UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
-------- -------
Exact name of registrants as specified in their charters, state
Commission of incorporation, address of principal executive offices, and I.R.S. Employer
File Number telephone number Identification Number
1-8349 Florida Progress Corporation 59-2147112
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
State of Incorporation: Florida
1-3274 Florida Power Corporation 59-0247770
d/b/a Progress Energy Florida, Inc.
100 Central Avenue
St. Petersburg, Florida 33701
Telephone (727) 820-5151
State of Incorporation: Florida
NONE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No X
This combined Form 10-Q is filed separately by two registrants: Florida Progress
Corporation and Florida Power Corporation d/b/a Progress Energy Florida (PEF).
Information contained herein relating to either individual registrant is filed
by such registrant solely on its own behalf. Each registrant makes no
representation as to information relating exclusively to the other registrant.
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date. As of July 31, 2004, each
registrant had the following shares of common stock outstanding:
Registrant Description Shares
---------- ----------- ------
Florida Progress Corporation Common Stock, without par value 98,616,658 (all of which were held
by Progress Energy, Inc.)
PEF Common Stock, without par value 100 (all of which were held by
Florida Progress Corporation)
Florida Progress Corporation and Florida Power Corporation meet the conditions
set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore
filing this form with the reduced disclosure format.
FLORIDA PROGRESS CORPORATION AND PROGRESS ENERGY FLORIDA, INC.
FORM 10-Q - For the Quarter Ended June 30, 2004
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Florida Progress Corporation
Unaudited Consolidated Statements of Income
Unaudited Consolidated Balance Sheets
Unaudited Consolidated Statements of Cash Flows
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
Unaudited Statements of Income
Unaudited Balance Sheets
Unaudited Statements of Cash Flows
Notes to Financial Statements
Florida Progress Corporation and Florida Power Corporation d/b/a Progress
Energy Florida, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
AFUDC Allowance for funds used during construction
the Agreement Stipulation and Settlement Agreement
APB Accounting Principles Board
BART Best available retrofit technology
Bcf Billion cubic feet
CAIR Clean Air Interstate Rule
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company Florida Progress Corporation
CR3 Progress Energy Florida Inc.'s nuclear generating plant, Crystal River
Unit No. 3
DOE United States Department of Energy
ECRC Environmental Cost Recovery Clause
EIS Environmental Impact Statement
EITF Emerging Issues Task Force
EPA United States Environmental Protection Agency
EPIK EPIK Communications, Inc.
FASB Financial Accounting Standards Board
FDEP Florida Department of Environmental Protection
Federal Circuit United States Circuit Court of Appeals
FERC Federal Energy Regulatory Commission
FIN No. 46R FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities -
An Interpretation of ARB No. 51"
Florida Progress or FPC Florida Progress Corporation
FPSC Florida Public Service Commission
Global U.S. Global LLC
MACT Maximum Available Control Technology
MGP Manufactured Gas Plant
NOx Nitrogen oxide
NRC United States Nuclear Regulatory Commission
NSP Northern States Power
PEF or the utility Progress Energy Florida, Inc., formerly referred to as Florida Power
Corporation
PFA IRS Prefiling Agreement
the Plan Revenue Sharing Incentive Plan
PLRs Private Letter Rulings
Progress Capital Progress Capital Holdings, Inc.
Progress Energy or the Parent Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation
PTC LLC Progress Telecom LLC
PUHCA Public Utility Holding Company Act of 1935, as amended
PWR Pressurized water reactor
RAFT Railcar Asset Financing Trust
Rail Services or Rail Rail Services business segment
RTO Regional Transmission Organization
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Code
Service Company Progress Energy Service Company, LLC
SFAS No. 5 Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies"
SFAS No. 71 Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation"
SFAS No. 123 Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation"
3
SFAS No. 133 Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative and Hedging Activities"
SFAS No. 142 Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets"
SFAS No. 143 Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations"
SFAS No. 148 Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123"
SMD NOPR Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
Discrimination through Open Access Transmission and Standard Market Design
SO2 Sulfur dioxide
the Trust FPC Capital I trust
4
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This combined report contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The matters discussed throughout this combined Form 10-Q that are not
historical facts are forward-looking and, accordingly, involve estimates,
projections, goals, forecasts, assumptions, risks and uncertainties that could
cause actual results or outcomes to differ materially from those expressed in
the forward-looking statements.
In addition, forward-looking statements are discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including, but not limited to, statements under the sub-heading "Liquidity and
Capital Resources" concerning operating cash flows.
Any forward-looking statement speaks only as of the date on which such statement
is made, and neither Florida Progress (the Company) nor Florida Power
Corporation doing business as Progress Energy Florida, Inc. (PEF) undertakes any
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: the impact of fluid and complex government laws and regulations,
including those relating to the environment; the impact of recent events in the
energy markets that have increased the level of public and regulatory scrutiny
in the energy industry and in the capital markets; deregulation or restructuring
in the electric industry that may result in increased competition and stranded
costs; the uncertainty regarding the timing, creation and structure of regional
transmission organizations; weather conditions that directly influence the
demand for electricity; recurring seasonal fluctuations in demand for
electricity; fluctuations in the price of energy commodities and purchased
power; successful maintenance and operation of PEF's energy commodities and
purchased power; economic fluctuations and the corresponding impact on PEF's
commercial and industrial customers; the inherent risks associated with the
operation of nuclear facilities, including environmental, health, regulatory and
financial risks; the impact of any terrorist acts generally and on our
generating facilities and other properties; the ability to successfully access
capital markets on favorable terms; the impact that increases in leverage may
have on the Company and PEF; the ability of the Company and PEF to maintain
their current credit ratings; the impact of derivative contracts used in the
normal course of business; investment performance of pension and benefit plans
and the ability to control costs; the availability and use of Internal Revenue
Code Section 29 (Section 29) tax credits by synthetic fuel producers and the
Company's continued ability to use Section 29 tax credits related to its coal
and synthetic fuel businesses; the impact to our financial condition and
performance in the event it is determined the Company is not entitled to
previously taken Section 29 tax credits; the Company's ability to successfully
integrate newly acquired assets or properties into its operations as quickly or
as profitably as expected; the outcome of any ongoing or future litigation or
similar disputes and the impact of any such outcome or related settlements; and
unanticipated changes in operating expenses and capital expenditures. Many of
these risks similarly impact the Company's subsidiaries.
These and other risks are detailed from time to time in Florida Progress' and
PEF's SEC reports. All such factors are difficult to predict, contain
uncertainties that may materially affect actual results, and may be beyond the
control of the Company and PEF. Many, but not all of the factors that may impact
actual results of the Company and PEF are discussed in the Risk Factors section
of PEF's annual report on Form 10-K for the year ended December 31, 2003 which
was filed with the SEC on March 12, 2004. You should carefully read these SEC
reports. New factors emerge from time to time, and it is not possible for
management to predict all such factors, nor can it assess the effect of each
such factor on Florida Progress and PEF.
5
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Florida Progress Corporation
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2004
UNAUDITED CONSOLIDATED STATEMENTS of INCOME
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------------------
(in millions) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------
Operating Revenues
Utility $ 860 $ 767 $ 1,644 $ 1,495
Diversified business 644 440 1,171 927
- ---------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,504 1,207 2,815 2,422
- ---------------------------------------------------------------------------------------------------------
Operating Expenses
Utility
Fuel used in electric generation 276 217 545 402
Purchased power 139 141 260 271
Operation and maintenance 152 154 312 295
Depreciation and amortization 72 80 141 159
Taxes other than on income 64 59 126 117
Diversified business
Cost of sales 562 388 1,033 826
Depreciation and amortization 27 22 52 43
Other 32 25 65 62
- ---------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,324 1,086 2,534 2,175
- ---------------------------------------------------------------------------------------------------------
Operating Income 180 121 281 247
- ---------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 1 1 2 2
Other, net (2) (1) (7) (7)
- ---------------------------------------------------------------------------------------------------------
Total Other Expense (1) - (5) (5)
- ---------------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 47 48 92 95
Allowance for borrowed funds used during construction (1) (2) (2) (4)
- ---------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 46 46 90 91
- ---------------------------------------------------------------------------------------------------------
Income before Income Taxes 133 75 186 151
Income Tax Benefit (2) (39) (4) (55)
- ---------------------------------------------------------------------------------------------------------
Net Income $ 135 $ 114 $ 190 $ 206
- ---------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
6
Florida Progress Corporation
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions) June 30 December 31
Assets 2004 2003
- ----------------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 8,281 $ 8,150
Accumulated depreciation (2,856) (2,828)
- ----------------------------------------------------------------------------------------------------------
Utility plant in service, net 5,425 5,322
Held for future use 8 8
Construction work in progress 349 328
Nuclear fuel, net of amortization 57 69
- ----------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 5,839 5,727
- ----------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 30 27
Accounts receivable 540 487
Unbilled accounts receivable 77 59
Receivables from affiliated companies 45 43
Inventory 437 412
Deferred fuel cost 178 204
Assets held for sale 6 75
Prepayments and other current assets 166 137
- ----------------------------------------------------------------------------------------------------------
Total Current Assets 1,479 1,444
- ----------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 131 126
Nuclear decommissioning trust funds 436 433
Diversified business property, net 892 841
Miscellaneous other property and investments 95 90
Prepaid pension cost 226 223
Deferred tax asset 349 189
Other assets and deferred debits 130 132
- ----------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 2,259 2,034
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 9,577 $ 9,205
- ----------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value $ 1,701 $ 1,699
Retained earnings 955 842
Accumulated other comprehensive loss (30) (17)
- ----------------------------------------------------------------------------------------------------------
Total Common Stock Equity 2,626 2,524
- ----------------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiaries - Not Subject to Mandatory Redemption 34 34
Long-Term Debt, Affiliate 809 809
Long-Term Debt, Net 2,045 2,045
- ----------------------------------------------------------------------------------------------------------
Total Capitalization 5,514 5,412
- ----------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 43 68
Accounts payable 458 415
Payables to affiliated companies 121 68
Notes payable to affiliated companies 327 636
Taxes accrued 177 16
Short-term obligations 231 -
Customer deposits 130 127
Other current liabilities 341 279
- ----------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,828 1,609
- ----------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes and investment tax credits 81 85
Regulatory liabilities 1,388 1,365
Asset retirement obligations 347 339
Other liabilities and deferred credits 419 395
- ----------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,235 2,184
- ----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- ----------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 9,577 $ 9,205
- ----------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
7
Florida Progress Corporation
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30
(in millions) 2004 2003
- ------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 190 $ 206
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 207 215
Deferred income taxes and investment tax credits, net (159) (44)
Deferred fuel cost (credit) 26 (103)
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable (84) (78)
Affiliate accounts receivable (2) (11)
Inventories (23) 30
Prepayments and other current assets (46) (16)
Accounts payable 51 37
Affiliate accounts payable 51 (58)
Income taxes, net 162 38
Other current liabilities 45 56
Other 26 24
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 444 296
- ------------------------------------------------------------------------------------------------------------
Investing Activities
Utility property additions (235) (283)
Diversified business property additions (103) (214)
Nuclear fuel additions - (38)
Proceeds from sale of assets 84 1
Other (13) (8)
- ------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (267) (542)
- ------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 1 639
Net increase (decrease) in short-term obligations 231 (35)
Retirement of long-term debt (26) (227)
Net change in intercompany notes (309) (78)
Equity contributions from parent 1 140
Dividends paid to parent (78) (203)
Other 6 (2)
- ------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (174) 234
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 3 (12)
Cash and Cash Equivalents at Beginning of Period 27 34
- ------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 30 $ 22
- ------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 92 $ 84
income taxes (net of refunds) $ (6) $ (1)
- ------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
8
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
INTERIM FINANCIAL STATEMENTS
June 30, 2004
UNAUDITED STATEMENTS of INCOME
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------------------
(in millions) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------
Operating Revenues $ 860 $ 767 $ 1,644 $ 1,495
Operating Expenses
Fuel used in electric generation 276 217 545 402
Purchased power 139 141 260 271
Operation and maintenance 152 154 312 295
Depreciation and amortization 72 80 141 159
Taxes other than on income 64 59 126 117
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses 703 651 1,384 1,244
- --------------------------------------------------------------------------------------------------------------
Operating Income 157 116 260 251
- --------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Other, net - 1 (1) 1
- --------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) - 1 (1) 1
- --------------------------------------------------------------------------------------------------------------
Interest Charges
Interest charges 29 29 60 58
Allowance for borrowed funds used during construction (1) (2) (2) (4)
- --------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 28 27 58 54
- --------------------------------------------------------------------------------------------------------------
Income before Income Taxes 129 90 201 198
Income Tax Expense 45 28 67 65
- --------------------------------------------------------------------------------------------------------------
Net Income 84 62 134 133
Preferred Stock Dividend Requirement - 1 1 1
- --------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 84 $ 61 $ 133 $ 132
- --------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
9
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.
UNAUDITED BALANCE SHEETS
(in millions) June 30 December 31
Assets 2004 2003
- --------------------------------------------------------------------------------------------------
Utility Plant
Utility plant in service $ 8,281 $ 8,150
Accumulated depreciation (2,856) (2,828)
- --------------------------------------------------------------------------------------------------
Utility plant in service, net 5,425 5,322
Held for future use 8 8
Construction work in progress 349 328
Nuclear fuel, net of amortization 57 69
- --------------------------------------------------------------------------------------------------
Total Utility Plant, Net 5,839 5,727
- --------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 11 10
Accounts receivable 217 191
Unbilled accounts receivable 77 59
Receivables from affiliated companies 6 7
Deferred income taxes 23 39
Inventory 241 230
Deferred fuel cost 178 204
Prepayments and other current assets 4 6
- --------------------------------------------------------------------------------------------------
Total Current Assets 757 746
- --------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Regulatory assets 131 126
Debt issuance costs 22 25
Nuclear decommissioning trust funds 436 433
Miscellaneous other property and investments 44 40
Prepaid pension cost 223 220
Other assets and deferred debits 5 6
- --------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 861 850
- --------------------------------------------------------------------------------------------------
Total Assets $ 7,457 $ 7,323
- --------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- --------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value $ 1,081 $ 1,081
Retained earnings 1,117 1,062
Accumulated other comprehensive loss (4) (4)
- --------------------------------------------------------------------------------------------------
Total Common Stock Equity 2,194 2,139
- --------------------------------------------------------------------------------------------------
Preferred Stock - Not Subject to Mandatory Redemption 34 34
Long-Term Debt, Net 1,902 1,904
- --------------------------------------------------------------------------------------------------
Total Capitalization 4,130 4,077
- --------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 43 43
Accounts payable 198 161
Payables to affiliated companies 132 75
Notes payable to affiliated companies - 363
Taxes accrued 76 20
Interest accrued 39 42
Short-term obligations 231 -
Customer deposits 130 127
Other current liabilities 114 85
- --------------------------------------------------------------------------------------------------
Total Current Liabilities 963 916
- --------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 353 363
Accumulated deferred investment tax credits 39 41
Regulatory liabilities 1,388 1,365
Asset retirement obligations 328 319
Other liabilities and deferred credits 256 242
- --------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,364 2,330
- --------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
- --------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 7,457 $ 7,323
- --------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
10
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.
UNAUDITED STATEMENTS of CASH FLOWS
Six Months Ended June 30
(in millions) 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 134 $ 133
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 155 172
Deferred income taxes and investment tax credits, net 1 1
Deferred fuel cost (credit) 26 (103)
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable (43) (18)
Inventories (6) (4)
Prepayments and other current assets 2 1
Accounts payable 87 (44)
Other current liabilities 82 124
Other 9 7
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 447 269
- ----------------------------------------------------------------------------------------------------------------
Investing Activities
Property additions (235) (283)
Nuclear fuel additions - (38)
Other - 1
- ----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (235) (320)
- ----------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 1 639
Net increase (decrease) in short-term obligations 231 (36)
Retirement of long-term debt (1) (227)
Net change in intercompany notes (363) (125)
Dividends paid to parent (78) (203)
Other (1) (1)
- ----------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (211) 47
- ----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 1 (4)
- ----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Period 10 16
- ----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 11 $ 12
- ----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 62 $ 48
income taxes (net of refunds) $ 11 $ 15
- ----------------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
11
Florida Progress Corporation and Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
A. Organization
Florida Progress Corporation (the Company or Florida Progress) is a holding
company under the Public Utility Holding Company Act of 1935 (PUHCA). The
Company became subject to the regulations of PUHCA when it was acquired by
Progress Energy, Inc. (Progress Energy or the Parent). Florida Progress'
two primary subsidiaries are Florida Power Corporation d/b/a Progress
Energy Florida, Inc. (PEF) and Progress Fuels Corporation (Progress Fuels).
PEF is a regulated public utility engaged in the generation, purchase,
transmission, distribution and sale of electricity primarily in portions of
Florida. PEF is regulated by the Florida Public Service Commission (FPSC),
the Federal Energy Regulatory Commission (FERC) and the Nuclear Regulatory
Commission (NRC). Progress Fuels is a diversified non-utility energy
company, whose principal business segments are Energy and Related Services
and Rail Services. Throughout the report, the terms utility and regulated
will be used to discuss items pertaining to PEF. Diversified business and
nonregulated will be used to discuss the subsidiaries of Florida Progress
excluding PEF.
B. Basis of Presentation
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. Because the
accompanying interim financial statements do not include all of the
information and footnotes required by GAAP, they should be read in
conjunction with the audited financial statements and notes thereto
included in Florida Progress' and PEF's Form 10-K for the year ended
December 31, 2003.
In accordance with the provisions of Accounting Principles Board Opinion
(APB) No. 28, "Interim Financial Reporting," GAAP requires companies to
apply a levelized effective tax rate to interim periods that is consistent
with the estimated annual effective tax rate. The intra-period tax
allocation, which will have no impact on total year net income, maintains
an effective tax rate consistent with the estimated annual effective tax
rate. For the three months ended June 30, 2004 and 2003, income tax expense
was decreased by $11 million and $10 million, respectively. For the six
months ended June 30, 2004 and 2003, income tax expense was increased by
$23 million and decreased by $15 million, respectively. The income tax
provisions for the Company differ from amounts computed by applying the
federal statutory tax rate to income before income taxes, primarily due to
the recognition of synthetic fuel tax credits.
PEF collects from customers certain excise taxes, which include gross
receipts tax, franchise taxes, and other excise taxes, levied by the state
or local government upon the customers. PEF accounts for excise taxes on a
gross basis. For the three months ended June 30, 2004 and 2003, excise
taxes of approximately $37 million and $34 million, respectively, are
included in taxes other than on income in the accompanying Statements of
Income. For the six months ended June 30, 2004 and 2003, excise taxes of
approximately $69 million and $64 million, respectively, are included in
taxes other than on income in the accompanying Statements of Income. These
approximate amounts are also included in utility revenues.
The amounts included in the interim financial statements are unaudited but,
in the opinion of management, reflect all normal recurring adjustments
necessary to fairly present Florida Progress' and PEF's financial position
and results of operations for the interim periods. Due to seasonal weather
variations and the timing of outages of electric generating units,
especially the nuclear-fueled unit, the results of operations for interim
periods are not necessarily indicative of amounts expected for the entire
year or future periods.
In preparing financial statements that conform with GAAP, management must
make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and amounts of revenues and expenses
reflected during the reporting period. Actual results could differ from
those estimates. Certain reclassifications for 2003 have been made to
conform to the 2004 presentation.
12
The results of operations of the Rail Services segment are reported one
month in arrears.
C. Subsidiary Reporting Period Change
In the fourth quarter of 2003, the Company ceased recording portions of
Fuels' segment operations, primarily synthetic fuel operations, one month
in arrears. As a result, earnings for the year ended December 31, 2003 as
reported in the Company's Form 10-K, included 13 months of results for
these operations. The 2003 quarterly results for periods ended March 31,
June 30 and September 30 have been restated for the above-mentioned
reporting period change. This resulted in four months of earnings in the
first quarter of 2003. The reclassification of earnings between quarters
resulted in a $4 million and a $15 million increase in net income for the
quarter and year to date periods, respectively, from $110 million to $114
million for the second quarter of 2003, and from $191 million to $206
million for the six months ended June 30, 2003.
D. Stock-Based Compensation
The Company measures compensation expense for stock options as the
difference between the market price of its common stock and the exercise
price of the option at the grant date. The exercise price at which options
are granted by the Company equals the market price at the grant date, and
accordingly, no compensation expense has been recognized for stock option
grants. For purposes of the pro forma disclosures required by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123" (SFAS No. 148), the estimated fair
value of the Company's stock options is amortized to expense over the
options' vesting period. The following table illustrates the effect on net
income and earnings per share if the fair value method had been applied to
all outstanding and unvested awards in each period:
Three Months Ended Six Months Ended
(in millions) June 30 June 30
--------------------------- -------------------------
FLORIDA PROGRESS CORPORATION 2004 2003 2004 2003
-------------- ----------- ------------- -----------
Net Income, as reported $ 135 $ 114 $ 190 $ 206
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 1 - 2 1
-------------- ----------- ------------- -----------
Pro forma net income $ 134 $ 114 $ 188 $ 205
============== =========== ============= ===========
Three Months Ended Six Months Ended
(in millions) June 30 June 30
--------------------------- -------------------------
PROGRESS ENERGY FLORIDA, INC. 2004 2003 2004 2003
-------------- ----------- ------------- -----------
Earnings for Common Stock, as reported $ 84 $ 61 $ 133 $ 132
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects 1 - 2 1
-------------- ----------- ------------- -----------
Pro forma earnings for common stock $ 83 $ 61 $ 131 $ 131
============== =========== ============= ===========
E. Consolidation of Variable Interest Entities
Florida Progress and PEF consolidate all voting interest entities in which
they own a majority voting interest and all variable interest entities for
which they are the primary beneficiary in accordance with FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51" (FIN No. 46R). During the first six months of
2004 and 2003, Florida Progress or PEF did not participate in the creation
of, or obtain a significant new variable interest in, any variable interest
entity.
A subsidiary of Florida Progress is the primary beneficiary of Colona
Synfuel Limited Partnership LLLP (Colona), a synthetic fuel production
facility that qualifies for federal tax credits under Section 29 of the
Internal Revenue Code and therefore has consolidated the entity under FIN
No. 46R. As of June 30, 2004, Colona's total assets were $16 million. None
of Florida Progress' consolidated assets are collateral for Colona's
obligations.
Florida Progress and PEF have interests in several variable interest
entities for which they are not the primary beneficiary. These arrangements
include investments in approximately six limited partnerships, limited
liability corporations and venture capital funds. The aggregate maximum
loss exposure at June 30, 2004, that Florida Progress could be required to
record in its consolidated income statement as a result of these
arrangements totals approximately $15 million. The aggregate maximum loss
13
exposure at June 30, 2004, that PEF could be required to record in its
income statement as a result of these arrangements totals approximately $5
million. The creditors of these variable interest entities do not have
recourse to the general credit of Florida Progress or PEF in excess of the
aggregate maximum loss exposure.
2. NEW ACCOUNTING STANDARDS
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. In accordance with
guidance issued by the FASB in FASB Staff Position FAS 106-1, the Company
elected to defer accounting for the effects of the Act due to uncertainties
regarding the effects of the implementation of the Act and the accounting
for certain provisions of the Act. Therefore, OPEB information presented in
the financial statements does not reflect the effects of the Act. The FASB
recently issued definitive accounting guidance for the Act in FASB Staff
Position 106-2, which is effective for the Company in the third quarter of
2004. FASB Staff Position 106-2 will result in the recognition of lower
OPEB costs to reflect prescription drug-related federal subsidies to be
received under the Act. The Company is in the process of quantifying the
impact of the Act on OPEB costs.
3. DIVESTITURES
A. Divestiture of Synfuel Partnership Interests
In June 2004, the Company through its subsidiary, Progress Fuels sold, in
two transactions, a combined 49.8 percent partnership interest in Colona
Synfuel Limited Partnership, LLLP, one of its synthetic fuel facilities.
Substantially all proceeds from the sales will be received over time, which
is typical of such sales in the industry. Gain from the sales will be
recognized on a cost recovery basis. The Company's book value of the
interests sold totaled approximately $3 million. Based on projected
production levels, the Company anticipates receiving total gross proceeds
of approximately $30 million per year, on an annualized basis. Under the
agreements, the buyers have a right to unwind the transactions if an IRS
reconfirmation private letter ruling (PLR) is not received by October 15,
2004. Therefore, no gain would be recognized prior to the expiration of
that right.
B. Railcar Ltd. Divestiture
In December 2002, the Progress Energy Board of Directors adopted a
resolution approving the sale of Railcar Ltd., a subsidiary included in the
Rail Services segment. In March 2003, the Company signed a letter of intent
to sell the majority of Railcar Ltd. assets to The Andersons, Inc., and the
transaction closed in February 2004. Proceeds from the sale were
approximately $82 million before transaction costs and taxes of
approximately $13 million. The assets of Railcar Ltd. were grouped as
assets held for sale and are included in other current assets on the
Company's Consolidated Balance Sheets at June 30, 2004 and December 31,
2003. The assets were recorded at approximately $6 million and $75 million
at June 30, 2004 and December 31, 2003, respectively, which reflects the
Company's estimates of the fair value expected to be realized from the sale
of these assets less costs to sell. In July 2004, the Company sold the
remaining assets classified as held for sale to a third-party for net
proceeds of $6 million.
4. REGULATORY MATTERS
A. Retail Rate Matters
On June 29, 2004, the FPSC approved a Stipulation and Settlement Agreement,
executed on April 29, 2004, by PEF, the Office of Public Counsel and the
Florida Industrial Power Users Group. The stipulation and settlement
resolved the issue currently pending before the FPSC regarding the costs
PEF will be allowed to recover through its Fuel and Purchased Power Cost
Recovery clause in 2004 and beyond for waterborne coal deliveries by the
Company's affiliated coal supplier, Progress Fuels Corporation. The
settlement sets fixed per ton prices based on point of origin for all
waterborne coal deliveries in 2004, and establishes a market-based pricing
methodology for determining recoverable waterborne coal transportation
costs through a competitive solicitation process or market price proxies
beginning in 2005 and thereafter. The settlement will reduce the amount
that PEF will charge to the Fuel and Purchased Power Cost Recovery clause
for waterborne transportation by approximately $13 million beginning in
2004. This concludes the FPSC's investigation of PEF's recoverable
waterborne coal transportation costs.
14
In March 2002, the parties in PEF's rate case entered into a Stipulation
and Settlement Agreement (the Agreement) related to retail rate matters.
The Agreement was approved by the FPSC and is generally effective from May
1, 2002 through December 31, 2005; provided, however, that if PEF's base
rate earnings fall below a 10% return on equity, PEF may petition the FPSC
to amend its base rates.
B. Regional Transmission Organizations
In 2000, the FERC issued Order No. 2000 on Regional Transmission
Organizations (RTOs), which set minimum characteristics and functions that
RTOs must meet, including independent transmission service. In July 2002,
FERC issued its Notice of Proposed Rulemaking in Docket No. RM01-12-000,
Remedying Undue Discrimination through Open Access Transmission Service and
Standard Electricity Market Design (SMD NOPR). If adopted as proposed, the
rules set forth in the SMD NOPR would materially alter the manner in which
transmission and generation services are provided and paid for. PEF filed
comments in November 2002 and supplement comments in January 2003. In April
2003, the FERC released a White Paper on the Wholesale Market Platform. The
White Paper provides an overview of what the FERC currently intends to
include in a final rule in the SMD NOPR docket. The White Paper retains the
fundamental and most protested aspects of SMD NOPR, including mandatory
RTOs and the FERC's assertion of jurisdiction over certain aspects of
retail service. FERC has not yet issued a final rule on SMD NOPR. In
December 2003, the FPSC issued an order requiring further state
proceedings. The Company cannot predict the outcome of these matters or the
effect that they may have on the GridFlorida proceedings currently ongoing
before the FERC. It is unknown what impact the future proceedings will have
on the Company's earnings, revenues or prices.
PEF has $4 million invested in GridFlorida related to startup costs at June
30, 2004. PEF expects to recover these startup costs in conjunction with
the GridFlorida original structure or in conjunction with any alternate
combined transmission structure that emerges.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill, by reportable segment, are
as follows:
Energy and
Related
(in millions) Services Other Total
----------------------------------
Balance as of January 1, 2003 $ 11 $ - $ 11
Divestitures (1) - (1)
Acquisition - 7 7
----------------------------------
Balance as of December 31, 2003 $ 10 $ 7 $ 17
Purchase accounting adjustment - 4 4
----------------------------------
Balance as of June 30, 2004 $ 10 $ 11 $ 21
==================================
In December 2003, $7 million in goodwill was acquired as part of the
Progress Telecommunications Corporation business combination and is in the
Other segment. The $4 million purchase accounting adjustment during the
first half of 2004 resulted primarily from changes in the estimated
restructuring costs related to the partial acquisition of EPIK in December
2003.
The Company has $9 million of net intangible assets at June 30, 2004 and
December 31, 2003. All of the Company's intangibles are subject to
amortization. The Company's intangibles are primarily acquired customer
contracts that are amortized over their respective lives. Amortization
expense recorded on intangible assets for the three and six months ended
June 30, 2004 and 2003, and estimated annual amortization expense for
intangible assets for 2004 through 2008 are not material to the results of
operations. PEF has no goodwill or significant intangible assets at June
30, 2004 or December 31, 2003.
15
6. COMPREHENSIVE INCOME
Comprehensive income for Florida Progress for the three months ended June
30, 2004 and 2003 was $131 million and $113 million, respectively, and $177
million and $204 million for the six months ended June 30, 2004 and June
2003, respectively. Comprehensive income for PEF for the three months ended
June 30, 2004 and 2003 was $84 million and $62 million, respectively, and
$134 million and $133 million for the six months ended June 30, 2004 and
2003, respectively. Items of other comprehensive income consisted primarily
of changes in fair value of derivatives used to hedge cash flows related to
interest on long-term debt and gas sales, and to foreign currency
translation adjustments.
7. FINANCING ACTIVITIES
On February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25
million 6.48% medium term notes with excess cash.
8. BENEFIT PLANS
The Company and some of its subsidiaries (including PEF) have a
non-contributory defined benefit retirement (pension) plan for
substantially all full-time employees. The Company also has supplementary
defined benefit pension plans that provide benefits to higher-level
employees. In addition to pension benefits, the Company and some of its
subsidiaries (including PEF) provide contributory other postretirement
benefits (OPEB), including certain health care and life insurance benefits,
for retired employees who meet specified criteria. The components of the
net periodic benefit cost for the three and six months ended June 30 are:
Three Months Ended June 30, Other Postretirement
Pension Benefits Benefits
--------------------- --------------------
(in millions) 2004 2003 2004 2003
--------------------- --------------------
Service cost $ 5 $ 5 $ 1 $ 1
Interest cost 12 11 4 4
Expected return on plan assets (18) (15) - -
Net amortization 1 - 1 1
--------------------- --------------------
Net cost recognized by Florida Progress $ - $ 1 $ 6 $ 6
--------------------- --------------------
Net cost/(benefit) recognized by PEF $ (1) $ - $ 6 $ 6
===================== ====================
Six Months Ended June 30, Other Postretirement
Pension Benefits Benefits
--------------------- --------------------
(in millions) 2004 2003 2004 2003
--------------------- --------------------
Service cost $ 11 $ 10 $ 3 $ 3
Interest cost 23 23 8 7
Expected return on plan assets (36) (31) - -
Net amortization 1 - 2 2
--------------------- --------------------
Net cost/(benefit) recognized by Florida Progress $ (1) $ 2 $ 13 $ 12
--------------------- --------------------
Net cost/(benefit) recognized by PEF $ (2) $ 1 $ 12 $ 12
===================== ====================
9. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
Progress Energy and its subsidiaries, including the Company and PEF, are
exposed to various risks related to changes in market conditions. The
Company has a risk management committee that includes senior executives
from various business groups. The risk management committee is responsible
for administering risk management policies and monitoring compliance with
those policies by all subsidiaries.
The Company, under its risk management policy, may use a variety of
instruments to manage exposure to fluctuations in commodity prices and
interest rates.
The Company uses interest rate derivative instruments to adjust the fixed
and variable rate debt components of its debt portfolio and to hedge
interest rates with regard to future fixed rate debt issuances.
16
As of June 30, 2004, there were no outstanding interest rate derivatives at
PEF.
PEF has entered into derivative instruments to hedge its exposure to price
fluctuations on fuel oil purchases. These instruments did not have a
material impact on the Company's consolidated and PEF's financial position
or results of operations.
Progress Fuels Corporation, through an affiliate, periodically enters into
derivative instruments to hedge its exposure to price fluctuations on
natural gas sales. As of June 30, 2004, Progress Fuels Corporation has
executed cash flow hedges of natural gas sales through December 2005. These
instruments did not have a material impact on the Company's consolidated
financial position or results of operations.
10. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company's principal business segment is PEF, a utility engaged in the
generation, purchase, transmission, distribution and sale of electricity
primarily in Florida. The other reportable business segments are Progress
Fuels' Energy & Related Services and Rail Services. The Energy & Related
Services segment includes coal and synthetic fuel operations, natural gas
production and sales, river terminal services and off-shore marine
transportation. Rail Services' operations include railcar repair, rail
parts reconditioning and sales, providing rail and track material, and
scrap metal recycling. The Other category consists primarily of PTC LLC,
the Company's telecommunications subsidiary, and the holding company,
Florida Progress Corporation. PTC LLC markets wholesale fiber-optic based
capacity service in the Eastern United States and also markets wireless
structure attachments to wireless communication companies and governmental
entities. The Company allocates a portion of its operating expenses to
business segments.
The Company's significant operations are geographically located in the
United States with limited operations in Mexico and Canada. The Company's
segments are based on differences in products and services, and therefore
no additional disclosures are presented. Intersegment sales and transfers
consist primarily of coal sales from the Energy and Related Services
segment of Progress Fuels to PEF. The price Progress Fuels charges PEF is
based on market rates for coal procurement. Prices for water-borne
transportation in 2003 were based on a methodology approved by the FPSC. In
April 2004, PEF executed a Stipulation and Settlement agreement with the
Office of Public Counsel and the Florida Industrial Power Users Group which
amends the transportation rate. On June 29, 2004, the FPSC approved the
Stipulation and Settlement. This concludes the FPSC's investigation of
PEF's recoverable waterborne coal transportation costs. See discussion at
Note 4A. Rail transportation is also based on market rates plus a return
allowed by the FPSC on equity in transportation equipment utilized in
transporting coal to PEF. The allowed rate of return is currently 12%. No
single customer accounted for 10% or more of unaffiliated revenues.
The following summarizes the revenues and segment profits or losses for the
reportable business segments. The combined segment profits and losses
represents Florida Progress' total income.
Energy and
(in millions) PEF Related Rail Other Consolidated
Services
-----------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2004:
Revenues $ 860 $ 343 $ 285 $ 16 $ 1,504
Intersegment revenues - 69 - (69) -
Total revenues 860 412 285 (53) 1,504
Segment profit 84 41 4 6 135
Total segment assets $ 7,457 $ 1,002 $ 532 $ 586 $ 9,577
Three Months Ended June 30, 2003:
Revenues $ 767 $ 219 $ 214 $ 7 $ 1,207
Intersegment revenues - 88 - (88) -
Total revenues 767 307 214 (81) 1,207
Segment profit (loss) 61 42 2 9 114
17
Energy and
PEF Related Rail Other Consolidated
Services
-----------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2004:
Revenues $ 1,644 $ 616 $ 523 $ 32 $ 2,815
Intersegment revenues - 151 - (151) -
Total revenues 1,644 767 523 (119) 2,815
Segment profit 133 79 9 (31) 190
-----------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2003:
Revenues $ 1,495 $ 522 $ 392 $ 13 $ 2,422
Intersegment revenues - 169 - (169) -
Total revenues 1,495 691 392 (156) 2,422
Segment profit (loss) 132 67 (1) 8 206
11. OTHER INCOME AND OTHER EXPENSE
Other income and expense includes interest income and other income and
expense items as discussed below. The components of other, net as shown on
the accompanying Statements of Income for the three and six months ended
June 30, 2004 and 2003, are as follows:
Three Months Ended Six Months Ended
(in millions) June 30 June 30
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ----------- -----------
Other income
Nonregulated energy and delivery services income 3 3 7 7
AFUDC equity 1 3 2 4
Other 1 1 2 2
------------ ------------ ----------- -----------
Total other income - PEF $ 5 $ 7 $ 11 $ 13
Other income - Florida Progress 3 4 2 2
------------ ------------ ----------- -----------
Total other income - PEF and Florida Progress $ 8 $ 11 $ 13 $ 15
------------ ------------ ----------- -----------
Other expense
Nonregulated energy and delivery services expenses $ 3 $ 3 $ 5 $ 6
Donations 1 2 5 4
Other 1 1 2 2
------------ ------------ ----------- -----------
Total other expense - PEF $ 5 $ 6 $ 12 $ 12
Loss from equity investments 4 4 7 7
Other expense - Florida Progress 1 2 1 3
------------ ------------ ----------- -----------
Total other expense - PEF and Florida Progress $ 10 $ 12 $ 20 $ 22
------------ ------------ ----------- -----------
Other, net $ (2) $ (1) $ (7) $ (7)
============ ============ =========== ===========
Nonregulated energy and delivery services include power protection services
and mass market programs such as surge protection, appliance services and
area light sales, and delivery, transmission and substation work for other
utilities.
12. COMMITMENTS AND CONTINGENCIES
Contingencies and significant changes to the commitments discussed in Note
19 of the Company's 2003 Annual Report on Form 10-K are described below.
A. Guarantees
As a part of normal business, Florida Progress and certain subsidiaries
including PEF enter into various agreements providing financial or
performance assurances to third parties. Such agreements include
guarantees, standby letters of credit and surety bonds. These agreements
are entered into primarily to support or enhance the creditworthiness
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 June 30, 2004, management
does not believe conditions are likely for significant performance under
these agreements.
18
Guarantees at June 30, 2004, are summarized in the table below and
discussed more fully in the subsequent paragraphs:
(in millions)
Guarantees issued on behalf of the Company and affiliates
Standby letters of credit $ 27
Surety bonds -
Other guarantees 20
Guarantees issued on behalf of third parties
Securities of affiliated trust 300
Other guarantees 24
-----------
Total $ 371
===========
Standby Letters of Credit
Financial institutions have issued standby letters of credit for the
Company 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. Of the total standby letters of credit issued,
PEF has outstanding letters of credit totaling $2 million. Any amounts owed
by the Company's subsidiaries are reflected in the Company's Consolidated
Balance Sheets.
Other Guarantees
The Company has total other guarantees outstanding of approximately $44
million. Included are $10 million of guarantees in support of synthetic
fuel operations at a third party plant. The remaining $34 million in other
guarantees is related primarily to prompt performance payments and other
payments subject to contingencies.
In connection with the sale of partnership interests in Colona (see Note
3.A), Progress Fuels indemnified the buyers against any claims related to
Colona resulting from violations of any environmental laws. Although the
terms of the agreement provide for no limitation to the maximum potential
future payments under the indemnification, the Company has estimated that
the maximum total of such payments would be insignificant.
Securities of Affiliated Trust
The Company has guaranteed certain payments of an affiliated company, FPC
Capital I (the Trust). Due to the nature of the relationship between the
Trust and Florida Progress Funding Corporation, the Company has guaranteed
the payment of all distributions related to the Trust's outstanding
mandatorily redeemable preferred securities. At June 30, 2004, the Trust
had outstanding 12 million shares of the securities with a liquidation
value of $300 million.
Guarantees Issued by Progress Energy
Progress Energy has issued approximately $46 million of guarantees on
behalf of Progress Fuels and its subsidiaries for obligations under coal
brokering operations.
B. Insurance
PEF is insured against public liability for a nuclear incident up to $10.76
billion per occurrence. Under the current provisions of the Price Anderson
Act, which limits liability for accidents at nuclear power plants, PEF, as
owner of a nuclear unit, can be assessed a portion of any third-party
liability claims arising from an accident at any commercial nuclear power
plant in the United States. In the event that public liability claims from
an insured nuclear incident exceed $300 million (currently available
through commercial insurers), each company would be subject to assessments
of up to $101 million for each reactor owned per occurrence. Payment of
such assessments would be made over time as necessary to limit the payment
in any one year to no more than $10 million per reactor owned. Congress is
considering revisions to the Price Anderson Act during 2004, that could
include increased limits and assessments per reactor owned. The final
outcome of this matter cannot be predicted at this time.
19
PEF self-insures their transmission and distribution lines against loss due
to storm damage and other natural disasters. PEF accrues $6 million
annually to a storm damage reserve pursuant to a regulatory order and may
defer losses in excess of the reserve.
C. Claims and Uncertainties
The Company is subject to federal, state and local regulations addressing
hazardous and solid waste management, air and water quality and other
environmental matters.
Hazardous and Solid Waste Management
Various organic materials associated with the production of manufactured
gas, generally referred to as coal tar, are regulated under federal and
state laws. The principal regulatory agency that is responsible for a
specific former manufactured gas plant (MGP) site depends largely upon the
state in which the site is located. There are several MGP sites to which
the Company has some connection. In this regard, PEF and other potentially
responsible parties, are participating in, investigating and, if necessary,
remediating former MGP sites with several regulatory agencies, including,
but not limited to, the U.S. Environmental Protection Agency (EPA) and the
Florida Department of Environmental Protection (FDEP). In addition, PEF is
periodically notified by regulators such as the EPA and various state
agencies of its involvement or potential involvement in sites, other than
MGP sites, that may require investigation and/or remediation.
PEF has filed claims with the Company's general liability insurance
carriers to recover costs arising out of actual or potential environmental
liabilities. Some claims have been settled and others are still pending.
The Company cannot predict the outcome of this matter.
PEF At June 30, 2004, PEF has accrued $27 million for probable and
estimable costs related to various environmental sites. Of this accrual,
$17 million is for costs associated with the remediation of distribution
and substation transformers for which PEF has received approval by the FPSC
for recovery through the Environmental Cost Recovery Clause (ECRC). For the
six months ended June 30, 2004, PEF accrued an additional $8 million
related to the remediation of transformers and a regulatory asset for the
probable recovery through the ECRC. The remaining $10 million is related to
two former MGP sites and other sites associated with PEF that have required
or are anticipated to require investigation and/or remediation costs. PEF
is unable to provide an estimate of the reasonably possible total
remediation costs beyond what is currently accrued.
These accruals have been recorded on an undiscounted basis. PEF measures
its liability for these sites based on available evidence including its
experience in investigating and remediating environmentally impaired sites.
This process often includes assessing and developing cost-sharing
arrangements with other potentially responsible parties. Presently, PEF
cannot determine the total costs that may be incurred in connection with
the remediation of all sites. As more activity occurs at these sites, PEF
will assess the need to adjust the accruals.
Florida Progress In 2001, Progress Fuels sold its Inland Marine
Transportation business to AEP Resources, Inc. Progress Fuels established
an accrual to address indemnities and retained environmental liability
associated with the transaction. Progress Fuels estimates that its
contractual liability to AEP Resources, Inc. associated with Inland Marine
Transportation is $4 million at June 30, 2004 and has accrued such amount.
The previous accrual of $10 million was reduced in 2003 based on a change
in estimate. This accrual has been determined on an undiscounted basis.
Progress Fuels measures its liability for this site based on estimable and
probable remediation scenarios. The Company cannot predict the outcome of
this matter.
Certain historical sites exist that are being addressed voluntarily by
Progress Fuels and FPC. An immaterial accrual has been established to
address investigation expenses related to these sites. The Company cannot
determine the total costs that may be incurred in connection with these
sites. The Company cannot predict the outcome of this matter.
Rail Rail Services is voluntarily addressing certain historical waste
sites. The Company cannot determine the total costs that may be incurred in
connection with these sites.
The Company is also currently in the process of assessing potential costs
and exposures at other environmentally impaired sites. As the assessments
are developed and analyzed, the Company will accrue costs for the sites to
the extent the costs are probable and can be reasonably estimated.
20
Air Quality
There has been and may be further proposed legislation requiring reductions
in air emissions for nitrogen oxides, sulfur dioxide, carbon dioxide and
mercury. Some of these proposals establish nationwide caps and emission
rates over an extended period of time. This national multi-pollutant
approach to air pollution control could involve significant capital costs
which could be material to the Company's consolidated and PEF's financial
position or results of operations. Some companies may seek recovery of the
related cost through rate adjustments or similar mechanisms. However, the
Company cannot predict the outcome of this matter.
The EPA is conducting an enforcement initiative related to a number of
coal-fired utility power plants in an effort to determine whether
modifications at those facilities were subject to New Source Review
requirements or New Source Performance Standards under the Clean Air Act.
PEF was asked to provide information to the EPA as part of this initiative
and cooperated in providing the requested information. During 2003, PEF
received a supplemental information request from the EPA and responded to
it. The EPA initiated civil enforcement actions against other unaffiliated
utilities as part of this initiative. Some of these actions resulted in
settlement agreements calling for expenditures ranging from $1.0 billion to
$1.4 billion. A utility that was not subject to a civil enforcement action
settled its New Source Review issues with the EPA for $300 million. These
settlement agreements have generally called for expenditures to be made
over extended time periods, and some of the companies may seek recovery of
the related cost through rate adjustments or similar mechanisms. The
Company cannot predict the outcome of the EPA's initiative or its impact,
if any, on the Company.
In 2003, the EPA published a final rule addressing routine equipment
replacement under the New Source Review program. The rule defines routine
equipment replacement and the types of activities that are not subject to
New Source Review requirements or New Source Performance Standards under
the Clean Air Act. The rule was challenged in the Federal Appeals Court and
its implementation stayed. In July 2004, the EPA announced it will
reconsider certain issues arising from the final routine equipment
replacement rule. Reconsideration does not impact the court-approved stay.
The agency plans to issue a final decision on these reconsidered issues by
year end. The Company cannot predict the outcome of this matter.
In 1997, the EPA's Mercury Study Report and Utility Report to Congress
conveyed that mercury is not a risk to the average American and expressed
uncertainty about whether reductions in mercury emissions from coal-fired
power plants would reduce human exposure. Nevertheless, the EPA determined
in 2000 that regulation of mercury emissions from coal-fired power plants
was appropriate. In 2003, the EPA proposed, and solicited comment on,
alternative control plans that would limit mercury emissions from
coal-fired power plants. The first, a Maximum Achievable Control Technology
(MACT) standard applicable to every coal-fired plant, would require
compliance in 2008. The second, which the EPA has stated it prefers, is a
mercury cap and trade program that would require limits to be met in two
phases, 2010 and 2018. The EPA expects to finalize the mercury rule in
March 2005. Achieving compliance with either proposal could involve
significant capital costs which could be material and adverse to the
Company's and PEF's financial condition or results of operations. However,
the Company cannot predict the outcome of this matter.
In conjunction with the proposed mercury rule, the EPA proposed a Maximum
Available Control Technology (MACT) standard to regulate nickel emissions
from residual oil-fired units. The agency estimates the proposal will
reduce national nickel emissions to approximately 103 tons. The EPA expects
to finalize the nickel rule in March 2005. The Company cannot predict the
outcome of this matter.
In December 2003, the EPA released its proposed Interstate Air Quality
Rule, currently referred to as the Clean Air Interstate Rule (CAIR). The
EPA's proposal requires 28 jurisdictions, including North Carolina, South
Carolina, Georgia and Florida, to further reduce nitrogen oxide (NOx) and
sulfur dioxide (SO2) emissions in order to attain pre-set NOx and SO2
emissions levels. The rule is expected to become final in 2004. In a
supplemental notice of proposed rulemaking on the CAIR, the EPA indicated
that compliance with the rule would meet the best available retrofit
technology (BART) requirements of its regional haze rule, as the emissions
controls to be installed for the CAIR are roughly equivalent to the
regional haze BART provisions. The installation of controls necessary to
comply with the rule could involve significant capital costs.
21
Water Quality
As a result of the operation of certain control equipment needed to address
the air quality issues outlined above, new wastewater streams may be
generated. Integration of these new wastewater streams into existing
wastewater treatment processes may result in permitting, construction and
water treatment requirements imposed on the Company in the immediate and
extended future.
After many years of litigation and settlement negotiations, the EPA adopted
final regulations in February 2004 for the implementation of Section 316(b)
of the Clean Water Act. These regulations become effective September 7,
2004. The purpose of these regulations is to minimize adverse environmental
impacts caused by cooling water intake structures and intake systems
located at existing facilities. Over the next several years, these
regulations may require the facilities to mitigate the effects to aquatic
organisms by undertaking intake modifications or other restorative
activities. Substantial costs could be incurred by the facilities in order
to comply with the new regulations. The Company cannot predict the outcome
and impacts to the facilities at this time.
The EPA has published for comment a draft Environmental Impact Statement
(EIS) for surface coal mining (sometimes referred to as "mountaintop
mining") and valley fills in the Appalachian coal region, where Progress
Fuels currently operates a surface mine and may operate others in the
future. The final EIS, when published, may affect regulations for the
permitting of mining operations and the cost of compliance with
environmental regulations. Regulatory changes for mining may also affect
the cost of fuel for the coal-fueled electric generating plant. The Company
cannot predict the outcome of this matter.
Other Environmental Matters
The Kyoto Protocol was adopted in 1997 by the United Nations to address
global climate change by reducing emissions of carbon dioxide and other
greenhouse gases. The United States has not adopted the Kyoto Protocol;
however, a number of carbon dioxide emissions control proposals have been
advanced in Congress and by the Bush Administration. The Bush
Administration has stated it favors voluntary programs. Reductions in
carbon dioxide emissions to the levels specified by the Kyoto Protocol and
some legislative proposals could be materially adverse to the Company's
financials and operations if associated costs cannot be recovered from
customers. The Company favors the voluntary program approach recommended by
the administration, and is evaluating options for the reduction, avoidance
and sequestration of greenhouse gases. However, the Company cannot predict
the outcome of this matter.
Other Contingencies
1. Franchise Litigation
Three cities, with a total of approximately 18,000 customers, have
litigation pending against PEF in various circuit courts in Florida. As
discussed below, three other cities, with a total of approximately 30,000
customers, have subsequently settled their lawsuits with PEF and signed
new, 30-year franchise agreements. The lawsuits principally seek (1) a
declaratory judgment that the cities have the right to purchase PEF's
electric distribution system located within the municipal boundaries of the
cities, (2) a declaratory judgment that the value of the distribution
system must be determined through arbitration, and (3) injunctive relief
requiring PEF to continue to collect from PEF's customers and remit to the
cities, franchise fees during the pending litigation, and as long as PEF
continues to occupy the cities' rights-of-way to provide electric service,
notwithstanding the expiration of the franchise ordinances under which PEF
had agreed to collect such fees. Five circuit courts have entered orders
requiring arbitration to establish the purchase price of PEF's electric
distribution system within five cities. Two appellate courts have upheld
those circuit court decisions and authorized cities to determine the value
of PEF's electric distribution system within the cities through
arbitration.
Arbitration in one of the cases (the City of Casselberry) was held in
August 2002. Following arbitration, the parties entered settlement
discussions, and in July 2003 the City approved a settlement agreement and
a new, 30-year franchise agreement with PEF. The settlement resolves all
pending litigation with that City. A second arbitration (with the
13,000-customer City of Winter Park) was completed in February 2003. That
arbitration panel issued an award in May 2003 setting the value of PEF's
distribution system within the City of Winter Park at approximately $32
million, not including separation and reintegration and construction work
in progress, which could add several million dollars to the award. The
panel also awarded PEF approximately $11 million in stranded costs, which
according to the award decreases over time. In September 2003, Winter Park
22
voters passed a referendum that would authorize the City to issue bonds of
up to approximately $50 million to acquire PEF's electric distribution
system. While the City has not yet definitively decided whether it will
acquire the system, on April 26, 2004, the City Commission voted to enter
into a hedge agreement to lock into interest rates for the acquisition of
the system and to proceed with the acquisition. The City sought and
received wholesale power supply bids and on June 23, 2004, executed a
wholesale power supply contract with PEF. On May 12, 2004, the City
solicited bids to operate and maintain the distribution system. The City
received bids on July 1, 2004, and expects to make its selection in August
2004. The City has indicated that its goal is to begin electric operations
in June 2005. At this time, whether and when there will be further
proceedings regarding the bids on City of Winter Park cannot be determined.
A third arbitration (with the 2,500-customer Town of Belleair) was
completed in June 2003. In September 2003, the arbitration panel issued an
award in that case setting the value of the electric distribution system
within the Town at approximately $6 million. The panel further required the
Town to pay to PEF its requested $1 million in separation and reintegration
costs and $2 million in stranded costs. The Town has not yet decided
whether it will attempt to acquire the system. At this time, whether and
when there will be further proceedings regarding the Town of Belleair
cannot be determined. A fourth arbitration (with the 13,000-customer City
of Apopka) had been scheduled for January 2004. In December 2003, the
Apopka City Commission voted on first reading to approve a settlement
agreement and a 30-year franchise with PEF. The settlement and franchise
became effective upon approval by the Commission at a second reading of the
franchise in January 2004. The settlement resolves all outstanding
litigation between the parties.
Arbitration in the remaining city's litigation (the 1,500-customer City of
Edgewood) has not yet been scheduled.
As part of the above litigation, two appellate courts have also reached
opposite conclusions regarding whether PEF must continue to collect from
its customers and remit to the cities "franchise fees" under the expired
franchise ordinances. PEF has filed an appeal with the Florida Supreme
Court to resolve the conflict between the two appellate courts. The Florida
Supreme Court held oral argument in one of the appeals in August 2003.
Subsequently, the Court requested briefing from the parties in the other
appeal, which was completed in November 2003. The Court has not yet issued
a decision in these cases. PEF cannot predict the outcome of these matters
at this time.
2. DOE Litigation
As required under the Nuclear Waste Policy Act of 1982, PEF entered into a
contract with the U.S. Department of Energy (DOE) under which the DOE
agreed to begin taking spent nuclear fuel by no later than January 31,
1998. All similarly situated utilities were required to sign the same
standard contract.
In 1995, the DOE issued a final interpretation that it did not have an
unconditional obligation to take spent nuclear fuel by January 31, 1998. In
Indiana & Michigan Power v. DOE, the Court of Appeals vacated the DOE's
final interpretation and ruled that the DOE had an unconditional obligation
to begin taking spent nuclear fuel. The Court did not specify a remedy
because the DOE was not yet in default.
After the DOE failed to comply with the decision in Indiana & Michigan
Power v. DOE, a group of utilities petitioned the Court of Appeals in
Northern States Power (NSP) v. DOE, seeking an order requiring the DOE to
begin taking spent nuclear fuel by January 31, 1998. The DOE took the
position that its delay was unavoidable, and the DOE was excused from
performance under the terms and conditions of the contract. The Court of
Appeals did not order the DOE to begin taking spent nuclear fuel, stating
that the utilities had a potentially adequate remedy by filing a claim for
damages under the contract.
After the DOE failed to begin taking spent nuclear fuel by January 31,
1998, a group of utilities filed a motion with the Court of Appeals to
enforce the mandate in NSP v. DOE. Specifically, this group of utilities
asked the Court to permit the utilities to escrow their waste fee payments,
to order the DOE not to use the waste fund to pay damages to the utilities,
and to order the DOE to establish a schedule for disposal of spent nuclear
fuel. The Court denied this motion based primarily on the grounds that a
review of the matter was premature, and that some of the requested remedies
fell outside of the mandate in NSP v. DOE.
Subsequently, a number of utilities each filed an action for damages in the
Federal Court of Claims. The U.S. Circuit Court of Appeals (Federal
Circuit) has ruled that utilities may sue the DOE for damages in the
Federal Court of Claims instead of having to file an administrative claim
with the DOE.
23
In January 2004, PEF filed a complaint with the DOE claiming that the DOE
breached the Standard Contract for Disposal of Spent Nuclear Fuel by
failing to accept spent nuclear fuel from various Progress Energy
facilities on or before January 31, 1998. Damages due to DOE's breach will
likely exceed $100 million. Similar suits have been initiated by over two
dozen other utilities.
In July 2002, Congress passed an override resolution to Nevada's veto of
DOE's proposal to locate a permanent underground nuclear waste storage
facility at Yucca Mountain, Nevada. DOE plans to submit a license
application for the Yucca Mountain facility by the end of 2004. On November
5, 2003, Congressional negotiators approved $580 million for fiscal year
2004 for the Yucca Mountain project, $123 million more than the previous
year. In January 2003, the State of Nevada, Clark County, Nevada, and the
City of Las Vegas petitioned the U.S. Court of Appeals for the District of
Columbia Circuit for review of the Congressional override resolution. On
July 9, 2004, the Court rejected the challenge to the constitutionality of
the resolution approving Yucca Mountain, but ruled that the EPA was wrong
to set a 10,000-year compliance period. The DOE continues to state it plans
to begin operation of the repository at Yucca Mountain in 2010. PEF cannot
predict the outcome of this matter.
PEF is currently storing spent nuclear fuel onsite in spent fuel pools.
PEF's nuclear unit, Crystal River Unit No. 3, (CR3) has sufficient storage
capacity in place for fuel consumed through the end of the expiration of
the current license in 2016. PEF will seek renewal of the CR3 operating
license and if approved, additional dry storage may be necessary.
3. Advanced Separation Technologies (AST)
In 1996, Florida Progress sold its 80% interest in AST to Calgon Carbon
Corporation (Calgon) for net proceeds of $56 million in cash. In 1998,
Calgon filed a lawsuit against Florida Progress and the other selling
shareholder and amended it in April 1998, alleging misstatement of AST's
1996 revenues, assets and liabilities, seeking damages and granting Calgon
the right to rescind the sale. The lawsuit also accused the sellers of
failing to disclose flaws in AST's manufacturing process and a lack of
quality control. Florida Progress believes that the aggregate total of all
legitimate warranty claims by customers of AST for which it is probable
that Florida Progress will be responsible for under the Stock Purchase
Agreement with Calgon is approximately $3 million, and accordingly, accrued
$3 million in the third quarter of 1999 as an estimate of probable loss.
All parties filed motions for summary judgment in July 2001. The summary
judgment motions of Calgon and the other selling shareholder were denied in
April 2002. The summary judgment motion of Florida Progress was withdrawn
pending a legal challenge to portions of the report of Calgon's expert,
Arthur Andersen, which had been used to oppose summary judgment. In
September 2003, the United States District Court for the Western District
of Pennsylvania issued final orders excluding from evidence in the case
that portion of Arthur Andersen's damage analysis based on the discounted
cash flow methodology of valuation. The Court did not exclude Arthur
Andersen's use of the guideline publicly traded company methodology in its
damage analysis. Florida Progress filed a renewed motion for summary
judgment in October 2003, which is pending. The Company cannot predict the
outcome of this matter, but will present a vigorous defense.
4. Synthetic Fuel Tax Credits
At December 31, 2003, Florida Progress, through its subsidiaries, was a
majority-owner in three entities and a minority owner in three entities
that own facilities that produce synthetic fuel as defined under the
Internal Revenue Code (Code). In June 2004, Progress Fuels sold, in two
transactions, a combined 49.8 percent partnership interest in Colona
Synfuel Limited Partnership, LLLP (Colona), one of its majority owned
synthetic fuel operations. The Company is now a minority owner in Colona,
but continues to consolidate Colona in accordance with FASB Interpretation
No. 46R. Florida Progress, through its subsidiaries, is currently a
majority owner in two synthetic fuel entities and a minority owner in four
synthetic fuel entities, including Colona. The production and sale of the
synthetic fuel from these facilities qualifies for tax credits under
Section 29 of the Code (Section 29) if certain requirements are satisfied,
including a requirement that the synthetic fuel differs significantly in
chemical composition from the coal used to produce such synthetic fuel and
that the fuel was produced from a facility that was placed in service
before July 1, 1998. Synthetic fuel tax credit amounts not utilized are
carried forward indefinitely as alternative minimum tax credits. All
majority-owned and minority-owned entities received private letter rulings
(PLRs) from the Internal Revenue Service (IRS) with respect to their
synthetic fuel operations. The PLRs do not limit the production on which
synthetic fuel credits may be claimed.
24
In September 2002, all of Florida Progress' majority-owned synthetic fuel
entities at that time, including Colona, and two of the Company's minority
owned synthetic fuel entities were accepted into the IRS's Pre-Filing
Agreement (PFA) program. The PFA program allows taxpayers to voluntarily
accelerate the IRS exam process in order to seek resolution of specific
issues. Either the Company or the IRS can withdraw from the program at any
time, and issues not resolved through the program may proceed to the next
level of the IRS exam process.
In July 2004, Progress Energy was notified that the Internal Revenue
Service (IRS) field auditors anticipate taking an adverse position
regarding the placed-in-service date of the Company's four Earthco
synthetic fuel facilities. Due to the auditors' position, the IRS has
decided to exercise its right to withdraw from the Pre-Filing Agreement
(PFA) program with Progress Energy. With the IRS's withdrawal from the PFA
program, the review of Progress Energy's Earthco facilities is back on the
normal procedural audit path of the Company's tax returns. The IRS has
indicated that the field audit team will provide its written recommendation
later this year. After the field audit team's written recommendation is
received, the Company will begin the Appeals process within the IRS.
Through June 30, 2004, based on its ownership percentage, the Company has
claimed $528 million of tax credits generated by Earthco facilities. If
these credits were disallowed, the Company's one time exposure for cash tax
payments would be $64 million (excluding interest), and earnings and equity
would be reduced by $528 million, excluding interest. The Company believes
that the appeals process could take up to two years to complete, however,
it cannot control the actual timing of resolution and cannot predict the
outcome of this matter.
In February 2004, subsidiaries of the Company finalized execution of the
Colona Closing Agreement with the IRS concerning their Colona synthetic
fuel facilities. The Closing Agreement provided that the Colona facilities
were placed in service before July 1, 1998, which is one of the
qualification requirements for tax credits under Section 29 of the Code.
The Closing Agreement further provides that the fuel produced by the Colona
facilities in 2001 is a "qualified fuel" for purposes of the Section 29 tax
credits. This action concluded the IRS PFA program with respect to Colona.
In October 2003, the United States Senate Permanent Subcommittee on
Investigations began a general investigation concerning synthetic fuel tax
credits claimed under Section 29 of the Code. The investigation is
examining the utilization of the credits, the nature of the technologies
and fuels created, the use of the synthetic fuel, and other aspects of
Section 29 and is not specific to the Company's synthetic fuel operations.
Progress Energy is providing information in connection with this
investigation. The Company cannot predict the outcome of this matter.
In management's opinion, the Company is complying with all the necessary
requirements to be allowed such credits under Section 29, and, although it
cannot provide certainty, it believes that it will prevail in these
matters. Accordingly, the Company has no current plans to alter its
synthetic fuel production schedule as a result of these matters. However,
should the Company fail to prevail in these matters, there could be a
material liability for previously taken Section 29 credits, with a material
adverse impact on earnings and cash flows.
5. Other Legal Matters
Florida Progress and PEF are involved in various other claims and legal
actions arising in the ordinary course of business, some of which involve
claims for substantial amounts. Where appropriate, accruals have been made
in accordance with SFAS No. 5, "Accounting for Contingencies," to provide
for such matters. Florida Progress and PEF believe the ultimate disposition
of these matters will not have a material adverse effect upon either
Company's consolidated and PEF's financial position or results of
operations.
25
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements that involve estimates, projections, goals, forecasts, assumptions,
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Many, but not
all of the factors that may impact actual results of the Company and PEF are
discussed in the Risk Factors section of PEF's annual report on Form 10-K for
the year ended December 31, 2003 which was filed with the SEC on March 12, 2004.
You should carefully read these SEC reports. Please review "SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS" for a discussion of the factors that may impact any
such forward-looking statements made herein.
Amounts reported in the interim Consolidated Statements of Income for Florida
Progress Corporation (Florida Progress) and the interim Statements of Income for
Progress Energy Florida, Inc. (PEF) are not necessarily indicative of amounts
expected for the respective annual or future periods due to the effects of
seasonal temperature variations on energy consumption and the timing of
maintenance on electric generating units, among other factors.
This discussion should be read in conjunction with the accompanying financial
statements found elsewhere in this report and in conjunction with the 2003 Form
10-K.
OPERATING RESULTS
Beginning in the fourth quarter of 2003, the Company ceased recording portions
of Energy and Related Services segment's operations, primarily synthetic fuel
facilities, one month in arrears. As a result, earnings for the year ended
December 31, 2003 included 13 months of operations, resulting in a net income
increase of $2 million for the year. The Company restated previously reported
consolidated quarterly earnings to reflect the new reporting periods which
resulted in four months of earnings in the first quarter of 2003 and changed
reported net income for subsequent quarters. Earnings increased $4 million and
$15 million, respectively, for the three and six months ended June 30, 2003 as
compared to amounts originally reported.
The Company's segments contributed segment profits or losses for the three and
six months ended June 30, 2004 and 2003 as follows:
- ---------------------------------------------------------------------------------------
(in millions) Three Months Ended June 30 Six Months Ended June 30
- ---------------------------------------------------------------------------------------
Business Segment 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------
PEF $ 84 $ 61 $ 133 $ 132
Energy and Related Services 41 42 79 67
Rail 4 2 9 (1)
Other 6 9 (31) 8
------------------------------------------------------
Segment profit/(loss) $ 135 $ 114 $ 190 $ 206
- ---------------------------------------------------------------------------------------
Progress Energy Florida
PEF contributed segment profits of $84 million and $61 million for the three
months ended June 30, 2004 and 2003, respectively, and $133 million and $132
million for the six months ended June 30, 2004 and 2003, respectively. The
increase in profits for the three months ended June 30, 2004 when compared to
2003 is primarily due to a reduction in the provision for revenue sharing, the
additional return on investment for Hines 2 plant and favorable customer growth.
Profits for six months ended June 30, 2004 increased slightly due to a reduction
in the provision for revenue sharing, favorable customer growth and the
additional return on investment on the Hines 2 plant, partially offset by higher
operations and maintenance (O&M) charges and increased depreciation expense from
assets placed in service.
26
PEF's electric revenues for the three and six months ended June 30, 2004 and
2003, and the amount and percentage change by customer class are as follows:
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
(in millions of $)
- ---------------------------------------------------------------------------------------------------------------------
Customer Class 2004 Change % Change 2003 2004 Change % Change 2003
- ---------------------------------------------------------------------------------------------------------------------
Residential $ 422 $ 8 1.9 $ 414 $ 824 $ 26 3.3 $ 798
Commercial 214 22 11.5 192 395 53 15.5 342
Industrial 66 10 17.9 56 128 24 23.1 104
Governmental 52 6 13.0 46 99 15 17.9 84
Retail revenue sharing (3) 25 (28) (7) 21 (28)
-------------------- ------------------------------- ----------
Total retail revenues 751 71 10.4 $ 680 1,439 139 10.7 1,300
Wholesale 53 3 6.0 50 120 (1) (0.8) 121
Unbilled 24 17 7 18 11 7
Miscellaneous 32 2 6.7 30 67 - - 67
-------------------- ------------------------------- ----------
Total electric revenues $ 860 $ 93 12.1 $ 767 $ 1,644 $ 149 10.0 $ 1,495
- ---------------------------------------------------------------------------------------------------------------------
PEF's electric energy sales for the three and six months ended June 30, 2004 and
2003, and the amount and percentage change by customer class are as follows:
- ---------------------------------------------------------------------------------------------------------------------
(in thousands of mWh) Three Months Ended June 30 Six Months Ended June 30
- ---------------------------------------------------------------------------------------------------------------------
Customer Class 2004 Change % Change 2003 2004 Change % Change 2003
- --------------------------------------------------- ------------------------------------------ ----------------------
Residential 4,505 (198) (4.2) 4,703 8,797 (459) (5.0) 9,256
Commercial 2,941 (10) (0.3) 2,951 5,431 38 0.7 5,393
Industrial 1,051 43 4.3 1,008 2,074 150 7.8 1,924
Governmental 751 9 1.2 742 1,423 25 1.8 1,398
--------------------- ------------------------------ ----------
Total retail energy sales 9,248 (156) (1.7) 9,404 17,725 (246) (1.4) 17,971
Wholesale 1,093 203 22.8 890 2,415 249 11.5 2,166
Unbilled 790 292 498 655 101 554
--------------------- ------------------------------ ----------
Total mWh sales 11,131 339 3.1 10,792 20,795 104 0.5 20,691
- ---------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2004 compared to the three months ended June 30,
2003
PEF's revenues, excluding recoverable fuel and other pass-through revenues of
$479 million and $422 million for the three months ended June 30, 2004 and 2003,
respectively, increased $36 million. This increase was due primarily to a
reduction in the provision for revenue sharing of $25 million. The provision for
revenue sharing recorded in the prior year included an additional $18 million
related to 2002 as ordered by the FPSC and the year to date accrual for 2003
which was $7 million higher than the provisions recorded during 2004. Revenues
also increased $1l million and $10 million, respectively, due to favorable
customer growth and the return on investment on Hines 2 Plant which was placed
in service in December 2003. PEF has approximately 37,000 additional customers
as of June 30, 2004 compared to June 30, 2003. Based on the Stipulation and
Settlement Agreement reached with the FPSC in April 2002, beginning with the
in-service date of PEF's Hines Unit 2 and continuing through December 2005, PEF
will be allowed to recover through the fuel cost recovery clause a return on
average investment and depreciation expense for Hines Unit 2, to the extent such
costs do not exceed the Unit's cumulative fuel savings over the recovery period.
These increases were partially offset by the impact of milder weather in the
current year of approximately $5 million.
Fuel and purchased power costs represent the costs of generation, which includes
fuel purchases for generation, as well as energy purchased in the market to meet
customer load. Fuel and purchased power expenses are recovered primarily through
cost recovery clauses and, as such, changes in these expenses, do not have a
material impact on earnings. The difference between fuel and purchased power
costs incurred and associated fuel revenues is deferred for future collection or
refund to customers.
27
Fuel and purchased power expenses increased $57 million from $358 million for
the three months ended June 30, 2003 to $415 million for the three months ended
June 30, 2004. This increase is attributable primarily to an increase in fuel
used in electric generation which increased $59 million. Higher system
requirements and increased fuel costs in the current year account for $32
million of the increase in fuel used in electric generation. The remaining
increase is due to the recovery of fuel expenses that were deferred in the prior
year, as well as the deferral of fuel expenses in the current year.
O&M costs decreased $2 million, when compared to the $154 million incurred
during the three months ended June 30, 2003. This decrease is primarily related
to the timing of outages and maintenance at generation facilities of $3 million
and a reduction in costs allocated from the Service Company of $1 million
partially offset by higher costs associated with planned reliability
improvements of approximately $2 million.
Depreciation and amortization decreased $8 million when compared to the $80
million incurred during the three months ended June 30, 2003, primarily due to
the amortization of the Tiger Bay regulatory asset in the prior year. The Tiger
Bay regulatory asset, for contract termination costs, was recovered pursuant to
an agreement between PEF which was approved by the FPSC in 1997, and as such
fluctuations in this expense did not have an impact on earnings. During the
second quarter of 2003, Tiger Bay amortization was $15 million. The Tiger Bay
asset was fully amortized in September 2003. The decrease in Tiger Bay
amortization was partially offset by additional depreciation for assets placed
in service.
Six months ended June 30, 2004 compared to the six months ended June 30, 2003
PEF's revenues, excluding recoverable fuel and other pass-through revenues of
$926 million and $794 million for the six months ended June 30, 2004 and 2003,
respectively, increased $17 million. This increase was due primarily to a
reduction in the provision for revenue sharing of $21 million. Results for 2003
included the accrual of an additional $18 million related to the 2002 revenue
sharing provision as ordered by the FPSC in June of 2003. In addition, the
return on investment in Hines 2 and favorable customer growth increased revenues
by $19 million and $9 million, respectively. These increases were partially
offset by the impact of milder weather in the current year of approximately $17
million.
Fuel and purchased power costs represent the costs of generation, which includes
fuel purchases for generation, as well as energy purchased in the market to meet
customer load. Fuel and purchased power expenses are recovered primarily through
cost recovery clauses and, as such, changes in these expenses, do not have a
material impact on earnings. The difference between fuel and purchased power
costs incurred and associated fuel revenues is deferred for future collection or
refund to customers.
Fuel and purchased power expenses were $805 million for the six months ended
June 30, 2004, which represents a $132 million increase compared to the same
period in the prior year. This increase is due to an increase in fuel used in
electric generation of $143 million offset by a reduction in purchased power
costs. This increase in fuel used in electric generation is due to the recovery
of fuel expenses that were deferred in the prior year as well as the deferral of
current year fuel expenses. In November 2003, the FPSC approved PEF's request
for a cost adjustment in its annual fuel filing due to the rising costs of fuel.
The new rates became effective January 2004. The decrease in purchased power
expense of $11 million is attributable primarily to the Hines 2 Plant being
placed in service in December of 2003, thereby reducing the need for purchased
power.
O&M costs increased $17 million, when compared to the $295 million incurred
during the six months ended June 30, 2003. This increase is primarily related to
higher costs associated with plant outages and planned reliability improvements
of approximately $9 million each.
Depreciation and amortization decreased $18 million when compared to the $159
million incurred during the six months ended June 30, 2003, primarily due to the
amortization of the Tiger Bay regulatory asset in the prior year. The Tiger Bay
regulatory asset, for contract termination costs, was recovered pursuant to an
agreement between PEF which was approved by the FPSC in 1997 and as such
fluctuations in this expense did not have an impact on earnings. During the six
months ended June 30, 2003, Tiger Bay amortization was $30 million. The Tiger
Bay asset was fully amortized in September 2003. The decrease in Tiger Bay
amortization was partially offset by additional depreciation for assets placed
in service.
28
ENERGY AND RELATED SERVICES
The Energy and Related Services segment operations include synthetic fuels
production, natural gas production, coal extraction and terminal operations.
Energy and Related Services results for the six months ended June 30, 2003 were
restated to reflect seven months of earnings for certain operations, primarily
synthetic fuel facilities as discussed previously.
The following summarizes Energy and Related Services' segment profits for the
three and six months ended June 30, 2004 and 2003:
- -----------------------------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
- -----------------------------------------------------------------------------------------------
(in millions) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------
Synthetic fuel operations $ 21 $ 33 $ 47 $ 54
Gas production 12 9 25 16
Coal fuel and other operations 8 - 7 (3)
---------------------------------------------------------
Segments Profits $ 41 $ 42 $ 79 $ 67
- -----------------------------------------------------------------------------------------------
Synthetic Fuel Operations
The synthetic fuel operations generated net profits of $21 million and $33
million for the three months ended June 30, 2004 and 2003, respectively, and $47
million and $54 million for the six months ended June 30, 2004 and 2003,
respectively. The production and sale of synthetic fuel generate operating
losses, but qualify for tax credits under Section 29 of the Code, which more
than offset the effect of such losses. See Note 12 of the Notes to the Interim
Financial Statements for further discussion of synthetic fuel tax credit
matters.
The operations resulted in the following for the three and six months ended June
30, 2004 and 2003:
- -----------------------------------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
- -----------------------------------------------------------------------------------------------------
(in millions) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------
Tons sold 1.5 1.8 3.4 3.2
-----------------------------------------------------------
Operating losses, excluding tax credits $ (16) $ (17) $ (40) $ (33)
Tax credits generated 37 50 87 87
-----------------------------------------------------------
Net profits $ 21 $ 33 $ 47 $ 54
- -----------------------------------------------------------------------------------------------------
Synthetic fuels' tons net profits decreased in the three months ended June 30,
2004 as compared to the same period in 2003 due primarily to a reduction in
credits earned of as a result of a decrease in tons sold and an increase in
operating cost. Synthetic fuel profits decreased in the six months ended June
30, 2004 due primarily to increases in operating cost
Natural Gas Operations
Natural gas operations generated profits of $12 million and $9 million for the
three months ended June 30, 2004 and 2003, respectively, and $25 million and $16
million for the six months ended June 30, 2004 and 2003. The increase in
production resulting from the acquisition of North Texas Gas in late February
2003 and increased drilling, and higher gas prices in 2004 contributed to
increased earnings in 2004 as compared to 2003. In October 2003, the Company
completed the sale of certain gas producing properties owned by Mesa
Hydrocarbons, LLC. The following summarizes the gas production, revenues and
gross margins for the three and six months ended June 30, 2004 and 2003 by
production facility:
29
- -------------------------------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
- -------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------
Production in Bcf equivalent
Mesa - 1.5 - 3.2
Westchester 4.9 3.1 9.0 6.3
North Texas Gas 2.7 1.8 5.3 2.4
--------------------------------------------------------
Total Production 7.6 6.4 14.3 11.9
--------------------------------------------------------
Revenues in millions
Mesa $ - $ 3 $ - $ 8
Westchester 26 16 48 31
North Texas Gas 14 10 27 14
--------------------------------------------------------
Total Revenues $ 40 $ 29 $ 75 $ 53
--------------------------------------------------------
Gross Margin
in millions of $ $ 33 $ 24 $ 60 $ 43
As a % of revenues 83% 83% 80% 81%
- -------------------------------------------------------------------------------------------------
Coal Fuel and Other Operations
Coal fuel and other operations generated segment profits of $8 million for the
three months ended June 30, 2004 compared to zero profit for the comparable
period in the prior year. For the six months ended June 30, 2004, coal fuel and
other operations generated segment profits of $7 million compared to a segment
loss of $3 million for the comparable period in the prior year. This increase in
profits for the quarter and year to date is due to higher volumes and margin for
coal fuel operations of $9 million after-tax offset by a reduction in profits of
$4 million after-tax for fuel transportation operations related to the
waterborne transportation ruling by the FPSC. See Note 4A of the Interim
Financial Statements. The increase in net income is also due to the impact of
the retroactive Service Company allocation in the prior year. Results in the
same period for the prior year were negatively impacted by the retroactive
reallocation of Service Company costs of $4 million after-tax.
Rail
Rail's operations include railcar and locomotive repair, trackwork, rail parts
reconditioning and sales, scrap metal recycling and other rail related services.
The Company sold the majority of the assets of Railcar Ltd., a leasing
subsidiary, in 2004. See Note 3B of the Notes to the Consolidated Interim
Financial Statements.
Rail contributed segment profit of $4 million and $2 million for the three
months ended June 30, 2004 and 2003, respectively. Revenues have increased $71
million to $285 million for the three months ended June 30, 2004 compared to the
same period in the prior year. This increase is due primarily to increased
volumes and higher prices in recycling operations and in part to increased
production and sales in locomotive and railcar services and engineering and
track services. Cost of goods sold increased $62 million compared to $188
million in the prior year. The increase in costs of good sold is due to
increased costs for inventory, labor and operations as a result of the increased
volume in the recycling operations, locomotive and railcar services and
engineering and track services. The increase in margins of $9 million was
partially offset by an increase in general and administrative costs related
primarily to higher professional fees.
Rail contributed segment profit of $9 million for the six months ended June 30,
2004 compared with a net loss of $1 million for the same period in the prior
year. Revenues have increased $130 million to $523 million for the six months
ended June 30, 2004 compared to the same period in the prior year. This increase
is due primarily to increased volumes and higher prices in recycling operations
and in part to increased production and sales in locomotive and railcar services
and engineering and track services. Cost of goods sold increased $112 million
compared to $455 million in the prior year. The increase in costs of good sold
is due to increased costs for inventory, labor and operations as a result of the
increased volume in the recycling operations, locomotive and railcar services
and engineering and track services. Results in the prior year were negatively
impacted by the retroactive reallocation of Service Company costs of $3 million
after-tax. The favorability related to the reallocation was offset by an
increase in general and administrative costs in the current year related
primarily to higher professional fees.
30
OTHER
The Other segment includes telecommunications, holding company and financing
expenses.
Other segment profits decreased $3 million for the three months ended June 30,
2004 compared to the same period in the prior year. Other segment profits
decreased $39 million for the six months ended June 30, 2004 compared to the
same period in the prior year. The decreases were due primarily to the impact of
tax levelization adjustments booked each quarter. GAAP requires companies to
apply a levelized effective tax rate to interim periods that is consistent with
the estimated annual effective tax rate. Income tax expense was decreased by $11
million and decreased by $10 million for the three months ended June 30, 2004
and 2003, respectively, in order to maintain an effective tax rate consistent
with the estimated annual rate. Income tax expense was increased by $23 million
and decreased by $15 million for the six months ended June 30, 2004 and 2003,
respectively, in order to maintain an effective tax rate consistent with the
estimated annual rate. The tax credits associated with the Company's synthetic
fuel operations primarily drive the required levelization amount. Fluctuations
in estimated annual earnings and tax credits can also cause large swings in the
effective tax rate for interim periods. Therefore, this adjustment will vary
each quarter, but will have no effect on net income for the year.
LIQUIDITY AND CAPITAL RESOURCES
Statements of Cash Flows and Financing Activities
Florida Progress
Cash provided by operating activities increased $148 million for the six months
ended June 30, 2004, when compared to the six months ended June 30, 2003. The
increase in operating cash flow was due primarily to the recovery of previously
deferred fuel costs.
Net cash used in investing activities decreased $275 million for the six months
ended June 30, 2004, when compared to the three months ended June 30, 2003. The
decrease is primarily due to reduced nonregulated capital expenditures,
primarily the purchase of North Texas Gas assets in the first quarter of 2003
and proceeds from the sale of Railcar Ltd. in 2004.
On February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25
million 6.48% medium term notes with excess cash.
PEF
Cash provided by operating activities increased $178 million for the six months
ended June 30, 2004, when compared to the six months ended June 30, 2003. The
increase in operating cash flow was due primarily to approximately $100 million
of lower operating cash flow at PEF for the period in 2003, which resulted from
an under recovery of fuel costs.
Net cash used in investing activities decreased $85 million for the six months
ended June 30, 2004, when compared to the three months ended June 30, 2003. The
decrease is due to the absence of nuclear fuel purchases and reduced capital
spending in 2004.
The amount and timing of future sales of company securities will depend on
market conditions, operating cash flow, asset sales and the specific needs of
the Company and PEF. The Company and PEF may from time to time sell securities
beyond the amount needed to meet capital requirements in order to allow for the
early redemption of long-term debt, the redemption of preferred stock, the
reduction of short-term debt or for other generation corporate purposes.
Future Commitments
As of June 30, 2004, both Florida Progress' and PEF's contractual cash
obligations and other commercial commitments have not changed materially from
what was reported in the 2003 Annual Report on Form 10-K.
31
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by ITEM 3 is omitted pursuant to Instruction H(2)(c)
to Form 10-Q (Omission of Information by Certain Wholly Owned Subsidiaries).
Item 4. CONTROLS AND PROCEDURES
Florida Progress Corporation
Pursuant to the Securities Exchange Act of 1934, Florida Progress carried out an
evaluation, with the participation of Florida Progress' management, including
Florida Progress' President and Chief Executive Officer, and Chief Financial
Officer, of the effectiveness of Florida Progress' disclosure controls and
procedures (as defined under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based upon that evaluation, Florida
Progress' President and Chief Executive Officer, and Chief Financial Officer
concluded that Florida Progress' disclosure controls and procedures are
effective in timely alerting them to material information relating to Florida
Progress (including its consolidated subsidiaries) required to be included in
Florida Progress' periodic SEC filings.
There has been no change in Florida Progress' internal control over financial
reporting during the quarter ended June 30, 2004 that has materially affected,
or is reasonably likely to materially affect, Florida Progress' internal control
over financial reporting.
Progress Energy Florida, Inc.
Pursuant to the Securities Exchange Act of 1934, PEF carried out an evaluation,
with the participation of PEF's management, including PEF's President and Chief
Executive Officer, and Chief Financial Officer, of the effectiveness of PEF's
disclosure controls and procedures (as defined under the Securities Exchange Act
of 1934) as of the end of the period covered by this report. Based upon that
evaluation, PEF's President and Chief Executive Officer, and Chief Financial
Officer concluded that PEF's disclosure controls and procedures are effective in
timely alerting them to material information relating to PEF required to be
included in PEF's periodic SEC filings.
There has been no change in PEF's internal control over financial reporting
during the quarter ended June 30, 2004 that has materially affected, or is
reasonably likely to materially affect, PEF's internal control over financial
reporting.
32
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Legal aspects of certain matters are set forth in Part I, Item 1. See Note 12 to
the Florida Progress Corporation and PEF Interim Financial Statements.
1. U.S. Global, LLC v. Progress Energy, Inc. et al, Case No. 03004028-03 and
Progress Synfuel Holdings, Inc. et al, v. U.S. Global, LLC, Case No.
03004028-03
A number of Progress Energy, Inc. subsidiaries and affiliates are parties to two
lawsuits arising out of an Asset Purchase Agreement dated as of October 19,
1999, by and among U.S. Global LLC (Global), EARTHCO, certain affiliates of
EARTHCO (collectively the EARTHCO Sellers), EFC Synfuel LLC (which is owned
indirectly be Progress Energy, Inc.) and certain of its affiliates, including
Solid Energy LLC, Solid Fuel LLC, Ceredo Synfuel LLC, Gulf Coast Synfuel LLC
(currently named Sandy River Synfuel LLC) (Collectively the Progress
Affiliates), as amended by an amendment to Purchase Agreement as of August 23,
2000 (the Asset Purchase Agreement). Global has asserted that pursuant to the
Asset Purchase Agreement it is entitled to (1) interest in two synthetic fuel
facilities currently owned by the Progress Affiliates, and (2) an option to
purchase additional interests in the two synthetic fuel facilities.
The first suit, U.S. Global, LLC v. Progress Energy, Inc. et al, was filed in
the Circuit Court for Broward County, Florida in March 2003 (the Florida Global
Case). The Florida Global Case asserts claims for breach of the Asset Purchase
Agreement and other contract and tort claims related to the Progress Affiliates'
alleged interference with Global's rights under the Asset Purchase Agreement.
The Florida Global Case requests an unspecified amount of compensatory damages,
as well as declaratory relief. On December 15, 2003, the Progress Affiliates
filed a motion to dismiss the Third Amended Complaint in the Florida Global
Case. The motion to dismiss filed on behalf of the Progress Energy, Inc.
subsidiaries and affiliates that are parties to the case will be heard by the
Circuit Court of Broward County, Florida on June 7, 2004. The case was dismissed
on procedural issues, but allowed the plaintiff to refile. The case was refiled
on June 23, 2004.
The second suit, Progress Synfuel Holdings, Inc. et al. v. U.S. Global, LLC, was
filed by the Progress Affiliates in the Superior Court for Wake County, North
Carolina seeking declaratory relief consistent with the Company's interpretation
of the asset Purchase Agreement (the North Carolina Global Case). Global was
served with the North Carolina Global Case on April 17, 2003.
On May 15, 2003, Global moved to dismiss the North Carolina Global Case for lack
of personal jurisdiction over Global. In the alternative, Global requested that
the court decline to exercise its discretion to hear the Progress Affiliates'
declaratory judgment action. On August 7, 2003, the Wake County Superior court
denied Global's motion to dismiss and entered an order staying the North
Carolina Global Case, pending the outcome of the Florida Global Case. The
Progress Affiliates have appealed the Superior court's order staying the case;
Global has cross appealed the denial of its motion to dismiss for lack of
personal jurisdiction. The North Carolina Court of Appeals heard argument on the
Progress Affiliates' Appeal and the Global's cross appeal on May 26, 2004. There
has been no ruling on the appeal or the cross appeal. The Company cannot predict
the outcome of these matters, but will vigorously defend against the
allegations. On July 29, 2004, the Progress Affiliates filed a motion to
dismiss.
33
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Florida Progress Progress Energy
Number Description Corporation Florida, Inc.
------ ----------- ----------- -------------
31(a) Certifications pursuant to Section 302 of the X X
Sarbanes-Oxley Action of 2002 - Chairman,
President and Chief Executive Officer
31(b) Certifications pursuant to Section 302 of the X X
Sarbanes-Oxley Action of 2002 - Executive Vice
President and Chief Financial Officer
32(a) Certifications pursuant to Section 906 of the X X
Sarbanes-Oxley Action of 2002 - Chairman,
President and Chief Executive Officer
32(b) Certifications pursuant to Section 906 of the X X
Sarbanes-Oxley Action of 2002 - Executive Vice
President and Chief Financial Officer
(b) Reports filed or furnished on Form 8-K since the beginning of the quarter:
Florida Progress Corporation
Financial
Item Statements
Reported Included Date of Event Date Filed or Furnished
9, 12 Yes July 21, 2004 July 21, 2004
5, 9 No July 7, 2004 July 7, 2004
9, 12 Yes April 21, 2004 April 21, 2004
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
Financial
Item Statements
Reported Included Date of Event Date Filed or Furnished
9, 12 Yes July 21, 2004 July 21, 2004
9, 12 Yes April 21, 2004 April 21, 2004
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLORIDA PROGRESS CORPORATION
FLORIDA POWER CORPORATION
(Registrants)
Date: August 6, 2004 By: /s/ Geoffrey S. Chatas
----------------------
Geoffrey Chatas
Executive Vice President and
Chief Financial Officer
By: /s/Robert H. Bazemore, Jr.
--------------------------
Robert H. Bazemore, Jr.
Vice President and Controller
Chief Accounting Officer