SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of report (date of earliest event reported):
February 18, 2003
Commission Exact name of registrants as specified in their charters, I.R.S. Employer
File Number state of incorporation, address of principal executive offices, Identification Number
and telephone number
1-8349 Florida Progress Corporation 59-2147112
A Florida Corporation
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
1-3274 Florida Power Corporation 59-0247770
d/b/a Progress Energy Florida, Inc.
A Florida Corporation
100 Central Avenue
St. Petersburg, Florida 33701
Telephone (727) 820-5151
Former Address of
Florida Power Corporation
One Progress Plaza
St. Petersburg, Florida 33701
This combined Form 8-K is filed separately by two registrants: Florida Progress
Corporation and Florida Power Corporation. Information contained herein relating
to either individual registrant is filed by such registrant solely on its own
behalf.
================================================================================
1
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The registrants file this combined Form 8-K Current Report for the purpose of
filing the exhibits listed below. Exhibit 99 is expected to be filed in
identical form with the registrant's combined Form 10-K Annual Report for the
year ended December 31, 2002.
(c) Exhibits.
4 Fortieth Supplemental Indenture (to the Mortgage Indenture
dated as of January 1, 1944) dated as of July 1, 2002
between Florida Power Corporation and First Chicago Trust
Company of New York
12a Florida Power Corporation Statement of Computation of Ratios
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG LLP
23.3 Consent of KPMG LLP
99 Florida Progress Corporation and Florida Power Corporation
financial statements:
Combined Independent Auditors' Report - Deloitte & Touche LLP
Combined Independent Auditors' Report - KPMG LLP
Florida Progress Corporation
Consolidated Statements of Income and Comprehensive Income for
the Years Ended December 31, 2002, 2001, and 2000
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001, and 2000
Consolidated Schedules of Capitalization as of December 31,
2002 and 2001
Consolidated Statements of Common Equity for the Years Ended
December 31, 2002, 2001, and 2000
Consolidated Quarterly Financial Data (Unaudited)
Florida Power Corporation
Statements of Income and Comprehensive Income for the Years
Ended December 31, 2002, 2001, and 2000
Balance Sheets as of December 31, 2002 and 2001
Statements of Cash Flows for the Years Ended December 31,
2002, 2001, and 2000
Schedules of Capitalization as of December 31, 2002 and 2001
Statements of Common Equity for the Years Ended December 31,
2002, 2001, and 2000 Quarterly
Financial Data (Unaudited)
Combined Notes to Financial Statements
2
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 hereunto duly authorized.
FLORIDA PROGRESS CORPORATION
FLORIDA POWER CORPORATION
Registrants
By: /s/ Robert H. Bazemore, Jr.
-----------------------------------
Robert H. Bazemore, Jr.
Vice President and Controller
Date: February 18, 2003
3
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
4 Fortieth Supplemental Indenture (to the Mortgage Indenture
dated as of January 1, 1944) dated as of July 1, 2002
between Florida Power Corporation and First Chicago Trust
Company of New York
12a Florida Power Corporation Statement of Computation of Ratios
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG LLP
23.3 Consent of KPMG LLP
99 Florida Progress Corporation and Florida Power Corporation
financial statements:
Combined Independent Auditors' Report - Deloitte & Touche LLP
Combined Independent Auditors' Report - KPMG LLP
Florida Progress Corporation
Consolidated Statements of Income and Comprehensive
Income for the Years Ended December 31, 2002, 2001, and 2000
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001, and 2000
Consolidated Schedules of Capitalization as of December 31, 2002
and 2001
Consolidated Statements of Common Equity for the Years
Ended December 31, 2002, 2001, and 2000
Consolidated Quarterly Financial Data (Unaudited)
Florida Power Corporation
Statements of Income and Comprehensive Income for the Years Ended
December 31, 2002, 2001, and 2000
Balance Sheets as of December 31, 2002 and 2001
Statements of Cash Flows for the Years Ended December 31,
2002, 2001, and 2000
Schedules of Capitalization as of December 31, 2002 and 2001
Statements of Common Equity for the Years Ended December 31,
2002, 2001, and 2000
Quarterly Financial Data (Unaudited)
Combined Notes to Financial Statements
4
Exhibit 12a
FLORIDA POWER CORPORATION
Statement of Computation of Ratios
(Dollars In Millions)
Ratio of Earnings to Fixed Charges:
2002 2001 2000 1999 1998
----------- ---------- ---------- ---------- ----------
Net Income $324.1 $311.1 $211.8 $267.0 $250.1
Income Taxes 163.3 182.6 150.5 151.3 141.0
----------- ---------- ---------- ---------- ----------
Income Before Taxes 487.4 493.7 362.3 418.3 391.1
Net Interest Charges 109.4 114.8 128.5 124.0 136.5
----------- ---------- ---------- ---------- ----------
Total Earnings (A) $596.8 $608.5 $490.8 $542.3 $527.6
----------- ---------- ---------- ---------- ----------
Fixed Charges (B) $109.4 $114.8 $128.5 $124.0 $136.5
----------- ---------- ---------- ---------- ----------
Preferred Dividends grossed
up for effective tax rate 2.4 2.4 2.6 2.3 2.3
Total Fixed Charges plus
Preferred Dividends (C) 111.8 117.2 131.1 126.3 138.8
----------- ---------- ---------- ---------- ----------
Ratio of Earnings to
Fixed Charges (A/B) 5.46 5.30 3.82 4.37 3.87
=========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges
and Preferred Dividends (A/C) 5.34 5.19 3.74 4.29 3.80
=========== ========== ========== ========== ==========
5
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-53939 on Form S-8, Registration Statement No. 33-54972 on Form S-8,
Registration Statement No. 333-02169 on Form S-8, Registration Statement No.
333-19037 on Form S-8, Registration Statement No. 333-75373 on Form S-8,
Registration Statement No. 333-39232 on Form S-3, Registration Statement No.
33-51573 on Form S-3, Registration Statement No. 33-47623 on Form S-8,
Registration Statement No. 2-93111 on Form S-3, Registration Statement No.
333-94143 on Form S-8, Registration Statement No. 333-66161 on Form S-8, and
Registration Statement No. 333-07853 on Form S-3 of Florida Progress Corporation
of our report dated February 12, 2003, appearing in this Form 8-K of Florida
Progress Corporation.
We consent to the incorporation by reference in Post-Effective Amendment 1 to
Registration Statement No. 33-55273 on Form S-3, Post-Effective Amendment 1 to
Registration Statement No. 333-29897 on Form S-3, Post-Effective Amendment 1 to
Registration Statement No. 333-62210 on Form S-3, and Registration Statement No.
333-63204 on Form S-3 of Florida Power Corporation of our report dated February
12, 2003, appearing in this Form 8-K of Florida Power Corporation.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
February 18, 2003
6
EXHIBIT 23.2
Board of Directors
Florida Progress Corporation:
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 33-53939, 33-54972, 333-02169, 333-19037, 333-75373, 33-47623,
333-94143 and 333-66161) and Form S-3 (Nos. 333-39232, 33-51573, 2-93111 and
333-07853) of Florida Progress Corporation of our report dated February 15, 2001
relating to the statements of income and comprehensive income, cash flows and
common equity of Florida Progress Corporation and subsidiaries, and of Florida
Power Corporation for the year ended December 31, 2000, which report appears in
this report on Form 8-K of Florida Progress Corporation.
/s/KPMG LLP
KPMG LLP
Tampa, Florida
February 18, 2003
EXHIBIT 23.3
Board of Directors
Florida Power Corporation:
We consent to incorporation by reference in the registration statements on Form
S-3 (No. 333-63204, Post-Effective Amendment 1 to No. 33-55273, Post-Effective
Amendment 1 to No. 333-29897, and Post-Effective Amendment 1 to 333-62210) of
Florida Power Corporation of our report dated February 15, 2001, relating to the
statements of income and comprehensive income, cash flows and common equity of
Florida Progress Corporation and subsidiaries, and of Florida Power Corporation
for the year ended December 31, 2000, which report appears in this report on
Form 8-K of Florida Power Corporation.
/s/KPMG LLP
KPMG LLP
Tampa, Florida
February 18, 2003
7
INDEPENDENT AUDITORS' REPORT
TO THE BOARDS OF DIRECTORS OF FLORIDA PROGRESS CORPORATION AND FLORIDA POWER
CORPORATION:
We have audited the accompanying consolidated balance sheets and schedules of
capitalization of Florida Progress Corporation and its subsidiaries (Florida
Progress) and the accompanying balance sheets and schedules of capitalization of
Florida Power Corporation (Florida Power) as of December 31, 2002 and 2001, and
the related Florida Progress consolidated statements of income and comprehensive
income, of common equity, and of cash flows and the related Florida Power
statements of income and comprehensive income, of common equity, and of cash
flows for each of the two years in the period ended December 31, 2002. These
financial statements are the responsibility of the respective company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements of Florida
Progress and the financial statements of Florida Power for the year ended
December 31, 2000 were audited by other auditors whose report, dated February
15, 2001 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Florida Progress and of Florida Power,
respectively, at December 31, 2002 and 2001, and the results of their respective
operations and cash flows for each of the two years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
February 12, 2003
8
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF FLORIDA PROGRESS CORPORATION:
We have audited the accompanying statements of income and comprehensive income,
cash flows, and common equity of Florida Progress Corporation and subsidiaries,
and of Florida Power Corporation, for the year ended December 31, 2000. These
financial statements are the responsibility of the respective management of
Florida Progress Corporation and Florida Power Corporation. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Florida
Progress Corporation and subsidiaries, and Florida Power Corporation for the
year ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/KPMG LLP
KPMG LLP
St. Petersburg, Florida
February 15, 2001
9
CONSOLIDATED STATEMENTS of INCOME AND COMPREHENSIVE INCOME
Florida Progress Corporation Years ended December 31
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Operating Revenues
Utility $ 3,061,732 $ 3,212,841 $ 2,871,563
Diversified business 1,291,534 1,323,620 1,358,772
- --------------------------------------------------------------------------------------------------------------
Total Operating Revenues 4,353,266 4,536,461 4,230,335
- --------------------------------------------------------------------------------------------------------------
Operating Expenses
Utility
Fuel used in electric generation 853,500 912,735 681,869
Purchased power 514,975 514,528 498,458
Operation and maintenance 572,237 487,144 589,131
Depreciation and amortization 294,856 452,972 402,625
Taxes other than on income 227,699 230,169 213,280
Diversified business
Cost of sales 1,329,157 1,374,445 1,336,276
Impairment of long-lived assets 281,157 160,569 130,700
Other 32,679 100,401 143,135
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses 4,106,260 4,232,963 3,995,474
- --------------------------------------------------------------------------------------------------------------
Operating Income 247,006 303,498 234,861
- --------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 6,647 9,005 8,418
Other, net (13,676) (26,085) (26,332)
- --------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (7,029) (17,080) (17,914)
- --------------------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 185,808 194,841 209,510
Allowance for borrowed funds used during construction (2,659) (1,087) (3,117)
- --------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 183,149 193,754 206,393
- --------------------------------------------------------------------------------------------------------------
Income before Income Taxes 56,828 92,664 10,554
Income Tax Benefit (173,223) (172,719) (124,715)
- --------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 230,051 265,383 135,269
Discontinued Operations, Net of Tax:
Income from discontinued operations - 2,682 8,972
Net gain (loss) on disposal of discontinued operations,
(net of applicable income tax expense and benefit of
$2,880 and $7,896, respectively) 5,120 (23,734) -
- --------------------------------------------------------------------------------------------------------------
Net Income $ 235,171 $ 244,331 $ 144,241
- --------------------------------------------------------------------------------------------------------------
Change in net unrealized losses on cash flow hedges
(net of tax of $3,678) (6,150) - -
Reclassification adjustment for amounts included in net
income (net of tax of $315) (515) - -
Minimum pension liability adjustment (net of tax
of $2,829) (4,503) - -
Foreign currency and other (1,584) (1,578) (982)
- --------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 222,419 $ 242,753 $ 143,259
- --------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
10
CONSOLIDATED BALANCE SHEETS
Florida Progress Corporation
(In thousands) December 31
Assets 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 7,477,025 $7,151,729
Accumulated depreciation (4,123,947) (3,984,308)
- ---------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,353,078 3,167,421
Held for future use 7,921 8,274
Construction work in progress 426,641 292,883
Nuclear fuel, net of amortization 40,260 62,536
- ---------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,827,900 3,531,114
- ---------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 33,601 5,201
Accounts receivable 385,431 357,038
Unbilled accounts receivable 60,481 63,080
Receivables from affiliated companies 42,418 26,976
Deferred income taxes 26,209 32,334
Inventory 492,273 485,891
Deferred fuel cost 37,503 15,147
Prepayments and other current assets 93,802 73,684
- ---------------------------------------------------------------------------------------------------------------
Total Current Assets 1,171,718 1,059,351
- ---------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 130,114 174,081
Unamortized debt expense 23,363 21,021
Nuclear decommissioning trust funds 373,551 406,100
Diversified business property, net 699,493 669,078
Miscellaneous other property and investments 83,222 115,496
Prepaid pension cost 226,413 202,167
Other assets and deferred debits 90,716 144,875
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,626,872 1,732,818
- ---------------------------------------------------------------------------------------------------------------
Total Assets $ 6,626,490 $ 6,323,283
- ---------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ---------------------------------------------------------------------------------------------------------------
Capitalization (see consolidated schedules of capitalization)
- ---------------------------------------------------------------------------------------------------------------
Common stock $ 1,628,951 $ 1,409,034
Retained earnings 598,191 666,201
Accumulated other comprehensive loss (15,737) (2,985)
Preferred stock of subsidiaries - not subject to mandatory redemption 33,497 33,497
Unsecured note with parent 500,000 500,000
Long-term debt, net 1,710,363 1,989,684
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization 4,455,265 4,595,431
- ---------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 275,397 88,053
Accounts payable 348,842 292,292
Payables to affiliated companies 102,619 116,520
Notes payable to affiliated companies 379,677 147,583
Interest accrued 68,120 67,861
Short-term obligations 257,100 154,250
Customer deposits 121,998 118,285
Other current liabilities 167,164 141,304
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,720,917 1,126,148
- ---------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes - 165,816
Accumulated deferred investment tax credits 47,914 54,387
Regulatory liabilities 61,004 50,193
Other liabilities and deferred credits 341,390 331,308
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 450,308 601,704
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 22)
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 6,626,490 $ 6,323,283
- ---------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
11
CONSOLIDATED STATEMENTS of CASH FLOWS
Florida Progress Corporation Years ended December 31
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 235,171 $ 244,331 $ 144,241
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations - (2,682) (8,972)
Net (gain) loss on disposal of discontinued operations (5,120) 23,734 -
Impairment of long-lived assets 281,157 160,569 130,700
Depreciation and amortization 386,126 537,983 453,757
Deferred income taxes and investment tax credits, net (239,526) (201,787) (236,978)
Deferred fuel cost (credit) (22,356) 75,287 (122,076)
Net (increase) decrease in accounts receivable (34,619) 39,808 (137,794)
Net (increase) decrease in inventories (39,914) (131,662) 47,572
Net increase in prepayments and other current assets (11,918) (10,600) (57,602)
Net increase in accounts payable 38,564 55,685 48,979
Net increase in other current liabilities 28,723 216,957 84,242
Other 54,749 (56,391) 174,627
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 671,037 951,232 520,696
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Property additions (550,019) (353,433) (286,800)
Diversified business property additions (153,908) (133,447) (194,195)
Nuclear fuel additions (58) (43,087) -
Net contributions to nuclear decommissioning trust 12,206 (19,973) (19,971)
Proceeds from sale of assets 34,825 24,988 -
Proceeds from sale of discontinued operations 8,000 28,023 -
Other 1,231 (5,927) (45,673)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (647,723) (502,856) (546,639)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 235,975 299,201 7,307
Proceeds from issuance of long-term debt to parent - 500,000 -
Net increase (decrease) in short-term obligations 102,850 (813,042) 330,611
Retirement of long-term debt (350,477) (190,642) (166,441)
Net increase (decrease) in intercompany notes 232,094 (102,403) -
Equity contributions from parent 87,155 90,149 84,490
Dividends paid to parent (303,181) (248,804) -
Dividends paid on common stock - - (215,277)
Other 670 (1,786) (168)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 5,086 (467,327) 40,522
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used in) Discontinued Operations - (48) 33
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 28,400 (18,999) 14,612
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 5,201 24,200 9,588
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 33,601 $ 5,201 $ 24,200
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 180,032 $ 169,983 $ 195,500
income taxes (net of refunds) $ 60,303 $ (3,926) $ 182,500
Noncash Activities
o On April 26, 2002, Progress Fuels Corporation received an equity
contribution from Progress Energy, Inc., with which it acquired 100% of
Westchester Gas Company. In conjunction with the purchase, Progress Energy,
Inc., issued approximately $129 million in common stock.
See Notes to Financial Statements.
12
CONSOLIDATED SCHEDULES of CAPITALIZATION
Florida Progress Corporation December 31
(In thousands except share data) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value, 250,000,000 shares
authorized; 98,616,658 outstanding in 2002 and 2001 $1,628,951 $1,409,034
Accumulated other comprehensive loss (15,737) (2,985)
Retained earnings 598,191 666,201
- ----------------------------------------------------------------------------------------------------------
Total Common Stock Equity $2,211,405 $2,072,250
- ----------------------------------------------------------------------------------------------------------
Preferred Stock of Florida Power Corporation - not subject to mandatory
redemption
Authorized-4,000,000 shares cumulative, $100 par value Preferred Stock;
5,000,000 shares cumulative, no par value preferred stock; 1,000,000 shares,
$100 par value Preference Stock $100 par value Preferred Stock:
4.00% - 39,980 shares outstanding (redemption
price $104.25) $ 3,998 $ 3,998
4.40% - 75,000 shares outstanding (redemption
price $102.00) 7,500 7,500
4.58% - 99,990 shares outstanding (redemption
price $101.00) 9,999 9,999
4.60% - 39,997 shares outstanding (redemption
price $103.25) 4,000 4,000
4.75% - 80,000 shares outstanding (redemption
price $102.00) 8,000 8,000
- ----------------------------------------------------------------------------------------------------------
Total Preferred Stock of Florida Power Corporation $ 33,497 $ 33,497
- ----------------------------------------------------------------------------------------------------------
Long-Term Debt (maturities and weighted-average
interest rates as of December 31, 2002)
Florida Power Corporation:
First mortgage bonds, maturing 2003-2023 6.83% $ 810,000 $ 810,000
Pollution control revenue bonds, maturing 2018-2027 1.11% 240,865 240,865
Medium-term notes, maturing 2003-2028 6.74% 416,900 449,100
Unamortized premium and discount, net (6,433)
(2,935)
- ----------------------------------------------------------------------------------------------------------
$ 1,461,332 $ 1,497,030
- ----------------------------------------------------------------------------------------------------------
Florida Progress Funding Corporation:
Mandatorily redeemable preferred securities, maturing
2039 7.10% $ 300,000 $ 300,000
- ----------------------------------------------------------------------------------------------------------
$ 300,000 $ 300,000
- ----------------------------------------------------------------------------------------------------------
Progress Capital Holdings, Inc.:
Medium-term notes, maturing 2003-2008 6.96% $ 223,000 $ 273,000
Unsecured note with parent, maturing 2011 6.43% 500,000 500,000
Miscellaneous notes, maturing 2003-2004 1.53% 1,428 7,707
- ----------------------------------------------------------------------------------------------------------
724,428 780,707
- ----------------------------------------------------------------------------------------------------------
Less: Current portion of long-term debt (275,397) (88,053)
- ----------------------------------------------------------------------------------------------------------
Total Long-Term Debt, Net $ 2,210,363 $ 2,489,684
- ----------------------------------------------------------------------------------------------------------
Total Capitalization $ 4,455,265 $ 4,595,431
==========================================================================================================
See Notes to Financial Statements.
13
CONSOLIDATED STATEMENTS of COMMON EQUITY
Florida Progress Corporation Years ended December 31
(In thousands except share data) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Beginning Balance $ 2,072,250 $ 1,987,581 $ 2,008,707
Net income 235,171 244,331 144,241
Other comprehensive loss (12,752) (1,578) (982)
Common stock issued - 162,570 shares - - 6,854
Equity contribution from parent, net 219,917 90,720 44,038
Dividend to parent (303,181) (248,804) -
Common stock dividends - - (215,277)
- -------------------------------------------------------------------------------------------------------------
Ending Balance $ 2,211,405 $ 2,072,250 $ 1,987,581
- -------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Florida Progress Corporation
(In thousands) First Quarter Second Quarter Third Quarter Fourth Quarter
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
Operating revenues $ 978,779 $ 1,110,223 $ 1,187,120 $ 1,077,144
Operating income (loss) 102,683 128,803 (43,249) 58,769
Income (loss) from continuing operations 75,773 90,356 (57,021) 120,943
Net income (loss) 75,773 90,356 (51,901) 120,943
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Operating revenues $ 1,131,247 $ 1,119,984 $ 1,246,939 $ 1,038,291
Operating income (loss) 129,265 130,120 178,265 (134,152)
Income (loss) from continuing operations 75,625 101,900 181,452 (93,594)
Net income (loss) 75,988 89,811 167,332 (88,800)
o In the opinion of management, all adjustments necessary to fairly present
amounts shown for interim periods have been made. Results of operations for
an interim period may not give a true indication of results for the year.
Certain reclassifications have been made to previously reported amounts to
conform to the current year's presentation.
o Fourth quarter 2001 includes impairment, loss on sale of assets and other
charges of $201.3 million ($136.5 million after tax).
o Third quarter 2002 includes impairment and other charges related to Progress
Telecommunications Corporation, of $233.0 million ($137.4 million after tax)
(See Note 7).
o Fourth quarter 2002 includes estimated impairment on assets held for sale of
Railcar Ltd. of $66.5 million ($44.7 million after tax) (See Note 4A).
See Notes to Financial Statements.
14
STATEMENTS of INCOME AND COMPREHENSIVE INCOME
Florida Power Corporation Years ended December 31
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Operating Revenues
Utility $ 3,061,732 $ 3,212,841 $ 2,871,563
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 3,061,732 3,212,841 2,871,563
- ---------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 853,500 912,735 681,869
Purchased power 514,975 514,528 498,458
Operation and maintenance 572,237 487,144 589,131
Depreciation and amortization 294,856 452,972 402,625
Taxes other than on income 227,699 230,169 213,280
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,463,267 2,597,548 2,385,363
- ---------------------------------------------------------------------------------------------------------------------
Operating Income 598,465 615,293 486,200
- ---------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 1,624 2,872 1,852
Other, net (5,927) (10,780) (407)
- ---------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (4,303) (7,908) 1,445
- ---------------------------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 109,442 114,794 128,479
Allowance for borrowed funds used during construction (2,659) (1,087) (3,117)
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 106,783 113,707 125,362
- ---------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 487,379 493,678 362,283
Income Tax Expense 163,273 182,590 150,473
- ---------------------------------------------------------------------------------------------------------------------
Net Income 324,106 311,088 211,810
Dividends on Preferred Stock 1,512 1,512 1,512
- ---------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 322,594 $ 309,576 $ 210,298
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive Income, Net of Tax:
Net Income $ 324,106 $ 311,088 $ 211,810
Change in net unrealized losses on cash flow hedges
(net of tax of $200) (318) - -
Minimum pension liability adjustment (net of tax of $1,486) (2,366) - -
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 321,422 $ 311,088 $ 211,810
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
15
BALANCE SHEETS
Florida Power Corporation
(In thousands) December 31
Assets 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $7,477,025 $ 7,151,729
Accumulated depreciation (4,123,947) (3,984,308)
- ----------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,353,078 3,167,421
Held for future use 7,921 8,274
Construction work in progress 426,641 292,883
Nuclear fuel, net of amortization 40,260 62,536
- ----------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,827,900 3,531,114
- ----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 15,636 -
Accounts receivable 186,630 185,562
Unbilled accounts receivable 60,481 63,080
Receivables from affiliated companies 44,976 16,424
Notes receivable from affiliated companies - 119,799
Deferred income taxes 26,209 32,334
Inventory 235,043 188,630
Deferred fuel cost 37,503 15,147
Prepayments and other current assets 5,339 4,336
- ----------------------------------------------------------------------------------------------------------------------
Total Current Assets 611,817 625,312
- ----------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 130,114 174,081
Unamortized debt expense 14,503 11,844
Nuclear decommissioning trust funds 373,551 406,100
Miscellaneous other property and investments 39,298 44,403
Prepaid pension cost 222,543 198,351
Other assets and deferred debits 6,517 18,435
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 786,526 853,214
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $5,226,243 $ 5,009,640
- ----------------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------------------
Capitalization (see schedules of capitalization)
- ----------------------------------------------------------------------------------------------------------------------
Common stock $1,081,257 $ 1,081,257
Retained earnings 969,795 950,387
Accumulated other comprehensive loss (2,684) -
Preferred stock - not subject to mandatory redemption 33,497 33,497
Long-term debt, net 1,244,411 1,465,030
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization 3,326,276 3,530,171
- ----------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 216,921 32,000
Accounts payable 147,978 150,595
Payables to affiliated companies 88,661 189,817
Notes payable to affiliated companies 237,425 -
Taxes accrued 24,472 1,768
Interest accrued 55,675 54,440
Short-term obligations 257,100 154,250
Customer deposits 121,998 118,285
Other current liabilities 55,323 63,919
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,205,553 765,074
- ----------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 361,133 394,828
Accumulated deferred investment tax credits 47,423 53,875
Regulatory liabilities 61,004 50,193
Other liabilities and deferred credits 224,854 215,499
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 694,414 714,395
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 22)
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $5,226,243 $ 5,009,640
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
16
STATEMENTS of CASH FLOWS
Florida Power Corporation Years ended December 31
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 324,106 $ 311,088 $ 211,810
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 320,886 467,025 453,291
Deferred income taxes and investment tax credits, net (37,349) (41,080) (59,495)
Deferred fuel (credit) cost (22,356) 75,287 (122,076)
Net (increase) decrease in accounts receivable (27,021) 32,271 (117,191)
Net (increase) decrease in inventories (46,413) (49,514) 28,124
Net (increase) decrease in prepayments and other current assets (1,004) 4,761 (55,550)
Net increase (decrease) in accounts payable (103,773) 130,761 33,720
Net increase in other current liabilities 18,538 107,816 30,433
Other 2,468 (110,237) 52,599
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 428,082 928,178 455,665
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Property additions (550,019) (353,433) (286,800)
Nuclear fuel additions (58) (43,087) -
Net contributions to nuclear decommissioning trust 12,206 (19,973) (19,971)
Other 11,632 7,239 3,501
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (526,239) (409,254) (303,270)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 235,975 297,621 -
Net increase (decrease) in short-term obligations 102,850 (238,280) 39,374
Retirement of long-term debt (277,559) (82,000) (76,800)
Net increase (decrease) in intercompany notes 357,225 (109,350) -
Equity contributions from parent - - 71,000
Advances to/from parent - (139,979) 20,200
Dividends paid to parent (303,186) (248,804) (201,277)
Dividends paid on preferred stock (1,512) (1,512) (1,512)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 113,793 (522,304) (149,015)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 15,636 (3,380) 3,380
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year - 3,380 -
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 15,636 $ - $ 3,380
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 105,549 $ 106,384 $ 135,000
income taxes (net of refunds) $ 173,168 $ 210,629 $ 194,400
See Notes to Financial Statements.
17
SCHEDULES of CAPITALIZATION
Florida Power Corporation December 31
(In thousands except share data) 2002 2001
- ---------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value $1,081,257 $1,081,257
Accumulated other comprehensive loss (2,684) -
Retained earnings 969,795 950,387
- ---------------------------------------------------------------------------------------------------------
Total Common Stock Equity $2,048,368 $2,031,644
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Preferred Stock - not subject to mandatory redemption
Authorized-4,000,000 shares cumulative, $100 par value Preferred Stock;
5,000,000 shares cumulative, no par value preferred stock; 1,000,000 shares,
$100 par value Preference Stock $100 par value Preferred Stock:
4.00% - 39,980 shares outstanding (redemption
price $104.25) $ 3,998 $ 3,998
4.40% - 75,000 shares outstanding (redemption
price $102.00) 7,500 7,500
4.58% - 99,990 shares outstanding (redemption
price $101.00) 9,999 9,999
4.60% - 39,997 shares outstanding (redemption
price $103.25) 4,000 4,000
4.75% - 80,000 shares outstanding (redemption
price $102.00) 8,000 8,000
- ---------------------------------------------------------------------------------------------------------
Total Preferred Stock $ 33,497 $ 33,497
- ---------------------------------------------------------------------------------------------------------
Long-Term Debt (maturities and weighted-average interest rates as of December 31, 2002)
First mortgage bonds, maturing 2003-2023 6.83% $ 810,000 $ 810,000
Pollution control revenue bonds, maturing 2018-2027 1.11% 240,865 240,865
Medium-term notes, maturing 2003-2028 6.74% 416,900 449,100
Unamortized premium and discount, net (6,433) (2,935)
- ---------------------------------------------------------------------------------------------------------
Less: Current portion of long-term debt (216,921) (32,000)
- ---------------------------------------------------------------------------------------------------------
Total Long-Term Debt, Net $1,244,411 $1,465,030
- ---------------------------------------------------------------------------------------------------------
Total Capitalization $3,326,276 $3,530,171
- ---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
18
STATEMENTS of COMMON EQUITY
Florida Power Corporation Years ended December 31
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Beginning Balance $ 2,031,644 $ 1,965,028 $ 1,885,007
Net income 324,106 311,088 211,810
Preferred stock dividends at stated rates (1,512) (1,512) (1,512)
Other comprehensive loss (2,684) - -
Equity contribution from parent - 5,844 71,000
Dividends paid to parent (303,186) (248,804) (201,277)
- -----------------------------------------------------------------------------------------------------------------
Ending Balance $ 2,048,368 $ 2,031,644 $ 1,965,028
- -----------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Florida Power Corporation
(In thousands) First Quarter Second Quarter Third Quarter Fourth Quarter
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
Operating revenues $686,441 $765,923 $863,637 $745,731
Operating income 120,417 150,974 207,100 119,974
Net income 58,121 77,131 124,152 64,702
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Operating revenues $810,474 $783,660 $906,131 $712,576
Operating income 145,425 164,904 213,158 91,806
Net income 71,984 84,689 114,457 39,958
In the opinion of management, all adjustments necessary to fairly present
amounts shown for interim periods have been made. Results of operations for an
interim period may not give a true indication of results for the year. Certain
reclassifications have been made to previously reported amounts to conform to
the current year's presentation.
See Notes to Financial Statements.
19
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
A. Organization
Florida Progress Corporation (the Company or Florida Progress) is a holding
company under the Public Utility Holding Company Act of 1935 (PUHCA). The
Company became subject to the regulations of PUHCA when it was acquired by
CP&L Energy, Inc. on November 30, 2000 (See Note 2). CP&L Energy, Inc.
subsequently changed its name to Progress Energy, Inc. (Progress Energy or
the Parent). Florida Progress' two primary subsidiaries are Florida Power
Corporation (Florida Power) and Progress Fuels Corporation (Progress Fuels).
Throughout the report, the terms utility and regulated will be used to
discuss items pertaining to Florida Power. Diversified business and
nonregulated will be used to discuss the subsidiaries of Florida Progress
excluding Florida Power.
Effective January 1, 2003, Florida Power began doing business under the
assumed name Progress Energy Florida, Inc. The legal name of the entity has
not changed and there is no restructuring of any kind related to the name
change. The current corporate and business unit structure remains unchanged.
B. Basis of Presentation
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP). Florida Power is regulated by the Florida Public Service Commission
(FPSC) and the Federal Energy Regulatory Commission (FERC). The utility
follows the accounting practices set forth in the Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation." This standard allows regulated entities to capitalize
or defer certain costs or reduce revenues based on regulatory approval and
management's ongoing assessment that it is probable these items will be
recovered or refunded through the ratemaking process. Significant
intercompany balances and transactions have been eliminated in consolidation
except as permitted by Statement of Financial Accounting Standards (SFAS)
No. 71, which provides that profits on intercompany sales to regulated
affiliates are not eliminated if the sales price is reasonable and the
future recovery of the sales price through the ratemaking process is
probable.
The financial statements include the financial results of the Company and
its majority-owned operations. Unconsolidated investments in 20% to
50% owned joint ventures are accounted for using the equity method. Other
investments are stated principally at cost. These equity and cost
investments, which total approximately $13.9 million and $33.1 million at
December 31, 2002 and 2001, respectively, are included in miscellaneous
property and investments on the Consolidated Balance Sheets. The primary
component of this balance is the Company's investment in affordable housing
of $8.9 million and $28.1 million, respectively, for December 31, 2002 and
2001.
Results of operations of Progress Rail Services Corporation and certain
other diversified operations are recognized one month in arrears.
Certain amounts for 2001 and 2000 have been reclassified to conform to the
2002 presentation.
C. Use of Estimates and Assumptions
In preparing financial statements that conform with GAAP, management must
make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date
of the financial statements and amounts of revenues and expenses reflected
during the reporting period. Actual results could differ from those
estimates.
D. Utility Plant
Utility plant in service is stated at historical cost less accumulated
depreciation. The Company capitalizes all construction related direct labor
and material costs of units of property as well as indirect construction
costs. The costs of renewals and betterments are also capitalized.
20
Maintenance and repairs of property, and replacements and renewals of items
determined to be less than units of property, are charged to maintenance
expense as incurred. The cost of units of property replaced, renewed or
retired, plus removal or disposal costs, less salvage, is charged to
accumulated depreciation.
The balances of utility plant in service at December 31 are listed below (in
thousands), with a range of depreciable lives for each:
2002 2001
----------- -----------
Production plant (7-33 years) $ 3,432,865 $ 3,369,491
Transmission plant (30-75 years) 976,423 921,219
Distribution plant (12-50 years) 2,728,239 2,704,035
General plant and other (8-75 years) 339,498 156,984
----------- -----------
Utility plant in service $ 7,477,025 $ 7,151,729
=========== ===========
Substantially all of the electric utility plant is pledged as collateral for
the first mortgage bonds of Florida Power (See Note 8).
Allowance for funds used during construction (AFUDC) represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated assets. As prescribed in the regulatory
uniform systems of accounts, AFUDC is charged to the cost of the plant. The
equity funds portion of AFUDC is credited to other income and the borrowed
funds portion is credited to interest charges. Regulatory authorities
consider AFUDC an appropriate charge for inclusion in the rates charged to
customers by the utilities over the service life of the property. The total
equity funds portion of AFUDC was $2.3 million, $0.1 million and $1.3
million in 2002, 2001 and 2000, respectively. The composite AFUDC rate for
Florida Power's electric utility plant was 7.8% in 2002, 2001 and 2000.
E. Depreciation and Amortization - Utility Plant
For financial reporting purposes, substantially all depreciation of utility
plant other than nuclear fuel is computed on the straight-line method based
on the estimated remaining useful life of the property, adjusted for
estimated net salvage. Florida Power's depreciation provisions, including
decommissioning costs (See Note 1F), as a percentage of average depreciable
property other than nuclear fuel, were approximately 3.3%, 4.3% and 4.6% in
2002, 2001 and 2000, respectively. Total depreciation provisions were $230.6
million, $299.1 million and $301.0 million in 2002, 2001 and 2000,
respectively. Depreciation in 2002 was reduced pursuant to the rate case
settlement (See Note 12A).
Amortization of nuclear fuel costs, including disposal costs associated with
obligations to the U.S. Department of Energy (DOE), is computed primarily on
the units-of-production method and charged to fuel expense. Costs related to
obligations to the DOE for the decommissioning and decontamination of
enrichment facilities are also charged to fuel expense. The total of these
costs for the years ended December 31, 2002, 2001 and 2000 were $32.0
million, $29.1 million and $31.6 million, respectively.
Effective January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," and no longer amortizes goodwill (See Note 19).
Prior to the adoption of SFAS No. 142, the Company amortized goodwill on a
straight-line basis over a period not exceeding 40 years. Intangible assets
are being amortized on a straight-line basis over their respective lives.
F. Decommissioning and Dismantlement Provisions
Florida Power's nuclear plant depreciation expenses include a provision for
future decommissioning costs, which are recoverable through rates charged to
customers. Florida Power is placing amounts collected in an externally
managed trust fund.
In January 2002, Florida Power received regulatory approval from the FPSC to
decrease its retail provision for nuclear decommissioning from approximately
$20.5 million annually to approximately $7.7 million annually, effective
January 1, 2001. As a result of the settlement in the Florida Power rate
case, Florida Power suspended accruals on its reserves for nuclear
decommissioning through December 31, 2005.
Florida Power's most recent site-specific estimate of decommissioning costs
for Crystal River Nuclear Plant (CR3) was developed in 2000 based on prompt
dismantlement decommissioning. The estimate, in 2000 dollars, is $490.9
million and is subject to change based on a variety of factors including,
but not limited to, cost escalation, changes in technology applicable to
nuclear decommissioning and changes in federal, state or local regulations.
21
The cost estimate excludes the portion attributable to other co-owners of
CR3. Florida Power has a license to operate the nuclear unit through
December 3, 2016. Application to extend the plant license for 20 years is
anticipated to be submitted in the first quarter of 2007.
Management believes that decommissioning costs that have been and will be
recovered through rates by Florida Power will be sufficient to provide for
the costs of decommissioning.
Florida Power's reserve for fossil plant dismantlement was approximately
$141.6 million and $140.5 million at December 31, 2002 and 2001,
respectively, and was included in accumulated depreciation. The provision
for fossil plant dismantlement was previously suspended per a 1997 FPSC
settlement agreement, but resumed mid-2001. The annual provision, approved
by the FPSC in 2001, was $8.8 million. The accrual for fossil dismantlement
reserves was suspended again in 2002 by the Florida Rate Case settlement.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," that will impact the
accounting for the decommissioning provisions beginning in 2003 (See Note
1R).
G. Diversified Business Property
Diversified business property is stated at cost less accumulated
depreciation. If an impairment loss is recognized on an asset, the fair
value becomes its new cost basis. The costs of renewals and betterments are
capitalized. The cost of repairs and maintenance is charged to expense as
incurred. Depreciation is computed on a straight-line basis using the
estimated useful lives as indicated in the table below. Depletion of mineral
rights is provided on the units-of-production method based upon the
estimates of recoverable amounts of clean mineral.
The Company uses the full cost method to account for its natural gas and oil
properties. Under the full cost method, substantially all productive and
nonproductive costs incurred in connection with the acquisition, exploration
and development of natural gas and oil reserves are capitalized. These
capitalized costs include the costs of all unproved properties, internal
costs directly related to acquisition and exploration activities. These
costs are amortized using the units-of-production method over the life of
the Company's proved reserves. Total capitalized costs are limited to a
ceiling based on the present value of discounted (at 10%) future net
revenues using current prices, plus the lower of cost or fair market value
of unproved properties. If the ceiling (discounted revenues) is not equal to
or greater than total capitalized costs, the Company is required to
write-down capitalized costs to this level. The Company performs this
ceiling test calculation every quarter. No write-downs were required in
2002, 2001 or 2000.
The following is a summary of diversified business property as of December
31 (in thousands), with a range of depreciable lives for each:
2002 2001
---------- ----------
Equipment (3 - 25 years) $ 328,790 $ 257,514
Land and mineral rights 76,145 72,972
Buildings and plants (5 - 40 years) 91,266 97,261
Oil and gas properties (units-of-production) 264,767 41,413
Telecommunications equipment (5 - 20 years) 40,827 184,539
Rail equipment (3 - 20 years) 54,283 72,733
Marine equipment (3 - 35 years) 80,501 78,868
Computers, office equipment and software (3 - 10 years) 30,306 39,600
Construction work in progress 34,163 106,839
Accumulated depreciation (301,555) (282,661)
---------- ----------
Diversified business property, net $ 699,493 $ 669,078
========== ==========
The decrease in telecommunications equipment from 2001 to 2002 is
attributable to an impairment of long-lived assets discussed in Note 7.
Diversified business depreciation expense was $64.9 million, $69.1 million
and $70.8 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The synthetic fuel facilities are being depreciated through
2007 when the Section 29 tax credits will expire.
22
H. Inventory
Inventory is carried at average cost. As of December 31, inventory was
comprised of the following (in thousands):
FLORIDA PROGRESS FLORIDA POWER
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Fuel $ 182,731 $ 155,188 $ 111,112 $ 92,417
Rail equipment and parts 155,206 200,697 - -
Materials and supplies 134,163 113,638 123,931 96,213
Other 20,173 16,368 - -
--------- --------- --------- ---------
Total inventory $ 492,273 $ 485,891 $ 235,043 $ 188,630
========= ========= ========= =========
I. Utility Revenues, Fuel and Purchased Power Expenses
The Company recognizes electric utility revenues as service is rendered to
customers. Operating revenues include unbilled electric utility revenues
earned when service has been delivered but not billed by the end of the
accounting period. Revenues include amounts resulting from fuel, purchased
power, energy conservation cost recovery and environmental cost recovery
clauses, which generally are designed to permit full recovery of these
costs. The adjustment factors are based on projected costs for a 12-month
period. The cumulative difference between actual and billed costs is
included on the balance sheet as a regulatory asset or liability. Any
difference is billed or refunded to customers during the subsequent period.
Florida Power accrues the nonfuel portion of base revenues for services
rendered but unbilled. As of December 31, 2002 and 2001, the amounts accrued
were $60.5 million and $63.1 million, respectively.
J. Diversified Business Revenues
Diversified business revenues include revenues from mining, processing and
procurement of coal; production and sale of natural gas; river terminal
services; production and sale of synthetic fuel; offshore marine
transportation; railcar repair and parts reconditioning; railcar leasing and
sales; manufacturing and supplying rail and track material; metal recycling
and sales of wholesale telecommunications services. Revenues are recognized
at the time products are shipped or as services are rendered. Leasing
activities are accounted for in accordance with SFAS No. 13, "Accounting for
Leases." Lease revenue for dedicated transport and data services is
generally billed in advance on a fixed rate basis and recognized over the
period the services are provided. Revenues relating to design and
construction of wireless infrastructure are recognized upon completion of
services for each completed phase of design and construction.
K. Income Taxes
Progress Energy and its affiliates file a consolidated federal income tax
return. The consolidated income tax of Progress Energy is allocated to
Florida Progress and Florida Power in accordance with the Inter-company
Income Tax Allocation Agreement. The agreement provides an allocation that
recognizes positive and negative corporate taxable income. The agreement
provides for an equitable method of apportioning the carry over of
uncompensated tax benefits. Progress Energy Holding Company tax benefits not
related to acquisition interest expense are allocated to profitable
subsidiaries, beginning in 2002, in accordance with a PUHCA order. Income
taxes are provided as if Florida Progress and Florida Power filed separate
returns.
Deferred income taxes have been provided for temporary differences. These
occur when there are differences between the book and tax bases of assets
and liabilities. Investment tax credits related to regulated operations have
been deferred and are being amortized over the estimated service life of the
related properties. Credits for the production and sale of synthetic fuel
are deferred to the extent they cannot be or have not been utilized in the
annual consolidated federal income tax returns (See Note 16).
L. Impairment of Long-lived Assets and Investments
The Company reviews the recoverability of long-lived and intangible assets
whenever indicators exist. Examples of these indicators include current
period losses, combined with a history of losses or a projection of
continuing losses, or a significant decrease in the market price of a
long-lived asset group. If an indicator exists, then the asset group is
tested for recoverability by comparing the carrying value to the sum of
23
undiscounted expected future cash flows directly attributable to the asset
group. If the asset group is not recoverable through undiscounted cash
flows, then an impairment loss is recognized for the difference between the
carrying value and the fair value of the asset group. The accounting for
impairment of long-lived assets is based on SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which was adopted by the
Company effective January 1, 2002. Prior to the adoption of this standard,
impairments were accounted for under SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which was superceded by SFAS No. 144. See Note 7 for a discussion of
impairment evaluations performed and charges taken.
M. Excise Taxes
The Company, as an agent for a state or local government, collects from
customers certain excise taxes levied by the state or local government upon
the customer. Florida Power accounts for excise taxes on a gross basis.
Excise taxes are separately billed to customers in addition to Florida
Power's base rates. For the years ended December 31, 2002, 2001 and 2000,
gross receipts tax and franchise taxes of approximately $131.7 million,
$133.0 million and $118.5 million, respectively, are included in taxes other
than on income on the accompanying Statements of Income and Comprehensive
Income. These approximate amounts are also included in electric operating
revenues.
N. Derivatives
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as assets or liabilities in the balance
sheet and measure those instruments at fair value (See Note 13).
In connection with the January 2003 FASB Emerging Issues Task Force (EITF)
meeting, the FASB was requested to reconsider an interpretation of SFAS No.
133. The interpretation, which is contained in the Derivatives
Implementation Group's C11 guidance, relates to the pricing of contracts
that include broad market indices. In particular, that guidance discusses
whether the pricing in a contract that contains broad market indices (e.g.,
CPI) could qualify as a normal purchase or sale (the normal purchase or sale
term is a defined accounting term, and may not, in all cases, indicate
whether the contract would be "normal" from an operating entity viewpoint).
The Company is currently reevaluating which contracts, if any, that have
previously been designated as normal purchases or sales would now not
qualify for this exception. The Company is currently evaluating the effects
that this guidance will have on its results of operations and financial
position.
O. Environmental
The Company accrues environmental remediation liabilities when the criteria
for SFAS No. 5, "Accounting for Contingencies," has been met. Environmental
expenditures are expensed as incurred or capitalized depending on their
future economic benefit. Expenditures that relate to an existing condition
caused by past operations and that have no future economic benefits are
expensed. Accruals for estimated losses from environmental remediation
obligations generally are recognized no later than completion of the
remedial feasibility study. Such accruals are adjusted as additional
information develops or circumstances change. Costs of future expenditures
for environmental remediation obligations are not discounted to their
present value. Recoveries of environmental remediation costs from other
parties are recognized when their receipt is deemed probable.
P. Other Policies
The Company considers cash and cash equivalents to include cash on hand,
cash in banks and temporary investments purchased with a maturity of three
months or less. Progress Energy and its subsidiaries participate in a money
pool arrangement to better manage cash and working capital requirements.
Under this arrangement, those companies with surplus short-term funds
provide short-term loans to participating affiliates (See Note 6).
The Company maintains an allowance for doubtful accounts receivable, which
totaled approximately $28.0 million and $25.7 million at December 31, 2002
and 2001, respectively. Florida Power's allowance for doubtful accounts
receivable totaled $2.5 million at December 31, 2002 and 2001, respectively.
Long-term debt premiums, discounts and issuance expenses are amortized over
the life of the related debt using the straight-line method. Any expenses or
call premiums associated with the reacquisition of debt obligations by
Florida Power are amortized over the applicable life using the straight-line
method consistent with ratemaking treatment.
24
The Company follows the guidance in SFAS No. 87 "Employers' Accounting for
Pensions," to account for its defined benefit retirement plans. In addition
to pension benefits, the Company provides other postretirement benefits
which are accounted for under SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions." See Note 15 for related
disclosures for these plans.
Liabilities for loss contingencies arising from litigation are recorded when
it is probable that a liability has been incurred and the amount can be
reasonably estimated in accordance with SFAS 5.
Q. Cost-Based Regulation
Florida Power's regulated operations are subject to SFAS No. 71, "Accounting
for the Effects of Certain Types of Regulation." SFAS No. 71 allows a
regulated company to record costs that have been or are expected to be
allowed in the ratemaking process in a period different from the period in
which the costs would be charged to expense by a nonregulated enterprise.
Accordingly, Florida Power records assets and liabilities that result from
the regulated ratemaking process that would not be recorded under GAAP for
nonregulated entities. These regulatory assets and liabilities represent
expenses deferred for future recovery from customers or obligations to be
refunded to customers and are primarily classified in the accompanying
Balance Sheets as regulatory assets and regulatory liabilities (See Note
12B).
R. New Accounting Standards
SFAS No. 143, "Accounting for Asset Retirement Obligations"
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations,"
in July 2001. This statement provides accounting and disclosure requirements
for retirement obligations associated with long-lived assets and is
effective January 1, 2003. This statement requires that the present value of
retirement costs for which the Company has a legal obligation be recorded as
a liability with an equivalent amount added to the asset cost and
depreciated over an appropriate period. The liability is then accreted over
time by applying an interest method of allocation to the liability.
Cumulative accretion and accumulated depreciation will be recognized for the
time period from the date the liability would have been recognized had the
provisions of this statement been in effect, to the date of adoption of this
statement. The cumulative effect of initially applying this statement is
recognized as a change in accounting principle. The adoption of this
statement will have no impact on the income of Florida Power, as the effects
are expected to be offset by the establishment of regulatory assets or
liabilities pursuant to SFAS No. 71.
The Company's review identified legal retirement obligations for nuclear
decommissioning, coal mine operations, synthetic fuel operations, and gas
production. The Company will record liabilities pursuant to SFAS No. 143
beginning in 2003. The Company used an expected cash flow approach to
measure the obligations. The following proforma liabilities reflect amounts
as if this statement had been applied during all periods (in millions):
Liability as of December 31, 2002 2001
---------- ----------
Regulated:
Nuclear decommissioning $ 302.8 $287.2
Nonregulated:
Coal mine operations $ 6.1 $ 5.6
Synfuel operations 1.4 1.1
Gas production 2.2 2.0
Nuclear decommissioning and coal mine operations have previously-recorded
liabilities. Amounts recorded for nuclear decommissioning were $283.8
million and $276.2 million at December 31, 2002 and 2001, respectively.
Amounts recorded for coal mine reclamation were $4.7 million and $4.8
million at December 31, 2002 and 2001, respectively. Synthetic fuel
operations and gas production had no previously recorded liabilities.
Proforma net income has not been presented for the years ended December 31,
2002, 2001 and 2000 because the proforma application of SFAS No. 143 to
prior periods would result in proforma net income and earnings per share not
materially different from the actual amounts reported for those periods in
the accompanying Consolidated Statements of Income and Comprehensive Income.
25
The Company has identified but not recognized asset retirement obligation
(ARO) liabilities related to electric transmission and distribution, gas
distribution, and telecommunications assets as the result of easements over
property not owned by the Company. These easements are generally perpetual
and only require retirement action upon abandonment or cessation of use of
the property for the specified purpose. The ARO liability is not estimable
for such easements, as the Company intends to utilize these properties
indefinitely. In the event the Company decides to abandon or cease the use
of a particular easement, an ARO liability would be recorded at that time.
Florida Power has previously recognized removal costs as a component of
depreciation in accordance with regulatory treatment. To the extent these
amounts do not represent SFAS No. 143 legal retirement obligations, they
will be disclosed as regulatory liabilities upon adoption of the statement.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections"
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This newly issued statement rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt (an amendment of Accounting
Principles Board (APB) Opinion No. 30)," which required all gains and losses
from the extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria set forth by APB Opinion 30 will now be used to
classify those gains and losses. Any gain or loss on extinguishment will be
recorded in the most appropriate line item to which it relates within net
income before extraordinary items. For Florida Power, any expenses or call
premiums associated with the reacquisition of debt obligations are amortized
over the applicable life using the straight-line method consistent with
ratemaking treatment (See Note 1P). SFAS No. 145 also amends SFAS No. 13 to
require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS No. 145 amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. For the
provisions related to the rescission of SFAS No. 4, SFAS No. 145 is
effective for the Company beginning in fiscal year 2004. The remaining
provisions of SFAS No. 145 are effective for the Company in fiscal year
2003. The Company is currently evaluating the effects, if any, that this
statement will have on its results of operations and financial position.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure"
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement
No. 123," and provided alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements
of SFAS No. 123, "Accounting for Stock-Based Compensation," to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This statement requires that
companies follow the prescribed format and provide the additional
disclosures in their annual reports for years ending after December 15,
2002. The Company applies the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by
SFAS Nos. 123 and 148, and related interpretations in accounting for its
stock-based compensation plans, as described in Note 14.
26
The following table illustrates the effect on net income (in thousands) if
the Company had applied the fair value recognition provisions of SFAS No.
123 to the stock option plan. The stock option plan was not in effect in
2000.
FLORIDA PROGRESS 2002 2001 2000
---------------- ---------------- ------------
Net income, as reported $ 235,171 $ 244,331 $ 144,241
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 2,806 600 -
---------------- ---------------- ------------
Proforma net income $ 232,365 $ 243,731 $ 144,241
================ ================ ============
FLORIDA POWER 2002 2001 2000
---------------- ---------------- ------------
Net income, as reported $ 324,106 $ 311,088 $ 211,810
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 2,372 500 -
---------------- ---------------- ------------
Proforma net income $ 321,734 $ 310,588 $ 211,810
================ ================ ============
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others"
In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others - an interpretation of FASB Statements
No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34" (FIN No.
45). This interpretation clarifies the disclosures to be made by a guarantor
in its interim and annual financial statements about obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of certain guarantees, a liability
for the fair value of the obligation undertaken in issuing the guarantee.
The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December
15, 2002. The applicable disclosures required by FIN No. 45 have been made
in Notes 9 and 22B. The Company is currently evaluating the effects, if any,
that this interpretation will have on its results of operations and
financial position.
FIN No. 46, "Consolidation of Variable Interest Entities"
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46).
This interpretation provides guidance related to identifying variable
interest entities (previously known as special purpose entities or SPEs) and
determining whether such entities should be consolidated. Certain
disclosures are required when FIN No. 46 becomes effective if it is
reasonably possible that a company will consolidate or disclose information
about a variable interest entity when it initially applies FIN No. 46. This
interpretation must be applied immediately to variable interest entities
created or obtained after January 31, 2003. For those variable interest
entities created or obtained on or before January 31, 2003, the Company must
apply the provisions of FIN No. 46 in the third quarter of 2003.
The Company has an arrangement with Railcar Asset Financing Trust (RAFT),
through its Railcar Ltd. subsidiary to which this interpretation may apply.
Because the Company expects to sell Railcar Ltd. during 2003 (See Note 4A),
the application of FIN No. 46 is not expected to have a material impact. The
Company is currently evaluating what effects, if any, this interpretation
will have on its results of operations and financial position.
EITF Issue 02-03, "Accounting for Contracts Involved in Energy Trading and
Risk Management Activities"
In June 2002, the Emerging Issues Task Force (EITF) reached consensus on a
portion of Issue 02-03, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." EITF Issue 02-03 requires all gains and
losses (realized or unrealized) on energy trading contracts to be shown net
in the income statement. Florida Power's policy already required the gains
and losses to be recorded on a net basis. The net of the gains and losses
are recorded in other, net on the Consolidated Statements of Income and
Comprehensive Income. Florida Power does not recognize a dealer profit or
unrealized gain or loss at the inception of a derivative unless the fair
value of that instrument, in its entirety, is evidenced by quoted market
prices or current market transactions.
27
2. Acquisition by Progress Energy
On November 30, 2000, Progress Energy acquired all of the outstanding shares
of Florida Progress' common stock in accordance with the Amended and
Restated Plan of Exchange, including the related Plan of Share Exchange,
dated as of August 22, 1999, as amended and restated as of March 3, 2000,
among CP&L Energy, Florida Progress and Carolina Power & Light Company
(CP&L). Florida Progress shareholders received $54.00 in cash or shares of
Progress Energy common stock having a value of $54.00, subject to proration,
and one contingent value obligation (CVO) in exchange for each share of
Florida Progress common stock. Each CVO represents the right to receive
contingent payments based upon the net after-tax cash flow to Progress
Energy generated by four synthetic fuel facilities purchased by subsidiaries
of Florida Progress in 1999.
The acquisition was accounted for by Progress Energy using the purchase
method of accounting; however, due to the significance of the public debt
and preferred securities of the Company and Florida Power, the acquisition
cost was not pushed down to the Florida Progress or Florida Power separate
financial statements. Even though a new basis of accounting and reporting
for the Company was not established, significant merger-related costs were
incurred in 2000 and reported in the following captions on the Consolidated
Statements of Income and Comprehensive Income (in millions):
Florida Power Diversified Total - Florida
Operation and Business Progress
Maintenance Corporation
-------------- ----------- ---------------
Employee separation costs $72.8 $17.9 $ 90.7
Other merger-related costs 21.4 34.9 56.3
-------------- ----------- --------------
Total $94.2 $52.8 $147.0
============== =========== ==============
In connection with the acquisition of the Company by Progress Energy, the
Company began the implementation of a plan to combine operations with
Progress Energy. In the fourth quarter 2000, the Company recorded executive
involuntary termination costs of $24.5 million and non-executive involuntary
termination costs of $41.8 million. Substantially all of the executive
termination expense was attributable to lump-sum severance costs paid in
December 2000. In connection with the termination of certain key executives,
the Company also recorded a curtailment and special termination benefit
charge of $25.5 million related to two supplemental defined benefit pension
plans (See Note 15). The non-executive involuntary termination accrual
includes estimates for administrative leave, severance, employer FICA,
medical benefits and outplacement costs associated with the Company's
employee involuntary termination plan. During 2001, the Company finalized
the plan to combine operations of the companies with certain final
termination payments occurring in 2002. The termination did not result in a
plan curtailment related to postretirement benefits other than pension. An
immaterial curtailment gain was recorded for the pension plan in 2001.
The activity for the non-executive involuntary termination costs is detailed
in the table below (in millions):
2002 2001
--------- ----------
Balance at January 1 $ 7.7 $41.8
Payments (4.1) (28.0)
Adjustments credited to operating results (3.6) (6.1)
--------- ----------
Balance at December 31 $ - $ 7.7
========= ==========
Other merger-related costs include $17.9 million of change of control costs
substantially related to the immediate vesting of a stock-based performance
plan (See Note 14), and $17.3 million of direct transaction costs related to
investment banker, legal and accounting fees. Other costs incurred include
employee retention costs and excise tax payments triggered by executive
severance and change of control payments.
3. Acquisitions
A. Westchester Acquisition
On April 26, 2002, Progress Fuels, a subsidiary of Florida Progress,
acquired 100% of Westchester Gas Company (Westchester). The acquisition
included approximately 215 natural gas-producing wells, 52 miles of
intrastate gas pipeline and 170 miles of gas-gathering systems located
within a 25-miles radius of Jonesville, Texas, on the Texas-Louisiana
border.
28
The aggregate purchase price of approximately $153 million consisted of cash
consideration of approximately $22 million and the issuance of 2.5 million
shares of Progress Energy common stock valued at approximately $129 million.
The purchase price included approximately $2 million of direct transaction
costs. The purchase price was primarily allocated to fixed assets, including
oil and gas properties, based on the preliminary fair values of the assets
acquired. The preliminary purchase price allocation is subject to adjustment
for changes in the preliminary assumptions and analyses used, pending
additional information including final asset valuations.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations for Westchester have
been included in Florida Progress' consolidated financial statements since
the date of acquisition. The proforma results of operations reflecting the
acquisition would not be materially different than the reported results of
operations for the years ended December 31, 2002 or 2001.
B. Other Acquisitions
During 2000, subsidiaries of Progress Fuels acquired seven businesses, in
separate transactions. The cash paid for the 2000 acquisitions was $45.7
million. The excess of the aggregate purchase price over the fair value of
net assets acquired was approximately $11.1 million. The acquisitions were
accounted for under the purchase method of accounting and, accordingly, the
operating results of the acquired businesses have been included in the
Company's financial statements since the date of acquisition. Each of the
acquired companies conducted operations similar to those of the subsidiaries
and has been integrated into Progress Fuels' operations. The proforma
results of consolidated operations for 2000, assuming the 2000 acquisitions
were made at the beginning of the year, would not differ significantly from
the historical results.
4. Divestitures
A. Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a
resolution approving the sale of Railcar Ltd., a subsidiary included in the
Rail Services segment. A series of sales transactions is expected to take
place throughout 2003. In accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," an estimated impairment on
assets held for sale of $66.5 million has been recognized for the write-down
of the assets to be sold to fair value less the costs to sell. This
impairment has been included in impairment of long-lived assets in the
Consolidated Statements of Income and Comprehensive Income (See Note 7).
The assets of Railcar Ltd. have been grouped as assets held for sale and are
included in other current assets on the Consolidated Balance Sheets as of
December 31, 2002. The assets are recorded at $23.6 million, which reflects
the Company's initial estimate of the fair value expected to be realized
from the sale of these assets. The majority of these assets, approximately
$21.6 million, are current assets. These assets are subject to certain
commitments under operating leases (See Note 20). The Company expects to be
relieved of the majority of these commitments as a result of the sale.
B. Inland Marine Transportation Divestiture
On July 23, 2001, Progress Energy announced the disposition of the Inland
Marine Transportation segment of the Company, which was operated by MEMCO
Barge Line, Inc. Inland Marine provided transportation of coal, agricultural
and other dry-bulk commodities as well as fleet management services.
Progress Energy entered into a contract to sell MEMCO Barge Line, Inc., to
AEP Resources, Inc., a wholly owned subsidiary of American Electric Power.
On November 1, 2001, the Company completed the sale of the Inland Marine
Transportation segment.
The results of operations for all periods presented have been restated for
the discontinued operations of the Inland Marine Transportation segment. The
net income of these operations is reported in the Consolidated Statements of
Income and Comprehensive Income as discontinued operations.
29
Results of discontinued operations for years ended December 31, were as
follows (in thousands):
2001 2000
--------- ---------
Revenues $142,721 $170,329
Earnings before income taxes 4,530 16,961
Income taxes 1,848 7,989
--------- ---------
Net earnings 2,682 8,972
Estimated loss on disposal of discontinued operations,
including provision of $5,468 for pre-tax operating income
during phase-out period (net of applicable income tax
benefit of $7,896) (23,734) -
--------- ---------
Income (loss) from discontinued operations $(21,052) $ 8,972
========= =========
The net gain on disposal of discontinued operations in the Company's
Consolidated Statements of Income and Comprehensive Income for year ended
December 31, 2002, represents the after-tax gain from the resolution of
approximately $5.1 million of contingencies in the purchase agreement of the
Inland Marine Transportation segment.
In connection with the sale, the Company entered into environmental
indemnification provisions covering both unknown and known sites. The
Company has recorded an accrual to cover estimated probable future
environmental expenditures. The Company believes that it is reasonably
possible that additional costs, which cannot be currently estimated, may be
incurred related to the environmental indemnification provision beyond the
amounts accrued. The Company cannot predict the outcome of this matter.
5. Financial Information by Business Segment
The Company's principal business segment is Florida Power, a utility engaged
in the generation, purchase, transmission, distribution and sale of
electricity primarily in Florida. The other reportable business segments are
Progress Fuels' Energy & Related Services and Rail Services. The Inland
Marine Transportation business, formerly a business segment, was sold in
November 2001 (See Note 4B). The Energy & Related Services segment includes
coal and synthetic fuel operations, natural gas production and sales, river
terminal services and off-shore marine transportation. Rail Services'
operations include railcar repair, rail parts reconditioning and sales,
railcar leasing and sales, providing rail and track material, and scrap
metal recycling. The Other category consists primarily of Progress
Telecommunications Corporation (Progress Telecom), the Company's
telecommunications subsidiary, the Company's investment in FPC Capital
Trust, which holds the Preferred Securities, and the holding company,
Florida Progress Corporation. Progress Telecom markets wholesale fiber-optic
based capacity service in the Eastern United States and also markets
wireless structure attachments to wireless communication companies and
governmental entities. The Company allocates a portion of its operating
expenses to business segments.
The Company's business segment information for 2002, 2001 and 2000 is
summarized below. The Company's significant operations are geographically
located in the United States with limited operations in Mexico and Canada.
The Company's segments are based on differences in products and services,
and therefore no additional disclosures are presented. Intersegment sales
and transfers consist primarily of coal sales from the Energy and Related
Services segment of Progress Fuels to Florida Power. The price Progress
Fuels charges Florida Power is based on market rates for coal procurement
and for water-borne transportation under a methodology approved by the FPSC.
Rail transportation is also based on market rates plus a return allowed by
the FPSC on equity in transportation equipment utilized in transporting coal
to Florida Power. The allowed rate of return is currently 12%. No single
customer accounted for 10% or more of unaffiliated revenues.
Segment net income (loss) for 2002 includes an estimated impairment on the
assets held for sale of Railcar Ltd. of $66.5 million pre-tax ($44.7 million
after-tax) included in the Rail Services segment and an asset impairment and
other charges related to Progress Telecom totaling $233.0 million on a
pre-tax basis ($144.0 million after-tax) included in the Other segment.
Segment net income (loss) for 2001 includes a long-lived asset impairment
pre-tax loss of $160.6 million (after-tax $108.1 million) included in the
Rail Services segment. Segment net income (loss) for 2000 includes a
long-lived asset impairment pre-tax loss of $70.2 million (after-tax $47.3
million) included in the Energy & Related Services segment and $60.5 million
impairment pre-tax loss (after-tax $36.3 million) included in the Rail
Services segment (See Note 7).
30
Energy
and
Related Rail
(In millions) Utility Services Services Other Consolidated
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2002
Revenues $ 3,061.7 $ 342.8 $ 714.5 $ 234.3 $ 4,353.3
Intersegment revenues - 525.6 4.6 (530.2) -
Depreciation and amortization 294.9 33.9 20.4 11.2 360.4
Net interest charges 106.8 21.9 32.8 21.6 183.1
Impairment of long-lived assets and
investments - - 66.5 214.6 281.1
Income tax expense (benefit) 163.3 (206.6) (19.4) (110.5) (173.2)
Income (loss) from continuing operations 322.6 117.5 (47.4) (162.6) 230.1
Total segment assets 5,226.2 708.0 614.5 77.8 6,626.5
Capital and investment expenditures 550.0 104.2 8.3 41.4 703.9
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001
Revenues $ 3,212.8 $ 369.7 $ 820.1 $ 133.9 $ 4,536.5
Intersegment revenues - 398.3 1.1 (399.4) -
Depreciation and amortization 453.0 23.6 33.8 12.0 522.4
Net interest charges 113.7 12.0 36.4 31.7 193.8
Impairment of long-lived assets - - 160.6 - 160.6
Income tax expense (benefit) 182.6 (253.6) (74.7) (27.0) (172.7)
Income (loss) from continuing operations 309.6 128.5 (144.4) (28.3) 265.4
Total segment assets 5,009.6 452.9 602.6 258.2 6,323.3
Capital and investment expenditures 353.4 43.5 18.0 72.0 486.9
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
Revenues $ 2,871.6 $ 329.3 $ 1,002.1 $ 27.3 $ 4,230.3
Intersegment revenues - 244.3 0.7 (245.0) -
Depreciation and amortization 402.6 25.2 32.3 13.3 473.4
Net interest charges 125.4 12.2 42.7 26.1 206.4
Impairment of long-lived assets - 70.2 60.5 - 130.7
Income tax expense (benefit) 150.5 (200.4) (28.9) (45.9) (124.7)
Income (loss) from continuing operations 210.3 34.1 (52.9) (56.2) 135.3
Total segment assets 4,978.0 345.4 802.3 366.9 6,492.6
Capital and investment expenditures 286.8 63.0 25.1 106.1 481.0
- --------------------------------------------------------------------------------------------------------------------
6. Related Party Transactions
The Company and its subsidiaries participate in two internal money pools,
operated by Progress Energy, to more effectively utilize cash resources and
to reduce outside short-term borrowings. Short-term borrowing needs are met
first by available funds of the money pool participants. Borrowing companies
pay interest at a rate designed to approximate the cost of outside
short-term borrowings. Subsidiaries, which invest in the money pool, earn
interest on a basis proportionate to their average monthly investment. The
interest rate used to calculate earnings approximates external interest
rates. The weighted-average interest rates associated with such money pool
balances were 2.18% and 4.47% at December 31, 2002 and 2001, respectively.
Funds may be withdrawn from or repaid to the pool at any time without prior
notice. At December 31, 2002, Florida Progress and Florida Power had $379.7
31
million and $237.4 million, respectively, of amounts payable to the money
pool that are included in notes payable to affiliated companies on the
Balance Sheets. At December 31, 2001, Florida Progress had $147.6 million of
amounts payable to the money pool and Florida Power had $119.8 million of
amounts receivable from the money pool that are included in notes payable to
affiliated companies and notes receivable from affiliated companies,
respectively, on the Balance Sheets. Interest expense related to advances
from Progress Energy was $6.6 million and $8.2 million for Florida Progress
in 2002 and 2001, respectively, and $0.6 million for Florida Power in 2002.
Florida Progress and Florida Power both recorded $1.2 million and $2.4
million of interest income related to the money pool for 2002 and 2001,
respectively. Interest expense and interest income related to the money pool
in 2000 was not significant.
During 2000, Progress Energy formed Progress Energy Service Company, LLC
(PESC) to provide specialized services, at cost, to the Company and its
subsidiaries, as approved by the U.S. Securities and Exchange Commission
(SEC). The Company and its subsidiaries have an agreement with PESC under
which PESC services, including purchasing, accounting, treasury, tax,
marketing, legal, and human resources are rendered at cost. Amounts billed
by PESC to Florida Progress and Florida Power for these services during 2002
and 2001 amounted to $248.6 million and $199.9 million, respectively, and
$116.1 million and $110.9 million, respectively. At December 31, 2002 and
2001, Florida Progress had a net payable to PESC of $43.1 million and $31.7
million, respectively. Florida Power had a net payable to the service
company of $36.6 million and $28.1 million, respectively, at December 31,
2002 and 2001. During 2002, the Office of Public Utility Regulation within
the SEC completed an audit examination of the Progress Energy's books and
records. This examination is a standard process for all PUHCA registrants.
Based on the review, the method for allocating PESC costs to the Parent and
its affiliates will change in 2003. The Company does not anticipate the
reallocation of costs will have a material impact on the results of
operations.
Progress Fuels has an outstanding note due to the Parent. The principal
outstanding on this note was $500.0 million at December 31, 2002 and 2001.
Progress Fuels recorded interest expense related to this note of $32.1
million and $5.4 million for 2002 and 2001, respectively.
Progress Fuels sells coal to Florida Power which are eliminated from
revenues in Florida Progress' consolidated financial statements. In
accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," profits on intercompany sales between Progress Fuels and
Florida Power are not eliminated if the sales price is reasonable and the
future recovery of sales price through the ratemaking process is probable.
In April 2000, Progress Ventures Holdings, Inc. (PVHI), a wholly owned
subsidiary of Progress Energy, purchased a 90% interest in an affiliate of
Progress Fuels that owns a synthetic fuel facility located at the
company-owned mine site in Virginia. In May 2000, PVHI purchased a 90%
ownership interest in another synthetic fuel facility located in West
Virginia. The purchase agreements contained a provision that would require
PVHI to sell, and the respective Progress Fuels affiliate to repurchase, the
90% interest had the share exchange among Florida Progress, CP&L Energy and
CP&L not occurred.
Progress Fuels has accounted for the transactions as a sale for tax purposes
and, because of the repurchase obligation, as a financing for financial
reporting purposes in the pre-acquisition period and as a transfer of assets
within a controlled group as of the acquisition date. At the date of
acquisition, assets of $8.3 million were transferred to Progress Energy. As
of December 31, 2002 and 2001, the Company has a note receivable of $46.6
million and $59.9 million from PVHI that has been recorded as a reduction to
equity for financial reporting purposes. Payments on the note during 2002
and 2001 totaled $17.2 million and $13.9 million, respectively, representing
$13.3 million and $3.9 million in principal and interest in 2002 and $9.4
million and $4.5 million in principal and interest in 2001.
From time-to-time the Company and its subsidiaries may receive equity
contributions from Progress Energy. During 2002, the Company received cash
equity contributions of $87.2 million. During 2001, the Company received
cash equity contributions of $90.1 million and a non-cash equity
contribution of $0.6 million. During 2000, the Company received cash equity
contributions totaling $84.5 million from Progress Energy.
In August 2002, CP&L transferred reservation payments for the manufacture of
two combustion turbines to Florida Power at CP&L's original cost of $20.0
million. These combustion turbines will be installed at the Florida Power
Hines facility in 2005. In December 2002, PVHI transferred reservation
payments for the manufacture of one combustion turbine and exhaust stack to
Florida Power at PVHI's original cost of $15.5 million. This combustion
turbine will be installed at a Florida Power production facility in 2004. At
December 31, 2002, Florida Power had a $14.2 million payable to CP&L related
to these transfers.
32
7. Impairment of Long-Lived Assets and Investments
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides
guidance for the accounting and reporting of impairment or disposal of
long-lived assets. The statement supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." In 2002, 2001 and 2000, the Company recorded impairments of
approximately $281.2 million, $160.6 million and $130.7 million,
respectively. The 2002 amount includes an estimated impairment of assets
held for sale of $66.5 million related to Railcar, Ltd. (See Note 4A).
Due to the decline of the telecommunications industry and continued
operating losses, the Company initiated an independent valuation study
during 2002 to assess the recoverability of the long-lived assets Progress
Telecom. Based on this assessment, the Company recorded asset impairments of
$214.6 million on a pre-tax basis and other charges of $18.4 million on a
pre-tax basis primarily related to inventory adjustments in the third
quarter of 2002. This write-down constitutes a significant reduction in the
book value of these long-lived assets.
The long-lived asset impairments include an impairment of property, plant
and equipment, construction work in process and intangible assets. The
impairment charge represents the difference between the fair value and
carrying amount of these long-lived assets. The fair value of these assets
was determined using a valuation study heavily weighted on the discounted
cash flow methodology, using market approaches as supporting information.
Due to results of divestiture efforts and the decision to retain the Rail
Services business segment in the near term, coupled with prior and current
year losses and a continued decline in the rail services industry, the
Company evaluated the recoverability of rail long-lived assets and
associated goodwill. Fair value was generally determined based on discounted
cash flows. As a result of this review, the Company recorded asset
impairments, primarily goodwill, of $160.6 million pre-tax ($108.1 million
after-tax) during the fourth quarter of 2001. Asset write-downs resulting
from this review were charged to diversified business expenses on the
Consolidated Statements of Income and Comprehensive Income.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other-than-temporary. During
the fourth quarter of 2001, the Company determined that the decline in fair
value of its affordable housing investments, held by Progress International
Holdings, a subsidiary of Progress Capital Holdings, Inc. (Progress Capital
Holdings) was other-than-temporary. As a result, the Company has recorded
investment impairments for other-than-temporary declines in the fair value
of its affordable housing investments. Investment write-downs of $9.1
million pre-tax are included in other, net on the Consolidated Statements of
Income and Comprehensive Income.
During the fourth quarter of 2000, Progress Fuels evaluated the economic
feasibility of accessing and mining its existing coal reserves in light of
the intended changes for the use of these assets by management and a
significant downturn in the coal industry. Progress Fuels concluded that
approximately 180 million tons of its existing reserves are impaired. Based
on the Progress Fuels' expectation of future net cash flow, these reserves
were written-down to their fair value, resulting in a pre-tax loss of $70.2
million. This impairment charge is included in diversified business expenses
on the Consolidated Statements of Income and Comprehensive Income.
During 2000, Progress Energy hired a financial advisor to assist Florida
Progress in evaluating its strategic alternatives with respect to two of
Progress Fuels' business segments, Rail Services and Inland Marine
Transportation. Preliminary valuations on the Rail Services business segment
indicated that the carrying amounts of goodwill and other long-lived assets
are not recoverable. As such, the carrying values of these assets were
written down to estimated fair value based on discounted cash flows
considering cash flows expected to result from the use of the assets and
their eventual disposition. During the fourth quarter of 2000, the Rail
Services segment recognized the resulting pre-tax impairment loss of $60.5
million, which was substantially attributed to the write-down of goodwill.
This impairment charge is included in diversified business expenses on the
Consolidated Statements of Income and Comprehensive Income.
33
8. Debt and Credit Facilities
A. Lines of Credit
At December 31, 2002, Florida Power had committed lines of credit totaling
$290.5 million, all of which are used to support its commercial paper
borrowings. Florida Power is required to pay minimal annual commitment fees
to maintain its credit facilities. The following table summarizes Florida
Power's credit facilities used to support the issuance of commercial paper
(in millions):
Description Total
------------------
364-Day (expiring 4/1/03) $ 90.5
5-Year (expiring 11/30/03) 200.0
------------------
$ 290.5
==================
There were no loans outstanding under these facilities at December 31, 2002.
As of December 31, 2002 and 2001, Florida Power had $257.1 million and
$154.3 million, respectively, of outstanding commercial paper and other
short-term debt classified as short-term obligations. The weighted-average
interest rates of such short-term obligations at December 31, 2002 and 2001
were 1.55% and 2.49%, respectively. Florida Power no longer reclassifies
commercial paper to long-term debt. Certain amounts for 2001 have been
reclassified to conform to 2002 presentation, with no effect on previously
reported net income or common stock equity.
The combined aggregate maturities of Florida Progress long-term debt for
2003 through 2007 are approximately $275 million, $68 million, $49 million,
$109 million and $124 million, respectively. Florida Power's aggregate
maturities of long-term debt for 2003 through 2007 are approximately $217
million, $43 million, $48 million, $48 million and $89 million,
respectively.
B. Covenants and Default Provisions
Financial Covenants
Florida Power's credit line contains various terms and conditions that could
affect Florida Power's ability to borrow under these facilities. These
include a maximum debt to total capital ratio, a material adverse change
clause and a cross-default provision.
Florida Power's credit line requires a maximum total debt to total capital
ratio of 65.0%. Indebtedness as defined by the bank agreement includes
certain letters of credit and guarantees which are not recorded on the
Consolidated Balance Sheets. As of December 31, 2002, Florida Power's total
debt to total capital ratio was 48.6%.
Material adverse change clause
The credit facility of Florida Power includes a provision under which
lenders could refuse to advance funds in the event of a material adverse
change in the borrower's financial condition.
Default provisions
Florida Power's credit lines include cross-default provisions for defaults
of indebtedness in excess of $10 million. Florida Power's cross-default
provisions only apply to defaults of indebtedness by Florida Power and not
to other affiliates of Florida Power. The credit lines of Progress Energy
include a similar provision. Progress Energy's cross-default provisions only
apply to defaults of indebtedness by Progress Energy and its significant
subsidiaries, which includes Florida Power, Florida Progress, Progress Fuels
and Progress Capital Holdings, Inc.
In the event that either of these cross-default provisions were triggered,
the lenders could accelerate payment of any outstanding debt. Any such
acceleration would cause a material adverse change in the respective
company's financial condition. Certain agreements underlying the Company's
indebtedness also limit the Company's ability to incur additional liens or
engage in certain types of sale and leaseback transactions.
34
Other restrictions
Florida Power's mortgage indenture provides that it will not pay any cash
dividends upon its common stock, or make any other distribution to the
stockholders, except a payment or distribution out of net income of Florida
Power subsequent to December 31, 1943.
In addition, Florida Power's Articles of Incorporation provide that no cash
dividends or distributions on common stock shall be paid, if the aggregate
amount thereof since April 30, 1944, including the amount then proposed to
be expended, plus all other charges to retained earnings since April 30,
1944, exceed (a) all credits to retained earnings since April 30, 1944, plus
(b) all amounts credited to capital surplus after April 30, 1944, arising
from the donation to Florida Power of cash or securities or transfers
amounts from retained earnings to capital surplus. At December 31, 2002,
none of Florida Power's retained earnings of $598 million was restricted.
Florida Power's Articles also provide that cash dividends on common stock
shall be limited to 75% of net income available for dividends if common
stock equity falls below 25% of total capitalization, and to 50% if common
stock equity falls below 20%. On December 31, 2002, Florida Power's common
stock equity was approximately 50.7% of total capitalization.
C. Secured Obligations
Florida Power's first mortgage bonds are secured by their respective
mortgage indentures. Florida Power's mortgage constitutes a first lien on
substantially all of its fixed properties, subject to certain permitted
encumbrances and exceptions. The Florida Power mortgage also constitutes a
lien on subsequently acquired property. At December 31, 2002, Florida Power
had approximately $1.1 billion in aggregate principal amount of first
mortgage bonds outstanding including those related to pollution control
obligations. The Florida Power mortgage allows the issuance of additional
mortgage bonds upon the satisfaction of certain conditions.
D. Guarantees of Subsidiary Debt
Florida Progress has guaranteed the outstanding debt obligations for two of
its wholly owned subsidiaries, FPC Capital I and Progress Capital Holdings.
At December 31, 2002 and 2001, Progress Capital Holdings had $223 million
and $273 million in medium term notes outstanding which was fully guaranteed
by Florida Progress. FPC Capital I had $300 million in mandatorily
redeemable securities outstanding at December 31, 2002 and 2001 for which
Florida Progress has guaranteed payment. See Note 9 for additional
discussion of these notes.
E. Hedging Activities
Florida Power uses interest rate derivatives to adjust the fixed and
variable rate components of its debt portfolio and to hedge cash flow risk
of fixed rate debt to be issued in the future. See discussion of risk
management and derivative transactions at Note 13.
9. Company-Obligated Mandatorily Redeemable Cumulative Quarterly Income
Preferred Securities of a Subsidiary Trust Holding Solely Florida Progress
Guaranteed Subordinated Deferrable Interest Notes
In April 1999, FPC Capital I (the Trust), an indirect wholly-owned
subsidiary of the Company, issued 12 million shares of $25 par cumulative
Company-obligated mandatorily redeemable preferred securities (Preferred
Securities) due 2039, with an aggregate liquidation value of $300 million
with an annual distribution rate of 7.10%, payable quarterly. Currently, all
12 million shares of the Preferred Securities that were issued are
outstanding. Concurrent with the issuance of the Preferred Securities, the
Trust issued to Florida Progress Funding Corporation (Funding Corp.) all of
the common securities of the Trust (371,135 shares), for $9.3 million.
Funding Corp. is a direct wholly owned subsidiary of the Company.
The existence of the Trust is for the sole purpose of issuing the Preferred
Securities and the common securities and using the proceeds thereof to
purchase from Funding Corp. its 7.10% Junior Subordinated Deferrable
Interest Notes (subordinated notes) due 2039, for a principal amount of
$309.3 million. The subordinated notes and the Notes Guarantee (as discussed
below) are the sole assets of the Trust. Funding Corp.'s proceeds from the
sale of the subordinated notes were advanced to Progress Capital Holdings
and used for general corporate purposes including the repayment of a portion
of certain outstanding short-term bank loans and commercial paper.
35
The Company has fully and unconditionally guaranteed the obligations of
Funding Corp. under the subordinated notes (the Notes Guarantee). In
addition, the Company has guaranteed the payment of all distributions
required to be made by the Trust, but only to the extent that the Trust has
funds available for such distributions (Preferred Securities Guarantee). The
Preferred Securities Guarantee, considered together with the Notes
Guarantee, constitutes a full and unconditional guarantee by the Company of
the Trust's obligations under the Preferred Securities.
The subordinated notes may be redeemed at the option of Funding Corp.
beginning in 2004 at par value plus accrued interest through the redemption
date. The proceeds of any redemption of the subordinated notes will be used
by the Trust to redeem proportional amounts of the Preferred Securities and
common securities in accordance with their terms. Upon liquidation or
dissolution of Funding Corp., holders of the Preferred Securities would be
entitled to the liquidation preference of $25 per share plus all accrued and
unpaid dividends thereon to the date of payment.
These Preferred Securities are classified as long-term debt on Florida
Progress' Consolidated Balance Sheets.
10. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and short-term obligations
approximate fair value due to the short maturities of these instruments. At
December 31, 2002 and 2001, there were miscellaneous investments, consisting
primarily of investments in company-owned life insurance and other benefit
plan assets, with carrying amounts of approximately $64.1 million and $74.2
million, respectively, included in miscellaneous other property and
investments. The carrying amount of these investments approximates fair
value due to the short maturity of certain instruments and certain
instruments are presented at fair value. The carrying amount of the
Company's long-term debt, including current maturities, was $2.5 billion and
$2.6 billion at December 31, 2002 and 2001, respectively. The estimated fair
value of this debt, as obtained from quoted market prices for the same or
similar issues, was $2.7 billion and $2.8 billion at December 31, 2002 and
2001, respectively.
External funds have been established as a mechanism to fund certain costs of
nuclear decommissioning (See Note 1F). These nuclear decommissioning trust
funds are invested in stocks, bonds and cash equivalents. Nuclear
decommissioning trust funds are presented on the Balance Sheets at amounts
that approximate fair value. Fair value is obtained from quoted market
prices for the same or similar investments.
11. Preferred and Preference Stock
The authorized capital stock of the Company includes 10 million shares of
preferred stock, without par value, including 2 million shares designated as
Series A Junior Participating Preferred Stock. No shares of the Company's
preferred stock are issued or outstanding.
The authorized capital stock of Florida Power includes three classes of
preferred stock: 4 million shares of Cumulative Preferred Stock, $100 par
value; 5 million shares of Cumulative Preferred Stock, without par value;
and 1 million shares of Preference Stock, $100 par value. No shares of
Florida Power's Cumulative Preferred Stock, without par value, or Preference
Stock are issued or outstanding. All Cumulative Preferred Stock series are
without sinking funds and are not subject to mandatory redemption.
12. Regulatory Matters
A. Rates
Florida Power's retail rates are set by the FPSC, while its wholesale rates
are governed by the FERC. Florida Power's last general retail rate case was
approved in 1992 and allowed a 12% regulatory return on equity with an
allowed range between 11% and 13%.
Florida Power previously operated under an agreement committing several
parties not to seek any reduction in its base rates or authorized return on
equity. That agreement expired on June 30, 2001. The FPSC initiated a rate
proceeding in 2001 regarding Florida Power's future base rates. On March 27,
2002, the parties in Florida Power's rate case entered into a Stipulation
and Settlement Agreement (the Agreement) related to retail rate matters. The
Agreement was approved by the FPSC on April 23, 2002. The Agreement is
generally effective from May 1, 2002 through December 31, 2005; provided,
however, that if Florida Power's base rate earnings fall below a 10% return
on equity, Florida Power may petition the FPSC to amend its base rates.
36
The Agreement provides that Florida Power will reduce its retail revenues
from the sale of electricity by an annual amount of $125 million. The
Agreement also provides that Florida Power will operate under a Revenue
Sharing Incentive Plan (the Plan) through 2005, and thereafter until
terminated by the FPSC, that establishes annual revenue caps and sharing
thresholds. The Plan provides that retail base rate revenues between the
sharing thresholds and the retail base rate revenue caps will be divided
into two shares - a 1/3 share to be received by Florida Power's
shareholders, and a 2/3 share to be refunded to Florida Power's retail
customers; provided, however, that for the year 2002 only, the refund to
customers was limited to 67.1% of the 2/3 customer share. The retail base
rate revenue sharing threshold amounts for 2002 was $1.296 billion and will
increase $37 million each year thereafter. The Plan also provides that all
retail base rate revenues above the retail base rate revenue caps
established for each year will be refunded to retail customers on an annual
basis. For 2002, the refund to customers was limited to 67.1% of the retail
base rate revenues that exceeded the 2002 cap. The retail base revenue cap
for 2002 was $1.356 billion and will increase $37 million each year
thereafter. Any amounts above the retail base revenue caps will be refunded
100% to customers. As of December 31, 2002, $4.7 million has been accrued
and will be refunded to customers by March 2003.
The Agreement also provides that beginning with the in-service date of
Florida Power's Hines Unit 2 and continuing through December 31, 2005,
Florida Power will be allowed to recover through the fuel cost recovery
clause a return on average investment and depreciation expense for Hines
Unit 2, to the extent such costs do not exceed the Unit's cumulative fuel
savings over the recovery period. Hines Unit 2 is a 516 MW combined-cycle
unit under construction and currently scheduled for completion in late 2003.
Additionally, the Agreement provided that Florida Power would effect a
mid-course correction of its fuel cost recovery clause to reduce the fuel
factor by $50 million for the remainder of 2002. The fuel cost recovery
clause will operate as it normally does, including, but not limited to any
additional mid-course adjustments that may become necessary, and the
calculation of true-ups to actual fuel clause expenses.
Florida Power will suspend accruals on its reserves for nuclear
decommissioning and fossil dismantlement through December 31, 2005.
Additionally, for each calendar year during the term of the Agreement,
Florida Power will record a $62.5 million depreciation expense reduction,
and may, at its option, record up to an equal annual amount as an offsetting
accelerated depreciation expense. In addition, Florida Power is authorized,
at its discretion, to accelerate the amortization of certain regulatory
assets over the term of the Agreement. There was no accelerated depreciation
or amortization expense recorded for the year ended December 31, 2002.
Under the terms of the Agreement, Florida Power agreed to continue the
implementation of its four-year Commitment to Excellence Reliability Plan
and expects to achieve a 20% improvement in its annual System Average
Interruption Duration Index by no later than 2004. If this improvement level
is not achieved for calendar years 2004 or 2005, Florida Power will provide
a refund of $3 million for each year the level is not achieved to 10% of its
total retail customers served by its worst performing distribution feeder
lines.
The Agreement also provided that Florida Power was required to refund to
customers $35 million of revenues Florida Power collected during the interim
period since March 13, 2001. This one-time retroactive revenue refund was
recorded in the first quarter of 2002 and was returned to retail customers
over an eight-month period ended December 31, 2002. Any additional refunds
under the Agreement are recorded when they become probable.
In February 2003, Florida Power petitioned the FPSC to increase its fuel
factors due to continuing increases in oil and natural gas commodity prices.
The crisis in the Middle East along with the Venezuelan oil workers' strike
have put upward pressure on commodity prices that were not anticipated by
Florida Power when fuel factors for 2003 were approved by the FPSC in
November 2002. If Florida Power's petition is approved, the increase would
go into effect April 1, 2003.
B. Regulatory Assets and Liabilities
As a regulated entity, Florida Power is subject to the provisions of SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation."
Accordingly, the Florida Power records certain assets and liabilities
resulting from the effects of the ratemaking process, which would not be
recorded under GAAP for nonregulated entities. The utility's ability to
continue to meet the criteria for application of SFAS No. 71 may be affected
in the future by competitive forces and restructuring in the electric
utility industry. In the event that SFAS No. 71 no longer applied to Florida
Power's operations, related regulatory assets and liabilities would be
eliminated unless an appropriate regulatory recovery mechanism was provided.
Additionally, these factors could result in an impairment of utility plant
assets as determined pursuant to SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (See Note 1L).
37
Florida Power has regulatory assets (liabilities) at December 31, 2002 and
2001 as follows (in thousands):
2002 2001
----------- -----------
Deferred fuel (included in current assets) $37,503 $15,147
----------- -----------
Income taxes recoverable through future rates 32,623 27,610
Deferred purchased power contract termination costs 46,601 95,326
Loss on reacquired debt 19,756 19,848
Deferred DOE enrichment facilities-related costs 6,955 8,531
Other 24,179 22,766
----------- -----------
Total regulatory assets 130,114 174,081
----------- -----------
Nuclear maintenance and refueling (9,601) (346)
Storm reserve (Note 22C) (35,631) (35,527)
Other (15,772) (14,320)
----------- -----------
Total regulatory liabilities (61,004) (50,193)
----------- -----------
Net regulatory assets $ 106,613 $ 139,035
=========== ===========
Except for portions of deferred fuel, all assets earn a return or the cash
has not yet been expended, in which case the assets are offset by
liabilities that do not incur a carrying cost. The utility expects to fully
recover these assets and refund the liabilities through customer rates under
current regulatory practice.
The Tiger Bay regulatory asset, for contract termination costs, is recovered
pursuant to an agreement between Florida Power and several intervening
parties, which was approved by the FPSC in June 1997. The amortization of
the regulatory asset is calculated using revenues collected under the fuel
adjustment clause as if the purchased power agreements related to the
facility were still in effect, less the actual fuel costs and the related
debt interest expense. This will continue until the regulatory asset is
fully amortized. Under the plan, Florida Power had the option to accelerate
the amortization at its discretion. Including accelerated amounts, Florida
Power recorded amortization expense of $48.7 million, $130.5 million and
$71.2 million in 2002, 2001 and 2000, respectively.
In December 2000, Florida Power received approval from the FPSC to establish
a regulatory liability to defer 2000 revenues for disposition by April 2,
2001. Florida Power applied the deferred revenues of $63 million, plus
accrued interest, to amortization of the Tiger Bay regulatory asset during
the first quarter of 2001.
Similar approvals were given by the FPSC in November 1999. Florida Power
received approval from the FPSC to defer nonfuel revenues towards the
development of a plan that would allow customers to realize the benefits
earlier than if they were used to accelerate the amortization of the Tiger
Bay regulatory asset. Florida Power was unable to identify any rate
initiatives that might allow its ratepayers to receive these benefits
sooner. In September 2000, Florida Power recognized $44.4 million of
revenue, and recorded $44.4 million, plus interest, of amortization against
the Tiger Bay regulatory asset.
In compliance with a regulatory order, Florida Power accrues a reserve for
maintenance and refueling expenses anticipated to be incurred during
scheduled nuclear plant outages.
13. Risk Management Activities and Derivatives Transactions
Under its risk management policy, the Company may use a variety of
instruments, including swaps, options and forward contracts, to manage
exposure to fluctuations in commodity prices and interest rates. Such
instruments contain credit risk if the counterparty fails to perform under
the contract. The Company minimizes such risk by performing credit reviews
using, among other things, publicly available credit ratings of such
counterparties. Potential non-performance by counterparties is not expected
to have a material effect on the consolidated financial position or
consolidated results of operations of the Company.
A. Commodity Contracts - General
Most of the Company's commodity contracts either are not derivatives
pursuant to SFAS No. 133 or qualify as normal purchases or sales pursuant to
SFAS No. 133. Therefore, such contracts are not recorded at fair value.
38
B. Commodity Derivatives - Cash Flow Hedges
Progress Fuels held natural gas and oil cash flow hedging instruments at
December 31, 2002. The objective for holding these instruments is to manage
a portion of the market risk associated with fluctuations in the price of
natural gas and oil on Progress Fuel's forecasted sales of natural gas and
oil production. As of December 31, 2002, Progress Fuels is hedging exposures
to the price variability of these commodities for contracts maturing through
December 2004.
The total fair value of these instruments at December 31, 2002 was a $10.2
million liability position. The ineffective portion of commodity cash flow
hedges was not material in 2002. As of December 31, 2002, $5.0 million of
after-tax deferred losses in accumulated other comprehensive income (OCI)
are expected to be reclassified to earnings during the next 12 months as the
hedged transactions occur. Due to the volatility of the commodities markets,
the value in OCI is subject to change prior to its reclassification into
earnings.
C. Commodity Derivatives - Economic Hedging and Trading
Nonhedging derivatives, primarily electricity forward contracts, may be
entered into for trading purposes and for economic hedging purposes. While
management believes the economic hedges mitigate exposures to fluctuations
in commodity prices, these instruments are not designated as hedges for
accounting purposes and are monitored consistent with trading positions. The
Company manages open positions with strict policies that limit its exposure
to market risk and require daily reporting to management of potential
financial exposures. Gains and losses from such contracts were not material
during 2002, 2001 or 2000, and the Company did not have material outstanding
positions in such contracts at December 31, 2002 or 2001.
D. Interest Rate Derivatives - Fair Value or Cash Flow Hedges
The Company manages its interest rate exposure in part by maintaining its
variable-rate and fixed rate-exposures within defined limits. In addition,
the Company also enters into financial derivative instruments, including,
but not limited to, interest rate swaps and lock agreements to manage and
mitigate interest rate risk exposure.
The Company uses cash flow hedging strategies to hedge variable interest
rates on long-term debt and to hedge interest rates with regard to future
fixed-rate debt issuances. At December 31, 2002, Florida Power held an
interest rate cash flow hedge, with a notional amount of $35 million,
related to an anticipated 2003 issuance of long-term debt. The fair value of
that hedge was a $0.5 million liability position at December 31, 2002. As of
December 31, 2002, an immaterial amount of after-tax deferred losses in OCI
is expected to be reclassified to earnings during the next 12 months as the
hedged interest payments occur. Due to the volatility of interest rates, the
value in OCI is subject to change prior to its reclassification into
earnings. At December 31, 2001, the Company held no interest rate cash flow
hedges.
The Company uses fair value hedging strategies to manage its exposure to
fixed interest rates on long-term debt. At December 31, 2002 and 2001, the
Company had no open interest rate fair value hedges.
The notional amounts of interest rate derivatives are not exchanged and do
not represent exposure to credit loss. In the event of default by a
counterparty, the risk in these transactions is the cost of replacing the
agreements at current market rates.
14. Stock-Based Compensation
A. Long-Term Incentive Plans
Prior to November 30, 2000, the Company and one of its subsidiaries had
Long-Term Incentive Plans (LTIPs) which authorized the granting of common
stock to certain executives in various forms. These plans were terminated on
November 30, 2000, in conjunction with the acquisition by Progress Energy
(See Note 2). All outstanding LTIP awards as of November 30, 2000 were paid
in full in 2000 in accordance with the change in control provisions of these
plans. Certain executives were also eligible to receive restricted stock,
which also were fully vested and paid in conjunction with the merger.
Compensation costs for performance shares, performance units and restricted
stock were recognized at the fair market value of the Company's stock and
recognized over the performance cycle. Compensation costs related to the
LTIPs for 2000 were $17 million. In addition the Company recognized
merger-related costs of $18 million associated with these plans in 2000, as
a result of the immediate vesting of all outstanding awards.
39
B. Employee Stock Ownership Plan
Progress Energy sponsors the Progress Energy 401(k) Savings and Stock
Ownership Plan (401(k)) for which substantially all full-time non-bargaining
unit employees and certain part-time non-bargaining employees within
participating subsidiaries are eligible. Effective January 1, 2002, Florida
Progress is a participating subsidiary of the 401(k), which has matching and
incentive goal features, encourages systematic savings by employees and
provides a method of acquiring Progress Energy common stock and other
diverse investments. The 401(k), as amended in 1989, is an Employee Stock
Ownership Plan (ESOP) that can enter into acquisition loans to acquire
Progress Energy common stock to satisfy 401(k) common stock needs.
Qualification as an ESOP did not change the level of benefits received by
employees under the 401(k). Common stock acquired with the proceeds of an
ESOP loan is held by the 401(k) Trustee in a suspense account. The common
stock is released from the suspense account and made available for
allocation to participants as the ESOP loan is repaid. Such allocations are
used to partially meet common stock needs related to Progress Energy
matching and incentive contributions and/or reinvested dividends.
Florida Progress' matching and incentive goal compensation cost under the
401(k) is determined based on matching percentages and incentive goal
attainment as defined in the plan. Such compensation cost is allocated to
participants' accounts in the form of Progress Energy common stock, with the
number of shares determined by dividing compensation cost by the common
stock market value at the time of allocation. The 401(k) common stock share
needs are met with open market purchases, with shares released from the ESOP
suspense account and with newly issued shares. Florida Progress' matching
and incentive cost met with shares released from the suspense account
totaled approximately $2.0 million for the year ended December 31, 2002.
C. Stock Option Agreements
Pursuant to the Progress Energy's 1997 Equity Incentive Plan and 2002 Equity
Incentive Plans as amended and restated as of July 10, 2002, Progress Energy
may grant options to purchase shares of common stock to directors, officers
and eligible employees. During 2002 and 2001, approximately 2.9 million and
2.4 million common stock options were granted. Of these amounts,
approximately 0.5 million and 0.4 million, respectively, were granted to
officers and eligible employees of Florida Progress and Florida Power. No
compensation expense was recognized under the provisions of APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Had compensation expense been measured based on the fair value of the
options on the date of grant, calculated under the provisions of SFAS No.
123, "Accounting for Stock Based Compensation," Florida Progress's and
Florida Power's allocated share of such compensation expense would have
reduced reported net income in 2002 by approximately $2.8 million and $2.4
million, respectively. Compensation expense for 2001 was insignificant.
D. Other Stock-Based Compensation Plans
Progress Energy has additional compensation plans for officers and key
employees that are stock-based in whole or in part. The Company participates
in these plans. The two primary active stock-based compensation programs are
the Performance Share Sub-Plan (PSSP) and the Restricted Stock Awards
program (RSA), both of which were established pursuant to Progress Energy's
1997 Equity Incentive Plan and were continued under the 2002 Equity
Incentive Plan, as amended and restated as of July 10, 2002.
Under the terms of the PSSP, officers and key employees are granted
performance shares on an annual basis that vest over a three-year
consecutive period. Each performance share has a value that is equal to, and
changes with, the value of a share of Progress Energy's common stock, and
dividend equivalents are accrued on, and reinvested in, the performance
shares. The PSSP has two equally weighted performance measures, both of
which are based on Progress Energy's results as compared to a peer group of
utilities. Compensation expense is recognized over the vesting period based
on the expected ultimate cash payout and is reduced by any forfeitures.
40
The RSA allows Progress Energy to grant shares of restricted common stock to
officers and key employees of Progress Energy. The restricted shares
generally vest on a graded vesting schedule over a minimum of three years.
Compensation expense, which is based on the fair value of common stock at
the grant date, is recognized over the applicable vesting period and is
reduced by any forfeitures.
The total amount expensed by the Company for other stock-based compensation
under these plans was $1.4 million in 2002 and 2001, and $0.03 million in
2000.
15. Benefit Plans
A. Pension Benefits
The Company and some of its subsidiaries (including Florida Power) sponsor
noncontributory defined benefit pension plans covering most employees.
The Company also has supplementary defined benefit pension plans, which
provide additional benefits to certain higher-level employees. As a result
of the acquisition by Progress Energy, the benefits of two plans are now
frozen, and in 2000, the Company recorded merger-related charges of $24.4
million associated with the two plans (See Note 2). The net pension benefit
recognized in 2000 of $53.6 million does not include the merger-related
charges.
B. Other Postretirement Benefits
The Company and some of its subsidiaries (including Florida Power) also
provide certain health care and life insurance benefits for retired
employees that reach retirement age while working for the Company.
Shown below are the components of the net pension expense and net
postretirement benefit expense calculations for 2002, 2001 and 2000:
Pension Benefits Other Postretirement Benefits
--------------------------------- -----------------------------
(In millions) 2002 2001 2000 2002 2001 2000
--------------------------------- -----------------------------
Service cost $ 18.9 $ 10.5 $ 18.7 $ 4.7 $ 3.9 $ 3.2
Interest cost 44.2 42.0 42.5 15.0 12.5 10.9
Expected return on plan assets (75.8) (86.3) (92.0) (0.7) (0.6) (0.5)
Net amortization and deferral (7.3) (18.8) (22.8) 4.1 3.5 2.7
--------------------------------- -----------------------------
Net cost/(benefit) recognized by Florida Progress $ (20.0) $ (52.6) $ (53.6) $ 23.1 $ 19.3 $ 16.3
--------------------------------- -----------------------------
Net cost/(benefit) recognized by Florida Power $ (21.9) $ (50.3) $ (51.3) $ 21.9 $ 18.0 $ 15.9
The following weighted average actuarial assumptions at December 31 were
used in the calculation of the year-end obligation or each year's cost:
Pension Benefits Other Postretirement Benefits
------------------------------- ---------------------------------
(In millions) 2002 2001 2000 2002 2001 2000
------------------------------- ---------------------------------
Discount rate for obligation 6.60% 7.50% N/A 6.60% 7.50% N/A
Expected long-term rate of return 9.25% 9.25% 9.00% 5.00% 5.00% 5.00%
Rate of compensation increase:
Bargaining unit employees 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%
Nonbargaining unit employees 4.00% 4.00% 4.50% 4.00% 4.00% 4.50%
Nonqualified plans 4.00% 4.50% 4.50% N/A N/A N/A
------------------------------- ---------------------------------
The following summarizes the change in the benefit obligation and plan
assets for both the pension plan and postretirement benefit plan for 2002
and 2001:
41
Other Postretirement
Pension Benefits Benefits
------------------------ -------------------------
(In millions) 2002 2001 2002 2001
------------------------ -------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 587.8 $ 627.7 $ 180.4 $ 156.2
Service cost 18.9 10.5 4.7 3.9
Interest cost 44.2 42.0 15.0 12.5
Plan amendment - (43.0) - 7.8
Actuarial (gain)/loss 118.9 (13.4) 55.5 9.6
Transfers (17.6) - (5.4) -
Benefits paid (38.7) (35.0) (14.4) (9.6)
Curtailment gain and special
termination benefits (See Note 2) - (1.0) - -
------------------------ -------------------------
Benefit obligation at end of year $ 713.5 $ 587.8 $ 235.8 $ 180.4
------------------------ -------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 853.7 $ 948.8 $ 13.4 $ 11.6
Return on plan assets (114.4) (63.3) 1.3 0.5
Employer contributions 4.4 3.2 15.8 10.9
Transfers (17.6) - - -
Benefits paid (38.7) (35.0) (14.4) (9.6)
------------------------ -------------------------
Fair value of plan assets at end of year $ 687.4 $ 853.7 $ 16.1 $ 13.4
------------------------ -------------------------
Funded status $ (26.1) $ 265.9 $ (219.7) $ (167.0)
Unrecognized transition (asset) obligation (0.7) (5.6) 34.9 38.4
Unrecognized prior service cost (20.0) (21.7) 7.0 7.5
Unrecognized net actuarial (gain) loss 213.2 (96.5) 32.9 (16.6)
Minimum pension liability adjustment (7.3) - - -
------------------------ -------------------------
Prepaid (accrued) benefit cost-Florida Progress $ 159.1 $ 142.1 $ (144.9) $ (137.7)
------------------------ -------------------------
Prepaid (accrued) benefit cost-Florida Power $ 188.0 $ 168.4 $ (139.4) $ (132.9)
The Florida Progress net prepaid pension cost of $159.1 million and $142.1
million at December 31, 2002 and 2001, respectively, is included in the
accompanying Consolidated Balance Sheets as prepaid pension cost of $226.4
million and $202.2 million, respectively, and accrued benefit cost of $67.3
million and $60.1 million, respectively, which is included in other
liabilities and deferred credits. The Florida Power net prepaid pension cost
of $188.0 million and $168.4 million at December 31, 2002 and 2001,
respectively, is included in the accompanying Consolidated Balance Sheets as
prepaid pension cost of $222.5 million and $198.4 million, respectively, and
accrued benefit cost of $34.5 million and $30.0 million, respectively, which
is included in other liabilities and deferred credits. For Florida Progress,
the defined benefit plans with accumulated benefit obligations in excess of
plan assets had projected benefit obligations totaling $67.6 million and
$59.6 million at December 31, 2002 and 2001, respectively. Those plans had
accumulated benefit obligations totaling $67.3 million and $59.6 million,
respectively, and no plan assets. For Florida Power, the defined benefit
plans with accumulated benefit obligations in excess of plan assets had
projected benefit obligations totaling $34.8 million and $30.0 million at
December 31, 2002 and 2001, respectively. Those plans had accumulated
benefit obligations totaling $34.5 million and $30.0 million, respectively,
and no plan assets.
Florida Progress and Florida Power recorded a minimum pension liability
adjustment of $7.3 million and $3.9 million, respectively, at December 31,
2002, with a corresponding pre-tax charge to accumulated other comprehensive
loss, a component of common stock equity.
Accrued other postretirement benefit cost is included in other liabilities
and deferred credits in the respective balance sheets of Florida Progress
and Florida Power.
42
The assumed pre-Medicare and post Medicare health care cost trend rates are:
2002 2001
--------------------------
Initial medical cost trend for pre-medicare benefits 7.50% 7.50%
Initial medical cost trend for post-medicare benefits 7.50% 7.50%
Ultimate medical cost trend rate 5.25% 5.00%
Year ultimate medical cost trend rate is achieved 2009 2008
Assuming a 1% increase in the medical cost trend rates, the aggregate of the
service and interest cost components of the net periodic OPEB cost for 2002
would increase by $3.0 million, and the OPEB obligation at December 31,
2002, would increase by $23.3 million. Assuming a 1% decrease in the medical
cost trend rates, the aggregate of the service and interest cost components
of the net periodic OPEB cost for 2002 would decrease by $2.6 million and
the OPEB obligation at December 31, 2002, would decrease by $21.2 million.
16. Income Taxes
Income tax expense (benefit) applicable to continuing operations is
comprised of (in millions):
FLORIDA PROGRESS 2002 2001 2000
-------------- --------------- ------------
Payable currently: Federal $ 42.9 $ 3.4 $96.8
State 23.4 25.7 15.5
-------------- --------------- ------------
66.3 29.1 112.3
-------------- --------------- ------------
Deferred, net: Federal (220.0) (187.5) (215.6)
State (13.1) (6.5) (13.5)
-------------- --------------- ------------
(233.1) (194.0) (229.1)
-------------- --------------- ------------
Amortization of investment tax credits, net (6.4) (7.8) (7.9)
-------------- --------------- ------------
Income tax benefit $ (173.2) $ (172.7) $ (124.7)
============== =============== ============
FLORIDA POWER 2002 2001 2000
-------------- --------------- ------------
Payable currently: Federal $ 171.6 $ 192.9 $ 181.3
State 29.0 30.7 28.6
-------------- --------------- ------------
200.6 223.6 209.9
-------------- --------------- ------------
Deferred, net: Federal (28.2) (30.2) (46.0)
State (2.7) (3.0) (5.6)
-------------- --------------- ------------
(30.9) (33.2) (51.6)
-------------- --------------- ------------
Amortization of investment tax credits, net (6.4) (7.8) (7.8)
-------------- --------------- ------------
Income tax expense $ 163.3 $ 182.6 $ 150.5
============== =============== ============
43
The primary differences between the statutory rates and the effective income
tax rates are detailed below:
FLORIDA PROGRESS 2002 2001 2000
--------------- -------------- --------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefits 10.3 12.8 12.4
Amortization of investment tax credits (11.3) (8.4) (74.8)
Synthetic fuel income tax credits (299.7) (230.3) (1,402.7)
Other income tax credits (11.6) (6.5) (66.3)
Goodwill amortization - 9.7 0.2
Non-deductible acquisition costs - - 233.8
Net unfunded taxes from prior years - - 40.0
Impairment loss - - 16.2
Company owned life insurance - cash surrender value 3.2 2.1 11.5
Progress Energy tax allocation benefit (See Note 1K) (35.2) - -
Other 4.5 (0.8) 13.0
--------------- -------------- --------------
Effective income tax rates (304.8)% (186.4)% (1,181.7)%
=============== ============== ==============
FLORIDA POWER 2002 2001 2000
--------------- -------------- --------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
income tax benefits 3.4 3.6 4.1
Amortization of investment tax credits (1.3) (1.6) (2.2)
Non-deductible acquisition costs - - 3.0
Progress Energy tax allocation benefit (See Note 1K) (3.8) - -
Other 0.3 - 1.6
--------------- -------------- --------------
Effective income tax rates 33.6% 37.0% 41.5%
=============== ============== ==============
The following summarizes the components of deferred tax liabilities and
assets at December 31 (in millions):
FLORIDA PROGRESS 2002 2001
--------------- --------------
Deferred tax liabilities:
Difference in tax basis of property,
plant and equipment $ 384.9 $ 436.4
Investment in partnerships (10.4) 1.8
Deferred book expenses 5.9 7.0
Other 93.0 80.6
--------------- --------------
Total deferred tax liabilities $ 473.4 $ 525.8
=============== ==============
Deferred tax assets:
Accrued book expenses $ 66.6 $ 71.4
Income tax credit carry forward 314.2 202.9
Unbilled revenues 17.8 17.7
State income tax loss carry forward 24.9 20.4
Valuation allowance (25.6) (20.4)
Other 108.5 100.3
--------------- --------------
Total deferred tax assets $ 506.4 $ 392.3
=============== ==============
44
FLORIDA POWER 2002 2001
--------------- --------------
Deferred tax liabilities:
Difference in tax basis of property,
plant and equipment $ 377.2 $ 413.7
Deferred book expenses 6.1 7.0
Other 21.2 10.4
--------------- --------------
Total deferred tax liabilities $ 404.5 $ 431.1
=============== ==============
Deferred tax assets:
Accrued book expenses $ 42.0 $ 40.4
Unbilled revenues 17.8 17.7
Other 9.8 10.5
--------------- --------------
Total deferred tax assets $ 69.6 $ 68.6
=============== ==============
At December 31, 2002 and 2001, Florida Progress had net non-current deferred
tax (assets)/liabilities of $(6.8) million and $165.8 million and net
current deferred tax assets of $26.2 million and $32.3 million,
respectively. The income tax credit carry forward at December 31, 2002,
consists of $301.6 million of alternative minimum tax credit with an
indefinite carry forward period, and $12.6 million of general business
credit with a carry forward period that will begin to expire in 2020. The
company had a valuation allowance of $20.4 million at December 31, 2001 and
established additional valuation allowances of $5.2 million during 2002 due
to the uncertainty of realizing certain future state income tax benefits.
The Company believes it is more likely than not that the results of future
operations will generate sufficient taxable income to allow for the
utilization of the remaining deferred tax assets.
At December 31, 2002 and 2001, Florida Power had net non-current deferred
tax liabilities of $361.1 million and $394.8 million and net current
deferred tax assets of $26.2 million and $32.3 million, respectively.
Florida Power expects the results of future operations will generate
sufficient taxable income to allow for the utilization of deferred tax
assets.
The Company, through its subsidiaries, is a majority owner in three entities
and a minority owner in three entities that own facilities that produce
synthetic fuel as defined under the Internal Revenue Service Code (Code).
The production and sale of the synthetic fuel from these facilities
qualifies for tax credits under Section 29 of the Code (Section 29) if
certain requirements are satisfied, including a requirement that the
synthetic fuel differs significantly in chemical composition from the coal
used to produce such synthetic fuel. Total Section 29 credits generated to
date are approximately $573.2 million. All three majority-owned entities and
all three minority-owned entities have received private letter rulings
(PLR's) from the Internal Revenue Service (IRS) with respect to their
synthetic fuel operations. The PLR's do not limit the production on which
synthetic fuel credits may be claimed. Should the tax credits be denied on
future audits, and the Company fails to prevail through the IRS or legal
process, there could be a significant tax liability owed for
previously-taken Section 29 credits, with a significant impact on earnings
and cash flows. The current Section 29 tax credit program will expire in
2007.
One of the Company's synthetic fuel entities, Colona Synfuel Limited
Partnership, L.L.L.P. (Colona), is being audited by the IRS. The audit of
Colona was expected. The Company is audited regularly in the normal course
of business as are most similarly situated companies. The Company has been
allocated approximately $225 million in tax credits to date for this
synthetic fuel entity. As provided for in contractual arrangements
pertaining to Progress Energy's purchase of Colona, the Company has begun
escrowing quarterly royalty payments owed to an unaffiliated entity until
final resolution of the audit.
In September 2002, all three of Florida Progress' majority-owned synthetic
fuel entities, including Colona, and two of the Company's minority owned
synthetic fuel entities were accepted into the IRS's Pre-Filing Agreement
(PFA) program. The PFA program allows taxpayers to voluntarily accelerate
the IRS exam process in order to seek resolution of specific issues. Either
the Company or the IRS can withdraw from the program at any time, and issues
not resolved through the program may proceed to the next level of the IRS
exam process. While the ultimate outcome is uncertain, the Company believes
that participation in the PFA program will likely shorten the tax exam
process.
45
In management's opinion, the Company is complying with all the necessary
requirements to be allowed such credits under Section 29 and believes it is
probable, although it cannot provide certainty, that it will prevail on any
credits taken.
17. Joint Ownership of Generating Facilities
Florida Power holds an undivided ownership interest in certain jointly-owned
generating facilities, CR3 and Intercessions Unit P-11 (P11). Florida Power
is entitled to shares of the generating capability and output of CR3 equal
to its ownership interest. Florida Power also pays its ownership share of
additional construction costs, fuel inventory purchases and operating
expenses. Florida Power's share of expenses for the jointly-owned facility
are included in the appropriate expense category. The co-owner of P11 has
exclusive rights to the output of the unit during the months of June through
September. Florida Power has that right for the remainder of the year.
Florida Power's ownership interest in CR3 and P11 is listed below with
related information as of December 31, 2002 and 2001 (dollars in thousands):
Company Unamortized Construction
Megawatt Ownership Plant Accumulated Accumulated Nuclear Work in
2002 Capability Interest Investment Depreciation Decommissioning Fuel Progress
---------- -------- ---------- ------------ --------------- ---- --------
CR3 834 91.78% $777,141 $504,417 $396,868 $40,260 $27,907
P11 143 66.67% 22,090 5,232 - - 3,897
Company Unamortized Construction
Megawatt Ownership Plant Accumulated Accumulated Nuclear Work in
2001 Capability Interest Investment Depreciation Decommissioning Fuel Progress
---------- -------- ---------- ------------ --------------- ---- --------
CR3 834 91.78% $773,835 $469,840 $416,995 $62,536 $25,723
P11 143 66.67% 22,302 4,583 - - 94
18. Other Income and Other Expense
Other income and expense includes interest income and other income and
expense items as discussed below. The components of other, net as shown on
the Consolidated Statements of Income and Comprehensive Income for fiscal
years 2002, 2001 and 2000 are as follows (in thousands):
2002 2001 2000
--------------- ---------------- ----------------
Other income
Net energy purchased for resale gain (loss) $ 292 $ (287) $ 3,822
Net financial trading gain (loss) - (3,958) 128
Nonregulated energy and delivery services income 16,937 17,655 21,840
AFUDC equity 2,307 77 1,297
Other 3,513 1,372 155
--------------- ---------------- ----------------
Total other income - Florida Power $ 23,049 $ 14,859 $ 27,242
--------------- ---------------- ----------------
Income from equity investments 5,213 4,416 1,220
Other income - Florida Progress 5,937 2,896 7,691
--------------- ---------------- ----------------
Total other income - Florida Progress $ 34,199 $ 22,171 $ 36,153
--------------- ---------------- ----------------
Other expense
Nonregulated energy and delivery services expenses $ 15,141 $ 13,382 $ 19,561
Donations 10,464 6,902 5,508
Other 3,371 5,355 2,580
--------------- ---------------- ----------------
Total other expense - Florida Power $ 28,976 $ 25,639 $ 27,649
--------------- ---------------- ----------------
Loss from equity investments 4,707 11,891 9,388
Other expense - Florida Progress 14,192 10,726 25,448
--------------- ---------------- ----------------
Total other expense - Florida Progress $ 47,875 $ 48,256 $ 62,485
--------------- ---------------- ----------------
Other, net $ (13,676) $ (26,085) $ (26,332)
=============== ================ ================
46
Net financial trading gain (loss) represents non-asset-backed trades of
electricity. Nonregulated energy and delivery services include power
protection services and mass market programs (surge protection, appliance
services and area light sales) and delivery, transmission and substation
work for other utilities.
19. Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." This statement clarifies the criteria for
recording of other intangible assets separately from goodwill. Effective
January 1, 2002, goodwill is no longer subject to amortization over its
estimated useful life. Instead, goodwill is subject to at least an annual
assessment for impairment by applying a two-step fair-value based test. This
assessment could result in periodic impairment charges. The Company
completed the first step of the initial transitional goodwill impairment
test, which indicated that the Company's goodwill was not impaired as of
January 1, 2002. The Company's carrying amount of goodwill at December 31,
2002 and 2001, was $11.1 million in the Energy and Related Services segment.
Florida Power has no goodwill and no significant intangible assets as of
December 31, 2002 and 2001. The Company and Florida Power had no other
significant intangible assets as of December 31, 2002 and 2001.
As required by SFAS No. 142, the results for the prior years have not been
restated. A reconciliation of net income as if SFAS No. 142 had been adopted
is presented below for the years ended December 31 (in thousands).
2001 2000
------------------- ------------------
Reported net income $ 244,331 $ 144,241
Goodwill amortization 2,394 3,001
------------------- ------------------
Adjusted net income $ 246,725 $ 147,242
=================== ==================
20. Leases
The Company leases transportation equipment, office buildings, computer
equipment, and other property and equipment with various terms and
expiration dates. The Company generally requires the subsidiaries to pay all
executory costs such as maintenance and insurance. Some rental payments
include minimum rentals plus contingent rentals based on mileage. These
contingent rentals are not significant. Rent expense (under operating
leases) totaled $32.6 million, $25.3 million and $73.9 million during 2002,
2001 and 2000, respectively. In addition, Progress Telecom has entered into
capital leases for equipment. Assets recorded under capital leases totaled
$2.9 million and $12.2 million as of December 31, 2002 and 2001,
respectively. Accumulated amortization was not significant. These assets
were written down in conjunction with the impairments of Progress Telecom
recorded during the third quarter of 2002 (See Note 7).
Minimum annual rental payments, excluding executory costs such as property
taxes, insurance and maintenance, under long-term noncancelable leases as of
December 31, 2002 are (in thousands):
Capital Leases Operating Leases
-------------- ----------------
2003 $ 1,111 $ 53,089
2004 1,111 41,671
2005 1,111 23,706
2006 1,111 17,230
2007 1,111 12,780
Thereafter 8,740 53,990
--------------- ----------------
$ 14,295 $202,466
================
Less amount representing imputed interest (4,828)
---------------
Present value of net minimum lease payments
uner capital lease $ 9,467
===============
The Company expects to sell Railcar Ltd. during 2003 (See Note 4A). The
operating lease obligations above include $34.2 million, $24.0 million, $6.7
million, $1.5 million, and $1.4 million for the years 2003 through 2007,
respectively, which are attributable to Railcar Ltd. Upon the sale of the
related assets, the Company expects to be relieved of these obligations.
47
The Company is also a lessor of land, buildings, railcars and other types of
properties it owns under operating leases with various terms and expiration
dates. The leased buildings and railcars are depreciated under the same
terms as other buildings and railcars included in diversified business
property. Minimum rentals receivable under noncancelable leases as of
December 31, 2002, are (in thousands):
Amounts
-----------------
2003 $ 10,589
2004 7,213
2005 5,836
2006 4,681
2007 2,626
Thereafter 6,304
-----------------
$ 37,249
=================
The rentals receivable totals above include $10.3 million, $7.0 million,
$5.6 million, $4.5 million, and $2.6 million, for the years 2003 through
2007, respectively, and $4.4 million thereafter, which are attributable to
Railcar Ltd. Upon the sale of the related assets, the Company expects to no
longer receive this income.
Florida Power is the lessor of electric poles and streetlights. Rents
received are contingent upon usage and totaled $52.5 million, $47.5 million
and $47.7 million for 2002, 2001 and 2000, respectively.
In December 2000, Railcar Ltd., a subsidiary of Progress Fuels, sold a
portfolio of railcars to Railcar Asset Financing Trust (RAFT). Railcar Ltd.
made a $4.9 million (9.95%) investment in RAFT and will remain as servicer
of the portfolio. The RAFT term is five years at which time Railcar Ltd. has
the option to repurchase the railcars at fair value. As of December 31,
2002, the RAFT was accounted for as assets held for sale, which is presented
in other current assets on the accompanying Consolidated Balance Sheets.
21. Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss for Florida Progress and
Florida Power as of December 31, 2002 and 2001 are as follows (in
thousands):
FLORIDA PROGRESS 2002 2001
----------- ------------
Loss on cash flow hedges $ (6,665) $ -
Minimum pension liability adjustments (4,503) -
Foreign currency translation and other (4,569) (2,985)
----------- ------------
Total accumulated other comprehensive loss $ (15,737) $ (2,985)
=========== ============
FLORIDA POWER
2002 2001
----------- ------------
Loss on cash flow hedges $ (318) $ -
Minimum pension liability adjustments (2,366) -
----------- ------------
Total accumulated other comprehensive loss $ (2,684) $ -
=========== ============
22. Commitments and Contingencies
A. Fuel, Coal and Purchased Power Commitments
Florida Power has long-term contracts for approximately 473 megawatts of
purchased power with other utilities, including a contract with The Southern
Company for approximately 413 megawatts of purchased power annually through
2010. Florida Power can lower these purchases to approximately 200 MW
annually with a three-year notice. Total purchases, for both energy and
capacity, under these agreements amounted to $159.3 million, $111.7 million
and $104.5 million for 2002, 2001 and 2000, respectively. Total capacity
payments were $50.5 million, $54.1 million and $54.0 million for 2002, 2001
and 2000, respectively. Minimum purchases under these contracts,
representing capital-related capacity costs, are approximately $50 million
annually through 2005 and $30 million annually for 2006 and 2007.
Florida Power has ongoing purchased power contracts with certain
cogenerators (qualifying facilities) for 871 megawatts of capacity with
expiration dates ranging from 2003 to 2025. These purchased power contracts
provide for capacity and energy payments. Energy payments are based on the
actual power taken under these contracts. Capacity payments are subject to
the qualifying facilities meeting certain contract performance obligations.
In most cases, these contracts account for 100% of the generating capacity
of each of the facilities. Of the 871 megawatts under contract, 831
48
megawatts currently are available to Florida Power. All commitments have
been approved by the FPSC. Total capacity purchases under these contracts
amounted to $231.7 million, $225.8 million and $226.4 million for 2002, 2001
and 2000, respectively. Minimum expected future capacity payments under
these contracts as of December 31, 2002 are $246.8 million, $257.4 million,
$268.7 million, $279.7 million and $289.4 million for 2003 through 2007,
respectively.
Florida Power has entered into various long-term contracts for oil, gas and
coal requirements of its generating plants. Payments under these commitments
were $750.3 million, $641.6 million and $614.7 million in 2002, 2001 and
2000, respectively. Estimated annual payments for firm commitments of fuel
purchases and transportation costs under these contracts are approximately
$1.2 billion, $635.7 million, $562.8 million, $595.6 million and $651.7
million for 2003 through 2007, respectively.
Progress Fuels has two coal supply contracts with Florida Power, which
require Florida Power to buy and Progress Fuels to supply substantially all
of the coal requirements of four of Florida Power's generating units, two
through 2002 and two through 2004. In connection with these contracts,
Progress Fuels has entered into several contracts with outside parties for
the purchase of coal. The annual obligations for coal purchases and
transportation under these contracts are $188.3 million and $41.7 million
for 2003 and 2004, respectively, with no obligations thereafter. The total
cost incurred for these commitments in 2002, 2001 and 2000 was $207.4
million, $134.1 million and $110.6 million, respectively.
The FPSC allows the capacity payments to be recovered through a capacity
cost recovery clause, which is similar to, and works in conjunction with,
energy payments recovered through the fuel cost recovery clause.
B. Guarantees
As a part of normal business, Florida Progress and certain subsidiaries
enter into various agreements providing financial or performance assessments
to third parties. Such agreements include guarantees, stand-by letters of
credit and surety bonds. These agreements are entered into primarily to
support or enhance the creditworthiness otherwise attributed to a subsidiary
on a stand-alone basis, thereby facilitating the extension of sufficient
credit to accomplish the subsidiaries' intended commercial purposes.
At December 31, outstanding guarantees are as follows (in millions):
2002 2001
------------------- -----------------
Standby letters of credit $ 42.5 $ 24.3
Surety bonds 38.6 13.0
Other guarantees 5.1 33.9
------------------- -----------------
Total $ 86.2 $ 71.2
=================== =================
Standby Letters of Credit
The Company has issued stand-by letters of credit to financial institutions
for the benefit of third parties that have extended credit to the Company
and certain subsidiaries. These letters of credit have been issued primarily
for the purpose of supporting payments of trade payables, securing
performance under contracts and lease obligations and self insurance for
workers compensation. If a subsidiary does not pay amounts when due under a
covered contract, the counterparty may present its claim for payment to the
financial institution, which will in turn request payment from the Company.
Any amounts owed by the Company's subsidiaries are reflected in the
Consolidated Balance Sheets.
Surety Bonds
At December 31, 2002, the Company had $38.6 million in surety bonds
purchased primarily for purposes such as providing workers compensation
coverage and obtaining licenses, permits and rights-of-way. To the extent
liabilities are incurred as a result of the activities covered by the surety
bonds, such liabilities are included in the Consolidated Balance Sheets.
Other Guarantees
The Company has other guarantees outstanding related primarily to prompt
performance payments, lease obligations, and other payments subject to
contingencies.
49
Progress Energy has issued approximately $7.5 million of financial
guarantees on behalf of Progress Rail Services Corporation for obligations
related to the purchase and sale of railcar parts, equipment and services.
As of December 31, 2002, management does not believe conditions are likely
for performance under these agreements.
C. Insurance
Florida Power is a member of Nuclear Electric Insurance Limited (NEIL),
which provides primary and excess insurance coverage against property damage
to members' nuclear generating facilities. Under the primary program,
Florida Power is insured for $500 million at its nuclear plant, CR3. In
addition to primary coverage, NEIL also provides decontamination, premature
decommissioning and excess property insurance with a limit of $1.1 billion.
Insurance coverage against incremental costs of replacement power resulting
from prolonged accidental outages at nuclear generating units is also
provided through membership in NEIL. Florida Power is insured thereunder,
following a twelve-week deductible period, for 52 weeks in the amount of
$3.5 million per week at CR3. An additional 110 weeks of coverage is
provided at 80% of the above weekly amount. For the current policy period,
Florida Power is subject to retrospective premium assessments of up to
approximately $7.3 million with respect to the primary coverage, $6.7
million with respect to the decontamination, decommissioning and excess
property coverage, and $4.7 million for the incremental replacement power
costs coverage, in the event covered losses at insured facilities exceed
premiums, reserves, reinsurance and other NEIL resources. Pursuant to
regulations of the U.S. Nuclear Regulatory Commission, Florida Power's
property damage insurance policies provide that all proceeds from such
insurance be applied, first, to place the plant in a safe and stable
condition after an accident and, second, to decontaminate, before any
proceeds can be used for decommissioning, plant repair or restoration.
Florida Power is responsible to the extent losses may exceed limits of the
coverage described above.
Florida Power is insured against public liability for a nuclear incident up
to $9.55 billion per occurrence. Under the current provisions of the Price
Anderson Act, which limits liability for accidents at nuclear power plants,
Florida Power, as an owner of a nuclear unit, can be assessed for a portion
of any third-party liability claims arising from an accident at any
commercial nuclear power plant in the United States. In the event that
public liability claims from an insured nuclear incident exceed $300 million
(currently available through commercial insurers), Florida Power would be
subject to pro rata assessments of up to $88.1 million for each reactor
owned per occurrence. Payment of such assessments would be made over time as
necessary to limit the payment in any one year to no more than $10 million
per reactor owned. Congress is expected to approve revisions to the Price
Anderson Act in the first quarter of 2003, that will include increased
limits and assessments per reactor owned. The final outcome of this matter
cannot be predicted at this time.
There have been recent revisions made to the nuclear property and nuclear
liability insurance policies regarding the maximum recoveries available for
multiple terrorism occurrences. Under the NEIL policies, if there were
multiple terrorism losses occurring within one year after the first loss
from terrorism, NEIL would make available one industry aggregate limit of
$3.2 billion, along with any amounts it recovers from reinsurance,
government indemnity or other sources up to the limits for each claimant. If
terrorism losses occurred beyond the one-year period, a new set of limits
and resources would apply. For nuclear liability claims arising out of
terrorist acts, the primary level available through commercial insurers is
now subject to an industry aggregate limit of $300 million. The second level
of coverage obtained through the assessments discussed above would continue
to apply to losses exceeding $300 million and would provide coverage in
excess of any diminished primary limits due to the terrorist acts aggregate.
Florida Power self-insures its transmission and distribution lines against
loss due to storm damage and other natural disasters. Pursuant to a
regulatory order, Florida Power is accruing $6 million annually to a storm
damage reserve and may defer any losses in excess of the reserve (See Note
12B). A reconciliation of the activity in the reserve for the years ended
December 31 is included in the table below (in thousands):
2002 2001 2000
------------- -------------- -----------
Reserve balance at beginning of year $ 35,527 $ 29,527 $ 25,629
Accruals made 6,000 6,000 6,000
Charges taken (5,896) - (2,102)
------------- -------------- -----------
Ending balance at end of year $ 35,631 $ 35,527 $ 29,527
============= ============== ===========
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D. Other Commitments
Florida Progress has certain future commitments related to synthetic fuel
facilities purchased that provide for contingent payments (royalties) of up
to $25.2 million on sales from Florida Progress' interests in these plants
annually through 2007. The related agreements were amended in December 2001
to require the payment of minimum annual royalties of which Florida
Progress' share is approximately $14.5 million through 2007. As a result of
the amendment, Florida Progress recorded a liability (included in other
liabilities and deferred credits on the Consolidated Balance Sheets) and a
deferred cost asset (included in other assets and deferred debits in the
Consolidated Balance Sheets) of approximately $57.1 million and $67.0
million at December 31, 2002 and 2001, representing the minimum amounts due
through 2007, discounted at 6.05%. As of December 31, 2002 and 2001,
respectively, the portions of the asset and liability recorded that were
classified as current were $11.9 million and $12.9 million, respectively.
The deferred cost asset will be amortized to expense each year as synthetic
fuel sales are made. The maximum amounts payable under these agreements
remain unchanged. Actual amounts paid under these agreements were
approximately $24.1 million in 2002, $25.2 million in 2001, and $22.5
million in 2000.
E. Claims and Uncertainties
The Company is subject to federal, state and local regulations addressing
hazardous and solid waste management, air and water quality and other
environmental matters.
Hazardous and Solid Waste Management
Various organic materials associated with the production of manufactured
gas, generally referred to as coal tar, are regulated under federal and
state laws. The principal regulatory agency that is responsible for a
specific former manufactured gas plant (MGP) site depends largely upon the
state in which the site is located. There are several MGP sites to which the
Company has some connection. In this regard, Florida Power and other
potentially responsible parties, are participating in investigating and, if
necessary, remediating former MGP sites with several regulatory agencies,
including, but not limited to, the U.S. Environmental Protection Agency
(EPA), and the Florida Department of Environmental Protection (FDEP). In
addition, Florida Power is periodically notified by regulators such as the
EPA and various state agencies of their involvement or potential involvement
in sites, other than MGP sites, that may require investigation and/or
remediation.
Florida Power. There are two former MGP sites and 11 other active sites
associated with Florida Power that have required or are anticipated to
require investigation and/or remediation costs. As of December 31, 2002 and
2001, Florida Power has accrued approximately $10.9 million and $8.5
million, respectively, for probable and reasonably estimable costs at these
sites. Florida Power does not believe that it can provide an estimate of the
reasonably possible total remediation costs beyond what is currently
accrued. In 2002, Florida Power filed a petition for recovery of
approximately $4.0 million in environmental cost through the Environmental
Cost Recovery Clause with the FPSC. Florida Power was successful with this
filing and will recover costs through rates for investigation and
remediation associated with transmission and distribution substations and
transformers. As more activity occurs at these sites, Florida Power will
assess the need to adjust the accruals. These accruals have been recorded on
an undiscounted basis. Florida Power measures its liability for these sites
based on available evidence including its experience in investigating and
remediating environmentally impaired sites. This process often includes
assessing and developing cost-sharing arrangements with other potentially
responsible parties. A rollforward of the balance in this liability is not
provided due to the immateriality of this activity in the periods presented.
Florida Progress. In 2001, Florida Progress sold Inland Marine
Transportation to AEP Resources, Inc (See Note 4B). Florida Progress
established an accrual to address indemnities and retained environmental
liability associated with the transaction. The balance in this accrual is
$9.9 million at December 31, 2002. Florida Progress estimates that its
maximum contractual liability to AEP Resources, Inc. associated with Inland
Marine Transportation is $60 million. This accrual has been determined on an
undiscounted basis. Florida Progress measures its liability for this site
based on estimable and probable remediation scenarios. The Company believes
that it is reasonably probable that additional costs, which cannot be
currently estimated, may be incurred related to the environmental
indemnification provision beyond the amount accrued. The Company cannot
predict the outcome of this matter.
51
Florida Power has filed claims with the Company's general liability
insurance carriers to recover costs arising out of actual or potential
environmental liabilities. Some claims have been settled and others are
still pending. While management cannot predict the outcome of these matters,
the outcome is not expected to have a material effect on the financial
position or results of operations.
The Company is also currently in the process of assessing potential costs
and exposures at other environmentally impaired sites. As the assessments
are developed and analyzed, the Company will accrue costs for the sites to
the extent the costs are probable and can be reasonably estimated.
Air and Water Quality
There has been and may be further proposed federal legislation requiring
reductions in air emissions for nitrogen oxides, sulfur dioxide, carbon
dioxide and mercury. Some of these proposals establish nationwide caps and
emission rates over an extended period of time. This national
multi-pollutant approach to air pollution control could involve significant
capital costs which could be material to the Company's consolidated
financial position or results of operations. Some companies may seek
recovery of the related cost through rate adjustments or similar mechanisms.
However, the Company cannot predict the outcome of this matter.
The EPA is conducting an enforcement initiative related to a number of
coal-fired utility power plants in an effort to determine whether
modifications at those facilities were subject to New Source Review
requirements or New Source Performance Standards under the Clean Air Act.
Florida Power was asked to provide information to the EPA as part of this
initiative and cooperated in providing the requested information. The EPA
initiated civil enforcement actions against other unaffiliated utilities as
part of this initiative. Some of these actions resulted in settlement
agreements calling for expenditures, ranging from $1.0 billion to $1.4
billion. A utility that was not subject to a civil enforcement action
settled its New Source Review issues with the EPA for $300 million. These
settlement agreements have generally called for expenditures to be made over
extended time periods, and some of the companies may seek recovery of the
related cost through rate adjustments or similar mechanisms. The Company
cannot predict the outcome of this matter.
Certain historical waste sites exist that are being addressed voluntarily by
the Energy and Related Service segment. An accrual has been established to
address investigation expenses related to these sites. The Company cannot
determine the total costs that may be incurred in connection with these
sites. According to current information, these future costs are not expected
to be material to the Company's financial condition or results of
operations.
Rail Services is voluntarily addressing certain historical waste sites. An
accrual has been established to address estimable costs. The Company cannot
determine the total costs that may be incurred in connection with these
sites. According to current information, these future costs are not expected
to be material to the Company's financial condition or results of
operations.
The Kyoto Protocol was adopted in 1997 by the United Nations to address
global climate change by reducing emissions of carbon dioxide and other
greenhouse gases. The United States has not adopted the Kyoto Protocol,
however, a number of carbon dioxide emissions control proposals have been
advanced in Congress and by the Bush Administration. The Bush Administration
favors voluntary programs. Reductions in carbon dioxide emissions to the
levels specified by the Kyoto Protocol and some legislative proposals could
be materially adverse to the Company's financials and operations if
associated costs cannot be recovered from customers. The Company favors the
voluntary program approach recommended by the administration, and is
evaluating options for the reduction, avoidance, and sequestration of
greenhouse gases. However, the Company cannot predict the outcome of this
matter.
In 1997, the EPA's Mercury Study Report and Utility Report to Congress
conveyed that mercury is not a risk to the average American and expressed
uncertainty about whether reductions in mercury emissions from coal-fired
power plants would reduce human exposure. Nevertheless, the EPA determined
in 2000 that regulation of mercury emissions from coal-fired power plants
was appropriate. The EPA is currently developing a Maximum Available Control
Technology (MACT) standard, which is expected to become final in December
2004, with compliance in 2008. Achieving compliance with the MACT standard
could be materially adverse to the Company's financials and operations.
However, the Company cannot predict the outcome of this matter.
52
F. Legal Matters
1. Age Discrimination Suit. Florida Power and Florida Progress have
successfully resolved and settled the multi-party lawsuit served on the
companies in 1995. In 1995, Florida Power and Florida Progress were named
defendants in an age discrimination lawsuit. The number of plaintiffs was
116, but four of those plaintiffs have had their federal claims dismissed
and 74 others have had their state age claims dismissed. While no dollar
amount was requested, each plaintiff sought back pay, reinstatement or front
pay through their projected dates of normal retirement, costs and attorneys'
fees. In October 1996, the Federal Court approved an agreement between the
parties to provisionally certify this case as a class action suit under the
Age Discrimination in Employment Act. Florida Power filed a motion to
decertify the class and in August 1999, the Court granted Florida Power's
motion. In October 1999, the judge certified the question of whether the
case should be tried as a class action to the Eleventh Circuit Court of
Appeals for immediate appellate review. In December 1999, the Court of
Appeals agreed to review the judge's order decertifying the class. In
anticipation of a potential ruling decertifying the case as a class action,
plaintiffs filed a virtually identical lawsuit, which identified all opt-in
plaintiffs as named plaintiffs. On July 5, 2001, the Eleventh Circuit Court
of Appeals ruled that as a matter of law, disparate claims cannot be brought
under the Americans with Disabilities Act (ADEA). This ruling has the effect
of decertifying the case as a class action. On October 3, 2001, the
plaintiffs filed a petition in the United States Supreme Court, requesting a
hearing of the case, on the issue of whether disparate claims can be brought
under the ADEA. On December 3, 2001, the United States Supreme Court agreed
to hear the case. Oral arguments on the issue were held on March 20, 2002.
On April 1, 2002, the U.S. Supreme Court issued a per curiam affirmed order
in the case stating they had improvidently granted the oral argument and
they would uphold the ruling of the Eleventh Circuit Court of Appeals.
Therefore, the case will remain decertified. As a result of the
decertification, the trial court has grouped the plaintiffs cases to be
tried. The trial for the first set of twelve plaintiffs began on July 22,
2002. The jury entered a verdict in favor of Florida Power in that trial on
August 9, 2002. The next group of plaintiffs' to be tried was named, but no
trial date was set. The parties attended a second mediation on October 31
and November 1, 2002. The Company was able to reach a settlement of this
matter with all but one plaintiff, the details of which are subject to a
confidentiality agreement.
2. Advanced Separation Technologies (AST). In 1996, Florida Progress sold
its 80% interest in AST to Calgon Carbon Corporation (Calgon) for net
proceeds of $56 million in cash. In January 1998, Calgon filed a lawsuit
against Florida Progress and the other selling shareholder and amended it in
April 1998, alleging misstatement of AST's 1996 revenues, assets and
liabilities, seeking damages and granting Calgon the right to rescind the
sale. The lawsuit also accused the sellers of failing to disclose flaws in
AST's manufacturing process and a lack of quality control. Florida Progress
believes that the aggregate total of all legitimate warranty claims by
customers of AST for which it is probable that Florida Progress will be
responsible for under the Stock Purchase Agreement with Calgon is
approximately $3.2 million, and accordingly, accrued $3.2 million in the
third quarter of 1999 as an estimate of probable loss. Florida Progress
filed a motion for summary judgement, which is pending. On June 19 and 20,
2002, a hearing was held before a federal magistrate judge, on the sellers
objection to the report of Calgon's damages expert. The sellers argued that
the report and opinions of Calgon's expert, Arthur Andersen, are
inadmissible for a number of reasons. On January 14, 2003, the federal
magistrate judge issued a Report and Recommendation finding that part of
Andersen's expert report should be excluded from evidence. Specifically, the
Report recommended that Andersen's damages analysis using the discounted
cash flow methodology should be excluded, but did not recommend exclusion of
Andersen's damage analysis based on the guideline public traded company
("GPTC") method. On January 30, 2003, the sellers filed a Notice of Appeal
from the Report with the United States District Court for the Western
District of Pennsylvania on the grounds that Andersen's GPTC analysis should
also be excluded. Calgon also filed a Notice of Appeal from the Report
arguing that Andersen's discounted cash flow analysis should be admissible.
3. Easement Litigation. In December 1998, Florida Power was served with a
class action lawsuit seeking damages, declaratory and injunctive relief for
the alleged improper use of electric transmission easements. The plaintiffs
contend that the licensing of fiber optic telecommunications lines to third
parties or telecommunications companies for other than Florida Power's
internal use along the electric transmission line right-of-way exceeds the
authority granted in the easements. In June 1999, plaintiffs amended their
complaint to add Progress Telecom as a defendant and adding counts for
unjust enrichment and constructive trust. In January 2000, the trial court
conditionally certified the class statewide. In mediation held in March
2000, the parties reached a tentative settlement of this claim. In January
2001, the trial court preliminarily approved the amended settlement
agreement, certified the settlement class and approved the class notice. On
November 16, 2001, the trial court issued a final order approving the
settlement. Several objectors to the settlement appealed the order to the
1st District Court of Appeal. On February 12, 2003, the appellate court
issued an opinion upholding the trial court's subject matter jurisdiction
over the case, but reversing the trial court's order approving the mandatory
settlement class for purposes of declaratory and injunctive relief. The
appellate court remanded the case to the trial court for further
proceedings. The Company is considering whether to file a motion for
rehearing and/or a motion for rehearing en banc before the 1st District
Court of Appeal, and/or whether to seek discretionary review before the
Florida Supreme Court. The Company cannot predict the outcome of any future
proceedings in this case.
53
4. Franchise Litigation. Six cities, with a total of approximately 49,000
customers, have sued Florida Power in various circuit courts in Florida. The
lawsuits principally seek (1) a declaratory judgment that the cities have
the right to purchase Florida Power's electric distribution system located
within the municipal boundaries of the cities, (2) a declaratory judgment
that the value of the distribution system must be determined through
arbitration, and (3) injunctive relief requiring Florida Power to continue
to collect from Florida Power's customers and remit to the cities, franchise
fees during the pending litigation, and as long as Florida Power continues
to occupy the cities' rights-of-way to provide electric service,
notwithstanding the expiration of the franchise ordinances under which
Florida Power had agreed to collect such fees. Five circuit courts have
entered orders requiring arbitration to establish the purchase price of
Florida Power's electric distribution system within five cities. Two
appellate courts have held those circuit court decisions and authorized
cities to determine the value of Florida Power's electric distribution
system within the cities through arbitration. To date, no city has attempted
to actually exercise the right to purchase any portion of Florida Power's
electric distribution system. An arbitration in one of the cases was held in
August 2002 and an award was issued in October 2002 setting the value of
Florida Power's distribution system within one city at approximately $22
million. At this time, whether and when there will be further proceedings
following this award cannot be determined. Additional arbitrations have been
scheduled to occur in the first and second quarters of 2003.
As part of the above litigation, two appellate courts have also reached
opposite conclusions regarding whether Florida Power must continue to
collect from its customers and remit to the cities "franchise fees" under
the expired franchise ordinances. Florida Power has filed an appeal with the
Florida Supreme Court to resolve the conflict between the two appellate
courts. The Florida Supreme Court has issued an order setting a briefing
schedule and reserving ruling on accepting jurisdiction. On January 12,
2003, Florida Power served its Initial Brief in the Supreme Court and its
request for oral argument. Three amicus curiae also filed motions seeking
leave to participate in support of Florida Power's position and filed amicus
briefs. No oral argument has yet been set. Florida Power cannot predict the
outcome of these matters at this time.
5. DOE Litigation. As required under the Nuclear Waste Policy Act of 1982,
Florida Power entered into a contract with the DOE under which the DOE
agreed to begin taking spent nuclear fuel by no later than January 31, 1998.
All similarly situated utilities were required to sign the same standard
contract.
In April 1995, the DOE issued a final interpretation that it did not have an
unconditional obligation to take spent nuclear fuel by January 31, 1998. In
Indiana & Michigan Power v. DOE, the Court of Appeals vacated the DOE's
final interpretation and ruled that the DOE had an unconditional obligation
to begin taking spent nuclear fuel. The Court did not specify a remedy
because the DOE was not yet in default.
After the DOE failed to comply with the decision in Indiana & Michigan Power
v. DOE, a group of utilities petitioned the Court of Appeals in Northern
States Power (NSP) v. DOE, seeking an order requiring the DOE to begin
taking spent nuclear fuel by January 31, 1998. The DOE took the position
that its delay was unavoidable, and the DOE was excused from performance
under the terms and conditions of the contract. The Court of Appeals did not
order the DOE to begin taking spent nuclear fuel, stating that the utilities
had a potentially adequate remedy by filing a claim for damages under the
contract.
After the DOE failed to begin taking spent nuclear fuel by January 31, 1998,
a group of utilities filed a motion with the Court of Appeals to enforce the
mandate in NSP v. DOE. Specifically, this group of utilities asked the Court
to permit the utilities to escrow their waste fee payments, to order the DOE
not to use the waste fund to pay damages to the utilities, and to order the
DOE to establish a schedule for disposal of spent nuclear fuel. The Court
denied this motion based primarily on the grounds that a review of the
matter was premature, and that some of the requested remedies fell outside
of the mandate in NSP v. DOE.
Subsequently, a number of utilities each filed an action for damages in the
Federal Court of Claims. In a recent decision, the U.S. Circuit Court of
Appeals (Federal Circuit) ruled that utilities may sue the DOE for damages
in the Federal Court of Claims instead of having to file an administrative
claim with DOE. Florida Power is in the process of evaluating whether it
should file a similar action for damages.
Florida Power also continues to monitor legislation that has been introduced
in Congress, which might provide some limited relief. Florida Power cannot
predict the outcome of this matter.
54
6. Other Legal Matters. Florida Progress and Florida Power are involved in
various other claims and legal actions arising in the ordinary course of
business, some of which involve substantial amounts. Where appropriate,
accruals have been made in accordance with SFAS No. 5, "Accounting for
Contingencies," to provide for such matters. In the opinion of management,
the ultimate disposition of these matters will not have a material adverse
effect upon either company's consolidated financial position, results of
operations or liquidity.
55