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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
------- -------
Exact name of registrants as specified in their charters, state
Commission of incorporation, address of principal executive offices, and I.R.S. Employer
File Number telephone number Identification Number
1-8349 Florida Progress Corporation 59-2147112
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
State of Incorporation: Florida
1-3274 Florida Power Corporation 59-0247770
d/b/a Progress Energy Florida, Inc.
100 Central Avenue
St. Petersburg, Florida 33701
Telephone (727) 820-5151
State of Incorporation: Florida
NONE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No X
This combined Form 10-Q is filed separately by two registrants: Florida Progress
Corporation and Florida Power Corporation d/b/a Progress Energy Florida (PEF).
Information contained herein relating to either individual registrant is filed
by such registrant solely on its own behalf. Each registrant makes no
representation as to information relating exclusively to the other registrant.
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date. As of April 30, 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 (all of which were held
by Progress Energy, Inc.)
PEF Common Stock, without par value 100 (all of which were held by
Florida Progress Corporation)
Florida Progress Corporation and Florida Power Corporation meet the conditions
set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore
filing this form with the reduced disclosure format.
1
FLORIDA PROGRESS CORPORATION AND PROGRESS ENERGY FLORIDA, INC.
FORM 10-Q - For the Quarter Ended March 31, 2004
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Florida Progress Corporation
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
Statements of Income
Balance Sheets
Statements of Cash Flows
Notes to Financial Statements
Florida Progress Corporation and Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement
Bcf Billion cubic feet
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company or Florida Florida Progress Corporation
Progress
CR3 Progress Energy Florida Inc.'s nuclear generating plant, Crystal River
Unit No. 3
DOE United States Department of Energy
EITF Emerging Issues Task Force
EPA United States Environmental Protection Agency
FDEP Florida Department of Environmental Protection
Federal Circuit United States Circuit Court of Appeals
FERC Federal Energy Regulatory Commission
FIN No. 46 FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51"
Florida Progress or FPC Florida Progress Corporation
FPSC Florida Public Service Commission
MACT Maximum Available Control Technology
MGP Manufactured Gas Plant
NOx Nitrogen oxide
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
Progress Capital Progress Capital Holdings, Inc.
Progress Energy or the Parent Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation
Progress Rail Progress Rail Services Corporation
PTC LLC Progress Telecom LLC
PVI Progress Ventures, Inc., formerly referred to as Energy Ventures
PUHCA Public Utility Holding Company Act of 1935, as amended
PWR Pressurized water reactor
RAFT Railcar Asset Financing Trust
Rail Services or Rail Rail Services business segment
RTO Regional Transmission Organization
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Code
Service Company Progress Energy Service Company, LLC
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. 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. 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"
3
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"
SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
Discrimination through Open Access Transmission and Standard Market Design
SO2 Sulfur dioxide
the Trust FPC Capital I trust
4
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This combined report contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The matters discussed throughout this combined Form 10-Q that are not
historical facts are forward-looking and, accordingly, involve estimates,
projections, goals, forecasts, assumptions, risks and uncertainties that could
cause actual results or outcomes to differ materially from those expressed in
the forward-looking statements.
In addition, forward-looking statements are discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including, but not limited to, statements under the sub-heading "Liquidity and
Capital Resources" concerning operating cash flows.
Any forward-looking statement speaks only as of the date on which such statement
is made, and neither Florida Progress (the Company) nor Florida Power
Corporation doing business as Progress Energy Florida, Inc. (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; 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; recurring seasonal fluctuations in demand for
electricity; fluctuations in the price of energy commodities and purchased
power; successful maintenance and operation of PEF's energy commodities and
purchased power; economic fluctuations and the corresponding impact on PEF's
commercial and industrial customers; the inherent risks associated with 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 availability and use of Internal Revenue
Code Section 29 (Section 29) tax credits by synthetic fuel producers and the
Company's continued ability to use Section 29 tax credits related to its coal
and synthetic fuels 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 risks 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 the Company and PEF. Many, but not all of the factors that may impact
actual results of the Company and PEF are discussed in the Risk Factors section
of PEF's annual report on Form 10-K for the year ended December 31, 2003 which
were filed with the SEC on March 12, 2004. You should carefully read these SEC
reports. New factors emerge from time to time, and it is not possible for
management to predict all such factors, nor can it assess the effect of each
such factor on Florida Progress and PEF.
5
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Florida Progress Corporation
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2004
UNAUDITED CONSOLIDATED STATEMENTS of INCOME
Three Months Ended
March 31,
----------------------
(in millions) 2004 2003
- ------------------------------------------------------------------------------------
Operating Revenues
Utility $ 784 $ 728
Diversified business 510 487
- ------------------------------------------------------------------------------------
Total Operating Revenues 1,294 1,215
- ------------------------------------------------------------------------------------
Operating Expenses
Utility
Fuel used in electric generation 269 185
Purchased power 121 130
Operation and maintenance 160 141
Depreciation and amortization 69 79
Taxes other than on income 62 58
Diversified business
Cost of sales 454 438
Depreciation and amortization 25 21
Other 33 37
- ------------------------------------------------------------------------------------
Total Operating Expenses 1,193 1,089
- ------------------------------------------------------------------------------------
Operating Income 101 126
- ------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 1 1
Other, net (5) (6)
- ------------------------------------------------------------------------------------
Total Other Expense (4) (5)
- ------------------------------------------------------------------------------------
Interest Charges
Interest charges 45 47
Allowance for borrowed funds used during construction (1) (2)
- ------------------------------------------------------------------------------------
Total Interest Charges, Net 44 45
- ------------------------------------------------------------------------------------
Income before Income Taxes 53 76
Income Tax Benefit (2) (16)
- ------------------------------------------------------------------------------------
Net Income $ 55 $ 92
- ------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
6
Florida Progress Corporation
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions) March 31, December 31,
Assets 2004 2003
- ----------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 8,183 $ 8,150
Accumulated depreciation (2,866) (2,845)
- ----------------------------------------------------------------------------------------------------------
Utility plant in service, net 5,317 5,305
Held for future use 8 8
Construction work in progress 379 328
Nuclear fuel, net of amortization 63 69
- ----------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 5,767 5,710
- ----------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 23 27
Accounts receivable 507 530
Unbilled accounts receivable 53 59
Receivables from affiliated companies 31 27
Inventory 433 422
Deferred fuel cost 155 204
Assets held for sale 6 75
Prepayments and other current assets 124 137
- ----------------------------------------------------------------------------------------------------------
Total Current Assets 1,332 1,481
- ----------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 123 126
Nuclear decommissioning trust funds 444 433
Diversified business property, net 869 841
Miscellaneous other property and investments 92 90
Prepaid pension cost 225 223
Deferred tax asset 240 189
Other assets and deferred debits 126 132
- ----------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 2,119 2,034
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 9,218 $ 9,225
- ----------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value $ 1,701 $ 1,699
Retained earnings 859 842
Accumulated other comprehensive loss (26) (17)
- ----------------------------------------------------------------------------------------------------------
Total Common Stock Equity 2,534 2,524
- ----------------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiaries - Not Subject to Mandatory Redemption 34 34
Long-Term Debt, Affiliate 809 809
Long-Term Debt, Net 2,047 2,045
- ----------------------------------------------------------------------------------------------------------
Total Capitalization 5,424 5,412
- ----------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 43 68
Accounts payable 387 452
Payables to affiliated companies 99 68
Notes payable to affiliated companies 380 636
Short-term obligations 242 -
Customer deposits 128 127
Other current liabilities 321 295
- ----------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,600 1,646
- ----------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes and investment tax credits 83 85
Regulatory liabilities 1,364 1,348
Asset retirement obligations 344 339
Other liabilities and deferred credits 403 395
- ----------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,194 2,167
- ----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- ----------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 9,218 $ 9,225
- ----------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
7
Florida Progress Corporation
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
(in millions) 2004 2003
- -------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 55 $ 92
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 100 105
Deferred income taxes and investment tax credits, net (32) 19
Deferred fuel cost (credit) 49 (54)
Cash provided/(used) by changes in operating assets and liabilities:
Accounts receivable 23 (25)
Inventories (12) 15
Prepayments and other current assets (24) (17)
Accounts payable (32) 40
Other current liabilities 14 (46)
Other 21 14
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 162 143
- --------------------------------------------------------------------------------------------------------
Investing Activities
Utility property additions (124) (141)
Diversified business property additions (47) (165)
Nuclear fuel additions - (38)
Proceeds from sale of assets 83 -
Other (4) (1)
- --------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (92) (345)
- --------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt - 639
Net increase (decrease) in short-term obligations 242 (81)
Retirement of long-term debt (25) (226)
Net change in intercompany notes (257) (159)
Equity contributions from parent 2 133
Dividends paid to parent (39) (123)
Other 3 -
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (74) 183
- --------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (4) (19)
Cash and Cash Equivalents at Beginning of Period 27 34
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 23 $ 15
- --------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 61 $ 58
income taxes (net of refunds) $ (3) $ 1
- --------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
8
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
INTERIM FINANCIAL STATEMENTS
March 31, 2004
UNAUDITED STATEMENTS of INCOME
Three Months Ended
March 31,
---------------------------------
(in millions) 2004 2003
- -----------------------------------------------------------------------------------------------------
Operating Revenues $ 784 $ 728
Operating Expenses
Fuel used in electric generation 269 185
Purchased power 121 130
Operation and maintenance 160 141
Depreciation and amortization 69 79
Taxes other than on income 62 58
- -----------------------------------------------------------------------------------------------------
Total Operating Expenses 681 593
- -----------------------------------------------------------------------------------------------------
Operating Income 103 135
- -----------------------------------------------------------------------------------------------------
Other Income (Expense)
Other, net (1) -
- -----------------------------------------------------------------------------------------------------
Total Other Expense (1) -
- -----------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 31 29
Allowance for borrowed funds used during construction (1) (2)
- -----------------------------------------------------------------------------------------------------
Total Interest Charges, Net 30 27
- -----------------------------------------------------------------------------------------------------
Income before Income Taxes 72 108
Income Tax Expense 22 37
- -----------------------------------------------------------------------------------------------------
Net Income 50 71
Preferred Stock Dividend Requirement 1 -
- -----------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 49 $ 71
- -----------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
9
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.
UNAUDITED BALANCE SHEETS
(in millions) March 31, December 31,
Assets 2004 2003
- ------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 8,183 $ 8,150
Accumulated depreciation (2,866) (2,845)
- ------------------------------------------------------------------------------------------------
Utility plant in service, net 5,317 5,305
Held for future use 8 8
Construction work in progress 379 328
Nuclear fuel, net of amortization 63 69
- ------------------------------------------------------------------------------------------------
Total Utility Plant, Net 5,767 5,710
- ------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 15 10
Accounts receivable 158 191
Unbilled accounts receivable 53 59
Receivables from affiliated companies 13 7
Inventory 249 230
Deferred fuel cost 155 204
Prepayments and other current assets 12 45
- ------------------------------------------------------------------------------------------------
Total Current Assets 655 746
- ------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 123 126
Nuclear decommissioning trust funds 444 433
Miscellaneous other property and investments 43 40
Prepaid pension cost 222 220
Other assets and deferred debits 30 31
- ------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 862 850
- ------------------------------------------------------------------------------------------------
Total Assets $ 7,284 $ 7,306
- ------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value $ 1,081 $ 1,081
Retained earnings 1,072 1,062
Accumulated other comprehensive loss (4) (4)
- ------------------------------------------------------------------------------------------------
Total Common Stock Equity 2,149 2,139
- ------------------------------------------------------------------------------------------------
Preferred Stock - Not Subject to Mandatory Redemption 34 34
Long-Term Debt, Net 1,904 1,904
- ------------------------------------------------------------------------------------------------
Total Capitalization 4,087 4,077
- ------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 43 43
Accounts payable 151 161
Payables to affiliated companies 102 75
Notes payable to affiliated companies 84 363
Short-term obligations 242 -
Customer deposits 129 127
Other current liabilities 110 147
- ------------------------------------------------------------------------------------------------
Total Current Liabilities 861 916
- ------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 360 363
Accumulated deferred investment tax credits 40 41
Regulatory liabilities 1,364 1,348
Asset retirement obligations 324 319
Other liabilities and deferred credits 248 242
- ------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,336 2,313
- ------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- ------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 7,284 $ 7,306
- ------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
10
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.
UNAUDITED STATEMENTS of CASH FLOWS
Three Months Ended March 31,
(in millions) 2004 2003
- ------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 50 $ 71
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 75 84
Deferred income taxes and investment tax credits, net 31 38
Deferred fuel cost (credit) 49 (54)
Cash provided/(used) by changes in operating assets and liabilities:
Accounts receivable 33 18
Inventories (18) (4)
Prepayments and other current assets (4) 1
Accounts payable 17 37
Other current liabilities (36) (10)
Other 8 3
- ------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 205 184
- ------------------------------------------------------------------------------------------------------
Investing Activities
Property additions (124) (141)
Nuclear fuel additions - (38)
Other - 1
- ------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (124) (178)
- ------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt - 639
Net increase (decrease) in short-term obligations 242 (81)
Retirement of long-term debt - (226)
Net change in intercompany notes (279) (218)
Dividends paid to parent (39) (123)
Other - (1)
- ------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (76) (10)
- ------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 5 (4)
- ------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period 10 16
- ------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 15 $ 12
- ------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 45 $ 36
income taxes (net of refunds) $ 3 $ 10
- ------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
11
Florida Progress Corporation and Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
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
Progress Energy, Inc. (Progress Energy or the Parent). Florida Progress'
two primary subsidiaries are Florida Power Corporation d/b/a Progress
Energy Florida, Inc. (PEF) and Progress Fuels Corporation (Progress Fuels).
PEF is a regulated public utility engaged in the generation, purchase,
transmission, distribution and sale of electricity primarily in portions of
Florida. PEF is regulated by the Florida Public Service Commission (FPSC),
the Federal Energy Regulatory Commission (FERC) and the Nuclear Regulatory
Commission (NRC). Progress Fuels is a diversified non-utility energy
company, whose principal business segments are Energy and Related Services
and Rail Services. Throughout the report, the terms utility and regulated
will be used to discuss items pertaining to PEF. Diversified business and
nonregulated will be used to discuss the subsidiaries of Florida Progress
excluding PEF.
B. Basis of Presentation
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. Because the
accompanying consolidated interim financial statements do not include all
of the information and footnotes required by GAAP, they should be read in
conjunction with the audited financial statements and notes thereto
included in Florida Progress' and PEF's Form 10-K for the year ended
December 31, 2003.
In accordance with the provisions of Accounting Principles Board Opinion
(APB) No. 28, "Interim Financial Reporting," GAAP requires companies to
apply a levelized effective tax rate to interim periods that is consistent
with the estimated annual effective tax rate. The intra-period tax
allocation, which will have no impact on total year net income, maintains
an effective tax rate consistent with the estimated annual effective tax
rate. For the three months ended March 31, 2004 and 2003, income tax
expense was increased by $33 million and decreased by $5 million,
respectively. The income tax provisions for the Company differ from amounts
computed by applying the federal statutory tax rate to income before income
taxes, primarily due to the recognition of synthetic fuel tax credits.
The amounts included in the consolidated interim financial statements are
unaudited but, in the opinion of management, reflect all normal recurring
adjustments necessary to fairly present Florida Progress' and PEF's
financial position and results of operations for the interim periods. Due
to seasonal weather variations and the timing of outages of electric
generating units, especially the nuclear-fueled unit, the results of
operations for interim periods are not necessarily indicative of amounts
expected for the entire year or future periods.
In preparing financial statements that conform with GAAP, management must
make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and amounts of revenues and expenses
reflected during the reporting period. Actual results could differ from
those estimates. Certain reclassifications for 2003 have been made to
conform to the 2004 presentation.
The results of operations of the Rail Services segment are reported one
month in arrears.
12
C. Subsidiary Reporting Period Change
In the fourth quarter of 2003, the Company ceased recording portions of
Fuels' segment operations, primarily synthetic fuel operations, one month
in arrears. As a result, earnings for the year ended December 31, 2003 as
reported in the Company's Form 10-K, included 13 months of results for
these operations. The 2003 quarterly results for periods ended March 31,
June 30 and September 30 have been restated for the above-mentioned
reporting period change. This resulted in four months of earnings in the
first quarter. The reclassification of earnings between quarters resulted
in an $11 million increase in net income from $81 million to $92 million
for the first quarter of 2003.
D. Stock-Based Compensation
The Company measures compensation expense for stock options as the
difference between the market price of its common stock and the exercise
price of the option at the grant date. The exercise price at which options
are granted by the Company equals the market price at the grant date, and
accordingly, no compensation expense has been recognized for stock option
grants. For purposes of the pro forma disclosures required by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123" (SFAS No. 148), the estimated fair
value of the Company's stock options is amortized to expense over the
options' vesting period. The following table illustrates the effect on net
income and earnings per share if the fair value method had been applied to
all outstanding and unvested awards in each period:
Three Months Ended
(in millions) March 31,
-------------------------------
FLORIDA PROGRESS CORPORATION 2004 2003
-------------- ---------------
Net Income, as reported $ 55 $92
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 1 1
-------------- ---------------
Pro forma net income $ 54 $91
============== ===============
Three Months Ended
(in millions) March 31,
-------------------------------
PROGRESS ENERGY FLORIDA, INC. 2004 2003
-------------- ---------------
Earnings for Common Stock, as reported $ 49 $71
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 1 1
-------------- ---------------
Pro forma earnings for common stock $ 48 $70
============== ===============
2. IMPACT OF NEW ACCOUNTING STANDARDS
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 or deconsolidated. FIN No. 46 requires an enterprise to
consolidate a variable interest entity when the enterprise (a) absorbs a
majority of the variable 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 and the first quarter of 2004, the Company did not participate
in the creation of, or obtain a significant 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 was effective for all variable interest entities as of March 31, 2004.
The Company adopted FIN No. 46 for special-purpose entities as of December
31, 2003, and deconsolidated the FPC Capital I trust (the Trust) as of that
date. Upon the adoption of FIN No. 46R as of March 31, 2004, no other
variable interest entities were required to be deconsolidated.
The Company has interests in several variable interest entities created
before January 31, 2003, for which the Company is not the primary
beneficiary. These arrangements include investments in approximately six
limited partnerships, limited liability corporations and venture capital
funds. The aggregate maximum loss exposure at March 31, 2004, that the
Company could be required to record in its income statement as a result of
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.
13
3. RAILCAR LTD. DIVESTITURE
In December 2002, the Progress Energy Board of Directors adopted a
resolution approving the sale of Railcar Ltd., a subsidiary included in the
Rail Services segment. In March 2003, the Company signed a letter of intent
to sell the majority of Railcar Ltd. assets to The Andersons, Inc. and the
transaction closed in February 2004. Proceeds from the sale were
approximately $82 million before transaction costs and taxes of
approximately $13 million. The assets of Railcar Ltd. were grouped as
assets held for sale and are included in other current assets on the
Consolidated Balance Sheets at December 31, 2003 and March 31, 2004. The
assets were recorded at approximately $6 million and $75 million at March
31, 2004 and December 31, 2003, respectively, which reflects the Company's
estimates of the fair value expected to be realized from the sale of these
assets less costs to sell. The primary component of assets held for sale at
December 31, 2003 was property and equipment of $74 million.
4. REGULATORY MATTERS
A. Retail Rate Matters
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 April
2003. 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
would 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.
On April 29, 2004, PEF, the Office of Public Counsel and the Florida
Industrial Power Users Group executed a Stipulation and Settlement that,
upon approval by the FPSC, will resolve the issue currently pending before
the FPSC regarding the costs PEF will be allowed to recover through its
Fuel and Purchased Power Cost Recovery clause in 2004 and beyond for
waterborne coal deliveries by the Company's affiliated coal supplier,
Progress Fuels Corporation. The settlement sets fixed per ton prices based
on point of origin for all waterborne coal deliveries in 2004, and
establishes a market-based pricing methodology for determining recoverable
waterborne coal transportation costs through a competitive solicitation
process or market price proxies beginning in 2005 and thereafter. The
settlement will reduce the amount that PEF will charge to the Fuel and
Purchased Power Cost Recovery clause for waterborne transportation by
approximately $13 million beginning in 2004. Also, on April 29, 2004, the
parties filed a joint request with the FPSC for approval of the Stipulation
and Settlement, which the FPSC is expected to act upon prior to the
commencement of a hearing on the waterborne transportation issues scheduled
for June 10, 2004.
B. Regional Transmission Organizations
In 2000, the FERC issued Order No. 2000 on Regional Transmission
Organizations (RTOs), which set minimum characteristics and functions that
RTOs must meet, including independent transmission service. 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. In
December 2003, the FPSC issued an order requiring further state
proceedings. The Company cannot predict the outcome of these matters or the
effect that they may have on the GridFlorida proceedings currently ongoing
before the FERC. It is unknown what impact the future proceedings will have
on the Company's earnings, revenues or prices.
PEF has recorded $4 million related to startup costs for GridFlorida at
March 31, 2004. PEF expects to recover these startup costs in conjunction
with the GridFlorida original structure or in conjunction with any
alternate combined transmission structure that emerges.
14
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company completed the annual goodwill impairment test in accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets," for the Energy
and Related Services 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.
The changes in the carrying amount of goodwill for the quarter ended March
31, 2004, by reportable segment, are as follows:
Energy and
Related
(in millions) Services Other Total
--------------------------------
Balance as of January 1, 2003 $ 11 $ - $ 11
Divestitures (1) - (1)
Acquisition - 7 7
--------------------------------
Balance as of December 31, 2003 $ 10 $ 7 $ 17
Purchase price adjustment - 3 3
--------------------------------
Balance as of March 31, 2004 $ 10 $ 10 $ 20
================================
In December 2003, $7 million in goodwill was acquired as part of the
Progress Telecommunications Corporation business combination and is in the
Other segment. The $3 million purchase price adjustment during the first
quarter of 2004, resulted from changes in the estimated restructuring costs
related to the partial acquisition of EPIK in December 2003.
The Company has $9 million of net intangible assets at March 31, 2004 and
December 31, 2003. All of the Company's intangibles are subject to
amortization. The Company's intangibles are primarily acquired customer
contracts that are amortized over their respective lives. Amortization
expense recorded on intangible assets for the three months ended March 31,
2004 and 2003, and estimated annual amortization expense for intangible
assets for 2004 through 2008 are not material to the results of operations.
PEF has no goodwill or significant intangible assets at March 31, 2004 or
December 31, 2003.
6. COMPREHENSIVE INCOME
Comprehensive income for Florida Progress for the three months ended March
31, 2004 and 2003 was $46 million and $91 million, respectively.
Comprehensive income for PEF for the three months ended March 31, 2004 and
2003 was $50 million and $71 million, respectively. Items of other
comprehensive income consisted primarily of changes in fair value of
derivatives used to hedge cash flows related to interest on long-term debt
and gas sales, and to foreign currency translation adjustments.
7. FINANCING ACTIVITIES
On February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25
million 6.48% medium term notes with excess cash.
8. 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 components of the
net periodic benefit cost for the three months ended March 31 are:
15
Other Postretirement
Pension Benefits Benefits
------------------- --------------------
(in millions) 2004 2003 2004 2003
------------------- --------------------
Service cost $ 5 $ 5 $ 1 $ 1
Interest cost 12 11 4 4
Expected return on plan assets (18) (15) - -
Net amortization 1 - 1 1
------------------- --------------------
Net cost recognized by Florida Progress $ - $ 1 $ 6 $ 6
------------------- --------------------
Net cost/(benefit) recognized by PEF $ (1) $ - $ 6 $ 6
=================== =================---
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. In accordance with
guidance issued by the FASB in FASB Staff Position FAS 106-1, the Company
has elected to defer accounting for the effects of the Act due to
uncertainties regarding the effects of the implementation of the Act and
the accounting for certain provisions of the Act. Therefore, OPEB
information presented in the financial statements does not reflect the
effects of the Act. 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.
9. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
Progress Energy and its subsidiaries, including the Company and PEF, are
exposed to various risks related to changes in market conditions. The
Company has a risk management committee that 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 under its risk management policy, may use a variety of
instruments to manage exposure to fluctuations in commodity prices and
interest rates.
The Company uses interest rate derivative instruments to adjust the fixed
and variable rate debt components of its debt portfolio and to hedge
interest rates with regard to future fixed rate debt issuances.
Progress Fuels Corporation, through an affiliate, periodically enters into
derivative instruments to hedge its exposure to price fluctuations on
natural gas sales. As of March 31, 2004, Progress Fuels Corporation has
executed cash flow hedges of natural gas sales through December 2005. These
instruments did not have a material impact on the Company's consolidated
financial position or results of operations.
10. 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 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, providing rail and track material, and
scrap metal recycling. The Other category consists primarily of PTC LLC,
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. In April 2004, PEF
executed a Stipulation and Settlement agreement with the Office of Public
Counsel and the Florida Industrial Power Users Group which amends the
transportation rate. Approval for this agreement is still pending from the
FPSC. See discussion at Note 4A. 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.
16
The following summarizes the revenues and segment profits or losses for the
reportable business segments. The combined segment profits and losses
represents Florida Progress' total income.
Energy and
(in millions) PEF Related Rail Other Consolidated
Services
-----------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2004:
Revenues $ 784 $ 255 $ 240 $ 15 $ 1,294
Intersegment revenues - 82 - (82) -
Total revenues 784 337 240 (67) 1,294
Segment profit $ 49 $ 38 $ 6 $ (38) $ 55
===========================================================================================================
Energy and
PEF Related Rail Other Consolidated
Services
-----------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2003:
Revenues $ 728 $ 302 $ 178 $ 7 $ 1,215
Intersegment revenues - 82 - (82) -
Total revenues 728 384 178 (75) 1,215
Segment profit (loss) $ 71 $ 25 $ (3) $ (1) $ 92
===========================================================================================================
11. OTHER INCOME AND OTHER EXPENSE
Other income and expense includes interest income and other income and
expense items as discussed below. The components of other, net as shown on
the accompanying Consolidated Statements of Income for three ended March
31, 2004 and 2003, are as follows:
Three Months Ended
(in millions) March 31,
----------------------------
2004 2003
------------ ------------
Other income
Net financial trading gain $ - $ 1
Nonregulated energy and delivery services income 4 3
AFUDC equity 1 1
Other - 1
------------ ------------
Total other income - PEF $ 5 $ 6
Other income - Florida Progress 1 -
------------ ------------
Total other income - PEF and Florida Progress $ 6 $ 6
------------ ------------
Other expense
Nonregulated energy and delivery services expenses $ 2 $ 2
Donations 4 2
Other - 2
------------ ------------
Total other expense - PEF $ 6 $ 6
Loss from equity investments 4 4
Other expense - Florida Progress 1 2
------------ ------------
Total other expense - PEF and Florida Progress $ 11 $ 12
------------ ------------
Other, net $ (5) $ (6)
============ ============
Nonregulated energy and delivery services include power protection services
and mass market programs such as surge protection, appliance services and
area light sales, and delivery, transmission and substation work for other
utilities.
12. COMMITMENTS AND CONTINGENCIES
Contingencies and significant changes to the commitments discussed in Note
19 of the Company's 2003 Annual Report on Form 10-K are described below.
A. Guarantees
As a part of normal business, Florida Progress and certain subsidiaries
including PEF enter into various agreements providing financial or
performance 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
17
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 March 31, 2004, management
does not believe conditions are likely for significant performance under
these agreements.
Guarantees at March 31, 2004, 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 10
--------------
Total $ 364
==============
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 March 31, 2004, 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 $31
million. Included in the $31 million are $10 million of guarantees in
support of synthetic fuel operations at a third party plant. 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 March 31, 2004, the Trust
had outstanding 12 million shares of the securities with a liquidation
value of $300 million.
Guarantees Issued by Progress Energy
Progress Energy has issued approximately $47 million of guarantees on
behalf of Progress Fuels and its subsidiaries for obligations under coal
brokering operations.
B. Insurance
PEF is insured against public liability for a nuclear incident up to
$10,760 million per occurrence. Under the current provisions of the Price
Anderson Act, which limits liability for accidents at nuclear power plants,
PEF, as owner of a nuclear unit, can be assessed a portion of any
third-party liability claims arising from an accident at any commercial
nuclear power plant in the United States. In the event that public
liability claims from an insured nuclear incident exceed $300 million
(currently available through commercial insurers), each company would be
subject to 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.
18
C. Claims and Uncertainties
The Company is subject to federal, state and local regulations addressing
hazardous and solid waste management, air and water quality and other
environmental matters.
Hazardous and Solid Waste Management
Various organic materials associated with the production of manufactured
gas, generally referred to as coal tar, are regulated under federal and
state laws. The principal regulatory agency that is responsible for a
specific former manufactured gas plant (MGP) site depends largely upon the
state in which the site is located. 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 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.
PEF At March 31, 2004, PEF has accrued $20 million for probable and
estimable costs related to various environmental sites. Of this accrual,
$10 million is for costs associated with the remediation of distribution
transformers which are more fully discussed below. The remaining $10
million is related to two former MGP sites and other sites associated with
PEF that have required or are anticipated to require investigation and/or
remediation costs. PEF 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). By December 2003,
PEF accrued an additional $9 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.
In addition, PEF received insurance proceeds of approximately $3 million to
address costs associated with environmental liabilities related to its
involvement with some MGP and other sites. All eligible expenses related to
these sites are included in the amount accrued above and charged against a
fund containing these proceeds.
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 March 31, 2004 and has accrued such amount.
The previous accrual of $10 million was reduced in 2003 based on a change
in estimate. This accrual has been determined on an undiscounted basis.
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.
Certain historical sites exist that are being addressed voluntarily by
Progress Fuels and FPC. An immaterial accrual has been established to
address investigation expenses related to these sites. The Company cannot
determine the total costs that may be incurred in connection with these
sites. The Company cannot predict the outcome of this matter.
19
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 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 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.
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,
alternative control plans that would limit mercury emissions from
coal-fired power plants. The rule is expected to become final in March
2005. 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 March 2005. 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 NOx, SO2 and particulate emissions from
certain coal, natural gas and oil-fired generating units owned or operated
by investor-owned electric utilities, including PEF. The NOx and SO2
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 legislature took no action on
this matter.
20
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
published 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 coal-fueled electric generating plant. 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
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, which
21
according to the award decreases over time. In September 2003, Winter Park
voters passed a referendum that would authorize the City to issue bonds of
up to approximately $50 million to acquire PEF's electric distribution
system. While the City has not yet definitively decided whether it will
acquire the system, on April 26, 2004, the City Commission voted to enter
into a hedge agreement to lock into interest rates for the acquisition of
the system. The City has sought and received wholesale power supply bids
and has indicated that it will seek 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.
In 1995, the DOE issued a final interpretation that it did not have an
unconditional obligation to take spent nuclear fuel by January 31, 1998. In
Indiana & Michigan Power v. DOE, the Court of Appeals vacated the DOE's
final interpretation and ruled that the DOE had an unconditional obligation
to begin taking spent nuclear fuel. The Court did not specify a remedy
because the DOE was not yet in default.
After the DOE failed to comply with the decision in Indiana & Michigan
Power v. DOE, a group of utilities petitioned the Court of Appeals in
Northern States Power (NSP) v. DOE, seeking an order requiring the DOE to
begin taking spent nuclear fuel by January 31, 1998. The DOE took the
position that its delay was unavoidable, and the DOE was excused from
performance under the terms and conditions of the contract. The Court of
Appeals 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.
22
On January 14, 2004, PEF filed a complaint with the DOE claiming that the
DOE breached the Standard Contract for Disposal of Spent Nuclear Fuel by
failing to accept spent nuclear fuel from various Progress Energy
facilities on or before January 31, 1998. Damages due to DOE's breach will
likely exceed $100 million. Similar suits have been initiated by over two
dozen other utilities.
In July 2002, Congress passed an override resolution to Nevada's veto of
DOE's proposal to locate a permanent underground nuclear waste storage
facility at Yucca Mountain, Nevada. DOE plans to submit a license
application for the Yucca Mountain facility by the end of 2004. 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.
PEF's nuclear unit, Crystal River Unit No. 3, (CR3) has sufficient storage
capacity in place for fuel consumed through the end of the expiration of
the current license in 2016. PEF will seek renewal of the CR3 operating
license and if approved, additional dry storage may be necessary.
3. 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 1998,
Calgon filed a lawsuit against Florida Progress and the other selling
shareholder and amended it in April 1998, alleging misstatement of AST's
1996 revenues, assets and liabilities, seeking damages and granting Calgon
the right to rescind the sale. The lawsuit also accused the sellers of
failing to disclose flaws in AST's manufacturing process and a lack of
quality control. Florida Progress believes that the aggregate total of all
legitimate warranty claims by customers of AST for which it is probable
that Florida Progress will be responsible for under the Stock Purchase
Agreement with Calgon is approximately $3 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 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.
4. Synthetic Fuel Tax Credits
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 Code (Code).
The production and sale of the synthetic fuel from these facilities
qualifies for tax credits under Section 29 of the Code (Section 29) if
certain requirements are satisfied, including a requirement that the
synthetic fuel differs significantly in chemical composition from the coal
used to produce such synthetic fuel and that the fuel was produced from a
facility that was placed in service before July 1, 1998. 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 audit, 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.
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.
In February 2004, subsidiaries of the Company finalized execution of the
Colona Closing Agreement with the IRS 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 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 PFA process continues with respect to the four synthetic fuel
23
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.
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 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.
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 or results of operation.
24
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements that involve estimates, projections, goals, forecasts, assumptions,
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Please review
"SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion of the factors
that may impact any such forward-looking statements made herein.
Amounts reported in the interim Consolidated Statements of Income for Florida
Progress Corporation (Florida Progress) and the interim Statements of Income for
Progress Energy Florida, Inc. (PEF) are not necessarily indicative of amounts
expected for the respective annual or future periods due to the effects of
seasonal temperature variations on energy consumption and the timing of
maintenance on electric generating units, among other factors.
This discussion should be read in conjunction with the accompanying financial
statements found elsewhere in this report and in conjunction with the 2003 Form
10-K.
OPERATING RESULTS
The Company's segments contributed segment profits or losses for the three
months ended March 31, 2004 and 2003 as follows:
- -------------------------------------------------------------
(in millions) Three Months Ended March 31,
- -------------------------------------------------------------
Business Segment 2004 2003
- -------------------------------------------------------------
PEF $ 49 $ 71
Energy and Related Services 38 25
Rail 6 (3)
Other (38) (1)
---------------------------
Segment profit/(loss) $ 55 $ 92
- -------------------------------------------------------------
Progress Energy Florida
PEF contributed segment profits of $49 million and $71 million in the three
months ended March 31, 2004 and 2003, respectively. The decrease in profits for
the three months ended March 31, 2004 when compared to 2003 is primarily due to
the impact of milder weather and higher O&M costs, partially offset by the
additional return on investment on the Hines 2 plant.
PEF's electric revenues for the three months ended March 31, 2004 and 2003 and
the amount and percentage change by customer class are as follows:
- -----------------------------------------------------------------------
(in millions of $) Three Months Ended March 31,
- -----------------------------------------------------------------------
Customer Class 2004 Change % Change 2003
- -----------------------------------------------------------------------
Residential $ 402 $17 4.4% $385
Commercial 181 31 20.7% 150
Industrial 63 15 31.3% 48
Governmental 46 8 21.1% 38
Retroactive rate refund - - - -
Retail revenue sharing (4) (4) - -
--------------------- ----------
Total retail revenues 688 67 10.8% 621
Wholesale 67 (4) (5.6%) 71
Unbilled (6) (5) - (1)
Miscellaneous 35 (2) (5.4%) 37
--------------------- ----------
Total electric revenues $784 $56 7.7% $728
- -----------------------------------------------------------------------
PEF's electric energy sales for the three months ended March 31, 2004 and 2003
and the amount and percentage change by customer class are as follows:
25
- -----------------------------------------------------------------------
(in millions of kWh) Three Months Ended March 31,
- -----------------------------------------------------------------------
Customer Class 2004 Change % Change 2003
- -----------------------------------------------------------------------
Residential 4,291 (262) (5.8%) 4,553
Commercial 2,491 49 2.0% 2,442
Industrial 1,023 107 11.7% 916
Governmental 672 16 2.4% 656
--------------------- ----------
Total retail energy 8,477 (90) (1.1%) 8,567
sales
Wholesale 1,323 46 3.6% 1,277
Unbilled (135) (190) - 55
--------------------- ----------
Total kWh sales 9,665 (234) (2.4%) 9,899
- -----------------------------------------------------------------------
Revenues
PEF's revenues, excluding recoverable fuel revenues and other pass through items
of $448 million and $372 million for the three months ended March 31, 2004 and
2003, respectively, decreased $20 million. This decrease was due primarily to
the impact of milder weather which was offset partially by the $7 million return
on Hines 2 which was placed in service in December 2003.
Expenses
Fuel and purchased power expenses are recovered primarily through cost recovery
clauses and, as such, changes in expense have no material impact on operating
results.
Operations and maintenance (O&M) costs increased $19 million, when compared to
the $141 million incurred during the three months ended March 31, 2003. This
increase is primarily related to higher costs associated with scheduled plant
outages and planned reliability improvements of approximately $6 million each.
Depreciation and amortization decreased $10 million when compared to the $79
million incurred during the three months ended March 31, 2003, primarily due to
the amortization of the Tiger Bay regulatory asset in the prior year. During the
first quarter of 2003, Tiger Bay amortization was $15 million. The Tiger Bay
asset was fully amortized in September 2003. The decrease in Tiger Bay
amortization was partially offset by additional depreciation for assets placed
in service.
ENERGY AND RELATED SERVICES
The Energy and Related Services segment's operations include synthetic fuels
production, natural gas production, coal extraction and terminal operations.
Energy and Related Services' results for the three months ended March 31, 2003
were restated to reflect four months of earnings for certain operations,
primarily synthetic fuel facilities. Energy and Related Services' segment
profits increased $13 million as compared to $25 million for the same period
prior year due primarily to increased earnings from gas operations with a full
quarter of North Texas Gas volumes in the current year (acquired late February
2003) and higher gas prices in 2004.
The following summarizes Energy and Related Services' segment profits for the
three months ended March 31, 2004 and 2003:
- --------------------------------------------------------------
(in millions) 2004 2003
- --------------------------------------------------------------
Synthetic fuel operations $ 26 $ 21
Gas production 13 7
Coal fuel and other operations (1) (3)
-------------------------
Segment Profits $ 38 $ 25
- --------------------------------------------------------------
Synthetic Fuel Operations
The synthetic fuels operations generated net profits of $26 million and $21
million for the three months ended March 31, 2004 and 2003, respectively. The
production and sale of synthetic fuel generate operating losses, but qualify for
tax credits under Section 29 of the Code, which more than offset the effect of
such losses. See Note 12 to the Consolidated Interim Financial Statements.
26
The operations resulted in the following for the three months ended March 31,
2004 and 2003:
- --------------------------------------------------------------
(in millions) 2004 2003
- --------------------------------------------------------------
Tons sold 1.9 1.4
-------------------
Operating losses, excluding tax credits $ (24) $ (15)
Tax credits generated 50 36
-------------------
Net profits $ 26 $ 21
- --------------------------------------------------------------
Synthetic fuels' tons sold and net profits increased as compared to the same
period in 2003 due primarily to a change in internal production schedule in 2004
compared to 2003.
Natural Gas Operations
Natural gas operations generated profits of $13 million and $7 million for the
three months ended March 31, 2004 and 2003, respectively. The increase in
production resulted from the acquisition of North Texas Gas in late February
2003 and higher gas prices in 2004 contributed to increased earnings in 2004 as
compared to 2003. In October 2003, the Company completed the sale of certain gas
producing properties owned by Mesa Hydrocarbons, LLC. The following summarizes
the gas production, revenues and gross margins for the three months ended March
31, 2004 and 2003 by production facility:
- ----------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------
Production in Bcf equivalent
Mesa - 1.7
Westchester 4.0 3.2
North Texas Gas 2.7 0.5
----------------------
Total Production 6.7 5.4
----------------------
Revenues in millions
Mesa $ - $ 5
Westchester 22 15
North Texas Gas 13 4
----------------------
Total Revenues $ 35 $ 24
----------------------
Gross Margin
in millions of $ $ 27 $ 19
As a % of revenues 77% 79%
- ----------------------------------------------------------------
Coal Fuel and Other Operations
Coal fuel and other operations generated segment losses of $1 million for the
three months ended March 31, 2004 compared to losses of $3 million for the three
months ended March 31, 2003. The decrease in losses of $2 million is due
primarily to the impact of the retroactive Service Company allocation in the
prior year. Results for the same period in the prior year were negatively
impacted by the retroactive reallocation of Service Company costs of $4 million
after-tax.
Rail
Rail's operations include railcar and locomotive repair, trackwork, rail parts
reconditioning and sales, scrap metal recycling and other rail related services.
The Company sold the assets of Railcar Ltd., a leasing subsidiary, in 2004.
Progress Rail contributed segment profit of $6 million for the quarter ended
March 31, 2004 compared with a net loss of $3 million for the same period last
year. Progress Rail earnings were positively impacted by higher prices and
margins on recycling sales. In addition, results for the same period in the
prior year were negatively impacted by the retroactive reallocation of Service
Company costs of $3 million after-tax.
27
OTHER
The Other segment includes telecommunications, holding company and financing
expenses.
Other segment profits decreased to $37 million for the three months ended March
31, 2004 compared to the same period in the prior year. This decrease was due
primarily to the impact of tax levelization adjustments booked each quarter.
GAAP requires companies to apply a levelized effective tax rate to interim
periods that is consistent with the estimated annual effective tax rate. Income
tax expense was increased by $33 million and decreased by $5 million for the
three months ended March 31, 2004 and 2003, respectively, in order to maintain
an effective tax rate consistent with the estimated annual rate. The tax credits
associated with the Company's synthetic fuel operations primarily drive the
required levelization amount. Fluctuations in estimated annual earnings and tax
credits can also cause large swings in the effective tax rate for interim
periods. Therefore, this adjustment will vary each quarter, but will have no
effect on net income for the year.
LIQUIDITY AND CAPITAL RESOURCES
Statements of Cash Flows and Financing Activities
Cash provided by operating activities increased $19 million for the three months
ended March 31, 2004, when compared to the three months ended March 31, 2003.
The increase in operating cash flow was due primarily to the recovery of
previously deferred fuel costs which was partially offset by lower operating
results at PEF and higher corporate expenses.
Net cash used in investing activities decreased $253 million for the three
months ended March 31, 2004, when compared to the three months ended March 31,
2003. The decrease is primarily due to reduced nonregulated capital
expenditures, primarily the purchase of North Texas Gas assets in the first
quarter of 2003 and proceeds from the sale of Railcar Ltd. in 2004.
On February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25
million 6.48% medium term notes with excess cash.
The amount and timing of future sales of company securities will depend on
market conditions, operating cash flow, asset sales and the specific needs of
the Company. The Company may from time to time sell securities beyond the amount
needed to meet capital requirements in order to allow for the early redemption
of long-term debt, the redemption of preferred stock, the reduction of
short-term debt or for other generation corporate purposes.
Future Commitments
As of March 31, 2004, both Florida Progress' and PEF's contractual cash
obligations and other commercial commitments have not changed materially from
what was reported in the 2003 Annual Report on Form 10-K.
28
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 3 is omitted pursuant to Instruction H(2)(c)
to Form 10-Q (Omission of Information by Certain Wholly Owned Subsidiaries).
Item 4. CONTROLS AND PROCEDURES
Florida Progress Corporation
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, Florida
Progress carried out an evaluation, with the participation of Florida Progress'
management, including Florida Progress' President and Chief Executive Officer,
and Chief Financial Officer, of the effectiveness of Florida Progress'
disclosure controls and procedures (as defined under Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, Florida Progress' President and Chief
Executive Officer, and Chief Financial Officer concluded that Florida Progress'
disclosure controls and procedures are effective in timely alerting them to
material information relating to Florida Progress (including its consolidated
subsidiaries) required to be included in Florida Progress' periodic SEC filings.
There has been no change in Florida Progress' internal control over financial
reporting during the quarter ended March 31, 2004 that has materially affected,
or is reasonably likely to materially affect, Florida Progress' internal control
over financial reporting.
Progress Energy Florida, Inc.
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, PEF
carried out an evaluation, with the participation of PEF's management, including
PEF's President and Chief Executive Officer, and Chief Financial Officer, of the
effectiveness of PEF's disclosure controls and procedures (as defined under Rule
13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by this report. Based upon that evaluation, PEF's President and Chief
Executive Officer, and Chief Financial Officer concluded that PEF's disclosure
controls and procedures are effective in timely alerting them to material
information relating to PEF (including its consolidated subsidiaries) required
to be included in PEF's periodic SEC filings.
There has been no change in PEF's internal control over financial reporting
during the quarter ended March 31, 2004 that has materially affected, or is
reasonably likely to materially affect, PEF's internal control over financial
reporting.
29
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Legal aspects of certain matters are set forth in Part I, Item 1. See Note 12 to
the Florida Progress Corporation and PEF Interim Financial Statements.
1. U.S. Global, LLC v. Progress Energy, Inc. et al, Case No. 03004028-03
and Progress Synfuel Holdings, Inc. et al, v. U.S. Global, LLC, Case No.
03004028-03
A number of Progress Energy, Inc. subsidiaries and affiliates are parties
to two lawsuits arising out of an Asset Purchase Agreement dated as of
October 19, 1999, by and among U.S. Global LLC (Global), EARTHCO, certain
affiliates of EARTHCO (collectively the EARTHCO Sellers), EFC Synfuel LLC
(which is owned indirectly be Progress Energy, Inc.) and certain of its
affiliates, including Solid Energy LLC, Solid Fuel LLC, Ceredo Synfuel LLC,
Gulf Coast Synfuel LLC (currently named Sandy River Synfuel LLC)
(Collectively the Progress Affiliates), as amended by an amendment to
Purchase Agreement as of August 23, 2000 (the Asset Purchase Agreement).
Global has asserted that pursuant to the Asset Purchase Agreement it is
entitled to (1) interest in two synthetic fuel facilities currently owned
by the Progress Affiliates, and (2) an option to purchase additional
interests in the two synthetic fuel facilities.
The first suit, U.S. Global, LLC v. Progress Energy, Inc. et al, was filed
in the Circuit Court for Broward County, Florida in March 2003 (the Florida
Global Case). The Florida Global Case asserts claims for breach of the
Asset Purchase Agreement and other contract and tort claims related to the
Progress Affiliates' alleged interference with Global's rights under the
Asset Purchase Agreement. The Florida Global Case requests an unspecified
amount of compensatory damages, as well as declaratory relief. On December
15, 2003, the Progress Affiliates filed a motion to dismiss the Third
Amended Complaint in the Florida Global Case. The motion to dismiss filed
on behalf of the Progress Energy, Inc. subsidiaries and affiliates that are
parties to the case will be heard by the Circuit Court of Broward County,
Florida on June 7, 2004.
The second suit, Progress Synfuel Holdings, Inc. et al. v. U.S. Global,
LLC, was filed by the Progress Affiliates in the Superior Court for Wake
County, North Carolina seeking declaratory relief consistent with the
Company's interpretation of the asset Purchase Agreement (the North
Carolina Global Case). Global was served with the North Carolina Global
Case on April 17, 2003.
On May 15, 2003, Global moved to dismiss the North Carolina Global Case for
lack of personal jurisdiction over Global. In the alternative, Global
requested that the court decline to exercise its discretion to hear the
Progress Affiliates' declaratory judgment action. On August 7, 2003, the
Wake County Superior court denied Global's motion to dismiss and entered an
order staying the North Carolina Global Case, pending the outcome of the
Florida Global Case. The Progress Affiliates have appealed the Superior
court's order staying the case; Global has cross appealed the denial of its
motion to dismiss for lack of personal jurisdiction. The North Carolina
Court of Appeals 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 the allegations.
30
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Florida Progress Progress Energy
Number Description Corporation Florida, Inc.
------ ----------- ----------- -------------
3(ii)(a) By-Laws of Progress Energy, Inc., as amended on X X
March 17, 2004
31(a) Certifications pursuant to Section 302 of the X X
Sarbanes-Oxley Action of 2002 - Chairman and
Chief Executive Officer
31(b) Certifications pursuant to Section 302 of the X X
Sarbanes-Oxley Action of 2002 - Executive Vice
President and Chief Financial Officer
32(a) Certifications pursuant to Section 906 of the X X
Sarbanes-Oxley Action of 2002 - Chairman and
Chief Executive Officer
32(b) Certifications pursuant to Section 906 of the X X
Sarbanes-Oxley Action of 2002 - Chief Financial
Officer
(b) Reports filed or furnished on Form 8-K since the beginning of the
quarter:
Florida Progress Corporation
Financial
Item Statements
Reported Included Date of Event Date Filed or Furnished
-------- -------- ------------- -----------------------
9, 12 Yes April 21, 2004 April 21, 2004
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
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
Financial
Item Statements
Reported Included Date of Event Date Filed or Furnished
-------- -------- ------------- -----------------------
9, 12 Yes April 21, 2004 April 21, 2004
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
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLORIDA PROGRESS CORPORATION
FLORIDA POWER CORPORATION
(Registrants)
Date: May 6, 2004 By: /s/ Geoffrey Chatas
-------------------
Geoffrey Chatas
Executive Vice President and
Chief Financial Officer
By: /s/Robert H. Bazemore, Jr.
Robert H. Bazemore, Jr.
Vice President and Controller
Chief Accounting Officer
32