Back to GetFilings.com
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 September 30, 2002
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
------ -------
Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer
File Number incorporation, address of principal executive offices, and telephone number Identification Number
1-8349 Florida Progress Corporation 59-2147112
A Florida Corporation
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
1-3274 Florida Power Corporation 59-0247770
A Florida Corporation
100 Central Avenue
St. Petersburg, Florida 33701
Telephone (727) 820-5151
NONE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
This combined Form 10-Q is filed separately by two registrants: Florida
Progress Corporation and Florida Power Corporation. Information contained
herein relating to either individual registrant is filed by such registrant
solely on its own behalf.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of October 31, 2002,
each registrant had the following shares of common stock outstanding
Registrant Description Shares
---------- ----------- ------
Florida Progress Corporation Common Stock, without par value 98,616,658 (all of which were
held by Progress Energy, Inc.)
Florida Power Corporation Common Stock, without par value 100 (all of which were held by
Florida Progress Corporation)
1
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
FORM 10-Q - For the Quarter Ended September 30, 2002
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
-------------------------
Statements of Income
Balance Sheets
Statements of Cash Flows
Notes to Financial Statements
Florida Progress Corporation and Florida Power Corporation
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
Certifications
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
CR3 Florida Power's nuclear generating plant, Crystal River Unit No. 3
DOE United States Department of Energy
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FDEP Florida Department of Environmental Protection
FERC Federal Energy Regulatory Commission
Florida Power or the utility Florida Power Corporation
Florida Progress or the Company Florida Progress Corporation
FPSC Florida Public Service Commission
Funding Corp. Florida Progress Funding Corporation
IRS Internal Revenue Service
MEMCO MEMCO Barge Line, Inc.
MGP Manufactured Gas Plant
MW Megawatt
NRC United States Nuclear Regulatory Commission
PLR Private Letter Ruling
Preferred Securities 7.10% Cumulative Quarterly Income Preferred Securities, Series A, of FPC Capital
I, fully and unconditionally guaranteed by Florida Progress
Preferred Stock Florida Power Cumulative Preferred Stock, $100 par value
Progress Capital Progress Capital Holdings, Inc.
Progress Energy Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly referred to as Electric Fuels Corporation
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
Progress Ventures, Inc. Legal entity holding certain non-regulated operations and part of Progress
Energy's Progress Ventures business segment
PUHCA Public Utility Holding Company Act of 1935, as amended
RTO Regional Transmission Organization
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
SFAS Statements of Financial Accounting Standards
SFAS No. 133 Statements of Financial Accounting Standards No. 133, Accounting for Derivative
and Hedging Activities
SFAS No. 142 Statements of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets
SFAS No. 143 Statements of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations
SFAS No. 144 Statements of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets
SFAS No. 145 Statements of Financial Accounting Standards No. 145, Rescission of FASB
Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections
SFAS No. 146 Statements of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities
The Trust FPC Capital I
3
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 "Other Matters"
concerning synthetic fuel tax credits and regulatory developments.
Any forward-looking statement speaks only as of the date on which such statement
is made, and Florida Progress (the Company) and Florida Power undertake no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: the impact of fluid and complex government laws and regulations,
including those relating to the environment; the impact of recent events in the
energy markets that have increased the level of public and regulatory scrutiny
in the energy industry and in the capital markets; deregulation or restructuring
in the electric industry that may result in increased competition and
unrecovered (stranded) costs; the uncertainty regarding the timing, creation and
structure of regional transmission organizations; weather conditions that
directly influence the demand for electricity and natural gas; recurring
seasonal fluctuations in demand for electricity and natural gas; fluctuations in
the price of energy commodities; economic fluctuations and the corresponding
impact on commercial and industrial customers of the Company and Florida Power;
the ability of the Company's subsidiaries to pay upstream dividends or
distributions to it; the impact on the facilities and businesses of the Company
and Florida Power from a terrorist attack; the inherent risks associated with
the operation of nuclear facilities, including environmental, health, regulatory
and financial risks; the ability of the Company and Florida Power to
successfully access capital markets on favorable terms; the impact that
increases in leverage may have on the Company and Florida Power; the ability of
the Company and Florida Power to maintain their current credit ratings; the
impact of derivative contracts used in the normal course of business by the
Company and Florida Power; the Company's continued ability to use Section 29 tax
credits related to its coal and synthetic fuels businesses; the continued
depressed state of the telecommunications industry and the Company's ability to
realize future returns from Progress Telecom; the Company's ability to
successfully integrate newly acquired businesses, including Westchester Gas
Company, into its operations as quickly or as profitably as expected;
realization of cost savings related to synergies resulting from acquisition by
Progress Energy; the success of our direct and indirect subsidiaries; 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 the SEC reports of the
Company and Florida Power. You should closely read these 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 Florida
Power. 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 the Company and Florida Power.
4
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Florida Progress Corporation
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
September 30, 2002
CONSOLIDATED STATEMENTS of INCOME
(Unaudited) Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 863,637 $ 906,131 $2,316,001 $ 2,500,265
Diversified businesses 338,382 354,473 1,004,817 1,038,899
- ----------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,202,019 1,260,604 3,320,818 3,539,164
- ----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 237,021 259,763 636,436 696,766
Purchased power 145,743 154,958 387,473 407,180
Other operation and maintenance 139,160 119,931 420,477 350,612
Depreciation and amortization 73,427 95,087 218,004 341,801
Taxes other than on income 61,186 63,234 175,119 180,420
Diversified businesses 588,731 389,366 1,295,072 1,124,735
- ----------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,245,268 1,082,339 3,132,581 3,101,514
- ----------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (43,249) 178,265 188,237 437,650
- ----------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 1,744 2,348 5,619 6,275
Other, net (3,171) (3,345) (12,645) (14,329)
- ----------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (1,427) (997) (7,026) (8,054)
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) before Interest Charges and Income Taxes (44,676) 177,268 181,211 429,596
- ----------------------------------------------------------------------------------------------------------------------
Interest Charges
Net interest charges 45,773 46,757 141,083 146,663
Allowance for borrowed funds used during construction (899) (271) (1,932) (474)
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Charges 44,874 46,486 139,151 146,189
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations before Income (89,550) 130,782 42,060 283,407
Taxes
Income Taxes (Benefit) (32,529) (50,670) (67,049) (75,570)
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations (57,021) 181,452 109,109 358,977
Discontinued Operations, net of tax (Note 12):
Income (Loss) from discontinued operations 5,120 (14,120) 5,120 (25,846)
- ----------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (51,901) $ 167,332 $ 114,229 $ 333,131
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
5
Florida Progress Corporation
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands) September 30, December 31,
Assets 2002 2001
- ------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $7,374,282 $ 7,151,729
Accumulated depreciation (4,075,834) (3,984,308)
- ------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,298,448 3,167,421
Held for future use 7,921 8,274
Construction work in progress 316,274 292,883
Nuclear fuel, net of amortization 45,688 62,536
- ------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,668,331 3,531,114
- ------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 39,559 5,201
Accounts receivable 404,066 357,038
Unbilled accounts receivable 83,315 63,080
Receivable from affiliates 73,310 26,976
Taxes receivable - 14,761
Deferred income taxes 23,517 32,334
Inventory 516,410 485,891
Deferred fuel cost 29,840 15,147
Prepayments 27,892 10,748
Other current assets 42,504 48,175
- ------------------------------------------------------------------------------------------------------
Total Current Assets 1,240,413 1,059,351
- ------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 130,025 157,725
Unamortized debt expense 23,501 21,021
Nuclear decommissioning trust funds 377,238 406,100
Diversified business property, net 661,521 669,078
Miscellaneous other property and investments 103,138 117,535
Prepaid pension costs 221,215 202,167
Other assets and deferred debits 157,649 147,713
- ------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,674,287 1,721,339
- ------------------------------------------------------------------------------------------------------
Total Assets $6,583,031 $ 6,311,804
- ------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ------------------------------------------------------------------------------------------------------
Capitalization
Common stock $1,615,723 $ 1,409,034
Retained earnings 527,248 666,201
Accumulated other comprehensive loss (4,071) (2,985)
- ------------------------------------------------------------------------------------------------------
Total Common Stock Equity 2,138,900 2,072,250
Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497
Unsecured note with Parent 500,000 500,000
Long-term debt, net 1,715,181 1,989,684
- ------------------------------------------------------------------------------------------------------
Total Capitalization 4,387,578 4,595,431
- ------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 275,202 88,053
Accounts payable 318,338 285,524
Payable to affiliates 102,454 116,520
Notes payable to affiliates 325,398 147,583
Taxes accrued 100,318 -
Interest accrued 45,191 67,861
Short-term Obligations 244,600 154,250
Customer deposits 122,317 118,285
Accrued taxes other than on income 93,412 16,361
Other current liabilities 89,433 128,004
- ------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,716,663 1,122,441
- ------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 48,153 165,816
Accumulated deferred investment tax credits 48,882 54,387
Regulatory liabilities 53,965 45,643
Other liabilities and deferred credits 327,790 328,086
- ------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 478,790 593,932
- ------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- ------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $6,583,031 $ 6,311,804
- ------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
6
Florida Progress Corporation
CONSOLIDATED STATEMENTS of CASH FLOWS Nine Months Ended
(Unaudited) September 30,
(In thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 114,229 $ 333,131
Adjustments to reconcile net income to net cash provided by operating
activities:
Impairment of long-lived assets 214,617 -
Income from discontinued operations (5,120) (2,682)
Estimated loss on disposal of discontinued operations - 28,528
Depreciation and amortization 284,781 405,552
Deferred income taxes and investment tax credits, net (172,073) 501
Deferred fuel cost (credit) (14,694) 32,633
Changes in working capital, net of effects from sale or acquisition of
business
Net increase in accounts receivable (106,951) (70,919)
Net increase in inventories (34,381) (113,200)
Net (increase) decrease in prepaids and other current assets (11,655) 5,601
Net increase in accounts payable 15,077 37,510
Net increase in other current liabilities 127,070 20,868
Other 40,523 (81,545)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 451,423 595,978
- ----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Utility property additions (317,278) (222,951)
Diversified business property additions (96,462) (66,986)
Nuclear fuel additions (120) (42,783)
Net contributions to nuclear decommissioning fund 12,348 (14,976)
Proceeds from sale of discontinued operations 8,000 -
Proceeds from sale of asset 670 5,532
Acquisition, net of cash acquired (17,355) -
Other investing activities (16) (4,224)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (410,213) (346,388)
- ----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of long-term debt 236,242 299,058
Net increase in intercompany notes 177,816 125,622
Net increase (decrease) in short-term indebtedness 90,350 (294,632)
Retirement of long-term debt (335,495) (188,756)
Equity contribution from parent 77,904 39,651
Dividends paid to parent (253,182) (213,837)
Other financing activities (487) (2,224)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (6,852) (235,118)
- ----------------------------------------------------------------------------------------------------------------------
Cash Provided by Discontinued Operations - 277
- ----------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 34,358 14,749
- ----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period 5,201 24,200
- ----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 39,559 $ 38,949
- ----------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the period - interest (net of amount capitalized) $ 132,219 $ 151,405
income taxes $ 42,614 $ (76,300)
See Note 2 for non-cash investing and financing activities.
See Notes to Interim Financial Statements.
7
Florida Power Corporation
INTERIM FINANCIAL STATEMENTS
September 30, 2002
STATEMENTS of INCOME Three Months Ended Nine Months Ended
(Unaudited) September 30, September 30,
(In thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 863,637 $ 906,131 $2,316,001 $2,500,265
Operating Expenses
Fuel used in electric generation 237,021 259,763 636,436 696,766
Purchased power 145,743 154,958 387,473 407,180
Operation and maintenance 139,160 119,931 420,477 350,612
Depreciation and amortization 73,427 95,087 218,004 341,801
Taxes other than on income 61,186 63,234 175,119 180,420
- -------------------------------------------------------------------------------------------------------------
Total Operating Expenses 656,537 692,973 1,837,509 1,976,779
- -------------------------------------------------------------------------------------------------------------
Operating Income 207,100 213,158 478,492 523,486
- -------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 297 736 1,574 1,513
Other, net (1,453) (1,193) (3,529) (6,134)
- -------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (1,156) (457) (1,955) (4,621)
- -------------------------------------------------------------------------------------------------------------
Income before Interest Charges and Income Taxes 205,944 212,701 476,537 518,865
- -------------------------------------------------------------------------------------------------------------
Interest Charges
Gross interest charges 26,663 28,918 84,026 85,951
Allowance for borrowed funds used during (899) (271) (1,932) (475)
construction
- -------------------------------------------------------------------------------------------------------------
Net Interest Charges 25,764 28,647 82,094 85,476
- -------------------------------------------------------------------------------------------------------------
Income before Income Taxes 180,180 184,054 394,443 433,389
Income Taxes 56,028 69,597 135,038 162,259
- -------------------------------------------------------------------------------------------------------------
Net Income 124,152 114,457 259,405 271,130
Dividends on Preferred Stock 378 378 1,134 1,134
- -------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 123,774 $ 114,079 $ 258,271 $ 269,996
- -------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
8
Florida Power Corporation
BALANCE SHEETS
(Unaudited)
(In thousands) September 30, December 31,
Assets 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $7,374,282 $ 7,151,729
Accumulated depreciation (4,075,834) (3,984,308)
- ----------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,298,448 3,167,421
Held for future use 7,921 8,274
Construction work in progress 316,274 292,883
Nuclear fuel, net of amortization 45,688 62,536
- ----------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,668,331 3,531,114
- ----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 28,725 -
Accounts receivable 207,362 185,562
Unbilled accounts receivable 83,315 63,080
Receivable from affiliates 36,605 16,424
Notes receivable from affiliates - 119,799
Deferred income taxes 23,517 32,334
Inventory 204,601 188,630
Deferred fuel cost 29,840 15,147
Prepayments and other current assets 8,963 4,336
- ----------------------------------------------------------------------------------------------------------------------
Total Current Assets 622,928 625,312
- ----------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 130,025 157,725
Unamortized debt expense 14,562 11,844
Nuclear decommissioning trust funds 377,238 406,100
Miscellaneous other property and investments 40,852 46,442
Prepaid pension costs 216,893 198,351
Other assets and deferred debits 8,889 21,274
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 788,459 841,736
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $5,079,718 $ 4,998,162
- ----------------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------------------
Capitalization
Common stock $1,081,257 $ 1,081,257
Retained earnings 955,472 950,387
- ----------------------------------------------------------------------------------------------------------------------
Total Common Stock Equity 2,036,729 2,031,644
Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497
Long-term debt, net 1,249,325 1,465,030
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization 3,319,551 3,530,171
- ----------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 216,877 32,000
Accounts payable 158,857 143,828
Payable to affiliates 67,526 189,817
Notes payable to affiliates 72,381 -
Taxes accrued 28,128 1,768
Interest accrued 36,805 54,440
Short-term obligations 244,600 154,250
Customer deposits 122,317 118,285
Accrued taxes other than on income 82,277 9,202
Other current liabilities 30,623 57,778
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,060,391 761,368
- ----------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 382,030 394,828
Accumulated deferred investment tax credits 48,386 53,875
Regulatory liabilities 53,965 45,643
Other liabilities and deferred credits 215,395 212,277
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 699,776 706,623
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $5,079,718 $ 4,998,162
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
9
Florida Power Corporation
STATEMENTS of CASH FLOWS Nine Months Ended
(Unaudited) September 30,
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 259,405 $ 271,130
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 237,440 350,771
Deferred income taxes and investment tax credits, net (13,555) (22,180)
Deferred fuel cost (credit) (14,693) 32,633
Changes in working capital:
Net increase in accounts receivable (62,216) (59,693)
Net increase in inventories (15,971) (24,544)
Net (increase) decrease in prepaids and other current assets (4,627) 5,940
Net increase (decrease) in accounts payable (107,262) 31,487
Net increase in other current liabilities 58,677 184,425
Other 3,058 (87,697)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 340,256 682,272
- -------------------------------------------------------------------------------------------------------------------
Investing Activities:
Property additions (317,278) (222,951)
Nuclear fuel additions (120) (42,783)
Net contributions to nuclear decommissioning fund 12,348 (14,976)
Other investing activities 5,526 7,617
- -------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (299,524) (273,093)
- -------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of long-term debt 236,242 297,621
Net increase (decrease) in intercompany notes 192,180 (117,062)
Net increase (decrease) in short-term indebtedness 90,350 (288,806)
Retirement of long-term debt (276,459) (81,000)
Dividends paid to parent (253,186) (213,836)
Dividends paid on preferred stock (1,134) (1,134)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (12,007) (404,217)
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 28,725 4,962
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period - 3,380
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 28,725 $ 8,342
- -------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest (net of amount capitalized) $ 99,729 $ 94,071
income taxes (net of refunds) $ 88,004 $ 17,071
See Notes to Interim Financial Statements.
10
Florida Progress Corporation and Florida Power Corporation
NOTES TO INTERIM FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (Florida Power) and Progress Fuels Corporation (Progress
Fuels).
Florida Power is a regulated public utility engaged in the generation,
transmission, distribution and sale of electricity in portions of Florida.
Florida Power is regulated by the Florida Public Service Commission (FPSC)
and the Federal Energy Regulatory Commission (FERC).
Progress Fuels is a diversified non-utility energy company, whose principal
business segments are Energy & Related Services and Rail Services. Progress
Fuels' Rail Services and the non-Florida portion of its Energy & Related
Services operations report their results one-month in arrears, due to their
wide-ranging geographical locations.
Basis of Presentation. These financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America (generally accepted accounting principles) 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 generally accepted accounting principles for complete financial
statements. Because the accompanying consolidated interim financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles, they should be read in
conjunction with the audited financial statements for the period ended
December 31, 2001 and notes thereto included in Florida Progress' and
Florida Power's Form 10-K for the year ended December 31, 2001.
The amounts included in the consolidated interim financial statements are
unaudited but, in the opinion of management, reflect all adjustments
necessary to fairly present Florida Progress' and Florida Power'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,
the results of operations for interim periods are not necessarily
indicative of amounts expected for the entire year. Effective with the
quarter ended September 30, 2002, the Company will no longer reclassify
commercial paper as long-term debt. Certain reclassifications have been
made to prior-year amounts to conform to the current year's presentation.
In preparing financial statements that conform with generally accepted
accounting principles, management must make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements
and amounts of revenues and expenses reflected during the reporting period.
Actual results could differ from those estimates.
2. FUEL ACQUISITION
On April 26, 2002, Progress Fuels Corporation acquired 100% of Westchester
Gas Company. The acquisition included approximately 215 producing natural
gas wells, 52 miles of intrastate gas pipeline and 170 miles of
gas-gathering systems located within a 25-miles radius of Jonesville,
Texas, on the Texas-Louisiana border.
The aggregate purchase price of approximately $153 million consisted of
cash consideration of approximately $22 million and the issuance of 2.5
million shares of Progress Energy common stock valued at approximately $129
million. The purchase price included approximately $1.7 million of direct
transaction costs. The purchase price was primarily allocated to fixed
assets based on the preliminary fair values of the assets acquired. The
excess of the purchase price over the preliminary fair value of the net
identifiable assets and liabilities acquired has been recorded as goodwill.
Based on this preliminary allocation, goodwill of approximately $33 million
has been recorded. The preliminary purchase price allocation is subject to
adjustment for changes in the preliminary assumptions and analyses used,
pending additional information including final asset valuations and
allocations to gas properties.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations for Westchester have
been included in the Company's consolidated financial statements since the
11
date of acquisition. The pro forma results of operations would not be
materially different than the reported results of operations for the three
and nine months ended September 30, 2002, or for the comparable periods of
the prior year.
3. IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER ONE-TIME CHARGES
Due to the decline of the telecommunications industry and continued
operating losses, the Company initiated a valuation study to assess the
recoverability of Progress Telecom's long-lived assets. Based on this
assessment, the company recorded asset impairments and other one-time
charges totaling $233.0 million on a pre-tax basis in the third quarter of
2002 ($144.0 million after-tax). The asset write-downs and other one-time
charges are included in diversified business expenses on the Consolidated
Statements of Income. The results of Progress Telecom are included in the
Other segment (See Note 5). This write-down constitutes a significant
reduction in the book value of these long-lived assets.
The long-lived asset write-downs of $214.6 million on a pre-tax basis
include an impairment of property, plant and equipment and construction
work in process. The impairment charge represents the difference between
the fair value and carrying amount of these long-lived assets. The fair
value of these assets was determined using a valuation study heavily
weighted on the discounted cash flow methodology and using market
approaches as supporting information. The other one-time charges of $18.4
million on a pre-tax basis primarily relate to inventory adjustments.
4. FLORIDA POWER RATE CASE SETTLEMENT
On March 27, 2002, the parties in Florida Power's rate case entered into a
Stipulation and Settlement Agreement (the Agreement) related to retail rate
matters. The Agreement was approved by the Florida Public Service
Commission (FPSC) on April 23, 2002. The Agreement is generally effective
from May 1, 2002 through December 31, 2005; provided, however, that if
Florida Power's base rate earnings fall below a 10% return on equity,
Florida Power may petition the FPSC to amend its base rates.
The Agreement provides that Florida Power will reduce its retail revenues
from the sale of electricity by an annual amount of $125 million. The
Agreement also provides that Florida Power will operate under a Revenue
Sharing Incentive Plan (the Plan) through 2005, and thereafter until
terminated by the FPSC, that establishes annual revenue caps and sharing
thresholds. The Plan provides that retail base rate revenues between the
sharing thresholds and the retail base rate revenue caps will be divided
into two shares - a 1/3 share to be received by Florida Power's
shareholders, and a 2/3 share to be refunded to Florida Power's retail
customers; provided, however, that for the year 2002 only, the refund to
customers will be limited to 67.1% of the 2/3 customer share. The retail
base rate revenue sharing threshold amounts for 2002 will be $1,296 million
and will increase $37 million each year thereafter. The Plan also provides
that all retail base rate revenues above the retail base rate revenue caps
established for each year will be refunded to retail customers on an annual
basis. For 2002, the refund to customers will be limited to 67.1% of the
retail base rate revenues that exceed the 2002 cap. The retail base revenue
caps for 2002 will be $1,356 million and will increase $37 million each
year thereafter. Any amounts above the retail base revenue caps will be
refunded 100 percent to customers.
The Agreement also provides that beginning with the in-service date of
Florida Power's Hines Unit 2 and continuing through December 31, 2005,
Florida Power will be allowed to recover through the fuel cost recovery
clause a return on average investment and depreciation expense for Hines
Unit 2, to the extent such costs do not exceed the Unit's cumulative fuel
savings over the recovery period. Hines Unit 2 is a 516 MW combined-cycle
unit under construction and currently scheduled for completion in late
2003.
Additionally, the Agreement provides that Florida Power will effect a
mid-course correction of its fuel cost recovery clause to reduce the fuel
factor by $50 million for the remainder of 2002. The fuel cost recovery
clause will operate as it normally does, including, but not limited to any
additional mid-course adjustments that may become necessary, and the
calculation of true-ups to actual fuel clause expenses.
Florida Power will suspend accruals on its reserves for nuclear
decommissioning and fossil dismantlement through December 31, 2005.
Additionally, for each calendar year during the term of the Agreement,
Florida Power will record a $62.5 million depreciation expense reduction,
and may, at its option, record up to an equal annual amount as an
offsetting accelerated depreciation expense. In addition, Florida Power is
authorized, at its discretion, to accelerate the amortization of certain
regulatory assets over the term of the Agreement. There was no accelerated
depreciation or amortization expense recorded for the three and nine months
ended September 30, 2002.
12
Under the terms of the Agreement, Florida Power agreed to continue the
implementation of its four-year Commitment to Excellence Reliability Plan
and expects to achieve a 20% improvement in its annual System Average
Interruption Duration Index by no later than 2004. If this improvement
level is not achieved for calendar years 2004 or 2005, Florida Power will
provide a refund of $3 million for each year the level is not achieved to
10% of its total retail customers served by its worst performing
distribution feeder lines.
The Agreement also provides that Florida Power will refund to customers $35
million of revenues Florida Power collected during the interim period since
March 13, 2001. This one-time retroactive revenue refund was recorded in
the first quarter of 2002 and will be returned to retail customers over an
eight-month period ending December 31, 2002. Any additional refunds under
the Agreement will be recorded as they become probable. No additional
refunds have been accrued at September 30, 2002.
5. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company's principal business segment is Florida Power, an electric
utility engaged in the generation, purchase, transmission, distribution and
sale of electricity primarily in Florida. The other reportable business
segments are Progress Fuels' Energy & Related Services and Rail Services.
The Inland Marine Transportation business, formerly a business segment, was
sold in November 2001 (See Note 12). The Energy & Related Services includes
coal and synthetic fuel operations, natural gas production and sales, river
terminal services and off-shore marine transportation. Rail Services'
operations include railcar repair, rail parts reconditioning and sales,
railcar leasing and sales, rail and track material sales, and scrap metal
recycling. These activities include maintenance and reconditioning of
salvageable scrap components of railcars, locomotive repair, right-of-way
maintenance and operating manufacturing facilities for new rail cars. The
other category consists primarily of Progress Telecom, the Company's
telecommunications subsidiary, the Company's investment in FPC Capital
Trust, which holds the Preferred Securities, and the holding company,
Florida Progress Corporation. Progress Telecommunications 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. Florida Progress allocates a portion of its
operating expenses to business segments.
Financial data for business segments for the periods covered in this Form
10-Q are presented in the table below:
Energy and Rail
(In thousands) Utility Related Services Services (a) Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2002:
Revenues $ 863,637 $ 93,950 $194,611 $49,821 $1,202,019
Intersegment revenues -- 135,029 1,282 (136,311) --
Income (loss) from continuing operations 123,774 35,380 (579) (215,596) (57,021)
Total assets 5,079,718 832,588 579,947 90,778 6,583,031
==============================================================================================================================
Energy and Rail Services
Utility Related Services Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2001:
Revenues $ 906,131 $ 99,416 $ 219,554 $35,503 $1,260,604
Intersegment revenues -- 88,014 477 (88,491) --
Income (loss) from continuing operations 114,079 39,098 (2,165) 30,440 181,452
Total assets 5,044,029 550,141 828,384 114,930 6,537,484
==============================================================================================================================
13
Energy and Rail
Utility Related Services Services (a) Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2002:
Revenues $ 2,316,001 $248,253 $ 574,514 $ 182,050 $ 3,320,818
Intersegment revenues -- 394,848 2,632 (397,480) --
Income (loss) from continuing operations 258,271 103,846 1,667 (254,675) 109,109
Total assets 5,079,718 832,588 579,947 90,778 6,583,031
==============================================================================================================================
Energy and Rail Services
Utility Related Services Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2001:
Revenues $ 2,500,265 $ 275,904 $ 669,580 $93,415 $ 3,539,164
Intersegment revenues -- 280,426 1,055 (281,481) --
Income (loss) from continuing operations 269,996 106,521 (13,953) (3,587) 358,977
Total assets 5,044,029 550,141 828,384 114,930 6,537,484
==============================================================================================================================
(a)Rail Services' total segment assets at September 30, 2002, decreased from the
prior year due to asset sales and impairments recorded in the fourth quarter of
2001.
6. IMPACT OF NEW ACCOUNTING STANDARDS
During the second quarter of 2001, the Financial Accounting Standards Board
(FASB) issued interpretations of Statements of Financial Accounting
Standards No. 133, "Accounting for Derivative and Hedging Activities,"
(SFAS No. 133) indicating that options in general cannot qualify for the
normal purchases and sales exception, but provided an exception that allows
certain electricity contracts, including certain capacity-energy contracts,
to be excluded from the mark-to-market requirements of SFAS No. 133. The
interpretations were effective July 1, 2001. Those interpretations did not
require the Company to mark-to-market any of its electricity
capacity-energy contracts currently outstanding. In December 2001, the FASB
revised the criteria related to the exception for certain electricity
contracts, with the revision to be effective April 1, 2002. The revised
interpretation did not result in any significant changes to the Company's
assessment of mark-to-market requirements for its current contracts. If an
electricity or fuel supply contract in its regulated businesses is subject
to mark-to-market accounting, there generally would be no income statement
effect of the mark-to-market because such contracts are generally reflected
in fuel adjustment clauses so that the contract's mark-to-market gain or
loss would be recorded as a regulatory asset or liability. Any
mark-to-market gains or losses in its non-regulated businesses would affect
income unless those contracts qualify for hedge accounting treatment.
The application of the new rules is still evolving and further guidance
from the FASB is expected, which could additionally impact the Company's
financial statements.
See Note 7 for more information on SFAS No. 142, "Goodwill and Other
Intangible Assets.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in July 2001. This statement provides accounting and
disclosure requirements for retirement obligations associated with
long-lived assets and is effective January 1, 2003. This statement requires
that the present value of retirement costs for which the Company has a
legal obligation be recorded as liabilities with an equivalent amount added
to the asset cost and depreciated over an appropriate period. The liability
is then accreted over time by applying an interest method of allocation to
the beginning liability. The Company is in the process of identifying
retirement obligations. Areas that are being reviewed include electric
transmission and distribution, gas production and distribution, nuclear
decommissioning, all generating facilities, coal mines, synthetic fuel
facilities, terminals and telecommunication assets. The Company is also in
the process of quantifying the obligations that have been identified under
the measurement rules described in the standard. Florida Power does not
expect there to be any impact on earnings from this statement. For
unregulated companies, the Company currently cannot predict the earnings
impact.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides
guidance for the accounting and reporting of impairment or disposal of
long-lived assets. The statement supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." It also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
14
and Infrequently Occurring Events and Transactions" related to the disposal
of a segment of a business. Adoption of this statement did not have a
material effect on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" This standard will require gains and losses from
extinguishment of debt to be classified as extraordinary items only if they
meet the criteria of unusual and infrequent in Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Any gain or loss on extinguishment will be recorded in the
most appropriate line item to which it relates within net income before
extraordinary items. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002; however, certain sections are effective for
transactions occurring after May 15, 2002. The Company does not have any
transactions that are affected by this statement as of September 30, 2002.
For Florida Power, any expenses or call premiums associated with the
reacquisition of debt obligations are amortized over the remaining life of
the original debt using the straight-line method consistent with ratemaking
treatment.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This statement supercedes Emerging
Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability is recognized at the date an entity commits to an exit plan. SFAS
No. 146 also establishes that the liability should initially be measured
and recorded at fair value. The provisions of SFAS No. 146 will be
effective for any exit and disposal activities covered under the scope of
the standard and initiated after December 31, 2002.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." This statement clarifies the criteria for
recording of other intangible assets separately from goodwill. Effective
January 1, 2002, goodwill is no longer subject to amortization over its
estimated useful life. Instead, goodwill is subject to at least an annual
assessment for impairment by applying a two-step fair-value based test.
This assessment could result in periodic impairment charges.
The Company has completed the first step of the initial transitional
goodwill impairment test, which indicated that the Company's goodwill was
not impaired as of January 1, 2002.
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002, are as follows:
(in thousands)
Balance as of January 1, 2002 $11,101
Acquisitions 32,506
-------------
Balance as of September 30, 2002 $43,607
The acquired goodwill relates to the acquisition of Westchester Gas Company
in April 2002 (see Note 2). As of September 30, 2002, all goodwill has been
assigned to the Energy and Related Services segment.
As required by SFAS No. 142, the results for the prior year's periods have
not been restated. A reconciliation of net income as if SFAS No. 142 had
been adopted is presented below for the three and nine months ended
September 30, 2001, and the years ended December 31, 2001, 2000 and 1999.
(in thousands) Three Months Ended Nine Months Ended Year Ended Year Ended Year Ended
September 30, 2001 September 30, 2001 2001 2000 1999
-------------------------------------------------------------------------------------------
Reported net income $ 167,332 $ 333,131 $ 244,331 $ 144,241 $ 314,897
Add back: Goodwill amortization 529 1,702 2,394 3,001 5,509
--------- ---------- --------- --------- ---------
Adjusted net income $ 167,861 $ 334,833 $ 246,725 $ 147,242 $ 320,406
The Company has no other significant intangible assets as of September 30,
2002, and December 31, 2001. Florida Power has no goodwill and no
significant intangible assets as of September 30, 2002, and December 31,
2001.
15
8. COMPREHENSIVE INCOME
Florida Progress comprehensive loss for the three months ended September
30, 2002 was $58.4 million and comprehensive income for the nine months
ended September 30, 2002 was $108.0 million. Comprehensive income for
Florida Progress for the three and nine months ended September 30, 2001,
was $181.2 million and $346.7 million, respectively. Items of other
comprehensive income for the three and nine-month periods consisted
primarily of foreign currency translation adjustments. Florida Power does
not have any items of other comprehensive income.
9. FINANCING ACTIVITIES
In February 2002, $50 million of Progress Capital Holdings, Inc. (PCH)
medium-term notes, 5.78% Series, matured. Progress Energy funded this
maturity through the issuance of commercial paper.
On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54%
Series, matured. Florida Power funded this maturity through the issuance of
commercial paper.
On July 11, 2002, Florida Power announced the redemption of $108.55 million
principal amount of Citrus County Pollution Control Refunding Revenue
Bonds, Series 1992 A Due January 1, 2027, $90 million principal amount of
Citrus County Pollution Control Refunding Revenue Bonds, Series 1992 B Due
February 1, 2022, and $10.115 million principal amount of Pasco County
Pollution Control Refunding Revenue Bonds, Series 1992A Due February 1,
2022, at 102% of the principal amount of such bonds and $32.2 million
principal amount of Pinellas County Pollution Control Refunding Revenue
Bonds, Series 1991 Due December 1, 2014 at 101% of the principal amount of
such bonds. These redemptions were finalized on August 12, 2002.
On July 16, 2002, Florida Power issued $108.55 million principal amount of
Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due
January 1, 2027, $100.115 million principal amount of Citrus County
Pollution Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022
and $32.2 million principal amount of Citrus County Pollution Control
Revenue Refunding Bonds, Series 2002C Due January 1, 2018. Proceeds from
this issuance were used to redeem Florida Power's pollution control revenue
refunding bonds above.
10. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
Progress Fuels periodically enters into derivative instruments to hedge its
exposure to price fluctuations on natural gas sales. During 2002, Progress
Fuels has executed cash flow hedges on approximately 17.3 Bcf of natural
gas sales for the fourth quarter of 2002 and entire year 2003. These
instruments did not have a material impact on the Company's consolidated
financial position or results of operations.
11. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE QUARTERLY INCOME
PREFERRED SECURITIES (QUIPS) OF A SUBSIDIARY TRUST HOLDING SOLELY FLORIDA
PROGRESS GUARANTEED SUBORDINATED DEFERRABLE INTEREST NOTES
In April 1999, FPC Capital I (the Trust), an indirect wholly owned
subsidiary of the Company, issued 12 million shares of $25 par cumulative
Company-obligated mandatorily redeemable preferred securities (Preferred
Securities) due 2039, with an aggregate liquidation value of $300 million
and an annual distribution rate of 7.10%, payable quarterly. Currently, all
12 million shares of the Preferred Securities that were issued are
outstanding. Concurrent with the issuance of the Preferred Securities, the
Trust issued to Florida Progress Funding Corporation (Funding Corp.) all of
the common securities of the Trust (371,135 shares), for $9.3 million.
Funding Corp. is a direct wholly owned subsidiary of the Company.
The existence of the Trust is for the sole purpose of issuing the Preferred
Securities and the common securities and using the proceeds thereof to
purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable
Interest Notes (subordinated notes) due 2039, for a principal amount of
$309.3 million. The subordinated notes and the Notes Guarantee (as
discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds
from the sale of the subordinated notes were advanced to Progress Capital
Holdings, Inc. (PCH), and used for general corporate purposes including the
repayment of a portion of certain outstanding short-term bank loans and
commercial paper.
The Company has fully and unconditionally guaranteed the obligations of
Funding Corp. under the subordinated notes (the Notes Guarantee). In
addition, the Company has guaranteed the payment of all distributions
16
required to be made by the Trust, but only to the extent that the Trust has
funds available for such distributions (Preferred Securities Guarantee).
The Preferred Securities Guarantee, considered together with the Notes
Guarantee, constitutes a full and unconditional guarantee by the Company of
the Trust's obligations under the Preferred Securities.
The subordinated notes may be redeemed at the option of Funding Corp.
beginning in 2004 at par value plus accrued interest through the redemption
date. The proceeds of any redemption of the subordinated notes will be used
by the Trust to redeem proportional amounts of the Preferred Securities and
common securities in accordance with their terms. Upon liquidation or
dissolution of Funding Corp., holders of the Preferred Securities would be
entitled to the liquidation preference of $25 per share plus all accrued
and unpaid dividends thereon to the date of payment.
These Preferred Securities are classified as long-term debt on Florida
Progress' consolidated balance sheets.
12. COMMITMENTS AND CONTINGENCIES
Contingencies
1) IRS Audit
One of Progress Fuels' synthetic fuel entities, Colona Synfuel Limited
Partnership, L.L.L.P., is being audited by the Internal Revenue
Service (IRS). The audit of Colona was not unexpected. The Company is
audited regularly in the normal course of business as are most
similarly situated companies. The Company has been allocated
approximately $217 million in tax credits to date for this synthetic
fuel entity. In September 2002, all of the Company's majority-owned
synthetic fuel entities were accepted into the IRS's Pre-Filing
Agreement (PFA) program. The PFA program allows taxpayers to
voluntarily accelerate the IRS exam process in order to seek
resolution of specific issues. Either the Company or the IRS can
withdraw from the program at any time, and issues not resolved through
the program may proceed to the next level of the IRS exam process.
While the ultimate outcome is uncertain, the Company believes that
participation in the PFA program will likely shorten the tax exam
process.
In management's opinion, the Company is complying with all the
necessary requirements to be allowed such credits and believes it is
likely, although it cannot provide certainty, that it will prevail if
challenged by the IRS on any credits taken. The timing for the
ultimate disposition of this audit is uncertain.
2) Claims and Uncertainties
The Company is subject to federal, state and local regulations
addressing air and water quality, hazardous and solid waste management
and other environmental matters.
Various organic materials associated with the production of
manufactured gas, generally referred to as coal tar, are regulated
under federal and state laws. The lead or sole regulatory agency that
is responsible for a particular former coal tar site depends largely
upon the state in which the site is located. There are several MGP
sites to which Florida Power has some connection. In this regard,
Florida Power, with other potentially responsible parties, is
participating in investigating and, if necessary, remediating former
coal tar sites with several regulatory agencies, including, but not
limited to, the U.S. Environmental Protection Agency (EPA) and the
FDEP. In addition, the Company is periodically notified by regulators
such as the EPA and various state agencies of their involvement or
potential involvement in site, other than MGP sites, that may require
investigation and/or remediation.
There are two former MGP sites and 10 other active waste sites or
categories of sites associated with Florida Power that have required
or are anticipated to require investigation and/or remediation costs.
As of September 30, 2002, Florida Power has accrued approximately
$11.1 million for probable and reasonably estimable costs at these
sites. Florida Power believes that the maximum liability it can
currently estimate on these sites is $17.0 million. Florida Power has
filed for recovery of approximately $4.0 million of these costs. As
more activity occurs at these sites, Florida Power will assess the
need to adjust the accruals. These accruals have been recorded on an
undiscounted basis. Florida Power measures its liability for these
sites based on available evidence including its experience in
investigation and/or remediation of contaminated sites, which includes
assessing and developing cost-sharing arrangements with other
potentially responsible parties. A rollforward of the balance in this
accrual is not provided due to the immateriality of this activity in
the periods presented.
17
As part of the sale of the Inland Marine Transportation segment to AEP
Resources in 2001, Florida Progress established an accrual to address
liabilities which may result from known and unknown environmental
liabilities but primarily to address contamination in soil and
potentially groundwater at one site. The balance in this accrual is
$9.9 million at September 30, 2002. Florida Progress estimates that
its maximum contractual liability to AEP Resources associated with
Inland Marine Transportation segment is $60 million. These accruals
have been determined on an undiscounted basis. Florida Progress
measures its liability for this site based on estimable and probable
remediation scenarios. A rollforward of the balance in this accrual is
not provided due to the immateriality of this activity for the periods
presented. The Company believes that it is reasonably possible that
additional costs, which cannot be currently estimated, may be incurred
related to the environmental indemnification provision beyond the
amounts accrued. The Company cannot predict the outcome of this
matter.
The Company is also currently in the process of assessing potential
costs and exposures at other sites it has been notified of. 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.
There has been and may be further proposed federal legislation
requiring reductions in air emissions for nitrogen oxides, sulfur
dioxide, carbon dioxide and mercury setting forth national caps and
emission levels over an extended period of time. This national
multi-pollutant approach would have significant 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. The Company cannot
predict the outcome of this matter.
The EPA has been conducting an enforcement initiative related to a
number of coal-fired utility power plants in an effort to determine
whether modifications at those facilities were subject to New Source
Review requirements or New Source Performance Standards under the
Clean Air Act. Florida Power was asked to provide information to the
EPA as part of this initiative and cooperated in providing the
requested information. The EPA has initiated enforcement actions
against other utilities as part of this initiative, some of which have
resulted in or may result in settlement agreements, ranging from $1.0
billion to $1.4 billion. A utility that was not subject to a civil
enforcement action settled its New Source Review issues with the EPA
for $300 million. These settlement agreements have generally called
for expenditures to be made over extended time periods, and some of
the companies may seek recovery of the related costs through rate
adjustments. The Company cannot predict the outcome of this matter.
In July 1997, the EPA issued final regulations establishing a new
eight-hour ozone standard. In October 1999, the District of Columbia
Circuit Court of Appeals ruled against the EPA with regard to the
federal eight-hour ozone standard. The U.S. Supreme Court has upheld,
in part, the District of Columbia Circuit Court of Appeals decision.
Designation of areas that do not attain the standard is proceeding and
further litigation and rulemaking on this and other aspects of the
standard are anticipated. The Company cannot predict the outcome of
this matter.
Florida Power has filed claims with the Company's general liability
insurance carriers to recover costs arising out of actual or potential
liabilities. Some claims have settled and others are still pending.
While management cannot predict the outcome of these matters, the
outcome is not expected to have a material effect on the financial
position or results of operations.
Legal Matters
1) Age Discrimination Suit
Florida Power and Florida Progress have been named defendants in an
age discrimination lawsuit. The number of plaintiffs remains at 116,
but four of those plaintiffs have had their federal claims dismissed
and 74 others have had their state age claims dismissed. While no
dollar amount was requested, each plaintiff seeks back pay,
reinstatement or front pay through their projected dates of normal
retirement, costs and attorneys' fees. In October 1996, the Federal
Court approved an agreement between the parties to provisionally
certify this case as a class action suit under the Age Discrimination
in Employment Act. Florida Power filed a motion to decertify the class
and in August 1999, the Court granted Florida Power's motion. In
October 1999, the judge certified the question of whether the case
should be tried as a class action to the Eleventh Circuit Court of
Appeals for immediate appellate review. In December 1999, the Court of
18
Appeals agreed to review the judge's order decertifying the class. In
anticipation of a potential ruling decertifying the case as a class
action, plaintiffs filed a virtually identical lawsuit, which
identified all opt-in plaintiffs as named plaintiffs. On July 5, 2001,
the Eleventh Circuit Court of Appeals ruled that as a matter of law,
disparate claims cannot be brought under the Americans with
Disabilities Act (ADEA). This ruling has the effect of decertifying
the case as a class action. On October 3, 2001, the plaintiffs filed a
petition in the United States Supreme Court, requesting a hearing of
the case, on the issue of whether disparate claims can be brought
under the ADEA. On December 3, 2001, the United States Supreme Court
agreed to hear the case. Oral arguments on the issue were held on
March 20, 2002. On April 1, 2002, the U.S. Supreme Court issued a per
curiam affirmed order in the case stating they had improvidently
granted the oral argument and they would uphold the ruling of the
Eleventh Circuit Court of Appeals. Therefore, the case will remain
decertified. As a result of the decertification, the trial court has
grouped the plaintiffs cases to be tried. The trial for the first set
of twelve plaintiffs began on July 22, 2002. The jury entered a
verdict in favor of Florida Power in that trial on August 9, 2002. The
next group of plaintiffs' to be tried was named, but no trial date was
set. The parties attended a second mediation on October 31 and
November 1, 2002. The Company was able to reach a settlement of this
matter with all but three plaintiffs, the details of which are subject
to a confidentiality agreement.
2) Franchise Litigation
Six cities, with a total of approximately 49,000 customers, have sued
Florida Power in various circuit courts in Florida. The lawsuits
principally seek 1) a declaratory judgment that the cities have the
right to purchase Florida Power's electric distribution system located
within the municipal boundaries of the cities, 2) a declaratory
judgment that the value of the distribution system must be determined
through arbitration, and 3) injunctive relief requiring Florida Power
to continue to collect from Florida Power's customers and remit to the
cities, franchise fees during the pending litigation, and as long as
Florida Power continues to occupy the cities' rights-of-way to provide
electric service, notwithstanding the expiration of the franchise
ordinances under which Florida Power had agreed to collect such fees.
Three circuit courts have entered orders requiring arbitration to
establish the purchase price of Florida Power's electric distribution
facilities within three cities. Two appellate courts have upheld those
circuit court decisions and authorized cities to determine the value
of Florida Power's facilities within the cities through arbitration.
To date, no city has attempted to actually exercise the right to
purchase any portion of Florida Power's electric distribution system.
An arbitration in one of the cases was held in August 2002 and an
award was issued in October 2002 setting the value of Florida Power's
distribution system within one city at approximately $22 million. At
this time, whether and when there will be further proceedings
following this award cannot be determined. Additional arbitration's
have been scheduled to occur in the fourth quarter of 2002 and second
quarter of 2003. The Company cannot predict the outcome of these
matters.
3) Other Legal Matters
Florida Progress and Florida Power are involved in various other
claims and legal actions arising in the ordinary course of business,
some of which involve substantial amounts. Where appropriate, accruals
have been made in accordance with SFAS No. 5, "Accounting for
Contingencies," to provide for such matters. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect upon either company's consolidated financial
position, results of operations or liquidity.
13. DISCONTINUED OPERATIONS
On July 23, 2001, Progress Energy announced the disposition of the Inland
Marine Transportation segment of the Company, which was operated by MEMCO
Barge Line, Inc. Inland Marine provides transportation of coal,
agricultural and other dry-bulk commodities as well as fleet management
services. Progress Energy entered into a contract to sell MEMCO Barge Line,
Inc., to AEP Resources, Inc., a wholly-owned subsidiary of American
Electric Power. On November 1, 2001, the Company completed the sale of the
Inland Marine Transportation segment.
The results of operations for the three and nine months ended September 30,
2001, have been restated for the discontinued operations of the Inland
Marine Transportation segment. The net income of these operations is
reported in the Consolidated Statements of Income under discontinued
operations.
19
Results for discontinued operations for the three and nine months ended
September 30, 2001, were as follows:
(in thousands) Three Months ended Nine Months ended
September 30, 2001 September 30, 2001
------------------- -------------------
Revenues $ 39,313 $ 114,620
=================== ===================
Earnings before income taxes $ - $ 4,530
Income taxes - 1,848
------------------- -------------------
Net earnings - 2,682
Estimated loss on disposal of discontinued operations,
Including provision of $5,468 for pre-tax operating income
During phase-out period, (net of applicable income tax
Benefit of $9,028 and $7,797 for the three and nine months
ended September 30,2001, respectively) (14,120) (28,528)
------------------- -------------------
Loss from discontinued operations $ (14,120) $ (25,846)
=================== ===================
The discontinued operations in the Consolidated Statements of Income for
the three and nine months ended September 30, 2002, represents the
after-tax gain from the resolution of approximately $8.0 million of
contingencies in the purchase agreement of the Inland Marine Transportation
segment.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING RESULTS
Florida Progress' consolidated earnings from continuing operations for the three
and nine months ended September 30, 2002, were a loss of $57.0 million and
income of $109.1 million respectively, compared to income of $181.5 million and
$359.0 million for the comparable periods ended September 30, 2001. The year
over year comparisons were most significantly impacted by the recognition of
asset impairments and other one time charges of $144.0 million, net of tax,
recognized in the Progress Telecom business in the third quarter of 2002. In
addition, the current year results were negatively affected by intra-period tax
adjustments. These factors and other key business drivers are discussed in more
detail in the following business segment reviews.
FLORIDA POWER CORPORATION
Florida Power reported earnings for common stock for the three and nine months
ended September 30, 2002 of $123.8 million and $258.3 million, respectively,
compared to earnings of $114.1 million and $270.0 million, respectively, for the
same periods in the prior year. Additionally, Florida Power results for the
three and nine months ended September 30, 2002 were favorably impacted by a
$13.4 million tax benefit reallocation from the holding company to Florida
Power. See Other Businesses section below for additional information on the tax
benefit reallocation.
Florida Power's earnings for the three and nine months ended September 30, 2002,
were negatively affected by the outcome of the Florida Power rate case
settlement, which included a one-time retroactive revenue refund of $35.0
million, $21.0 million after tax, recorded in the first quarter of 2002 and a
decrease in retail rates, which was partially offset by reductions in
depreciation in accordance with the settlement. See Note 4 to the Interim
Financial Statements for additional information on the settlement. In addition,
Florida Power results for the three months and nine months ended were negatively
affected by increases in operations and maintenance expense as described more
fully below.
Florida Power's electric revenues for the three and nine months ended September
30, 2002 and 2001 and the percentage change by customer class are as follows (in
millions):
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------------------------------------
Customer Class 2002 % Change 2001 2002 % Change 2001
- -------------------------------------------------------------------------------------------------------------------
Residential $469.8 (5.7)% $498.2 $1,244.7 (3.0)% $1,283.2
Commercial 199.5 (8.0) 216.9 549.7 (3.3) 568.2
Industrial 52.6 (4.0) 54.8 157.7 (5.8) 167.5
Governmental 45.1 (7.2) 48.6 128.5 (1.6) 130.6
Retroactive Retail Revenue Refund - - - (35.0) - -
- --------------------------------------------------- ----------------------- --------------
Total Retail Revenues 767.0 (6.3) 818.5 2,045.6 (4.8) 2,149.5
Wholesale 57.8 (19.9) 72.2 166.1 (28.4) 232.0
Unbilled 8.4 - (7.3) 20.2 - (12.1)
Miscellaneous 30.4 33.9 22.7 84.1 (35.8) 130.9
- --------------------------------------------------- ----------------------- --------------
Total Electric Revenues $863.6 (4.7)% $906.1 $2,316.0 (7.4)% $2,500.3
- -------------------------------------------------------------------------------------------------------------------
21
Florida Power's electric energy sales for the three and nine months ended
September 30, 2002 and 2001, and the percentage change by customer class are as
follows (in thousands of mWh):
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------------------------------------
2002 % Change 2001 2002 % Change 2001
- -------------------------------------------------------------------------------------------------------------------
Residential 5,503 2.5% 5,370 14,078 1.7% 13,841
Commercial 3,207 1.4 3,164 8,519 1.8 8,367
Industrial 983 5.3 934 2,859 (2.2) 2,923
Governmental 759 1.2 750 2,095 2.6 2,042
- --------------------------------------------------- --------------------- --------------
Total Retail Energy Sales 10,452 2.3 10,218 27,551 1.4 27,173
Wholesale 1,020 (22.7) 1,320 2,975 (18.8) 3,666
Unbilled 214 - (181) 689 - (122)
- --------------------------------------------------- --------------------- --------------
Total mWh sales 11,686 2.9% 11,357 31,215 1.6% 30,717
- -------------------------------------------------------------------------------------------------------------------
As a result of the settlement of the Florida Power rate case, effective May 1,
2002, Florida Power reduced its rates by 9.25%. The effect of this reduction was
to reduce revenue by $30.9 million for the third quarter of 2002 and $51.4
million for the nine months ended September 30, 2002, when compared to the same
periods in the prior year. Partially offsetting the decrease in rates and the
one-time refund from the settlement detailed above were the impacts of favorable
weather and customer growth. In addition, revenues for the first nine months of
2002 decreased when compared to the same period in the prior year due to the
recognition of $63 million of deferred revenue in the first quarter of 2001,
which is included in miscellaneous revenues in the table above. In 2001, the
deferred revenues were offset by accelerated amortization of the Tiger Bay
regulatory asset, discussed below, and therefore, had no net earnings impact.
Wholesale electric revenues and sales decreased from the prior year due to the
completion of specific contracts.
Fuel used in generation and purchased power decreased $32.0 million and $80.0
million for the three and nine months ended September 30, 2002, respectively,
when compared to $414.7 million and $1,103.9 million, respectively, for the same
periods in the prior year, primarily due to lower oil and gas prices and
purchased power costs, partially offset by an increase in coal prices and volume
from higher system requirements. In addition, the decrease for the three months
ended September 30, 2002, was due to the lowered recovery of fuel expense as a
result of the mid-course correction of Florida Power's fuel cost recovery clause
as part of the settlement. Fuel and purchased power expenses are recovered
primarily through cost recovery clauses and, as such, have no material impact on
operating results.
Operations and maintenance expense increased by $19.2 million and $69.9 million
for the three and nine months ended September 30, 2002, respectively, when
compared to operations and maintenance expense of $119.9 million and $350.6
million, respectively, for the same periods in the prior year. These amounts
have increased due to a decreased pension credit in the current year ($6.5
million and $22.8 million lower for the three and nine months ended September
30, 2002); increased other employee benefit costs, primarily driven by medical
costs (approximately $6.1 million and $15.6 million for the three and nine
months ended September 30, 2002); increased spending related to Florida Power's
Commitment to Excellence program which is aimed at improving system reliability
and customer satisfaction ($2.9 million and $8.5 million for the three and nine
months ended September 30, 2002); and increased support charges from the Service
Company as a result of higher vacancy rates in the prior year.
Depreciation and amortization expense decreased by $21.7 million and $123.8
million for the three and nine months ended September 30, 2002, respectively,
when compared to expense of $95.1 million and $341.8 million, respectively, for
the same periods in the prior year. The Florida Power rate case settlement
provides for ongoing reductions in depreciation, nuclear decommissioning and
fossil dismantlement costs that reduced the amount of depreciation recorded by
$19.5 million and $58.7 million for the three and nine months ended September
30, 2002, respectively. In addition, the first half of 2001 depreciation and
amortization includes $63 million of accelerated amortization on the Tiger Bay
regulatory asset associated with deferred revenue from 2000.
PROGRESS FUELS CORPORATION
Progress Fuels makes up the majority of Florida Progress' diversified
operations. The results of operations for Progress Fuels' Energy and Related
Services and Rail Services units are discussed below.
Energy and Related Services - Earnings at the Energy and Related Services Group
decreased $3.7 million for the three months ended September 30, 2002, and
decreased $2.7 million for the nine months ended September 30, 2002, when
compared to the same periods in the prior year. The Energy and Related Services
segment sold 1.7 million and 5.3 million tons of synthetic fuel for the three
and nine months ended September 30, 2002, respectively, compared to 2.4 million
22
and 6.2 million tons, respectively, for the same periods in the prior year. The
sales resulted in tax credits of $44.8 million and $144.5 million being recorded
for the three and nine months ended September 30, 2002, respectively, compared
to tax credits of $63.1 million and $166.3 million, respectively, for the same
periods in the prior year. The synthetic fuel production and related tax credits
are lower in 2002 than 2001 because the production schedule in 2002 has been
evenly distributed based on anticipated full-year production whereas in 2001
excess production in the first nine months of the year mandated lower fourth
quarter production. The production and sale of the synthetic fuel from these
facilities qualifies for tax credits under Section 29 of the Code. See
"Synthetic Fuels" under OTHER MATTERS below for additional discussion of these
tax credits.
The Energy and Related Services operations include the operations of Mesa
Hydrocarbons, Inc. (Mesa), which owns natural gas reserves and operates wells in
Colorado and sells natural gas. These operations also include the activities of
the recently acquired Westchester Gas Company. See Note 2 to the Interim
Financial Statements for additional information on this acquisition. Progress
Fuels periodically enters into derivative instruments to hedge its exposure to
price fluctuations on natural gas sales. During 2002, Progress Fuels has entered
into cash flow hedges for approximately 81 percent and 56 percent, respectively,
of Mesa and Westchester's total projected natural gas sales for the fourth
quarter of 2002 and the entire year 2003. See Note 10 to the Interim Financial
Statements for more information on these instruments.
Rail Services - Rail Services' operations represent the activities of Progress
Rail Services Corporation (Progress Rail) and include railcar repair, rail parts
reconditioning and sales, scrap metal recycling and other rail related services.
Rail Services generated a loss of $0.6 million for the three months ended and
income of $1.7 million for the nine months ended September 30, 2002, compared to
losses of $2.2 million and $14.0 million for the comparable periods in 2001.
Rail Service's year to year results were impacted by a weak business
environment, which resulted in $24.1 million decreased revenues for the quarter
and a decrease of $93.5 million for the nine months ended September 30, 2002
when compared to 2001 (actual third quarter 2001 revenues of $220.0, actual
September 2001 year to date revenues of $670.6 million). In addition, Rail
Services' transition from acting as a scrap reseller in 2001 to acting as a
scrap resale agent in 2002 and asset sales in 2001 decreased revenues.
Corresponding decreases in operating costs and the impact of targeted cost
cutting measures offset the revenue reductions.
OTHER
The other group includes telecommunications, holding company and financing
expenses. The increased loss over the three months (2002 loss of $215.6 million
compared to 2001 income of $30.4 million) and nine months (2002 loss of $254.7
million compared to 2001 loss of $3.6 million) of 2001 is due primarily to the
recognition of asset impairments and other one-time charges in the
telecommunications business unit and by intra-period income tax allocation
adjustments. Generally accepted accounting principles require 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 $60.2
million and $79.2 million for the three and nine months ended September 30,
2002, respectively, in order to maintain an effective tax rate consistent with
the estimated annual rate. Income tax expense was increased by $38.2 million and
$17.8 million for the three and nine months ended September 30, 2001,
respectively. The tax credits associated with the Company's synthetic fuel
operations lower the overall effective tax rate. These credits, along with
seasonal earnings variations and the impact of the Progress Telecom asset
impairment, can also cause large swings in the effective tax rate for interim
periods. Therefore, this adjustment will vary each quarter, but have no effect
on net income for the year.
Progress Telecom had net losses of $147.0 million and $156.6 million for the
three and nine months ended September 30, 2002, respectively. This compares to
net losses of $2.8 million and $6.9 million for the same periods in 2001. The
decrease in earnings in 2002, when compared to 2001, is primarily due to
long-lived asset impairments and other one-time after tax charges of $144.0
million. See Note 3 to the Interim Financial Statements for further discussion
of these charges. This write-down constitutes a significant reduction in the
book value of these assets and the ongoing operations are expected to have a
negligible impact on the Company's net income. Excluding the one-time charges,
Progress Telecom's third quarter 2002 loss of $3.0 million compares to the prior
year's comparable period loss of $2.8 million. A loss for the nine months ended
September 30, 2002 (excluding the one-time charges) of $12.6 million compares to
a loss of $6.9 million for the comparable period in 2001. The earnings declines
resulted primarily from additional depreciation on fiber assets being
capitalized and depreciated in the first half of 2002, partially offset by
declines in depreciation in the third quarter resulting from the asset
impairments.
Progress Energy and its subsidiaries are subject to regulation under the Public
Utility Holding Company Act (PUHCA) of 1935, as amended, of the SEC. According
to a recent SEC order, Progress Energy's tax benefit not related to acquisition
interest expense is to be allocated to profitable subsidiaries. Therefore, the
23
tax benefit that was previously held in the Parent's holding company, has been
allocated to the profitable subsidiaries effective with the third quarter of
2002. This allocation increased Florida Progress holding company tax expense by
$3.3 million for the three months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Statements of Cash Flows and Financing Activities
Cash provided by operating activities decreased $144.6 million for the nine
months ended September 30, 2002, when compared to the corresponding period in
the prior year. The decrease in cash from operating activities for the 2002
period is due to a decrease in operating income from the impact of the Florida
Power rate case settlement and to changes in the balances of certain current
assets and liabilities due to operational fluctuations.
Net cash used in investing activities increased $71.8 million for the nine
months ended September 30, 2002, when compared to the corresponding period in
the prior year. This is primarily due to increased expenditures on Florida
Power's construction program and the acquisition of Westchester Gas Company (See
Note 2 to the Interim Financial Statements). During the first nine months of
2002, $317.3 million was spent on the Florida Power construction program and
$96.5 million was spent in diversified operations. The acquisition of
Westchester Gas Company resulted in a net cash outflow of $17.4 million.
Net cash used in financing activities decreased $228.3 million for the nine
months ended September 30, 2002, when compared to the corresponding period in
the prior year. The decrease is primarily due to the Company paying off $294.6
million of short-term indebtedness in the prior year. This decrease was offset
with increases in the net equity transactions with the parent and intercompany
borrowings in the current year.
In February 2002, $50 million of Progress Capital Holding (PCH) medium-term
notes, 5.78% Series, matured. Progress Energy funded this maturity through the
issuance of commercial paper.
On March 28, 2002, Standard & Poor's affirmed Progress Energy's corporate credit
rating of BBB+ and Florida Power's rating but revised the outlook for Progress
Energy to negative from stable. S&P stated that its change in outlook reflects
the increased business risk at Progress Energy's Progress Ventures business unit
and lower-than-projected credit protection measures. On September 4, 2002, S&P
reaffirmed Progress Energy's and Florida Power's credit ratings and maintained
the negative outlook for Progress Energy.
On April 10, 2002, Moody's Investors Service revised its outlook to negative
from stable on Progress Energy's senior unsecured debt rating of Baa1. Moody's
maintained a stable outlook for both Florida Power and CP&L. Moody's stated that
its change in outlook to negative was in response to the increased level of debt
incurred by Progress Energy, primarily to finance the expansion of its Progress
Ventures unregulated generation portfolio. On October 18, 2002, Moody's
announced that it had placed Progress Energy's senior unsecured debt rating
(Baa1) on review for possible downgrade. As its basis for review, Moody's cited
primarily Progress Energy's recent writedown of the value of its long-lived
telecommunications assets and the related delay in its deleveraging plan.
Moody's further indicated that it did not expect its review to result in more
than a one notch downgrade of Progress Energy's senior unsecured debt rating.
Moody's confirmed its ratings of Progress Energy's commercial paper (P-2) and
the ratings of its two operating utilities, CP&L (senior secured--A-3,
commercial paper--P-2, stable outlook) and Florida Power (senior secured--A-1,
commercial paper--P-1, stable outlook).
The change in outlook by the rating agency has not materially affected the
Company's access to liquidity nor the cost of its short-term borrowings.
On July 1, 2002, $30 million of Florida Power medium-term notes, 6.54% Series,
matured. Florida Power funded this maturity through the issuance of commercial
paper.
On July 11, 2002, Florida Power announced the redemption of $108.55 million
principal amount of Citrus County Pollution Control Refunding Revenue Bonds,
Series 1992 A Due January 1, 2027, $90 million principal amount of Citrus County
Pollution Control Refunding Revenue Bonds, Series 1992 B Due February 1, 2022,
and $10.115 million principal amount of Pasco County Pollution Control Refunding
Revenue Bonds, Series 1992A Due February 1, 2022, at 102% of the principal
amount of such bonds and $32.2 million principal amount of Pinellas County
Pollution Control Refunding Revenue Bonds, Series 1991 Due December 1, 2014 at
101% of the principal amount of such bonds. These redemptions were finalized on
August 12, 2002.
24
On July 16, 2002, Florida Power issued $108.55 million principal amount of
Citrus County Pollution Control Revenue Refunding Bonds, Series 2002A Due
January 1, 2027, $100.115 million principal amount of Citrus County Pollution
Control Revenue Refunding Bonds, Series 2002B Due January 1, 2022 and $32.2
million principal amount of Citrus County Pollution Control Revenue Refunding
Bonds, Series 2002C Due January 1, 2018. Proceeds from this issuance were used
to redeem Florida Power's pollution control revenue refunding bonds above.
Future Commitments
As of September 30, 2002, both Florida Progress' and Florida Power's contractual
cash obligations and other commercial commitments have not changed materially
from what was reported in the 2001 Annual Report on Form 10-K.
OTHER MATTERS
Florida Power Rate Case Settlement
On March 27, 2002, the parties in Florida Power's rate case entered into a
Stipulation and Settlement Agreement (the Agreement) related to retail rate
matters. The Agreement was approved by the FPSC on April 23, 2002. The Agreement
is generally effective from May 1, 2002 through December 31, 2005; provided,
however, that if Florida Power's base rate earnings fall below a 10% return on
equity, Florida Power may petition the FPSC to amend its base rates.
See Note 4 to the Interim Financial Statements for additional information on the
Agreement.
Fuel Acquisition
On April 26, 2002, Progress Fuels finalized the acquisition of Westchester Gas
Company, which includes approximately 215 producing natural gas wells, 52 miles
of intrastate gas pipeline and 170 miles of gas-gathering systems. The aggregate
purchase price of approximately $153 million consisted of cash consideration of
approximately $22 million and the issuance of 2.5 million shares of Progress
Energy common stock valued at approximately $129 million. The purchase price
included approximately $1.7 million of direct transaction costs. The properties
are located within a 25-mile radius of Jonesville, Texas, on the Texas-Louisiana
border. This transaction added 140 billion cubic feet (Bcf) of gas reserves to
Progress Fuels' fuel business. See Note 2 to the Interim Financial Statements
for additional information on this acquisition.
Synthetic Fuels Tax Credits
The Company, through Progress Fuels and its subsidiaries, produces synthetic
fuel from coal. The production and sale of the synthetic fuel qualifies for tax
credits under Section 29 of the Internal Revenue Code (Section 29) if certain
requirements are satisfied, including a requirement that the synthetic fuel
differs significantly in chemical composition from the coal used to produce such
synthetic fuel. All of the Company's synthetic fuel facilities have received
favorable private letter rulings from the Internal Revenue Service (IRS) with
respect to their operations. These tax credits are subject to review by the IRS,
and if the Company failed to prevail through the administrative or legal
process, there could be a significant tax liability owed for previously taken
Section 29 credits, with a significant impact on earnings and cash flows. Tax
credits for the nine months ended September 30, 2002 and 2001, were $144.5
million and $166.3 million, respectively, offset by operating losses, net of
tax, of $59.9 million and $84.0 million, respectively, for the same periods. One
synthetic fuel entity, Colona Synfuel Limited Partnership, L.L.L.P., from which
the Company has been allocated approximately $217 million in tax credits to
date, is being audited by the IRS. The audit of Colona was not unexpected. The
Company is audited regularly in the normal course of business as are most
similarly situated companies. Total Section 29 credits generated to date are
approximately $547 million.
In September 2002, all of the Company's majority-owned synthetic fuel entities
were accepted into the IRS's Pre-Filing Agreement (PFA) program. The PFA program
allows taxpayers to voluntarily accelerate the IRS exam process in order to seek
resolution of specific issues. Either the Company or the IRS can withdraw from
the program at any time, and issues not resolved through the program may proceed
to the next level of the IRS exam process. While the ultimate outcome is
uncertain, the Company believes that participation in the PFA program will
likely shorten the tax exam process.
In management's opinion, the Company is complying with the private letter
rulings and all the necessary requirements to be allowed such credits under
Section 29 and believes it is likely, although it cannot provide certainty, that
it will prevail if challenged by the IRS on any credits taken. The current
Section 29 tax credit program expires in 2007.
25
Standard Market Design
On July 31, 2002, the Federal Energy Regulatory Commission (FERC) issued its
Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
Discrimination through Open Access Transmission Service and Standard Electricity
Market Design (SMD NOPR). The proposed rules set forth in the SMD NOPR would
require, among other things, that 1) all transmission owning utilities transfer
control of their transmission facilities to an independent third party; 2)
transmission service to bundled retail customers be provided under the
FERC-regulated transmission tariff, rather than state-mandated terms and
conditions; 3) new terms and conditions for transmission service be adopted
nationwide, including new provisions for pricing transmission in the event of
transmission congestion; 4) new energy markets be established for the buying and
selling of electric energy; and 5) load serving entities be required to meet
minimum criteria for generating reserves. If adopted as proposed, the rules set
forth in the SMD NOPR would materially alter the manner in which transmission
and generation services are provided and paid for. Progress Energy is reviewing
the SMD NOPR and expects to file comments thereto, portions of which are due on
November 15, 2002 and January 10, 2003. FERC also has indicated that it expects
to issue final rules during the third quarter of 2003. The Company cannot
predict the outcome of this rulemaking or the possible outcome of any further
proceedings, including appeals, related to this matter.
Regional Transmission Organizations
The GridFlorida applicants filed a revised RTO proposal with the FPSC on March
20, 2002 incorporating certain changes required by the FPSC's December 2001
order. The FPSC then conducted a series of workshops and meetings to allow
parties an opportunity to comment on the applicants' March 20 compliance filing.
As a result of these comments, the GridFlorida applicants filed modifications to
certain aspects of the compliance filing on June 21, 2002. On September 3, 2002,
the FPSC issued an order addressing the compliance of the applicants' modified
filing with the FPSC's December 2001 order through final agency action,
requiring additional revisions to the applicants' modified filing through
proposed agency action, and scheduling an expedited hearing for late October
2002 to consider the applicants' revised market design proposal and other
proposed agency action revisions protested by the parties. On October 3, 2002,
the Office of Public Counsel filed a Notice of Appeal to the Florida Supreme
Court regarding the FPSC's September 3rd order. At a public meeting on October
15, 2002, the FPSC voted to hold further proceedings in the GridFlorida docket
in abeyance pending the outcome of the Office of Public Counsel's appeal.
The actual structure of GridFlorida or any alternative combined transmission
structure, as well as the date it may become operational, depends upon the
resolution of all regulatory approvals and technical issues. Given the
regulatory uncertainty of the ultimate timing, structure and operations of
GridFlorida or an alternate combined transmission structure, the Company cannot
predict whether their creation will have any material adverse effect on its
future consolidated results of operations, cash flows or financial condition.
Franchise Litigation
Six cities, with a total of approximately 49,000 customers, have sued Florida
Power in various circuit courts in Florida. The lawsuits principally seek 1) a
declaratory judgment that the cities have the right to purchase Florida Power's
electric distribution system located within the municipal boundaries of the
cities, 2) a declaratory judgment that the value of the distribution system must
be determined through arbitration, and 3) injunctive relief requiring Florida
Power to continue to collect from Florida Power's customers and remit to the
cities, franchise fees during the pending litigation, and as long as Florida
Power continues to occupy the cities' rights-of-way to provide electric service,
notwithstanding the expiration of the franchise ordinances under which Florida
Power had agreed to collect such fees. Three circuit courts have entered orders
requiring arbitration to establish the purchase price of Florida Power's
electric distribution facilities within three cities. Two appellate courts have
upheld those circuit court decisions and authorized cities to determine the
value of Florida Power's facilities within the cities through arbitration. To
date, no city has attempted to actually exercise the right to purchase any
portion of Florida Power's electric distribution system. An arbitration in one
of the cases was held in August 2002 and an award was issued in October 2002
setting the value of Florida Power's distribution system within one city at
approximately $22 million. At this time, whether and when there will be further
proceedings following this award cannot be determined. Additional arbitration's
have been scheduled to occur in the fourth quarter of 2002 and second quarter of
2003. The Company cannot predict the outcome of these matters.
Nuclear Matters
Pressurized Water Reactors
On March 18, 2002 the Nuclear Regulatory Commission (NRC) sent a bulletin to
companies that hold licenses for pressurized water reactors (PWRs) requiring
information on the structural integrity of the reactor vessel head and a basis
26
for concluding that the vessel head will continue to perform its function as a
coolant pressure boundary. The Company filed responses as required. Inspections
of the vessel heads at the Company's PWR plants have been performed during
previous outages. In October 2001 at the Crystal River plant (CR3), one nozzle
was found to have a crack and was repaired; however, no degradation of the
reactor vessel head was identified. Current plans are to replace the vessel head
at CR3 during its next regularly scheduled refueling outage in 2003.
On August 9, 2002, the NRC issued an additional Bulletin dealing with head
leakage due to cracks near the control rod nozzles. The NRC has asked licensees
to commit to high inspection standards to ensure the more susceptible plants
have no cracks. For CR3, the Company has responded to the NRC that previous
inspections are sufficient until the reactor head is replaced in the fall of
2003.
Security
On February 25, 2002, the NRC issued orders formalizing many of the security
enhancements made at the Company's nuclear plants since September 2001. These
orders include additional restrictions on access, increased security presence
and closer coordination with the Company's partners in intelligence, military,
law enforcement and emergency response at the federal, state and local levels.
These interim security measures were required to be completed at each nuclear
site by August 31, 2002. The Company completed the requirements by the deadline
and expects the NRC to perform an inspection for compliance in the near future.
As the NRC, other governmental entities, and the industry continue to consider
security issues, it is possible that more extensive security plans could be
required.
Union Contract
Approximately 2,100 employees at Florida Power are represented by the
International Brotherhood of Electrical Workers (IBEW). The current union
contract was ratified in December 1999 and expires on December 1, 2002. Florida
Power is currently in negotiations with the IBEW, but cannot predict the outcome
or impact of this matter.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Florida Progress Corporation
Certain market risks are inherent in Florida Progress' financial instruments,
which arise from transactions entered into in the normal course of business.
Florida Progress' primary exposures are changes in interest rates with respect
to long-term debt, commercial paper reclassified as long-term debt and
fluctuations in the return on marketable securities with respect to its nuclear
decommissioning trust funds. Florida Progress' exposure to return on marketable
securities for the decommissioning trust funds has not changed materially since
December 31, 2001. In addition, Florida Progress' exposure to changes in
interest rates from the Company's fixed rate long-term debt, FPC mandatorily
redeemable securities of trust and unsecured note with parent at September 30,
2002, was not materially different than at December 31, 2001.
Progress Fuels periodically enters into derivative instruments to hedge its
exposure to price fluctuations on natural gas sales. During 2002, Progress Fuels
has executed cash flow hedges on approximately 17.3 Bcf of natural gas sales for
the fourth quarter of 2002 and entire year 2003. These instruments did not have
a material impact on the Company's consolidated financial position or results of
operations.
Effective with the quarter ended September 30, 2002, the Company will no longer
reclassify commercial paper as long-term debt. At December 31, 2001, the Company
had reclassified $154 million of commercial paper to long-term debt. At
September 30, 2002, the exposure to changes in interest rates from the Company's
commercial paper facilities was not materially different than at December 31,
2001.
Florida Power Corporation
Certain market risks are inherent in Florida Power's financial instruments,
which arise from transactions entered into in the normal course of business.
Florida Power's primary exposures are changes in interest rates with respect to
27
long-term debt, commercial paper reclassified as long-term debt and fluctuations
in the return on marketable securities with respect to its nuclear
decommissioning trust funds. Florida Power's exposure to return on marketable
securities for the decommissioning trust funds has not changed materially since
December 31, 2001. In addition, Florida Power's exposure to changes in interest
rates from its fixed rate long-term debt at September 30, 2002, was not
materially different than at December 31, 2001.
Effective with the quarter ended September 30, 2002, Florida Power will no
longer reclassify commercial paper as long-term debt. At December 31, 2001,
Florida Power had reclassified $154 million of commercial paper to long-term
debt. At September 30, 2002, the exposure to changes in interest rates from
Florida Power's commercial paper facilities was not materially different than at
December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
Florida Progress Corporation
Within the 90 days prior to the filing date of this report, Florida Progress
carried out an evaluation, under the supervision and with the participation of
its management, including Florida Progress' chief executive officer and chief
financial officer, of the effectiveness of the design and operation of Florida
Progress' disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934. Based upon that evaluation, Florida Progress'
chief executive officer and chief financial officer concluded that its
disclosure controls and procedures are effective in timely alerting them to
material information relating to Florida Progress (including its consolidated
subsidiaries) required to be included in its periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in
Florida Progress' internal controls or in other factors that could significantly
affect these controls.
Florida Power Corporation
Within the 90 days prior to the filing date of this report, Florida Power
carried out an evaluation, under the supervision and with the participation of
its management, including Florida Power's chief executive officer and chief
financial officer, of the effectiveness of the design and operation of Florida
Power's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934. Based upon that evaluation, Florida Power's
chief executive officer and chief financial officer concluded that its
disclosure controls and procedures are effective in timely alerting them to
material information relating to Florida Power (including its consolidated
subsidiaries) required to be included in its periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in
Florida Power's internal controls or in other factors that could significantly
affect these controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. Wanda L. Adams, et al. v. Florida Power Corporation and Florida Progress
Corporation, U.S. District Court, Middle District of Florida, Ocala
Division, Case No. 95-123-C.V.-OC-10.
See prior discussion of this matter in the 2001 Form 10-K, Item 3, paragraph 2.
On October 3, 2001, the plaintiffs filed a petition in the United States Supreme
Court, requesting a hearing of the case, on the issue of whether disparate
claims can be brought under the Americans with Disabilities Act (ADEA). On
December 3, 2001, the United States Supreme Court agreed to hear the case. Oral
arguments on the issue were held on March 20, 2002. On April 1, 2002, the U.S.
Supreme Court issued a per curiam affirmed order in the case stating they had
improvidently granted the oral argument and they would uphold the ruling of the
Eleventh Circuit Court of Appeals. Therefore, the case will remain decertified.
As a result of the decertification, the trial court has grouped the plaintiffs
cases to be tried. The trial for the first set of twelve plaintiffs began on
July 22, 2002. The jury entered a verdict in favor of Florida Power in that
trial on August 9, 2002. The next group of plaintiffs' to be tried was named,
but no trial date was set. The parties attended a second mediation on October 31
and November 1, 2002. The Company was able to reach a settlement of this matter
with all but three plaintiffs, the details of which are subject to a
confidentiality agreement.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Florida
Exhibit Progress Florida Power
Number Description Corporation Corporation
------- ----------- ----------- -------------
10(i) Progress Energy, Inc. 2002 Equity Incentive Plan X X
(Amended and Restated Effective July 10, 2002)
10(ii) 2002 Performance Share Sub-Plan (effective July X X
9, 2002), Exhibit A to the Progress Energy, Inc.
2002 Equity Incentive Plan
(b) Reports on Form 8-K filed during or with respect to the quarter:
Florida Progress Corporation
Financial
Item Statements
Reported Included Date of Event Date Filed
9 No August 13, 2002 August 13, 2002
Florida Power Corporation
Financial
Item Statements
Reported Included Date of Event Date Filed
9 No August 13, 2002 August 13, 2002
29
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: November 14, 2002 By: /s/ Peter M. Scott III
---------------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
By: /s/ Robert H. Bazemore, Jr.
--------------------------------
Robert H. Bazemore, Jr.
Vice President and Controller
Chief Accounting Officer
30
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William Cavanaugh III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Florida Progress
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ William Cavanaugh III
-------------------------
William Cavanaugh III
Chairman and Chief Executive Officer
31
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter M. Scott III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Florida Progress
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Peter M. Scott III
----------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, H. William Habermeyer, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Florida Power
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ H. William Habermeyer, Jr.
------------------------------
H. William Habermeyer, Jr.
President and Chief Executive Officer
33
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter M. Scott III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Florida Power
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Peter M. Scott III
----------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
34