, the Company cannot
predict the outcome of this matter.
In conjunction with the proposed mercury rule, the EPA proposed a Maximum
Available Control Technology (MACT) standard to regulate nickel emissions
from residual oil-fired units. The agency estimates the proposal will
reduce national nickel emissions to approximately 103 tons. The rule is
expected to become final in December 2004. The Company cannot predict the
outcome of this matter.
In December 2003, the EPA released its proposed Interstate Air Quality Rule
(commonly known as the Fine Particulate Transport Rule and/or the Regional
Transport Rule). The EPA's proposal requires 28 jurisdictions, including
North Carolina, South Carolina, Georgia and Florida, to further reduce
nitrogen oxide (NOx) and sulfur dioxide (SO2) emissions in order to attain
pre-set NOx and SO2 emissions levels (which have not yet been determined).
The rule is expected to become final in 2004. The installation of controls
necessary to comply with the rule could involve significant capital costs.
In 2004, a bill was introduced in the Florida legislature that would
require significant reductions in SO2, NOx and particulate emissions from
certain coal, natural gas and oil-fired generating units owned or operated
by investor-owned electric utilities, including PEF. The SO2 and NOx
reductions would be effective beginning with calendar year 2010 and the
particulate reductions would be effective beginning with calendar year
2012. Under the proposed legislation, the FPSC would be authorized to allow
the utilities to recover the costs of compliance with the emission
reductions over a period not greater than seven years beginning in 2005,
but the utilities' rates would be frozen at 2004 levels for at least five
years of the maximum recovery period. The Company cannot predict the
outcome of this matter.
Water Quality
As a result of the operation of certain control equipment needed to address
the air quality issues outlined above, new wastewater streams may be
generated. Integration of these new wastewater streams into existing
wastewater treatment processes may result in permitting, construction and
water treatment challenges to the Company in the immediate and extended
future.
After many years of litigation and settlement negotiations, the EPA is
scheduled to publish final regulations in February 2004 for the
implementation of Section 316(b) of the Clean Water Act. The purpose of
these regulations is to minimize adverse environmental impacts caused by
cooling water intake structures and intake systems located at existing
facilities. Over the next several years, these regulations may require the
facilities to mitigate the effects to aquatic organisms by undertaking
intake modifications or other restorative activities. Substantial costs
could be incurred by the facilities in order to comply with the new
regulations. The Company cannot predict the outcome and impacts to the
facilities at this time.
The EPA has published for comment a draft Environmental Impact Statement
(EIS) for surface coal mining (sometimes referred to as "mountaintop
mining") and valley fills in the Appalachian coal region, where Progress
Fuels currently operates a surface mine and may operate others in the
future. The final EIS, when published, may affect regulations for the
permitting of mines and the cost of compliance with environmental
regulations. Regulatory changes for mining may also affect the cost of fuel
for the PEC and PEF fueled electric generating plants. The Company cannot
predict the outcome of this matter.
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
75
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.
Other Contingencies
1) Franchise Litigation
Three cities, with a total of approximately 18,000 customers, have
litigation pending against PEF in various circuit courts in Florida. As
discussed below, three other cities, with a total of approximately 30,000
customers, have subsequently settled their lawsuits with PEF and signed
new, 30-year franchise agreements. The lawsuits principally seek (1) a
declaratory judgment that the cities have the right to purchase PEF's
electric distribution system located within the municipal boundaries of the
cities, (2) a declaratory judgment that the value of the distribution
system must be determined through arbitration, and (3) injunctive relief
requiring PEF to continue to collect from PEF's customers and remit to the
cities, franchise fees during the pending litigation, and as long as PEF
continues to occupy the cities' rights-of-way to provide electric service,
notwithstanding the expiration of the franchise ordinances under which PEF
had agreed to collect such fees. Five circuit courts have entered orders
requiring arbitration to establish the purchase price of PEF's electric
distribution system within five cities. Two appellate courts have upheld
those circuit court decisions and authorized cities to determine the value
of PEF's electric distribution system within the cities through
arbitration. Arbitration in one of the cases (the City of Casselberry) was
held in August 2002. Following arbitration, the parties entered settlement
discussions, and in July 2003 the City approved a settlement agreement and
a new, 30-year franchise agreement with PEF. The settlement resolves all
pending litigation with that City. A second arbitration (with the
13,000-customer City of Winter Park) was completed in February 2003. That
arbitration panel issued an award in May 2003 setting the value of PEF's
distribution system within the City of Winter Park at approximately $32
million, not including separation and reintegration and construction work
in progress, which could add several million dollars to the award. The
panel also awarded PEF approximately $11 million in stranded costs. In
September 2003, Winter Park voters passed a referendum that would authorize
the City to issue bonds of up to approximately $50 million to acquire PEF's
electric distribution system. The City has not yet definitively decided
whether it will acquire the system, but has indicated that it will seek
wholesale power supply bids and bids to operate and maintain the
distribution system. At this time, whether and when there will be further
proceedings regarding the City of Winter Park cannot be determined. A third
arbitration (with the 2,500-customer Town of Belleair) was completed in
June 2003. In September 2003, the arbitration panel issued an award in that
case setting the value of the electric distribution system within the Town
at approximately $6 million. The panel further required the Town to pay to
PEF its requested $1 million in separation and reintegration costs and $2
million in stranded costs. The Town has not yet decided whether it will
attempt to acquire the system. At this time, whether and when there will be
further proceedings regarding the Town of Belleair cannot be determined. A
fourth arbitration (with the 13,000-customer City of Apopka) had been
scheduled for January 2004. In December 2003, the Apopka City Commission
voted on first reading to approve a settlement agreement and a 30-year
franchise with PEF. The settlement and franchise became effective upon
approval by the Commission at a second reading of the franchise in January
2004. The settlement resolves all outstanding litigation between the
parties. Arbitration in the remaining city's litigation (the 1,500-customer
City of Edgewood) has not yet been scheduled.
As part of the above litigation, two appellate courts have also reached
opposite conclusions regarding whether PEF must continue to collect from
its customers and remit to the cities "franchise fees" under the expired
franchise ordinances. PEF has filed an appeal with the Florida Supreme
Court to resolve the conflict between the two appellate courts. The Florida
Supreme Court held oral argument in one of the appeals in August 2003.
Subsequently, the Court requested briefing from the parties in the other
appeal, which was completed in November 2003. The Court has not yet issued
a decision in these cases. 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.
76
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.
On January 14, 2004, PEF filed a complaint with the United States Court of
Federal Claims against the United States of America (Department of Energy)
claiming that the DOE breached the Standard Contract for Disposal of Spent
Nuclear Fuel by failing to accept spent nuclear fuel from various Progress
Energy facilities on or before January 31, 1998. Damages due to DOE's
breach will likely exceed $100 million. Similar suits have been initiated
by over two dozen other utilities.
In July 2002, Congress passed an override resolution to Nevada's veto of
DOE's proposal to locate a permanent underground nuclear waste storage
facility at Yucca Mountain, Nevada. DOE plans to submit a license
application for the Yucca Mountain facility by the end of 2004. On November
5, 2003, Congressional negotiators approved $580 million for fiscal year
2004 for the Yucca Mountain project, $123 million more than the previous
year. PEF cannot predict the outcome of this matter.
PEF is currently storing spent nuclear fuel onsite in spent fuel pools. If
PEF does not seek renewal of the Crystal River Nuclear Plant (CR3)
operating license, CR3 will have sufficient storage capacity in place for
fuel consumed through the end of the expiration of the license in 2016. If
PEF extends the CR3 operating license, dry storage may be necessary.
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 contended 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 1999, plaintiffs amended their complaint to add PTC.
After several legal motions and appeals over the years the Company and the
appellants reached a settlement resolving the appellants' dispute in 2003.
In May 2003 the trial court entered an Amended Final Judgment approving the
mandatory class settlement. No appeals have been taken from that judgment,
and the time to appeal has expired. In July 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 in July 2003. Under the terms of the mandatory class settlement,
PEF made settlement payments to class members in August 2003. The
settlement payments did not have a material adverse effect upon PEF's
financial condition or results of operations.
4) Advanced Separation Technologies (AST)
In 1996, Florida Progress sold its 80% interest in AST to Calgon Carbon
Corporation (Calgon) for net proceeds of $56 million in cash. In January
1998, Calgon filed a lawsuit against Florida Progress and the other selling
shareholder and amended it in April 1998, alleging misstatement of AST's
1996 revenues, assets and liabilities, seeking damages and granting Calgon
the right to rescind the sale. The lawsuit also accused the sellers of
77
failing to disclose flaws in AST's manufacturing process and a lack of
quality control. Florida Progress believes that the aggregate total of all
legitimate warranty claims by customers of AST for which it is probable
that Florida Progress will be responsible for under the Stock Purchase
Agreement with Calgon is approximately $3 million, and accordingly, accrued
$3 million in the third quarter of 1999 as an estimate of probable loss.
All parties filed motions for summary judgment in July 2001. The summary
judgment motions of Calgon and the other selling shareholder were denied in
April of 2002. The summary judgment motion of Florida Progress was
withdrawn pending a legal challenge to portions of the report of Calgon's
expert, Arthur Andersen, which had been used to oppose summary judgment. In
September 2003, the United States District Court for the Western District
of Pennsylvania issued final orders excluding from evidence in the case
that portion of Arthur Andersen's damage analysis based on the discounted
cash flow methodology of valuation. The Court did not exclude Arthur
Andersen's use of the guideline publicly traded company methodology in its
damage analysis. Florida Progress filed a renewed motion for summary
judgment in October 2003, which is pending. The Company cannot predict the
outcome of this matter, but will present a vigorous defense.
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.
78
INDEPENDENT AUDITORS' REPORT
To the Boards of Directors of Florida Progress Corporation and Florida POWER
CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC.:
We have audited the consolidated balance sheets of Florida Progress Corporation
and its subsidiaries (Florida Progress) and the balance sheets of Florida Power
Corporation d/b/a Progress Energy Florida, Inc. (PEF) at December 31, 2003 and
2002, and the related Florida Progress consolidated statements of income and
comprehensive income, of common equity, and of cash flows and the related PEF
statements of income and comprehensive income, of common equity, and of cash
flows for each of the three years in the period ended December 31, 2003 and have
issued our report thereon dated February 20, 2004 (which expresses an
unqualified opinion and includes an explanatory paragraph concerning the
adoption of new accounting principles in 2003); such financial statements and
report are included herein. Our audits also included the financial statement
schedules of Florida Progress and PEF for the years ended December 31, 2003 and
2002, listed in Item 8. These financial statement schedules are the
responsibility of the respective company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
February 20, 2004
79
Schedule II
FLORIDA PROGRESS CORPORATION
Valuation and Qualifying Accounts
For the Years Ended December 31, 2003, 2002 and 2001
(In millions)
Balance at Additions Balance at
Beginning Charged to Other End of
Description of Period Expense Additions Deductions Period
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003
Uncollectible accounts $ 28 $14 $ - $(27) $ 15
Fossil dismantlement reserve 142 1 - - 143
Nuclear refueling outage reserve 10 8 - (16) (b) 2
YEAR ENDED DECEMBER 31, 2002
Uncollectible accounts $ 26 $ 7 $ - $ (5) (a) $ 28
Fossil dismantlement reserve 141 1 - - 142
Nuclear refueling outage reserve - 10 - - 10
YEAR ENDED DECEMBER 31, 2001
Uncollectible accounts $ 26 $10 $ 1 $(11) (a) $ 26
Fossil dismantlement reserve 135 6 - - 141
Nuclear refueling outage reserve 11 17 - (28) (b) -
(a) Represents write-off of uncollectible accounts, net of recoveries.
(b) Represents payments of actual expenditures related to outages.
80
Schedule II
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA
Valuation and Qualifying Accounts
For the Years Ended December 31, 2003, 2002 and 2001
(In millions)
Balance at Additions Balance at
Beginning Charged to Other End of
Description Of Period Expense Additions Deductions Period
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003
Uncollectible accounts $ 2 $ 5 $ - $ (5) $ 2
Fossil dismantlement reserve 142 1 - - 143
Nuclear refueling outage reserve 10 8 (16) (b) 2
YEAR ENDED DECEMBER 31, 2002
Uncollectible accounts $ 3 $ 3 $ - $ (4) (a) $ 2
Fossil dismantlement reserve 141 1 - - 142
Nuclear refueling outage reserve - 10 - - 10
YEAR ENDED DECEMBER 31, 2001
Uncollectible accounts $ 5 $ 4 $ - $ (6) (a) $ 3
Fossil dismantlement reserve 135 6 - - 141
Nuclear refueling outage reserve 11 17 - (28) (b) -
(a) Represents write-off of uncollectible accounts, net of recoveries.
(b) Represents payments of actual expenditures related to outages.
81
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. 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, and with the participation of its
management, including Florida Progress' 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' Chief Executive Officer and Chief Financial
Officer concluded that its disclosure controls and procedures are effective in
timely alerting them to material information relating to Florida Progress
(including its consolidated subsidiaries) required to be included in its
periodic SEC filings. There has been no change in Florida Progress' internal
control over financial reporting during the quarter ended December 31, 2003 that
has materially affected, or is reasonably like to materially affect, Florida
Progress' internal control over financial reporting.
Progress Energy Florida
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, PEF
carried out an evaluation, and with the participation of its management,
including PEF's 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 Chief Executive
Officer and Chief Financial Officer concluded that its disclosure controls and
procedures are effective in timely alerting them to material information
relating to Florida Progress (including its consolidated subsidiaries) required
to be included in its periodic SEC filings. There has been no change in PEF's
internal control over financial reporting during the quarter ended December 31,
2003 that has materially affected, or is reasonably like to materially affect,
PEF's internal control over financial reporting.
82
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The information called for by ITEM 10 is omitted pursuant to Instruction I (2)
(c) to Form 10-K (Omission of Information by Certain Wholly-owned Subsidiaries).
ITEM 11. EXECUTIVE COMPENSATION
The information called for by ITEM 11 is omitted pursuant to Instruction I (2)
(c) to Form 10-K (Omission of Information by Certain Wholly-owned Subsidiaries).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by ITEM 12 is omitted pursuant to Instruction I (2)
(c) to Form 10-K (Omission of Information by Certain Wholly-owned Subsidiaries).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by ITEM 13 is omitted pursuant to Instruction I (2)
(c) to Form 10-K (Omission of Information by Certain Wholly-owned Subsidiaries).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit and Corporate Performance Committee of Progress Energy Inc.'s Board of
Directors ("Audit Committee") has actively monitored all services provided by
its independent auditors, Deloitte & Touche LLP, the member firms of Deloitte &
Touche Tohmatsu, and their respective affiliates (collectively, "Deloitte") and
the relationship between audit and non-audit services provided by Deloitte.
Progress Energy, Inc. has adopted policies and procedures for approving all
audit and permissible non-audit services rendered by Deloitte, and the fees
billed for those services. The Audit Committee specifically pre-approved the use
of Deloitte for audit, audit-related, tax and non-audit services, subject to
certain limitations. Audit and audit-related services include assurance and
related activities, services associated with internal control reviews, reports
related to regulatory filings, certain due diligence services pertaining to
acquisitions, consultations on dispositions and discontinued operations,
employee benefit plan audits and general accounting and reporting advice. The
preapproval policy provides that any audit and audit-related services covered by
the blanket preapproval whose project scope could not be defined at the time of
blanket approval that will require expenditure of over $50,000 will require
individual approval by the Audit Committee in advance of Deloitte being engaged
to render such services. Once, the cumulative total of those projects less than
$50,000 exceeds $500,000 for the year, each subsequent project, regardless of
amount, must be approved individually in advance by the Audit Committee.
The preapproval policy requires management to obtain specific preapproval from
the Audit Committee for the use of Deloitte for any permissible non-audit
services, which, generally, are limited to tax services including, tax
compliance, tax planning, and tax advice services such as return review and
consultation and assistance. Other types of permissible non-audit services will
be considered for approval only in rare circumstances, which may include
proposed services that provide significant economic or other benefits to the
Company. In determining whether to approve these services, the Audit Committee
will assess whether these services adversely impair the independence of
Deloitte. Any permissible non-audit services provided during a fiscal year that
(i) do not aggregate more than 5% of the total fees paid to Deloitte for all
services rendered during that fiscal year and (ii) were not recognized as
non-audit services at the time of the engagement must be brought to the
attention of the Controller for prompt submission to the Audit Committee for
approval. These "de minimis" non-audit services must be approved by the Audit
Committee or its designated representative before the completion of the project.
The policy also requires management to update the Audit Committee throughout the
year as to the services provided by Deloitte and the costs of those services.
The Audit Committee will assess the adequacy of this procedure on an annual
basis and revise it accordingly.
83
Set forth in the table below is certain information relating to the aggregate
fees billed by Deloitte for professional services rendered to Florida Progress
and Progress Energy Florida for the fiscal years ended December 31, 2003 and
December 31, 2002.
Florida Progress
2003 2002
Audit Fees $ 1,194,000 $ 647,000
Audit-Related Fees $ 78,000 $ 471,000
Tax Fees $ 31,000 $ 91,000
All Other Fees $ 4,000 $ 32,000
-----------------------------------------------
$ 1,307,000 $ 1,241,000
Progress Energy Florida
2003 2002
Audit Fees $ 598,000 $ 432,000
Audit-Related Fees $ 8,000 $ 7,000
Tax Fees $ 24,000 $ 87,000
All Other Fees $ 3,000 $ 32,000
-----------------------------------------------
$ 633,000 $ 558,000
Audit Fees consisted of audit work performed in the preparation of financial
statements, as well as work generally only the independent auditor can
reasonably be expected to provide, such as statutory audits.
Audit-Related Fees consisted principally of employee benefit plans, special
procedures and letter reports and accounting consultations.
Tax Fees include fees billed for tax compliance matters and tax planning and
advisory services.
All Other Fees consisted principally of advisory training services.
The Audit Committee has concluded that the provision of the non-audit services
listed above as "All Other Fees" is compatible with maintaining Deloitte's
independence.
All fees were related to services that were pre-approved by the Audit Committee.
84
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FOR
FLORIDA PROGRESS AND PROGRESS ENERGY FLORIDA
1. Financial Statements, notes to Financial Statements and reports thereon of
DELOITTE & TOUCHE LLP are found in ITEM 8 "Financial Statements and
Supplementary Data" herein.
2. Financial Statement Schedules and the report thereon of DELOITTE & TOUCHE
LLP are found at ITEM 8 " Financial Statements and Supplementary Data"
herein.
3. Exhibits filed herewith:
Florida
Number Exhibit Progress PEF-
*2 Amended and Restated Agreement and Plan of X
Exchange by and among Carolina Power & Light
Company, Florida Progress Corporation and CP&L
Energy, Inc., dated as of August 22, 1999, amended
and restated as of March 3, 2000. (Filed as Annex A
to the Florida Progress preliminary proxy statement
on Schedule 14A, as filed with the SEC on March 6,
2000).
*3. (a) Amended Articles of Incorporation, as X
amended, of Florida Power Corporation. (Filed as
Exhibit 3(a) to the Progress Energy Florida Form
10-K for the year ended December 31, 1991,
as filed with the SEC (File No. 1-3274)
on March 30, 1992.)
*3. (b) Restated Articles of Incorporation, as X
amended, of Florida Progress. (Filed as
Exhibit 3(a) to Florida Progress' Form
10-K for the year ended December 31,1991,
as filed with the SEC on March 30, 1992.)
*3.(c) Bylaws of Florida Progress, as amended November X
30, 2000. (Filed as Exhibit 3(c) to the Florida
Progress Form 10-K for the year ended December 31,
2001, as filed with the SEC on March 28, 2002).
*3.(d) Bylaws of Progress Energy Florida, as amended X
September 19, 2003. (Filed as Exhibit 3(ii) to
the Progress Energy Florida Form 10-Q for the
period ended September 30, 2003, as filed with the
SEC on November 12, 2003).
*4. (a) Indenture, dated as of January 1, 1944 (the X X
"Indenture"), between Florida Power Corporation
and Guaranty Trust Company of New York and The
Florida National Bank of Jacksonville, as
Trustees. (Filed as Exhibit B-18 to Florida
Power's Registration Statement on Form A-2
(No. 2-5293) filed with the SEC on January
24, 1944.)
*4. (b) Twenty-Ninth Supplemental Indenture, dated as X X
of September 1, 1982, between Florida Power Corporation
and Morgan Guaranty Trust Company of New York
and Florida National Bank, as Trustees, with
reference to the modification and amendment
of the Indenture. (Filed as Exhibit 4(c) to
Florida Power Corporation's Registration Statement
on Form S-3 (No. 2-79832) filed with the SEC on
September 17, 1982.)
85
*4. (c) Seventh Supplemental Indenture, dated as of X X
July 1, 1956, between Florida Power Corporation and
Guaranty Trust Company of New York and The
Florida National Bank of Jacksonville, as
Trustees, with reference to the modification
and amendment of the Indenture. (Filed as
Exhibit 4(b) to Florida Power Corporaiton's
Registration Statement on Form S-3 (No. 33-16788)
filed with the SEC on September 27, 1991.)
*4. (d) Eighth Supplemental Indenture, dated as of X X
July 1, 1958, between Florida Power Corporation
and Guaranty Trust Company of New York and The
Florida National Bank of Jacksonville, as
Trustees, with reference to the modification
and amendment of the Indenture. (Filed as
Exhibit 4(c) to Florida Power Corporation's
Registration Statement on Form S-3 (No. 33-16788)
filed with the SEC on September 27, 1991.)
*4. (e) Sixteenth Supplemental Indenture, dated as of X X
February 1, 1970, between Florida Power Corporation
and Morgan Guaranty Trust Company of New York and
The Florida National Bank of Jacksonville, as
Trustees, with reference to the modification
and amendment of the Indenture. (Filed as
Exhibit 4(d) to Florida Power Corporation's
Registration Statement on Form S-3 (No. 33-16788)
filed with the SEC on September 27, 1991.)
*4. (f) Rights Agreement, dated as of November 21, X
1991, between Florida Progress and
Manufacturers Hanover Trust Company,
including as Exhibit A the form of Rights
Certificate. (Filed as Exhibit 4(a) to
Florida Progress' Form 8-K dated November
21, 1991, as filed with the SEC on November 27, 1991.)
*4. (g) Thirty-Eighth Supplemental Indenture dated as X X
of July 25, 1994, between Florida Power Corporation
and First Chicago Trust Company of New York, as
successor Trustee, Morgan Guaranty Trust
Company of New York, as resigning Trustee,
and First Union National Bank of Florida, as
resigning Co-Trustee, with reference to
confirmation of First Chicago Trust Company
of New York as successor Trustee under the
Indenture. (Filed as exhibit 4(f) to Florida
Power's Registration Statement on Form S-3
(No. 33-55273) as filed with the SEC on August
29, 1994.)
86
*4.(h) Thirty-Ninth Supplemental Indenture dated as of X
July 1, 2001 between Florida Power Corporation
and First Chicago Trust Company of New York,
as Trustee. (Filed as Exhibit 4 to Current Report
on Form 8-K filed with the SEC on July 23, 2001.)
*4.(i) Fortieth Supplemental Indenture dated as of July 1, X
2002 between Progress Energy Florida and First
Chicago Trust Company of New York. (Filed as
Exhibit 4 to Current Report on Form 8-K filed with
the SEC on February 18, 2003.)
*4.(j) Forty-First Supplemental Indenture, dated as of X
February 1, 2003 between Progress Energy Florida
and First Chicago Trust Company of New York,
as successor Trustee. (Filed as Exhibit 4 to
Current Report on Form 8-K filed with the SEC on
February 21, 2003.)
*4(k) Forty-second Supplemental Indenture, dated as of April 1, X
2003, from 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
(filed as Exhibit 4 to Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003 filed with the SEC on
September 11, 2003.
*4. (k) Amendment to Shareholder Rights X
Agreement dated February 20, 1997,
between Florida Progress and The First
National Bank of Boston. (Filed as Exhibit
4(a) to the Florida Progress Form 10-K
for the year ended December 31, 1996,
as filed with the SEC on March 27, 1997.)
*4. (l) Form of Certificate representing shares of X
Florida Progress Common Stock. (Filed as
Exhibit 4(b) to the Florida Progress Form
10-K for the year ended December 31, 1996,
as filed with the SEC on March 27, 1997.)
*4. (m) Second Amendment to Shareholder Rights X
Agreement dated as of August 22, 1999, between
Florida Progress and BankBoston, N.A. (Filed as
Exhibit 4 to the combined Florida Progress and
Progress Energy Florida Form 8-K dated August 22,
1999.)
*10.(a)(1) Progress Energy Florida 364-Day $200,000,000 Credit X
Agreement dated as of April 1, 2003 (filed as
Exhibit 10(ii) to Progress Energy Florida Form 10-Q
for the quarter ended March 31, 2003).
*10.(a)(2) Progress Energy Florida 3-Year $200,000,000 Credit X
Agreement, dated as of April 1, 2003 (filed as
Exhibit 10(iii) to the Progress Energy Florida Form
10-Q for the quarter ended March 31, 2003).
87
+*10.(b)(1) Executive Optional Deferred Compensation X X
Plan. (Filed as Exhibit 10.(c) to the Florida
Progress Form 10-K for the year ended December 31,
1996 as filed with the
SEC on March 27, 1997.)
+*10.(b)(2) Management Incentive Compensation Plan X X
of Florida Progress Corporation, as amended
December 14, 1999. (Filed as Exhibit 10.(a) to the
Florida Progress Form 10-K for the year ended
December 31, 1999, as filed with the SEC on
March 30, 2000.)
+*10.(b)(3) Progress Energy Florida Management Incentive X
Compensation Plan, effective January 1, 2001
(filed as Exhibit 10b(25) to Annual Report on
Form 10-K for the year ended December 31, 2000,
File No. 1-15929 and No. 1-3382.)
+*10. (b)(4) Florida Progress Supplemental Executive X X
Retirement Plan, as amended and restated
effective February 20, 1997. (Filed as Exhibit 10.(e)
to the Florida Progress Form 10-K for the year ended
December 31, 1999, as filed with the SEC on
March 30, 2000.)
-+*10.(b)(5) Resolutions of the Board of Directors of Carolina X
Power & Light Company dated May 8, 1991, amending
the Directors Deferred Compensation Plan (filed as
Exhibit 10(b), File No. 33-48607).
+*10.b(6) Carolina Power & Light Company Non-Employee X
Director Stock Unit Plan, amended and restated.
Effective July 10, 2002 (filed as Exhibit 10(ii)
to the Progress Energy Form Quarterly Report
on Form 10-Q for the period ended June 30, 2003).
-+*10.(b)(6) Carolina Power & Light Company Restricted Stock X X
Agreement, as approved January 7, 1998, pursuant
to Carolina Power & Light Company's
1997 Equity Incentive Plan (filed as Exhibit No. 10
to Carolina Power & Light Company's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1998, File No. 1-3382.)
-+*10.(b)(7) Progress Energy, Inc. Restoration X X
Retirement Plan, as amended and restated July 10, 2002
(filed as Exhibit No. 10(i) to the Progress Energy, Inc.
Quarterly Report on Form 10-Q for the period ended
June 30, 2003).
-+*10.(b)(8) Amended and Restated Supplemental Senior X X
Executive Retirement Plan of Progress Energy, Inc.,
effective January 1, 1984, as last amended July 10, 2002
(filed as Exhibit 10(iii) to the Progress Energy Quarterly
Report on Form 10-Q for the period ended June 30, 2003).
88
+*10.(b)(9) Performance Share Pub-Plan of the Progress X X
Energy, Inc. 2002 Equity Incentive Plan, dated
July 9, 2002 (filed as Exhibit 10(ii) to Quarterly
Report on form 10-Q for the quarterly period ended
September 30, 2002, File No. 1-08349 and 1-03274).
-+*10.(b)(10) Performance Share Sub-Plan of the Carolina X X
Power & Light Company 1997 Equity
Incentive Plan, as amended January 1, 2001
(filed as Exhibit 10b(11) to the Progress Energy, Inc.
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001).
+*10.(b)(11) Progress Energy, Inc. 2002 Equity Incentive Plan, X X
dated July 10, 2002 (filed as Exhibit 10(i) to Quarterly
Report on form 10-Q for the quarterly period ended
September 30, 2002, File No. 1-08349 and 1-03274).
+*10.(b)(12) 1997 Equity Incentive Plan, Amended and Restated X X
as of September 26, 2001 (filed as Exhibit 4.3 to Progress
Energy, Inc. Form S-8 dated September 27, 2001,
File No. 1-3382).
+*10.(b)(13) Progress Energy, Inc. Form of Stock Option X X
Agreement (filed as Exhibit 4.4 to Form S-8
dated September 27, 2001,
File No. 333-70332.)
+*10.(b)(14) Progress Energy, Inc. Form of Stock Option Award X X
(filed as Exhibit 4.5 to Form S-8 dated September
27, 2001, File No. 333-70332.)
-+*10.(b)(15) Amended Management Incentive Compensation X X
Plan of Progress Energy, Inc., as amended
January 1, 2003 (filed as Exhibit 10(iv) to the
Progress Energy, Inc. Quarterly Report on Form 10-Q
for the period ended June 30, 2003).
-+*10.(b)(16) Progress Energy, Inc. Management X X
Deferred Compensation Plan, revised
and restated as of January 1, 2003
(filed as Exhibit 4.3 to the Progress Energy, Inc.
Form S-8 on May 2, 2003, File No. 333-104952).
+*10.(b)(17) Employment Agreement dated August 1, 2000 X
between CP&L Service Company LLC and William
Cavanaugh III (filed as Exhibit 10(i) to the Progress
Energy, Inc. Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000, File
No. 1-15929 and No. 1-3382)
+*10.(b)(18) Employment Agreement dated August 1, 2000 X
between Carolina Power & Light Company and
William S. "Skip" Orser (filed as Exhibit 10(ii) to
the Progress Energy, Inc. Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000,
File No. 1-15929 and No. 1-3382).
89
+*10.(b)(19) Employment Agreement dated August 1, 2000 X
between Carolina Power & Light Company
and Tom Kilgore (filed as Exhibit 10(iii) to the
Progress Eenrgy, Inc. Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000,
File No. 1-15929 and No. 1-3382.
+*10.(b)(20) Employment Agreement dated August 1, 2000 X
between CP&L Service Company LLC and Robert
McGehee (filed as Exhibit 10(iv) to the Progress Energy,
Inc. Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000, File No. 1-15929
and No. 1-3382).
+*10.(b)(21) Form of Employment Agreement dated August 1, 2000 X X
(i) between Carolina Power & Light Company
and Don K. Davis; and (ii) between CP&L Service
Company LLC and Peter M. Scott III; and
(iii) between CP&L Service Company LLC and
William D. Johnson (filed as Exhibit 10(v) to the
Progress Energy, Inc. Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000,
File No. 1-15929 and No. 1-3382).
+*10.(b)(22) Form of Employment Agreement dated August 1, 2000 X
between Carolina Power & Light Company and (i) Fred
Day IV, (ii) C.S. "Scotty" Hinnant, and (iii)E.
Michael Williams (filed as Exhibit 10(vi) to
the Progress Energy, Inc. Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
2000, File No. 1-15929 and No. 1-3382.)
+*10.(b)(23) Employment Agreement dated November 30, 2000 X X
between Carolina Power & Light Company, Florida
Power Corporation and H. William Habermeyer (filed
as Exhibit 10.(b)(32) to Annual Report on Form 10-K for
the year ended December 31, 2000).
+*10.(b)(24) Form of Employment Agreement (i) between Progress Energy X
Service Company LLC and Brenda F. Castonguay, effective
September 2002 and (ii) between Progress Energy Florida,
Inc. and Jeffrey J. Lyash, effective December 2003 (filed
as Exhibit 10c(27) to the Progress Energy, Inc. Annual
Report on Form 10-K for the fiscal year ended December 31,
2002, File No. 1-15929 and No. 1-3382).
+*10.(b)(25) Form of Employment Agreement effective January 2003 X X
between Progress Energy Service CompanyLLC and John R.
McArthur (filed as Exhibit 10c(27) to the Progress Energy,
Inc. Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, File No. 1-5929 and No. 1-3382).
+*10.(b)(26) Employment Agreement dated October 1, 2003 between Progress X X
Energy Service Company LLC and Geoffrey S. Chatas (filed
as Exhibit 10c(28) to the Progress Energy, Inc. Annual
Report on Form 10-K for the fiscal year ended December 31,
File No. 1-15929 and No. 1-3382.
12 Statement of Computation of Ratios X X
23. (a) Consent of Deloitte & Touche LLP X X
31(a) 302 Certification for Chief Executive Officer X X
31(b) 302 Certification for Chief Financial Officer X X
32(a) 906 Certification for Chief Executive Officer X X
32(b) 906 Certification for Chief Financial Officer X X
X Exhibit is filed for that respective company.
* Incorporated herein by reference as indicated.
+ Management contract or compensation plan or arrangement required
to be filed as an exhibit to this report pursuant to Item 14(c) of Form
10-K.
- Sponsorship of this management contract or compensation plan or
arrangement was transferred by Carolina Power & Light Company to
Progress Energy, Inc., effective August 1, 2000.
90
(b) Reports on Form 8-K filed or furnished during or with respect to the last
quarter of 2003 and the portion of the first quarter of 2004 prior to the
filing of this Form 10-K:
Florida Progress Corporation
Financial
Item Statements
Reported Included Date of Event Date Filed
-------- -------- ------------- ----------
12 Yes February 26, 2004 February 26, 2004
5 No February 24, 2004 February 24, 2004
5 No January 23, 2004 January 23, 2004
9, 12 Yes January 21, 2004 January 21, 2004
9, 12 Yes October 22, 2003 October 22, 2003
Progress Energy Florida, Inc.
Financial
Item Statements
Reported Included Date of Event Date Filed
-------- -------- ------------- ----------
12 Yes February 26, 2004 February 26, 2004
5 No January 23, 2004 January 23, 2004
9, 12 Yes January 21, 2004 January 21, 2004
5, 7 No November 18, 2003 November 21, 2003
5, 7 Yes November 18, 2003 November 18, 2003
9, 12 Yes October 22, 2003 October 22, 2003
91
Risk factors
In this section, unless the context indicates otherwise, the terms "our," "we,"
"us" or similar terms refer to Progress Energy Florida. The following section is
applicable most directly to Progress Energy Florida. However, the risk factors
discussed below are substantially applicable to our corporate parent, Florida
Progress.
Investing in our securities involves risks, including the risks described below,
that could affect the energy industry, as well as us and our business. Although
we have tried to discuss key factors, please be aware that other risks may prove
to be important in the future. New risks may emerge at any time and we cannot
predict such risks or estimate the extent to which they may affect our financial
performance. Before purchasing our securities, you should carefully consider the
following risks and the other information in this Annual Report, as well as the
documents we file with the SEC from time to time. Each of the risks described
below could result in a decrease in the value of our securities and your
investment therein.
Risks Related to the Energy Industry
We are subject to fluid and complex government regulations that may have a
negative impact on our business and our results of operations.
We are subject to comprehensive regulation by several federal and state
regulatory agencies, which significantly influence our operating environment and
may affect our ability to recover costs from utility customers. We are required
to have numerous permits, approvals and certificates from the agencies that
regulate our business. We believe the necessary permits, approvals and
certificates have been obtained for our existing operations and that our
business is conducted in accordance with applicable laws; however, we are unable
to predict the impact on our operating results from the future regulatory
activities of any of these agencies. Changes in regulations or the imposition of
additional regulations could have an adverse impact on our results of
operations.
The Federal Energy Regulatory Commission ("FERC"), the Nuclear Regulatory
Commission ("NRC"), the Environmental Protection Agency ("EPA") and the FPSC
regulate many aspects of our utility operations, including siting and
construction of facilities, customer service and the rates that we can charge
customers. Although we are not a registered holding company under the Public
Utility Holding Company Act of 1935, as amended ("PUHCA"), we are subject to
many of the regulatory provisions of PUHCA.
We are a wholly-owned subsidiary of Progress Energy, Inc., a registered public
utility holding company under PUHCA. Repeal of PUHCA has been proposed, but it
is unclear whether or when such a repeal would occur. It is also unclear to what
extent repeal of PUHCA would result in additional or new regulatory oversight or
action at the federal or state levels, or what the impact of those developments
might be on our business.
We are unable to predict the impact on our business and operating results from
future regulatory activities of these federal and state agencies. Changes in
regulations or the imposition of additional regulations could have a negative
impact on our business and results of operations.
We are subject to numerous environmental laws and regulations that may increase
our cost of operations, impact or limit our business plans, or expose us to
environmental liabilities.
We are subject to numerous environmental regulations affecting many aspects of
our present and future operations, including air emissions, water quality,
wastewater discharges, solid waste, and hazardous waste. These laws and
regulations can result in increased capital, operating and other costs,
particularly with regard to enforcement efforts focused on power plant emissions
obligations. These laws and regulations generally require us to obtain and
comply with a wide variety of environmental licenses, permits, inspections and
other approvals. Both public officials and private individuals may seek to
enforce applicable environmental laws and regulations. We cannot predict the
financial or operational outcome of any related litigation that may arise.
In addition, we may be a responsible party for environmental clean up at sites
identified by a regulatory body. We cannot predict with certainty the amount and
timing of all future expenditures related to environmental matters because of
the difficulty of estimating clean up costs. There is also uncertainty in
quantifying liabilities under environmental laws that impose joint and several
liability on all potentially responsible parties ("PRP"s).
92
We cannot assure you that existing environmental regulations will not be revised
or that new regulations seeking to protect the environment will not be adopted
or become applicable to us. Revised or additional regulations, which result in
increased compliance costs or additional operating restrictions, particularly if
those costs are not fully recoverable from our customers, could have a material
adverse effect on our results of operations.
Deregulation or restructuring in the electric utility industry may result in
increased competition and unrecovered costs that could adversely affect our
financial condition, results of operations and cash flows.
Increased competition resulting from deregulation or restructuring efforts could
have a significant adverse financial impact on our results of operations and
cash flows. Increased competition could also result in increased pressure to
lower rates. Retail competition and the unbundling of regulated energy and gas
service could have a significant adverse financial impact on us due to an
impairment of assets, a loss of retail customers, lower profit margins or
increased costs of capital. Because we have not previously operated in a
competitive retail environment, we cannot predict the extent and timing of entry
by additional competitors into the electric markets. Due to several factors,
however, there currently is little discussion of any movement toward
deregulation in Florida. We cannot predict when we will be subject to changes in
legislation or regulation, nor can we predict the impact of these changes on our
financial condition, results of operations or cash flows.
The uncertain outcome regarding the timing, creation and structure of regional
transmission organizations, or RTOs, may materially impact our results of
operations, cash flows or financial condition.
Congress, FERC, and the state utility regulators have paid significant attention
in recent years to transmission issues, including the possibility of regional
transmission organizations. While these deliberations have not yet resulted in
significant changes to our utilities' transmission operations, they cast
uncertainty over those operations, which constitute a material portion of our
assets.
For the last several years, the FERC has supported independent RTOs and has
indicated a belief that it has the authority to order transmission-owning
utilities to transfer operational control of their transmission assets to such
RTOs. Many state regulators, including most regulators in the Southeast, have
expressed skepticism over the potential benefits of RTOs and generally disagree
with the FERC's interpretation of its authority to mandate RTOs.
In addition, 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"). The
proposed rules set forth in the SMD NOPR would require, among other things, that
1) all transmission owning utilities transfer control of their transmission
facilities to an independent third party; 2) transmission service to bundled
retail customers be provided under the FERC- regulated transmission tariff,
rather than state-mandated terms and conditions; and 3) new terms and conditions
for transmission service be adopted nationwide, including new provisions for
pricing transmission in the event of transmission congestion; 4) new energy
markets be established for the buying and selling of electric energy; and 5)
load-serving entities (LSEs) be required to meet minimum criteria for generating
reserves. If adopted as proposed, the rules set forth in the SMD NOPR would
materially alter the manner in which transmission and generation services are
provided and paid for. Progress Energy, Inc. filed comments on the SMD NOPR in
November 2002 and supplemental comments in January 2003. The FERC has not yet
issued a final rule on SMD NOPR. Furthermore, the SMD NOPR presents several
uncertainties, including what percentage of our investments in GridFlorida will
be recovered, how the elimination of transmission charges, as proposed in the
SMD NOPR, will impact us, and what amount of capital expenditures will be
necessary to create a new wholesale market.
In response, PEF and other investor-owned utilities filed applications with the
FERC and the FPSC for approval of an RTO, currently named GridFlorida. The FERC
provisionally approved the structure and governance of GridFlorida. The FPSC's
most recent order in December 2003 ordered further state proceedings.
The actual structure of GridFlorida or any alternative combined transmission
structure, as well as the date it may become operational, depends upon the
resolution of all regulatory approvals and technical issues. Given the
regulatory uncertainty of the ultimate timing, structure and operations of
GridFlorida or an alternate combined transmission structure, we cannot predict
whether its creation or the creation of an alternate combined transmission
structure will have any material adverse effect on our future results of
operations, cash flows or financial condition.
Since weather conditions directly influence the demand of and cost of providing
electricity, our results of operations, financial condition and cash flows can
fluctuate and be negatively affected by changes in weather conditions and severe
weather.
93
Our results of operation, financial condition and cash flows may be affected by
changing weather conditions. Weather conditions in our service territories
directly influence the demand for electricity and affect the price of energy
commodities necessary to provide electricity to our customers.
Electric power demand is generally a seasonal business. In many parts of the
country, demand for power peaks during the hot summer months, with market prices
also peaking at that time. In other areas, power demand peaks during the winter.
As a result, our overall operating results in the future may fluctuate
substantially on a seasonal basis. The pattern of this fluctuation may change
depending on the nature and location of facilities we acquire and the terms of
power sale contracts into which we enter. In addition, we have historically sold
less power, and consequently earned less income, when weather conditions are
milder.
Furthermore, severe weather, such as hurricanes, tornadoes and severe thunder
storms, can be destructive, causing outages, downed power lines and property
damage and requiring us to incur additional and unexpected expenses and causing
us to lose generating revenues.
Our revenues, operating results and financial condition may fluctuate with the
economy and its corresponding impact on our commercial and industrial customers,
and may also fluctuate on a seasonal or quarterly basis.
Our business is impacted by fluctuations in the macroeconomy. For the year ended
December 31, 2003, commercial and industrial customers represented approximately
24% and 7% of our electric revenues, respectively. As a result, changes in the
macroeconomy can have negative impacts on our revenues. As our commercial and
industrial customers experience economic hardships, our revenues can be
negatively impacted.
Risks Related to Us and Our Business
Under a settlement agreement we entered into in 2002, we are required to reduce
our retail rates annually through 2005 and to operate under a revenue sharing
plan which provides for possible rate refunds to our retail customers. This
agreement could affect our profit margin if we do not control our costs.
In March 2002, we entered into a Stipulation and Settlement Agreement related to
retail rate matters. The agreement is generally effective from May 1, 2002
through December 31, 2005; provided, however, that if our base rate earnings
fall below a 10% return on equity, we may petition the FPSC to amend our base
rates. The agreement provided for a 9.25% rate reduction designed to result in a
reduction of our retail revenues from the sale of electricity by an annual
amount of $125 million. The agreement also provides that we will operate under a
revenue sharing incentive plan through 2005, and thereafter until terminated by
the FPSC, that establishes annual revenue caps and sharing thresholds.
There are inherent potential risks in the operation of nuclear facilities,
including environmental, health, regulatory, terrorism, and financial risks that
could result in fines or the shutdown of our nuclear unit, which may present
potential exposures in excess of our insurance coverage.
We own and operate one nuclear unit that represents approximately 838 megawatts,
or approximately 10%, of our generation capacity. Our nuclear facility is
subject to environmental, health and financial risks such as the ability to
dispose of spent nuclear fuel, the ability to maintain adequate capital reserves
for decommissioning, potential liabilities arising out of the operation of this
facility, and the costs of securing the facility against possible terrorist
attacks. We maintain a decommissioning trust and external insurance coverage to
minimize the financial exposure to these risks; however, it is possible that
damages could exceed the amount of our insurance coverage.
The NRC has broad authority under federal law to impose licensing and
safety-related requirements for the operation of nuclear generation facilities.
In the event of non-compliance, the NRC has the authority to impose fines or to
shut down our unit, or both, depending upon its assessment of the severity of
the situation, until compliance is achieved. Revised safety requirements
promulgated by the NRC could require us to make substantial capital expenditures
at our nuclear plant. In addition, although we have no reason to anticipate a
serious nuclear incident at our plant, if an incident did occur, it could
materially and adversely affect our results of operations or financial
condition. A major incident at a nuclear facility anywhere in the world could
cause the NRC to limit or prohibit the operation or licensing of any domestic
nuclear unit.
Our facility requires licenses that need to be renewed or extended in order to
continue operating. We do not anticipate any problems renewing these licenses.
However, as a result of potential terrorist threats and increased public
scrutiny of utilities, the licensing process could result in increased licensing
or compliance costs that are difficult or impossible to predict.
94
Our financial performance depends on the successful operation of our electric
generating facilities and our ability to deliver electricity to our customers.
Operating electric generating facilities involves many risks, including:
o operator error and breakdown or failure of equipment or processes;
o operating limitations that may be imposed by environmental or other
regulatory requirements;
o labor disputes;
o fuel supply interruptions; and
o catastrophic events such as fires, earthquakes, explosions, floods,
terrorist attacks or other similar occurrences.
A decrease or elimination of revenues generated by our electric generating
facilities or an increase in the cost of operating the facilities could have an
adverse effect on our business and results of operations.
Our business is dependent on our ability to successfully access capital markets.
Our inability to access capital may limit our ability to execute our business
plan, or pursue improvements and make acquisitions that we may otherwise rely on
for future growth.
We rely on access to both short-term money markets and long-term capital markets
as a significant source of liquidity for capital requirements not satisfied by
the cash flow from our operations. If we are not able to access capital at
competitive rates, our ability to implement our strategy will be adversely
affected. We believe that we will maintain sufficient access to these financial
markets based upon current credit ratings. However, certain market disruptions
or a downgrade of our credit rating may increase our cost of borrowing or
adversely affect our ability to access one or more financial markets. Such
disruptions could include:
o an economic downturn;
o the bankruptcy of an unrelated energy company;
o capital market conditions generally;
o market prices for electricity;
o terrorist attacks or threatened attacks on our facilities or those of
unrelated energy companies; or
o the overall health of the utility industry.
Restrictions on our ability to access financial markets may affect our ability
to execute our business plan as scheduled. An inability to access capital may
limit our ability to pursue improvements or acquisitions that we may otherwise
rely on for future growth.
Increases in our leverage could adversely affect our competitive position,
business planning and flexibility, financial condition, ability to service our
debt obligations and ability to access capital on favorable terms.
Our cash requirements arise primarily from the capital-intensive nature of our
business. In addition to operating cash flows, we rely heavily on our commercial
paper and long-term debt. At December 31, 2003, our commercial paper balance was
zero, our notes payable to affiliated companies balance was $363 million and our
long-term debt balances were approximately $2 billion (net of current portion,
which at December 31, 2003, was $68 million). In February 2003, we issued $650
million aggregate principal amount of our first mortgage bonds, the proceeds
from which were used to reduce, redeem, or retire our outstanding long- and
short-term, secured and unsecured, indebtedness. In November 2003, we issued
$300 million aggregate principal amount of our first mortgage bonds, the
proceeds from which were used to redeem outstanding long-term indebtedness.
We have two committed credit lines that support our commercial paper programs
totaling $400 million. At December 31, 2003, we had no outstanding borrowings
under these lines. If we are unable to extend or renew these credit lines on
favorable terms, or at all, we may experience a liquidity shortfall that could
have a material adverse impact on us and our financial condition. We also have
an uncommitted credit line for up to $100 million. At December 31, 2003, we had
no outstanding borrowings under this uncommitted line of credit. In addition,
under our shelf registration statement on file with the SEC, we may issue
secured and unsecured debt securities up to an additional $50 million. This
amount may be increased from time to time.
Our credit lines impose various limitations that could impact our liquidity. Our
credit facilities include defined maximum total debt to total capital ratios. At
December 31, 2003, the maximum and actual ratios, pursuant to the terms of the
credit facilities, were 65% and 51.5%, respectively. Indebtedness, as defined
under the credit facility agreements, includes certain letters of credit and
guarantees that are not recorded on our Balance Sheets. The covenants require
PEF's Earnings before interest, taxes, and depreciation and amortization to
interest expense ratio to be at least 3 to 1. For the year ended December 31,
2003, the ratio was 9.22 to 1 for PEF.
95
In the event our capital structure changes such that we approach the permitted
ratios, our access to capital and additional liquidity could decrease. A
limitation in our liquidity could have a material adverse impact on our business
strategy and our ongoing financing needs. Furthermore, our credit lines include
provisions that preclude us from borrowing additional funds in the event of a
material adverse change in our financial condition.
Our indebtedness also includes cross-default provisions which could
significantly impact our financial condition. Our credit lines include
cross-default provisions for defaults of indebtedness in excess of $10 million.
Our cross-default provisions only apply to defaults on our indebtedness, but not
defaults by our affiliates. In the event that a cross-default provision were
triggered, our lenders could accelerate payment of any outstanding debt. Any
such acceleration would cause a material adverse change in our financial
condition.
Changes in economic conditions could result in higher interest rates, which
would increase our interest expense on our floating rate debt and reduce funds
available to us for our current plans. Additionally, an increase in our leverage
could adversely affect us by:
o increasing the cost of future debt financing;
o making it more difficult for us to satisfy our existing financial
obligations;
o limiting our ability to obtain additional financing, if we need it, for
working capital, acquisitions, debt service requirements or other purposes;
o increasing our vulnerability to adverse economic and industry conditions;
o requiring us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which would reduce funds available to
us for operations, future business opportunities or other purposes;
o limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete;
o placing us at a competitive disadvantage compared to our competitors who
have less debt; and
o causing a downgrade in our credit ratings.
Any reduction in our credit ratings could increase our borrowing costs and limit
our access to additional capital, which could materially and adversely affect
our business, results of operations and financial condition.
We will seek to maintain a solid investment grade rating through prudent capital
management and financing structures. We cannot, however, assure you that our
current ratings will remain in effect for any given period of time or that our
ratings will not be lowered or withdrawn entirely by a rating agency if, in its
judgment, circumstances in the future so warrant. Any downgrade could increase
our borrowing costs and adversely affect our access to capital, which could
negatively impact our financial results. Further, we may be required to pay a
higher interest rate in future financings, and our potential pool of investors
and funding sources could decrease. Although we would have access to liquidity
under our committed and uncommitted credit lines, if our short-term rating were
to fall below "A-2" or "P-1," the current ratings assigned by S&P and Moody's,
respectively, it could significantly limit our access to the commercial paper
market. We note that the ratings from credit agencies are not recommendations to
buy, sell or hold our securities and that each rating should be evaluated
independently of any other rating.
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FLORIDA PROGRESS CORPORATION
Date: March 12, 2004 (Registrant)
By: /s/Robert B. McGehee
------------------------
Robert B. McGehee
President and
Chief Executive Officer
By: /s/Geoffrey Chatas
------------------------
Geoffrey Chatas
Executive Vice President and
Chief Financial Officer
By: /s/Robert H. Bazemore, Jr.
------------------------------
Robert H. Bazemore, Jr.
Controller
(Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
/s/ William Cavanaugh III Director March 12, 2004
- -------------------------
(William Cavanaugh III,
Chairman)
/s/ Edwin B. Borden Director March 12, 2004
- --------------------
(Edwin B. Borden)
/s/ James E. Bostic, Jr. Director March 12, 2004
- -------------------------
(James E. Bostic, Jr.)
/s/ David L. Burner Director March 12, 2004
- --------------------
(David L. Burner)
/s/ Charles W. Coker Director March 12, 2004
- ---------------------
(Charles W. Coker)
/s/ Richard L. Daugherty Director March 12, 2004
- -------------------------
(Richard L. Daugherty)
/s/ W.D. Frederick, Jr. Director March 12, 2004
- ------------------------
(W.D. Frederick, Jr.)
97
/s/ William O. McCoy Director March 12, 2004
- ---------------------
(William O. McCoy)
/s/ E. Marie McKee Director March 12, 2004
- -------------------
(E. Marie McKee)
/s/ John H. Mullin, III Director March 12, 2004
- ------------------------
(John H. Mullin, III)
/s/ Richard A. Nunis Director March 12, 2004
- ---------------------
(Richard A. Nunis)
/s/ Peter S. Rummell Director March 12, 2004
- --------------------
(Peter S. Rummell)
/s/ Carlos A. Saladrigas Director March 12, 2004
- -------------------------
(Carlos A. Saladrigas)
/s/ J. Tylee Wilson Director March 12, 2004
- --------------------
(J. Tylee Wilson)
/s/ Jean Giles Wittner Director March 12, 2004
- -----------------------
(Jean Giles Wittner)
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FLORIDA POWER CORPORATION
Date: March 12, 2004 (Registrant)
By: /s/ H. William Habermeyer, Jr.
------------------------------
H. William Habermeyer, Jr.
President and Chief Executive Officer
By: /s/Geoffrey Chatas
-----------------------
Geoffrey Chatas
Executive Vice President and
Chief Financial Officer
By: /s/Robert H. Bazemore, Jr.
------------------------------
Robert H. Bazemore, Jr.
Controller
(Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
/s/ William Cavanaugh III Director March 12, 2004
- --------------------------
(William Cavanaugh III,
Chairman)
/s/ Robert B. McGehee Director March 12, 2004
- ---------------------
(Robert B. McGehee)
/s/ William D. Johnson Director March 12, 2004
- ----------------------
(William D. Johnson)
/s/ Fred N. Day IV Director March 12, 2004
- ------------------
(Fred N. Day IV)
/s/ William S. Orser Director March 12, 2004
- ---------------------
(William S. Orser)
99
PROGRESS ENERGY FLORIDA, INC.
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS COMBINED AND RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Millions of Dollars)
Earnings, as defined:
Net income $ 297 $ 325 $ 311 $ 212 $ 267
Fixed charges, as below 100 111 117 130 126
Income taxes 147 163 183 151 151
- -----------------------------------------------------------------------------------------------------------------------
Total earnings, as defined $ 544 $ 599 $ 611 $ 493 $ 544
=======================================================================================================================
Fixed Charges, as defined:
Interest on long-term debt $ 101 $ 99 $ 100 $ 102 $ 106
Other interest (4) 10 14 26 18
Imputed interest factor in rentals-charged
principally to operating expenses 3 2 3 2 2
- -----------------------------------------------------------------------------------------------------------------------
Total fixed charges, as defined $ 100 $ 111 $ 117 $ 130 $ 126
=======================================================================================================================
Earnings Before Income Taxes $ 444 $ 488 $ 494 $ 363 $ 418
Ratio of Earnings Before Income Taxes to Net 1.49 1.50 1.59 1.71 1.57
Income
Preferred dividend factor:
Preferred dividends not deductible times
ratio of earnings before income taxes
to net income $ 3 $ 3 $ 3 $ 3 $ 3
Fixed charges, as above 100 111 117 130 126
- -----------------------------------------------------------------------------------------------------------------------
Total fixed charges and preferred $ 103 $ 114 $ 120 $ 133 $ 129
dividends combined
=======================================================================================================================
Ratio of Earnings to Fixed Charges 5.44 5.40 5.22 3.79 4.32
Ratio of Earnings to Fixed Charges and
Preferred Dividends Combined 5.28 5.25 5.09 3.71 4.22
100
Exhibit 23.(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-53939 on Form S-8, Registration Statement No. 33-54972 on Form S-8,
Registration Statement No. 333-02169 on Form S-8, Registration Statement No.
333-19037 on Form S-8, Registration Statement No. 333-75373 on Form S-8,
Registration Statement No. 333-39232 on Form S-3, Registration Statement No.
33-51573 on Form S-3, Registration Statement No. 33-47623 on Form S-8,
Registration Statement No. 2-93111 on Form S-3, Registration Statement No.
333-94143 on Form S-8, Registration Statement No. 333-66161 on Form S-8, and
Registration Statement No. 333-07853 on Form S-3 of Florida Progress Corporation
of our reports dated February 20, 2004, (which express an unqualified opinion
and include an explanatory paragraph concerning the adoption of new accounting
principles in 2003) appearing in this Annual Report on Form 10-K of Florida
Progress Corporation for the year ended December 31, 2003.
We also consent to the incorporation by reference in Post-Effective Amendment 1
to Registration Statement No. 33-55273 on Form S-3, Post-Effective Amendment 1
to Registration Statement No. 333-29897 on Form S-3, Post-Effective Amendment 1
to Registration Statement No. 333-62210 on Form S-3, and Registration Statement
No. 333-63204 on Form S-3 of Florida Power Corporation d/b/a Progress Energy
Florida, Inc. (PEF) of our reports dated February 20, 2004, (which express an
unqualified opinion and include an explanatory paragraph concerning the adoption
of new accounting principles in 2003) appearing in this Annual Report on Form
10-K of PEF for the year ended December 31, 2003.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
March 12, 2004
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