UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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, Inc.
(PEF). Information contained herein relating to either individual registrant is
filed by such registrant solely on its own behalf. Each registrant makes no
representation as to information relating exclusively to the other registrant.
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date. As of April 30, 2005, each
registrant had the following shares of common stock outstanding:
Registrant Description Shares
Florida Progress Corporation Common Stock, without par value 98,616,658 (all of which were held
by Progress Energy, Inc.)
PEF Common Stock, without par value 100 (all of which were held by
Florida Progress Corporation)
Florida Progress Corporation and Florida Power Corporation meet the conditions
set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore
filing this form with the reduced disclosure format.
1
FLORIDA PROGRESS CORPORATION AND PROGRESS ENERGY FLORIDA, INC.
FORM 10-Q - For the Quarter Ended March 31, 2005
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Florida Progress Corporation
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Florida Power Corporation
d/b/a Progress Energy Florida, Inc.
Statements of Income
Balance Sheets
Statements of Cash Flows
Notes to Financial Statements
Florida Progress Corporation and Florida Power Corporation d/b/a Progress
Energy Florida, Inc.
Item 1. Legal Proceedings
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
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 related to retail rate matters
APB Accounting Principles Board
ARO Asset retirement obligation
AST Advanced Separation Technology
Bcf Billion cubic feet
CAIR Clean Air Interstate Rule
CAMR Clean Air Mercury Rule
Calgon Calgon Carbon Corporation
CAMR Clean air mercury rule
the Code Internal Revenue Code
Colona Colona Synfuel Limited Partnership, L.L.L.P.
the Company, Florida Progress or FPC Florida Progress Corporation
CR3 PEF's nuclear generating plant, Crystal River Unit No. 3
DOE United States Department of Energy
ECRC Environmental Cost Recovery Clause
EIA Energy Information Agency
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FDEP Florida Department of Environmental Protection
FERC Federal Energy Regulatory Commission
FIN No. 45 Financial Accounting Standards Board (FASB) Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others"
FIN No. 46R FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51"
Financial Statements Florida Progress' Financial Statements and Progress Energy Florida's Financial Statements
contained under ITEM 8 herein
Florida Power or the Utility Florida Power Corporation d/b/a Progress Energy Florida, Inc.
FPSC Florida Public Service Commission
GAAP Accounting principles generally accepted in the United States of America
HLW High Level Waste
IRS Internal Revenue Service
MACT Maximum Achievable Control Technology
MGP Manufactured Gas Plant
MW Megawatts
NOx Nitrogen Oxide
NRC United States Nuclear Regulatory Commission
OCI Other comprehensive income
OPEB Other postretirement benefits
PEF or the Utility Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation
PFA IRS Prefiling Agreement
PLRs Private Letter Rulings
PRPs Potentially Responsible Parties
Progress Energy or the Parent Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly Electric Fuels Corporation
Progress Rail Progress Rail Services Corporation
PTC Progress Telecommunications Corporation
PT LLC Progress Telecom LLC
PVI Progress Ventures, Inc., formerly referred to as Energy Ventures, a business unit of
Progress Energy
PUHCA Public Utility Holding Company Act of 1935, as amended
3
RBCA or Global RBCA Risk-based corrective action
Rail Rail Services
RCA Revolving credit agreement
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
Service Company Progress Energy Service Company, LLC
SFAS No. 71 Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation"
SFAS No. 123 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"
SFAS No. 133 Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
and Hedging Activities"
SFAS No. 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"
SNF Spent Nuclear Fuel
SO2 Sulfur dioxide
the Trust FPC Capital I
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 "Results of
Operations" about trends and uncertainties and "Liquidity and Capital Resources"
concerning operating cash flows and future liquidity requirements.
Any forward-looking statement is based on information current as of the date of
this report and 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; deregulation or restructuring in
the electric industry that may result in increased competition and unrecovered
(stranded) costs; the uncertainty regarding the timing, creation and structure
of GridFlorida or other regional transmission organizations; weather conditions
that directly influence the demand for electricity; the Company's ability to
recover through the regulatory process, and the timing of such recovery of, the
costs associated with the four hurricanes that impacted our service territory in
2004 or other future significant weather events; recurring seasonal fluctuations
in demand for electricity; fluctuations in the price of energy commodities and
purchased power; economic fluctuations and the corresponding impact on the
Company and its subsidiaries' commercial and industrial customers; the ability
of the Company's subsidiaries to pay upstream dividends or distributions to it;
the impact on the facilities and the businesses of the Company from a terrorist
attack; the inherent risks associated with the operation of nuclear facilities,
including environmental, health, regulatory and financial risks; the ability to
successfully access capital markets on favorable terms; the ability of the
Company to maintain its current credit ratings and the impact of the Company's
financial condition and ability to meet its cash and other financial obligations
in the event its credit ratings are downgraded below investment grade; the
impact that increases in leverage and the affect it may have on the Company; the
impact of derivative contracts used in the normal course of business by the
Company; investment performance of pension and benefit plans; the Company's
ability to control costs, including pension and benefit expense, and achieve its
cost management targets for 2007; 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 the Company's financial condition
and performance in the event it is determined the Company is not entitled to
previously taken Section 29 tax credits; the impact of future accounting
pronouncements regarding uncertain tax positions; the outcome of PEF's rate
proceeding in 2005 regarding its future base rates; the Company's ability to
manage the risks involved with the operation of its nonregulated plants,
including dependence on third parties and related counter-party risks, and a
lack of operating history; the Company's ability to manage the risks associated
with its energy marketing operations; 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 filings with the United States Securities and Exchange Commission (SEC).
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, 2004 which was filed with the SEC
on March 16, 2005. You should carefully read this SEC report. New factors emerge
from time to time, and it is not possible for management to predict all such
factors, nor can it assess the effect of each such factor on Florida Progress
and PEF.
5
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
FLORIDA PROGRESS CORPORATION
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2005
UNAUDITED CONSOLIDATED STATEMENTS of INCOME
- ---------------------------------------------------------------------------------------
(in millions)
Three months ended March 31, 2005 2004
- ---------------------------------------------------------------------------------------
Operating revenues
Utility $ 848 $ 784
Diversified business 367 285
- ---------------------------------------------------------------------------------------
Total operating revenues 1,215 1,069
- ---------------------------------------------------------------------------------------
Operating expenses
Utility
Fuel used in electric generation 302 269
Purchased power 131 121
Operation and maintenance 189 160
Depreciation and amortization 70 69
Taxes other than on income 67 62
Diversified business
Cost of sales 333 263
Depreciation and amortization 23 20
Gain on the sale of assets (5) (1)
Other 28 20
- ---------------------------------------------------------------------------------------
Total operating expenses 1,138 983
- ---------------------------------------------------------------------------------------
Operating income 77 86
- ---------------------------------------------------------------------------------------
Other income (expense)
Interest income 1 1
Other, net (1) (4)
- ---------------------------------------------------------------------------------------
Total other expense - (3)
- ---------------------------------------------------------------------------------------
Interest charges
Interest charges 47 41
Allowance for borrowed funds used during construction (2) (1)
- ---------------------------------------------------------------------------------------
Total interest charges, net 45 40
- ---------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and minority interest 32 43
Income tax benefit 5 5
- ---------------------------------------------------------------------------------------
Income from continuing operations before minority
interest, net of tax 37 48
Minority interest in subsidiaries' loss (income), net of tax 8 (1)
- ---------------------------------------------------------------------------------------
Income from continuing operations 45 47
Discontinued operations, net of tax (27) 8
- ---------------------------------------------------------------------------------------
Net income $ 18 $ 55
- ---------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
6
FLORIDA PROGRESS CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------
March 31, December 31,
(in millions) 2005 2004
- -----------------------------------------------------------------------------------------------------------
ASSETS
Utility plant
Utility plant in service $ 8,368 $ 8,387
Accumulated depreciation (3,312) (2,978)
- -----------------------------------------------------------------------------------------------------------
Utility plant in service, net 5,056 5,409
Held for future use 8 8
Construction work in progress 502 420
Nuclear fuel, net of amortization 73 45
- -----------------------------------------------------------------------------------------------------------
Total utility plant, net 5,639 5,882
- -----------------------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents 28 24
Receivables 482 476
Receivables from affiliated companies 32 40
Deferred income taxes 35 57
Inventory 346 341
Deferred fuel cost 72 89
Assets of discontinued operations - 590
Prepayments and other current assets 101 33
- -----------------------------------------------------------------------------------------------------------
Total current assets 1,096 1,650
- -----------------------------------------------------------------------------------------------------------
Deferred debits and other assets
Regulatory assets 491 524
Nuclear decommissioning trust funds 475 463
Diversified business property, net 589 576
Miscellaneous other property and investments 106 95
Other assets and deferred debits 519 509
- -----------------------------------------------------------------------------------------------------------
Total deferred debits and other assets 2,180 2,167
- -----------------------------------------------------------------------------------------------------------
Total assets $ 8,915 $ 9,699
- -----------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
- -----------------------------------------------------------------------------------------------------------
Common stock equity
Common stock without par value $ 1,726 $ 1,712
Retained earnings 994 976
Accumulated other comprehensive loss (22) (7)
- -----------------------------------------------------------------------------------------------------------
Total common stock equity 2,698 2,681
- -----------------------------------------------------------------------------------------------------------
Preferred stock of subsidiaries - not subject to mandatory redemption 34 34
Minority interest 34 32
Long-term debt, affiliate 440 809
Long-term debt, net 1,998 2,052
- -----------------------------------------------------------------------------------------------------------
Total capitalization 5,204 5,608
- -----------------------------------------------------------------------------------------------------------
Current liabilities
Current portion of long-term debt 48 49
Accounts payable 278 333
Payables to affiliated companies 84 71
Notes payable to affiliated companies 747 431
Short-term obligations 153 293
Customer deposits 140 135
Liabilities of discontinued operations - 152
Other current liabilities 337 406
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 1,787 1,870
- -----------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
Noncurrent income tax liabilities 63 78
Accumulated deferred investment tax credits 34 36
Regulatory liabilities 1,117 1,362
Asset retirement obligations 274 358
Other liabilities and deferred credits 436 387
- -----------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 1,924 2,221
- -----------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 13)
- -----------------------------------------------------------------------------------------------------------
Total capitalization and liabilities $ 8,915 $ 9,699
- -----------------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
7
FLORIDA PROGRESS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
(in millions)
- ----------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2005 2004
- ----------------------------------------------------------------------------------------------------
Operating activities
Net income $ 18 $ 55
Adjustments to reconcile net income to net cash provided by operating
activities:
Discontinued operations, net of tax 27 (8)
Depreciation and amortization 102 95
Deferred income taxes and investment tax credits, net (10) (16)
Deferred fuel cost 36 49
Other adjustments to net income 31 3
Cash provided/(used) by changes in operating assets and liabilities:
Receivables 14 22
Receivables from affiliated companies (12) (6)
Inventory (38) (24)
Prepayments and other current assets (6) (6)
Accounts payable 19 (57)
Payables to affiliated companies 12 33
Other current liabilities (66) (4)
Regulatory assets and liabilities (52) 6
Other (14) 7
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 61 149
- ----------------------------------------------------------------------------------------------------
Investing activities
Utility property additions (128) (121)
Diversified business property additions (33) (35)
Nuclear fuel additions (34) -
Proceeds from sales of subsidiaries and other investments 405 82
Other (4) (3)
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 206 (77)
- ----------------------------------------------------------------------------------------------------
Financing activities
Net (decrease) increase in short-term obligations (140) 242
Retirement of long-term debt (425) (25)
Net change in intercompany notes 335 (257)
Dividends paid to parent - (39)
Other 9 5
- ----------------------------------------------------------------------------------------------------
Net cash used in financing activities (221) (74)
- ----------------------------------------------------------------------------------------------------
Cash (used) provided by discontinued operations (42) 6
Net increase in cash and cash equivalents 4 4
Cash and cash equivalents at beginning of period 24 15
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 28 $ 19
- ----------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
8
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.
INTERIM FINANCIAL STATEMENTS
March 31, 2005
UNAUDITED STATEMENTS of INCOME
- ------------------------------------------------------------------------------------------
(in millions)
Three months ended March 31, 2005 2004
- ------------------------------------------------------------------------------------------
Operating revenues $ 848 $ 784
Operating expenses
Fuel used in electric generation 302 269
Purchased power 131 121
Operation and maintenance 189 160
Depreciation and amortization 70 69
Taxes other than on income 67 62
- ------------------------------------------------------------------------------------------
Total operating expenses 759 681
- ------------------------------------------------------------------------------------------
Operating income 89 103
- ------------------------------------------------------------------------------------------
Other income (expense)
Other, net 3 (1)
- ------------------------------------------------------------------------------------------
Total other income (expense) 3 (1)
- ------------------------------------------------------------------------------------------
Interest charges
Interest charges 34 31
Allowance for borrowed funds used during construction (2) (1)
- ------------------------------------------------------------------------------------------
Total interest charges, net 32 30
- ------------------------------------------------------------------------------------------
Income before income taxes 60 72
Income tax expense 16 22
- ------------------------------------------------------------------------------------------
Net income 44 50
Preferred stock dividend requirement 1 1
- ------------------------------------------------------------------------------------------
Earnings for common stock $ 43 $ 49
- ------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
9
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.
UNAUDITED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------
March 31, December 31,
(in millions) 2005 2004
- ------------------------------------------------------------------------------------------------
ASSETS
Utility plant
Utility plant in service $ 8,368 $ 8,387
Accumulated depreciation (3,312) (2,978)
- ------------------------------------------------------------------------------------------------
Utility plant in service, net 5,056 5,409
Held for future use 8 8
Construction work in progress 502 420
Nuclear fuel, net of amortization 73 45
- ------------------------------------------------------------------------------------------------
Total utility plant, net 5,639 5,882
- ------------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents 18 12
Receivables 239 266
Receivables from affiliated companies 6 16
Deferred income taxes 19 42
Inventory 266 279
Deferred fuel cost 72 89
Prepayments and other current assets 95 12
- ------------------------------------------------------------------------------------------------
Total current assets 715 716
- ------------------------------------------------------------------------------------------------
Deferred debits and other assets
Regulatory assets 491 524
Nuclear decommissioning trust funds 475 463
Miscellaneous other property and investments 47 46
Prepaid pension cost 237 234
Other assets and deferred debits 59 59
- ------------------------------------------------------------------------------------------------
Total deferred debits and other assets 1,309 1,326
- ------------------------------------------------------------------------------------------------
Total assets $ 7,663 $ 7,924
- ------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
- ------------------------------------------------------------------------------------------------
Common stock equity
Common stock without par value $ 1,096 $ 1,081
Retained earnings 1,283 1,240
- ------------------------------------------------------------------------------------------------
Total common stock equity 2,379 2,321
- ------------------------------------------------------------------------------------------------
Preferred stock - not subject to mandatory redemption 34 34
Long-term debt, net 1,856 1,912
- ------------------------------------------------------------------------------------------------
Total capitalization 4,269 4,267
- ------------------------------------------------------------------------------------------------
Current liabilities
Current portion of long-term debt 48 48
Accounts payable 186 262
Payables to affiliated companies 85 80
Notes payable to affiliated companies 479 178
Short-term obligations 153 293
Customer deposits 140 135
Other current liabilities 123 161
- ------------------------------------------------------------------------------------------------
Total current liabilities 1,214 1,157
- ------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
Noncurrent income tax liabilities 492 489
Accumulated deferred investment tax credits 34 35
Regulatory liabilities 1,117 1,362
Asset retirement obligations 253 337
Other liabilities and deferred credits 284 277
- ------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 2,180 2,500
- ------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 13)
- ------------------------------------------------------------------------------------------------
Total capitalization and liabilities $ 7,663 $ 7,924
- ------------------------------------------------------------------------------------------------
See Notes to Interim Financial Statements.
10
FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.
UNAUDITED STATEMENTS of CASH FLOWS
- ---------------------------------------------------------------------------------------------------
(in millions)
Three Months Ended March 31, 2005 2004
- --------------------------------------------------------------------------------------------------
Operating activities
Net income $ 44 $ 50
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 79 75
Deferred income taxes and investment tax credits, net 13 31
Deferred fuel cost 36 49
Other adjustments to net income 18 -
Cash provided/(used) by changes in operating assets and liabilities:
Receivables 22 37
Receivables from affiliated companies 10 (5)
Inventory (16) (21)
Prepayments and other current assets (6) (4)
Accounts payable (6) (10)
Payables to affiliated companies 5 27
Other current liabilities (78) (36)
Regulatory assets and liabilities (52) 6
Other (4) 3
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 65 202
- --------------------------------------------------------------------------------------------------
Investing activities
Property additions (128) (121)
Nuclear fuel additions (34) -
Other (1) -
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (163) (121)
- --------------------------------------------------------------------------------------------------
Financing activities
Net (decrease) increase in short-term obligations (140) 242
Retirement of long-term debt (55) -
Net change in intercompany notes 301 (279)
Dividends paid to parent (1) (39)
Other (1) -
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 104 (76)
- --------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6 5
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 12 10
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 18 $ 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. BASIS OF PRESENTATION
A. Basis of Presentation
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. Because the
accompanying consolidated interim financial statements do not include all
of the information and footnotes required by GAAP, they should be read in
conjunction with the audited financial statements and notes thereto
included in Florida Progress' (the Company) and Progress Energy Florida's
(PEF) Form 10-K for the year ended December 31, 2004.
In accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 28, "Interim Financial Reporting," GAAP requires companies to
apply a levelized effective tax rate to interim periods that is consistent
with the estimated annual effective tax rate. The intra-period tax
allocation, which will have no impact on total year net income, maintains
an effective tax rate consistent with the estimated annual effective tax
rate. For the three months ended March 31, 2005 and 2004, income tax
expense was increased by $6 million and $33 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 levied by the state or
local government upon the customer. PEF accounts for excise taxes on a
gross basis. For the three months ended March 31, 2005 and 2004, gross
receipts tax and franchise taxes of approximately $35 million and $32
million, respectively, are included in electric operating revenues and
taxes other than on income on the Statements of Income.
The amounts included in the consolidated interim financial statements are
unaudited but, in the opinion of management, reflect all normal recurring
adjustments necessary to fairly present Florida Progress' and PEF's
financial position and results of operations for the interim periods. Due
to seasonal weather variations and the timing of outages of electric
generating units, especially the nuclear-fueled unit, the results of
operations for interim periods is 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 2004 have been made to
conform to the 2005 presentation.
B. Stock-Based Compensation
The Company and PEF measure compensation expense for stock options as the
difference between the market price of Progress Energy's common stock and
the exercise price of the option at the grant date. The exercise price at
which options are granted by Progress Energy 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 and PEF'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:
12
-------------------------------------------------------------------------------------------
Three Months Ended
(in millions) March 31,
-------------------------------------------------------------------------------------------
FLORIDA PROGRESS CORPORATION 2005 2004
-------------------------------------------------------------------------------------------
Net income, as reported $ 18 $ 55
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects - 1
-------------------------------------------------------------------------------------------
Pro forma net income $ 18 $ 54
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Three Months Ended
(in millions) March 31,
-------------------------------------------------------------------------------------------
PROGRESS ENERGY FLORIDA, INC. 2005 2004
-------------------------------------------------------------------------------------------
Net income, as reported $ 44 $ 50
Deduct: Total stock option expense determined under fair
value method for all awards, net of related tax effects - 1
-------------------------------------------------------------------------------------------
Pro forma earnings for common stock $ 44 $ 49
-------------------------------------------------------------------------------------------
The Company and PEF expect to begin expensing stock options on July 1, 2005
(See Note 2).
C. 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). A subsidiary of Florida
Progress is the primary beneficiary of and consolidates 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. As of March 31, 2005, Colona's total assets were $32 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 five limited partnerships, limited
liability corporations and venture capital funds. The aggregate maximum
loss exposure at March 31, 2005, that Florida Progress could be required to
record in its consolidated income statement as a result of these
arrangements totals approximately $13 million. The aggregate maximum loss
exposure at March 31, 2005, that PEF could be required to record in its
income statement as a result of these arrangements totals approximately $6
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. IMPACT OF NEW ACCOUNTING STANDARDS
PROPOSED FASB INTERPRETATION OF SFAS NO. 109, "ACCOUNTING FOR INCOME TAXES"
In July 2004, the Financial Accounting Standards Board (FASB) stated that
it plans to issue an exposure draft of a proposed interpretation of SFAS
No. 109, "Accounting for Income Taxes," that would address the accounting
for uncertain tax positions. The FASB has indicated that the interpretation
would require that uncertain tax benefits be probable of being sustained in
order to record such benefits in the financial statements. The exposure
draft is expected to be issued in the second quarter of 2005. The Company
cannot predict what actions the FASB will take or how any such actions
might ultimately affect the Company's financial position or results of
operations, but such changes could have a material impact on the Company's
evaluation and recognition of Section 29 tax credits (see Note 13).
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (REVISED 2004),
"SHARE-BASED PAYMENT" (SFAS NO. 123R)
In December 2004, the FASB Issued SFAS No. 123R, which revises SFAS No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123) and
supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." The key requirement of SFAS No. 123R is
that the cost of share-based awards to employees will be measured based on
an award's fair value at the grant date, with such cost to be amortized
over the appropriate service period. Previously, entities could elect to
continue accounting for such awards at their grant date intrinsic value
under APB Opinion No. 25, and the Company made that election. The intrinsic
value method resulted in the Company and PEF recording no compensation
expense for stock options granted to employees (See Note 1B).
13
As written, SFAS No. 123R had an original effective date of July 1, 2005
for the Company. In April 2005, the SEC delayed the effective date for
public companies, which resulted in a required effective date of January 1,
2006 for the Company. The SEC delayed the effective date due to concerns
that implementation in mid-year could make compliance more difficult and
make comparisons of quarterly reports more difficult. The Company currently
intends to implement SFAS No. 123R on the original effective date of July
1, 2005. The Company intends to implement the standard using the required
modified prospective method. Under that method and with a July 1, 2005
implementation, the Company will record compensation expense under SFAS No.
123R for all awards it grants after July 1, 2005, and it will record
compensation expense (as previous awards continue to vest) for the unvested
portion of previously granted awards that remain outstanding at July 1,
2005. In 2004, Progress Energy made the decision to cease granting stock
options and replaced that compensation with alternative forms of
compensation. Therefore, the amount of stock option expense expected to be
recorded in 2005 is below the amount that would have been recorded if the
stock option program had continued. The Company and PEF expect to record
less than $1 million of pre-tax expense for stock options in 2005.
FASB INTERPRETATION NO. 47, "ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS"
On March 30, 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," an interpretation of SFAS No.
143, "Accounting for Asset Retirement Obligations." The interpretation
clarifies that a legal obligation to perform an asset retirement activity
that is conditional on a future event is within the scope of SFAS No. 143.
Accordingly, an entity is required to recognize a liability for the fair
value of an asset retirement obligation that is conditional on a future
event if the liability's fair value can be reasonably estimated. The
interpretation also provides additional guidance for evaluating whether
sufficient information is available to make a reasonable estimate of the
fair value. The interpretation is effective for Florida Progress and PEF no
later than December 31, 2005. Neither Florida Progress nor PEF has yet
determined the impact of the interpretation on its financial position,
results of operations or liquidity.
3. DIVESTITURE
Progress Rail Divestiture
On March 24, 2005, the Company completed the sale of Progress Rail to One
Equity Partners LLC, a private equity unit of J.P. Morgan Chase & Co. Gross
cash proceeds from the sale are estimated to be $433 million, consisting of
$405 million base proceeds plus an estimated working capital adjustment.
Proceeds from the sale were used to reduce debt.
Based on the estimated gross proceeds associated with the sale of $433
million, the Company recorded an estimated after-tax loss on disposal of
$32 million during the first quarter of 2005. The Company anticipates
adjustments to the loss on the divestiture during the second quarter of
2005 related to employee benefit settlements and the finalization of the
working capital adjustment and other operating estimates.
The accompanying consolidated interim financial statements of Florida
Progress have been restated for all periods presented to reflect the
operations of Progress Rail as discontinued operations in the Consolidated
Statements of Income. Interest expense has been allocated to discontinued
operations based on the net assets of Progress Rail, assuming a uniform
debt-to-equity ratio across the Company's operations. Interest expense
allocated for the three months ended March 31, 2005 and 2004 was $4 million
each period. The Company ceased recording depreciation upon classification
of the assets as discontinued operations in February 2005. After-tax
depreciation expense recorded by Progress Rail during the three months
ended March 31, 2005 and 2004 was $3 million each period. Results of
discontinued operations were as follows:
---------------------------------------------------------------------------
(in millions)
Three Months Ended March 31, 2005 2004
---------------------------------------------------------------------------
Revenues $ 358 $ 239
---------------------------------------------------------------------------
Earnings before income taxes $ 7 $ 11
Income tax expense 2 3
---------------------------------------------------------------------------
Net earnings from discontinued operations 5 8
---------------------------------------------------------------------------
Estimated loss on disposal of discontinued operations,
including income tax benefit of $21 (32) -
---------------------------------------------------------------------------
Earnings (loss) from discontinued operations $ (27) $ 8
---------------------------------------------------------------------------
14
Prior to the sale of Progress Rail, the results of operations of Progress
Rail were reported one month in arrears. Accordingly, the net loss from
discontinued operations for the first quarter of 2005 includes four months
of Progress Rail's operations.
In connection with the sale, Progress Fuels and Progress Energy provided
guarantees and indemnifications of certain legal, tax and environmental
matters to One Equity Partners. See discussion of the Company's guarantees
at Note 13A.
The major balance sheet classes included in assets and liabilities of
discontinued operations in the Consolidated Balance Sheets as of December
31, 2004 are as follows:
-------------------------------------------------------------
(in millions)
-------------------------------------------------------------
Accounts receivable $ 172
Inventory 177
Other current assets 18
Total property, plant and equipment, net 199
Total other assets 24
-------------------------------------------------------------
Assets of discontinued operations $ 590
-------------------------------------------------------------
Accounts payable $ 113
Accrued expenses 37
-------------------------------------------------------------
Total long-term liabilities 2
-------------------------------------------------------------
Liabilities of discontinued operations $ 152
-------------------------------------------------------------
In February 2004, the Company sold the majority of the assets of Railcar
Ltd., a subsidiary of Progress Rail, to The Andersons, Inc. for proceeds of
approximately $82 million.
4. REGULATORY MATTERS
PEF Retail Rate Matters
Hearings on PEF's petition for recovery of $252 million of storm costs
filed with the Florida Public Service Commission (FPSC) were held from
March 30, 2005 to April 1, 2005. The FPSC is scheduled to vote on the
Company's petition on June 14, 2005, with an order expected on July 5,
2005. The Company cannot predict the outcome of this matter.
On May 4, 2005, a bill was approved by the Florida Legislature that would
authorize the FPSC to consider allowing the state's investor-owned
utilities to issue bonds that are secured by surcharges on utility customer
bills. These bonds would be issued for recovery of storm damage costs and
potentially to restore depleted storm reserves. The amount of funds
established for recovery is subject to the review and approval of the FPSC.
The bill will now be sent to Governor Bush for his consideration. The
Governor has indicated that he supports the bill. The Company cannot
predict the outcome of this matter.
On April 29, 2005, PEF submitted minimum filing requirements, based on a
2006 projected test year, to initiate a base rate proceeding regarding its
future base rates. In its filing, PEF has requested a $206 million annual
increase in base rates effective January 1, 2006. PEF's request for an
increase in base rates reflects an increase in operational costs with (i)
the addition of Hines 2 generation facility into base rates rather than the
Fuel Clause as was permitted under the terms of existing Stipulation and
Settlement Agreement (the Agreement) (ii) completion of the Hines 3
generation facility, (iii) the need to replenish PEF's depleted storm
reserve by adjusting the annual accrual in light of recent history on a
going-forward basis, (iv) the expected infrastructure investment necessary
to meet high customer expectations, coupled with the demands placed on
PEF's strong customer growth, (v) significant additional costs including
increased depreciation and fossil dismantlement expenses and (vi) general
inflationary pressures.
Hearings on the base rate proceeding are expected during the third quarter
of 2005 and a final decision is expected by the end of 2005. The Company
cannot predict the outcome of this matter.
The FPSC requires that PEF perform a depreciation study no less than every
four years. PEF filed a depreciation study with the FPSC on April 29, 2005,
as part of the Company's base rate filing, which will increase depreciation
expense in 2006 by $14 million and forward, if approved by the FPSC. The
15
Company cannot predict the outcome or impact of this matter. PEF reduced
its estimated removal costs to take into account the estimates used in the
depreciation study. This resulted in a downward revision in the PEF
estimated removal costs and equal increase in accumulated depreciation of
approximately $379 million.
The FPSC requires that PEF update its cost estimate for fossil
dismantlement every four years. PEF filed an updated fossil dismantlement
study with the FPSC on April 29, 2005, as part of the Company's base rate
filing, which will increase the accrual by $10 million and what PEF
collects in base rates for fossil dismantlement in 2006 and forward if
approved by the FPSC. PEF's retail reserve for fossil plant dismantlement
was approximately $133 million at March 31, 2005. Retail accruals on PEF's
reserves for fossil dismantlement were previously suspended through
December 2005 under the terms of PEF's existing Agreement. The Company
cannot predict the outcome or impact of this matter.
The FPSC requires that PEF update its cost estimate for nuclear
decommissioning every five years. PEF filed a new site-specific estimate of
decommissioning costs for the Crystal River Nuclear Plant (CR3) with the
FPSC on April 29, 2005 as part of the Company's base rate filing. PEF's
estimate was based on prompt decommissioning. The estimate, in 2005
dollars, is $614 million and is subject to change based on a variety of
factors including, but not limited to, cost escalation, changes in
technology applicable to nuclear decommissioning and changes in federal,
state or local regulations. The cost estimate excludes the portion
attributable to other co-owners of CR3. The NRC operating license held by
PEF for Crystal River Unit No. 3 (CR3) currently expires in December 2016.
An application to extend this license 20 years is expected to be submitted
in the first quarter of 2009. As part of this new estimate and assumed
license extension, PEF reduced its ARO liability by approximately $88
million at March 31, 2005. Retail accruals on PEF's reserves for nuclear
decommissioning were previously suspended through December 2005 under the
terms of the Agreement and the new study supports a continuation of that
suspension. The Company cannot predict the outcome or impact of this
matter.
5. COMPREHENSIVE INCOME
-----------------------------------------------------------------------------------
Three Months Ended
Florida Progress Corporation March 31,
(in millions) 2005 2004
-----------------------------------------------------------------------------------
Net income $ 18 $ 55
Other comprehensive loss:
Reclassification adjustments included in net income:
Change in cash flow hedges (net of tax expense of $0
and $1, respectively) 1 2
Foreign currency translation adjustment included in
discontinued operations (5) -
Minimum pension liability adjustment included in
discontinued operations (net of tax expense of $1) 1 -
Changes in net unrealized losses on cash flow hedges
(net of tax benefit of $7 and $7, respectively) (12) (12)
Foreign currency translation adjustment and other - 1
-----------------------------------------------------------------------------------
Other comprehensive loss $ (15) $ (9)
-----------------------------------------------------------------------------------
Comprehensive income $ 3 $ 46
-----------------------------------------------------------------------------------
Comprehensive income and net income for PEF for the three months ended
March 31, 2005 and 2004 were $44 million and $50 million, respectively.
6. DEBT AND CREDIT FACILITIES AND FINANCING ACTIVITIES
Changes to the Company's and PEF's debt and credit facilities since
December 31, 2004, discussed in Note 12 to the Financial Statements in Item
8 of the Company's and PEF's 2004 Form 10-K, are described below.
In January 2005, PEF used proceeds from the issuance of commercial paper to
pay off $170 million of revolving credit agreement (RCA) loans. PEF
subsequently used money pool borrowings to reduce commercial paper. In
February 2005, PEF used proceeds from money pool borrowings to pay off $55
million of RCA loans.
16
On March 28, 2005, PEF entered into a new $450 million RCA with a
syndication of financial institutions. The RCA will be used to provide
liquidity support for PEF's issuances of commercial paper and other
short-term obligations. The RCA will expire on March 28, 2010. The new $450
million RCA replaced PEF's $200 million three-year RCA and $200 million
364-day RCA, which were each terminated effective March 28, 2005. Fees and
interest rates under the $450 million RCA are to be determined based upon
the credit rating of PEF's long-term unsecured senior non-credit enhanced
debt, currently rated as A3 by Moody's Investor Services (Moody's) and BBB
by Standard and Poor's (S&P). The RCA includes a defined maximum total debt
to capital ratio of 65%. The RCA also contains various cross-default and
other acceleration provisions, including a cross-default provision for
defaults of indebtedness in excess of $35 million. The RCA does not include
a material adverse change representation for borrowings or a financial
covenant for interest coverage, which had been provisions in the terminated
agreements.
7. BENEFIT PLANS
The Company and some of its subsidiaries (including PEF) have a
noncontributory defined benefit retirement (pension) plan for substantially
all full-time employees. The Company also has supplementary defined benefit
pension plans that provide benefits to higher-level employees. In addition
to pension benefits, the Company and some of its subsidiaries (including
PEF) provide contributory other postretirement benefits (OPEB), including
certain health care and life insurance benefits, for retired employees who
meet specified criteria. The components of the net periodic benefit cost
for the three months ended March 31 are:
-------------------------------------------------------------------------------------------------
Other Postretirement
Pension Benefits Benefits
--------------------- --------------------
(in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------
Service cost $ 6 $ 5 $ 1 $ 1
Interest cost 13 12 4 4
Expected return on plan assets (19) (18) - -
Net amortization - 1 1 1
-------------------------------------------------------------------------------------------------
Net cost recognized by Florida Progress $ - $ - $ 6 $ 6
-------------------------------------------------------------------------------------------------
Net cost/(benefit) recognized by PEF $ (1) $ (1) $ 5 $ 6
-------------------------------------------------------------------------------------------------
8. RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS
The Company and PEF are exposed to various risks related to changes in
market conditions. The Company's and PEF's parent, Progress Energy, 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. Under its risk management policy, the Company
and PEF may use a variety of instruments, including swaps, options and
forward contracts, to manage exposure to fluctuations in commodity prices
and interest rates. Such instruments contain credit risk if the
counterparty fails to perform under the contract. The Company and PEF
minimize such risk by performing credit reviews using, among other things,
publicly available credit ratings of such counterparties. Potential
non-performance by counterparties is not expected to have a material effect
on the consolidated financial position or consolidated results of
operations of the Company or PEF.
A. Commodity Derivatives
GENERAL
Most of the Company's and PEF's commodity contracts either are not
derivatives or qualify as normal purchases or sales pursuant to SFAS No.
133. Therefore, such contracts are not recorded at fair value.
ECONOMIC DERIVATIVES
Derivative products, primarily electricity and natural gas contracts, may
be entered into from time to time for economic hedging purposes. While
management believes the economic hedges mitigate exposures to fluctuations
in commodity prices, these instruments are not designated as hedges for
accounting purposes and are monitored consistent with trading positions.
The Company and PEF manage open positions with strict policies that limit
exposure to market risk and require daily reporting to management of
potential financial exposures. Gains and losses from such contracts were
17
not material to results of operations during the three months ended March
31, 2005 and 2004, and the Company and PEF did not have material
outstanding positions in such contracts at March 31, 2005 or December 31,
2004.
PEF has derivative instruments related to its exposure to price
fluctuations on fuel oil purchases. At March 31, 2005, the fair values of
these instruments were a $34 million short-term derivative asset position
included in other current assets and a $23 million long-term derivative
asset position included in other assets and deferred debits. At December
31, 2004, the fair values of these instruments were a $2 million long-term
derivative asset position included in other assets and deferred debits and
a $5 million short-term derivative liability position included in other
current liabilities. These instruments receive regulatory accounting
treatment. Unrealized gains and losses are recorded in regulatory
liabilities and regulatory assets, respectively.
CASH FLOW HEDGES
The Company's subsidiaries designate a portion of commodity derivative
instruments as cash flow hedges under SFAS No. 133. The objective for
holding these instruments is to hedge exposure to market risk associated
with fluctuations in the price of natural gas for the Company's forecasted
sales. In the normal course of business, Progress Fuels through an
affiliate, Progress Ventures, Inc. (PVI), enters natural gas cash flow
hedging instruments, which PVI offsets with third party transactions.
Progress Fuels accounts for such contracts as if it were transacted with a
third party and records the contract using mark-to-market accounting. At
March 31, 2005, Progress Fuels is hedging exposures to the price
variability of natural gas through December 2006.
The total fair value of these instruments at March 31, 2005 and December
31, 2004 was a $26 million and a $9 million liability position,
respectively. The ineffective portion of commodity cash flow hedges was not
material for the three months ending March 31, 2005 and 2004. At March 31,
2004, there were $17 million of after-tax deferred losses in accumulated
other comprehensive income (OCI) of which $16 million is expected to be
reclassified to earnings during the next 12 months as the hedged
transactions occur. Due to the volatility of the commodities markets, the
value in OCI is subject to change prior to its reclassification into
earnings.
B. Interest Rate Derivatives - Fair Value or Cash Flow Hedges
The Company and PEF manage their interest rate exposures in part by
maintaining variable-rate and fixed rate-exposures within defined limits.
In addition, the Company and PEF also enter into financial derivative
instruments, including, but not limited to, interest rate swaps and lock
agreements to manage and mitigate interest rate risk exposure.
The Company and PEF use cash flow hedging strategies to hedge variable
interest rates on long-term debt and to hedge interest rates with regard to
future fixed-rate debt issuances. The Company and PEF held no interest rate
cash flow hedges at March 31, 2005 and December 31, 2004.
The Company and PEF use fair value hedging strategies to manage exposure to
fixed interest rates on long-term debt. At March 31, 2005 and December 31,
2004, the Company and PEF had no open interest rate fair value hedges.
9. SEVERANCE COSTS
On February 28, 2005, as part of a previously announced cost management
initiative, Progress Energy approved a workforce restructuring, which is
expected to be completed in September of 2005. In addition to the workforce
restructuring, the cost management initiative includes a voluntary enhanced
retirement program. In connection with the cost management initiative, the
Company and PEF expect to incur estimated pre-tax charges of approximately
$115 million. In addition, the Company and PEF expect to incur certain
incremental costs other than severance and postretirement benefits for
recruiting, training and staff augmentation activities that cannot be
quantified at this time.
The Company recorded $15 million of expense during the first quarter of
2005 for the estimated severance benefits to be paid as a result of the
approximate number of positions to be eliminated under the restructuring
and due to the implementation of an automated meter reading initiative at
PEF. This amount includes approximately $4 million of severance costs
allocated from Progress Energy Service Company. These amounts will be paid
over time and are subject to revision in future quarters based on the
impact of the voluntary enhanced retirement program. The severance expenses
are primarily included in operations and maintenance (O&M) expenses on the
Consolidated Statements of Income.
18
The activity in the severance liability is as follows:
-----------------------------------------------------
(in millions) FPC PEF
-----------------------------------------------------
Balance as of January 1, 2005 $ 1 $ -
Severance Costs Accrued 11 10
Payments - -
-----------------------------------------------------
Balance as of March 31, 2005 $ 12 $ 10
-----------------------------------------------------
The Company has estimated that an additional $105 million charge will be
recognized in the second quarter of 2005 and relates primarily to
postretirement benefits that will be paid over time to those eligible
employees who elected to participate in the voluntary enhanced retirement
program. The elections indicate that 692 of the Company's employees have
elected to participate in the voluntary enhanced retirement program, which
includes 680 PEF employees. The cost management initiative charges could
change significantly primarily due to the demographics of the specific
employees who elected enhanced retirement and its impact on the
postretirement benefit actuarial studies.
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 Synthetic Fuels. The Energy & Related
Services segment includes coal operations, natural gas production and
sales, river terminal services and off-shore marine transportation.
Synthetic Fuels' operations include the production and sale of synthetic
fuel as defined under the Internal Revenue Code and the operation of
synthetic fuel facilities for outside parties. See Note 13 for more
information. The Other category consists primarily of Progress
Telecommunications Corp (PTC), the Company's telecommunications subsidiary,
and the holding company, Florida Progress Corporation. PTC markets
wholesale fiber-optic based capacity service in the Eastern United States
and also markets wireless structure attachments to wireless communication
companies and governmental entities. The Company allocates a portion of its
operating expenses to business segments.
Prior to 2005, Rail Services was reported as a separate segment. In
connection with the divestiture of Progress Rail (see Note 3), the
operations of Rail Services were reclassified to discontinued operations in
the first quarter of 2005 and therefore are not included in the results
from continuing operations during the periods reported. In addition,
Synthetic Fuel activities were reported in the Energy & Related Services
segment prior to 2005 and now are considered a reportable segment. These
reportable segment changes reflect the current reporting structure. For
comparative purposes, the prior year results have been restated to align
with the current presentation.
The Company's segments are based on differences in products and services,
and therefore no additional disclosures are presented. All intersegment
transactions are at cost except for coal sales from the Energy and Related
Services segment to PEF. The price Progress Fuels charges PEF is based on
market rates for coal procurement. 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%. In accordance with SFAS No. 71, profits on intercompany
sales between Energy and Related Services and PEF are not eliminated if the
sales price is reasonable and the future recovery of sales price through
the ratemaking process is probable. The profits for the periods presented
were not significant. 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 from continuing operations.
19
-----------------------------------------------------------------------------------------------------
(in millions) Energy and
PEF Related Synthetic Other Consolidated
Services Fuels
-----------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2005:
Revenues $ 848 $ 182 $ 166 $ 19 $ 1,215
Intersegment revenues - 261 - (261) -
Total revenues 848 443 166 (242) 1,215
Segment profit (loss) $ 43 $ 10 $ - $ (8) $ 45
-----------------------------------------------------------------------------------------------------
Energy and
(in millions) PEF Related Synthetic Other Consolidated
Services Fuels
-----------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2004:
Revenues $ 784 $ 128 $ 143 $ 14 $ 1,069
Intersegment revenues - 239 4 (243) -
Total revenues 784 367 147 (229) 1,069
Segment profit (loss) $ 49 $ 10 $ 26 $ (38) $ 47
-----------------------------------------------------------------------------------------------------
11. OTHER INCOME AND OTHER EXPENSE
Other income and expense includes interest income and other income and
expense items as discussed below. The components of other, net as shown on
the accompanying Consolidated Statements of Income for three ended March
31, 2005 and 2004, are as follows:
----------------------------------------------------------------------------
Three Months Ended
March 31,
(in millions) 2005 2004
----------------------------------------------------------------------------
Other income
Nonregulated energy and delivery services income $ 4 $ 4
AFUDC equity 3 1
Other 2 -
----------------------------------------------------------------------------
Total other income - PEF $ 9 $ 5
Other income - Florida Progress 1 2
----------------------------------------------------------------------------
Total other income - PEF and Florida Progress $ 10 $ 7
----------------------------------------------------------------------------
Other expense
Nonregulated energy and delivery services expenses $ 3 $ 2
Donations 3 4
----------------------------------------------------------------------------
Total other expense - PEF $ 6 $ 6
Loss from equity investments 5 4
Other expense - Florida Progress - 1
----------------------------------------------------------------------------
Total other expense - PEF and Florida Progress $ 11 $ 11
----------------------------------------------------------------------------
Other, net $ (1) $ (4)
----------------------------------------------------------------------------
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. ENVIRONMENTAL MATTERS
The Company and PEF are subject to federal, state and local regulations
addressing hazardous and solid waste management, air and water quality and
other environmental matters. See Note 20 of the Company's and PEF's 2004
Annual Report on Form 10-K for a more detailed, historical discussion of
these federal, state, and local regulations.
HAZARDOUS AND SOLID WASTE MANAGEMENT
The provisions of the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, authorize the EPA to require the
cleanup of hazardous waste sites. This statute imposes retroactive joint
and several liabilities. Some states, including Florida, have similar types
of legislation. The Company and PEF are periodically notified by regulators
such as the EPA and various state agencies of their involvement or
potential involvement in sites, other than MGP sites, that may require
investigation and/or remediation. The Company and PEF are also currently in
the process of assessing potential costs and exposures at other
environmentally impaired sites. For all sites the assessments are developed
and analyzed, the Company and PEF will accrue costs for the sites to the
extent the costs are probable and can be reasonably estimated.
20
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, through PEF, has some connection. In this regard, PEF and
other potentially responsible parties (PRPs), 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 Florida, a risk-based corrective action (RBCA, known as Global RBCA)
rule was developed by the FDEP and adopted at the February 2, 2005,
Environmental Review Commission hearing. Risk-based corrective action
generally means that the corrective action prescribed for contaminated
sites can correlate to the level of human health risk imposed by the
contamination at the property. The Global RBCA rule expands the use of the
risk-based corrective action to all contaminated sites in the state that
are not currently in one of the state's waste cleanup programs and has the
potential for making future cleanups in Florida more costly to complete.
The effective date of the Global RBCA rule was April 17, 2005. The Company
and PEF are in the process of assessing the impact of this rule.
The Company and PEF have 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 and PEF cannot predict the outcome of this
matter.
PEF
As of March 31, 2005 and December 31, 2004, PEF's accruals for probable and
estimable costs related to various environmental sites, which are included
in other liabilities and deferred credits and are expected to be paid out
over many years, were:
----------------------------------------------------------------------------------------------
(in millions) March 31, 2005 December 31, 2004
----------------------------------------------------------------------------------------------
Remediation of distribution and substation transformers $ 25 $ 27
MGP and other sites 18 18
----------------------------------------------------------------------------------------------
Total accrual for environmental sites $ 43 $ 45
----------------------------------------------------------------------------------------------
PEF has received approval from the FPSC for recovery of costs associated
with the remediation of distribution and substation transformers through
the Environmental Cost Recovery Clause (ECRC). Under agreements with the
Florida Department of Environmental Protection (FDEP), PEF is in the
process of examining distribution transformer sites and substation sites
for potential equipment integrity issues that could result in the need for
mineral oil impacted soil remediation. PEF has reviewed a number of
distribution transformer sites and substation sites. PEF expects to have
completed its review of distribution transformer sites by the end of 2007.
Should further sites be identified, PEF believes that any estimated costs
would also be recovered through the ECRC. For the three months ended March
31, 2005, PEF made no additional accruals and spent approximately $2
million related to the remediation of transformers. PEF has recorded a
regulatory asset for the probable recovery of these costs through the ECRC.
The amounts for MGP and other sites, in the table above, relate to two
former MGP sites and other sites associated with PEF that have required or
are anticipated to require investigation and/or remediation. In 2004, PEF
received approximately $12 million in insurance claim settlement proceeds
and recorded a related accrual for associated environmental expenses, as
these insurance proceeds are restricted for use in addressing costs
associated with environmental liabilities. PEF made no additional accruals
or material expenditures and received no insurance proceeds for the three
months ended March 31, 2005.
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 PRPs. Because the extent of environmental impact,
allocation among PRPs for all sites, remediation alternatives (which could
involve either minimal or significant efforts), and concurrence of the
regulatory authorities have not yet advanced to the stage where a
reasonable estimate of the remediation costs can be made, at this time PEF
is unable to provide an estimate of its obligation to remediate these sites
beyond what is currently accrued. As more activity occurs at these sites,
PEF will assess the need to adjust the accruals. It is anticipated that
sufficient information will become available in 2005 to make a reasonable
estimate of PEF's obligation for one of the MGP sites.
21
Florida Progress Corporation
In 2001, FPC established an accrual to address indemnities and retained an
environmental liability associated with the sale of its Inland Marine
Transportation business. In 2003, the accrual was reduced to $4 million
based on a change in estimate. As of March 31, 2005 and December 31, 2004,
the remaining accrual balance was approximately $3 million. Expenditures
related to this liability were not material to the Company's financial
condition for the three months ended March 31, 2005. FPC measures its
liability for these exposures based on estimable and probable remediation
scenarios.
Certain historical sites are being addressed voluntarily by FPC. An
immaterial accrual has been established to address investigation expenses
related to these sites. At this time, the Company cannot determine the
total costs that may be incurred in connection with these sites.
Progress Rail
On March 24, 2005, the Company closed on the sale of its Progress Rail
subsidiary. In connection with the sale, the Company incurred indemnity
obligations related to certain pre-closing liabilities, including certain
environmental matters (see discussion under Guarantees in Note 13A).
AIR QUALITY
The Company and PEF are subject to various current and proposed federal,
state, and local environmental compliance laws and regulations, which may
result in increased planned capital expenditures and operating and
maintenance costs. Significant updates to these laws and regulations and
related impacts to the Company and PEF since December 31, 2004, are
discussed below. Additionally, Congress is considering legislation that
would require reductions in air emissions of NOx, SO2, 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
that could be material to the Company's and PEF's consolidated financial
position or results of operations. However, the Company and PEF cannot
predict the outcome of the matter.
The EPA is conducting an enforcement initiative related to a number of
coal-fired utility power plants in an effort to determine whether changes
at those facilities were subject to New Source Review requirements or New
Source Performance Standards under the Clean Air Act. The Company was asked
to provide information to the EPA as part of this initiative and cooperated
in supplying the requested information. The EPA initiated civil enforcement
actions against other unaffiliated utilities as part of this initiative.
Some of these actions resulted in settlement agreements calling for
expenditures by these unaffiliated utilities in excess of $1.0 billion.
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 and PEF cannot predict the outcome of this matter.
On March 10, 2005, the EPA issued the final Clean Air Interstate Rule
(CAIR). The EPA's rule requires 28 states and the District of Columbia,
including North Carolina, South Carolina, Georgia and Florida, to reduce
NOx and SO2 emissions in order to attain state NOx and SO2 emissions
levels. The Company is reviewing the final rule. Installation of additional
air quality controls is likely to be needed to meet the CAIR requirements.
The Company is in the process of determining compliance plans and the cost
to comply with the rule. The air quality controls already installed for
compliance with the NOx SIP Call and currently planned by the Company to
comply with the Smokestacks Act will reduce the costs required to meet the
CAIR requirements for the Company's North Carolina units.
On March 15, 2005, the EPA finalized two separate but related rules: the
Clean Air Mercury Rule (CAMR) that sets emissions limits to be met in two
phases and encourages a cap and trade approach to achieving those caps, and
a de-listing rule that eliminated any requirement to pursue a maximum
achievable control technology (MACT) approach for limiting mercury
emissions from coal-fired power plants. NOx and SO2 controls also are
effective in reducing mercury emissions, however, according to the EPA the
second phase cap reflects a level of mercury emissions reduction that
exceeds the level that would be achieved solely as a co-benefit of
controlling NOx and SO2 under CAIR. The Company is in the process of
determining compliance plans and the cost to comply with the CAMR.
Installation of additional air quality controls is likely to be needed to
meet the CAMR's requirements. The de-listing rule has been challenged by a
number of parties; the resolution of the challenges could impact the
Company's final compliance plans and costs.
22
In conjunction with the proposed mercury rule, the EPA proposed a MACT
standard to regulate nickel emissions from residual oil-fired units. The
EPA withdrew the proposed nickel rule in March 2005.
PEF is filing a petition through the ECRC program for recovery of costs for
development and implementation of an integrated strategy to comply with the
CAIR and CAMR. PEF is developing an integrated compliance strategy for the
CAIR and CAMR rules because NOx and SO2 controls also are effective in
reducing mercury emissions. PEF estimates the program costs for the
remainder of 2005 to be approximately $2 million for preliminary
engineering activities and strategy development work necessary to determine
the Company's integrated compliance strategy. PEF projects approximately
$62 million in program costs for 2006. These costs may increase or decrease
depending upon the results of the engineering and strategy development
work. Among other things, subsequent rule interpretations, equipment
availability, or the unexpected acceleration of the initial NOx or other
compliance dates could require acceleration of some projects and therefore
result in additional costs in 2005 and 2006. PEF expects to incur
significant additional capital and O&M costs to achieve compliance with the
CAIR and CAMR through 2015 and beyond. The timing and extent of the costs
for future projects will depend upon the final compliance strategy.
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 at the affected facilities. Integration of these new wastewater
streams into the existing wastewater treatment processes may result in
permitting, construction and treatment requirements imposed on PEF in the
immediate and extended future.
Based on changes to the estimated time frame of expenditures, the Company
has revised the estimated time period for expenditures to meet Section
316(b) requirements of the Clean Water Act. PEF currently estimates that
from 2005 through 2010 the range of expenditures will be approximately $65
million to $85 million.
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 treaty went into effect on February 16, 2005. The
United States has not adopted the Kyoto Protocol, and the Bush
administration has stated it favors voluntary programs. A number of carbon
dioxide emissions control proposals have been advanced in Congress.
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 consolidated financial position or results of operations if
associated costs of control or limitation cannot be recovered from
customers. The Company favors the voluntary program approach recommended by
the Bush administration and continually evaluates options for the
reduction, avoidance and sequestration of greenhouse gases. However, the
Company and PEF cannot predict the outcome of this matter.
Progress Energy has announced its plan to issue a report on the Progress
Energy's activities associated with current and future environmental
requirements. The report will include a discussion of the environmental
requirements that the Company and PEF currently face and expect to face in
the future with respect to its air emissions. The report is expected to be
issued by March 31, 2006.
13. COMMITMENTS AND CONTINGENCIES
Contingencies and significant changes to the commitments discussed in Note
21 of the Company's 2004 Annual Report on Form 10-K are described below.
A. Guarantees
As a part of normal business, Florida Progress and certain subsidiaries,
including PEF and Progress Fuels, enter into various agreements providing
financial or performance assurances to third parties, which are outside the
scope of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" (FIN No. 45). 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 March 31, 2005, management does not believe conditions are
likely for significant performance under these agreements. To the extent
liabilities are incurred as a result of the activities covered by the
guarantees, such liabilities are included in the accompanying Consolidated
Balance Sheets.
23
At March 31, 2005, the Company had issued guarantees and indemnifications
of certain legal, tax and environmental matters to third parties in
connection with sales of businesses and for timely payment of obligations
in support of its non-wholly owned synthetic fuel operations. Related to
the sales of businesses, the notice period extends until 2012 for the
majority of matters provided for in the indemnification provisions. For
matters which the Company has received timely notice, the Company's
indemnity obligations may extend beyond the notice period. Certain
environmental indemnifications related to the sale of synthetic fuel
operations have no limitations as to time or maximum potential future
payments. Other guarantees and indemnifications have an estimated maximum
exposure of approximately $111 million. At March 31, 2005, the Company has
recorded liabilities related to guarantees and indemnifications to
third-parties of $22 million. Management does not believe conditions are
likely for significant performance under these agreements in excess of the
recorded liabilities.
Securities of Affiliated Trust
The Company has guaranteed certain payments of an affiliated company, FPC
Capital I (the Trust). Due to the nature of the relationship between the
Trust and Florida Progress Funding Corporation, the Company has guaranteed
the payment of all distributions related to the Trust's outstanding
mandatorily redeemable preferred securities. At March 31, 2005, the Trust
had outstanding 12 million shares of the securities with a liquidation
value of $300 million.
B. Insurance
PEF is a member of Nuclear Electric Insurance Limited (NEIL), which
provides primary and excess insurance coverage against property damage to
members' nuclear generating facilities. Under the primary program, PEF is
insured for $500 million at its nuclear plant, CR3. In addition to primary
coverage, NEIL also provides decontamination, premature decommissioning and
excess property insurance with a limit of $1.75 billion.
C. Other Commitments
As discussed in Note 21B of the Company's annual report on Form 10-K for
the year ended December 31, 2004, the Company has certain future
commitments related to four synthetic fuel facilities purchased that
provide for contingent payments (royalties). The Company has exercised its
right in the related agreements to escrow those payments if certain
conditions in the agreements were met. The Company previously accrued and
retained 2004 and 2003 royalty payments of approximately $20 million and
$22 million, respectively. In May 2005, these funds were placed into escrow
upon establishment of the necessary escrow accounts.
D. 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
previously reported, 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, 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. The circuit courts in those cases 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 the cities to
determine the value of PEF's electric distribution system within the cities
through arbitration.
Arbitration in one of the cases (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 (the City) 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,
decrease over time. In September 2003, Winter Park voters passed a
referendum that would authorize the City to issue bonds of up to
24
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 proceed with the
acquisition. The City sought and received wholesale power supply bids and
on June 24, 2004, executed a wholesale power supply contract with PEF with
a five-year term option from the date service begins and a renewal option.
On May 12, 2004, the City solicited bids to operate and maintain the
distribution system and awarded a contract in January 2005. The City has
indicated that its goal is to begin electric operations in June 2005. On
February 10, 2005, PEF filed a petition with the Florida Public Service
Commission (FPSC) to relieve the Company of its statutory obligation to
serve customers in Winter Park on June 1, 2005, or at such time when the
City is able to provide retail service. On April 19, 2005, the FPSC voted
to approve PEF's petition. At this time, whether and when there will be
further proceedings regarding the City of Winter Park cannot be determined.
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; however, on January 18, 2005, it issued a
request for proposals for wholesale power supply and to operate and
maintain the distribution system. In March 2005, PEF submitted a bid to
supply wholesale power to the Town. The Town received several other
proposals for wholesale power and distribution services. In February 2005,
the Town Commission also voted to put the issue of whether to acquire the
distribution system to a voter referendum on or before October 2, 2005. At
this time, whether and when there will be further proceedings regarding the
Town of Belleair cannot be determined.
Arbitration in the remaining city's litigation (the 1,500-customer City of
Edgewood) has not yet been scheduled. On February 17, 2005, the parties
filed a joint motion to stay the litigation for a 90-day period during
which the parties will discuss potential settlement. In April, the City
Council voted to proceed with arbitration. At this time, whether and when
there will be further proceedings regarding the City of Edgewood cannot be
determined.
A fourth city (the 7,000-customer City of Maitland) is contemplating
municipalization and has indicated its intent to proceed with arbitration
to determine the value of PEF's electric distribution system within the
City. Maitland's franchise expires in August 2005. At this time, whether
and when there will be further proceedings regarding the City of Maitland
cannot be determined.
As part of the above litigation, two appellate courts 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 filed an appeal with the Florida Supreme Court to
resolve the conflict between the two appellate courts. On October 28, 2004,
the Court issued a decision holding that PEF must collect from its
customers and remit to the cities franchise fees during the interim period
when the city exercises its purchase option or executes a new franchise
agreement. The Court's decision should not have a material impact on the
Company.
2. DOE Litigation
Pursuant to the Nuclear Waste Policy Act of 1982, the predecessors to PEF
entered into contracts 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.
DOE failed to begin taking spent nuclear fuel by January 31, 1998. In
January 2004, PEF filed a complaint with the United States Court of Federal
Claims against the DOE, claiming that the DOE breached the Standard
Contract for Disposal of Spent Nuclear Fuel (SNF) by failing to accept SNF
from PEF facilities on or before January 31, 1998. Damages due to DOE's
breach will likely exceed $100 million. Approximately 60 cases involving
the Government's actions in connection with SNF are currently pending in
the Court of Federal Claims.
DOE and the PEF parties have agreed to a stay of the lawsuit, including
discovery. The parties agreed to, and the trial court entered, a stay of
proceedings, in order to allow for possible efficiencies due to the
resolution of legal and factual issues in previously-filed cases in which
similar claims are being pursued by other plaintiffs. These issues may
include, among others, so-called "rate issues," or the minimum mandatory
schedule for the acceptance of SNF and high level waste (HLW) by which the
Government was contractually obligated to accept contract holders' SNF
and/or HLW, and issues regarding recovery of damages under a partial breach
25
of contract theory that will be alleged to occur in the future. These
issues are expected to be presented in the trials that are scheduled to
occur by April 2005. Resolution of these issues in other cases could
facilitate agreements by the parties in the PEF lawsuit, or at a minimum,
inform the Court of decisions reached by other courts if they remain
contested and require resolution in this case. The trial court has
continued this stay until June 24, 2005.
With certain modifications and additional approval by the NRC, including
the installation of onsite dry storage facilities at PEF's nuclear unit,
Crystal River Unit No. 3 (CR3), PEF's spent nuclear fuel storage facilities
will be sufficient to provide storage space for spent fuel generated on
PEF's system through the expiration of the operating license for CR3.
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. 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. These same parties also challenged EPA's
radiation standards for Yucca Mountain. 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 in the radiation protection standard. EPA is currently reworking the
standard but has not stated when the work will be complete. DOE originally
planned to submit a license application to the NRC to construct the Yucca
Mountain facility by the end of 2004. However, in November 2004, DOE
announced it would not submit the license application until mid-2005 or
later. Also in November 2004, Congressional negotiators approved $577
million for fiscal year 2005 for the Yucca Mountain project, approximately
$300 million less than requested by DOE but approximately the same as
approved in 2004. The DOE has acknowledged that a working repository will
not be operational until sometime after 2010, but the DOE has not
identified a new target date. PEF cannot predict the outcome of this
matter.
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.
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. Because the motion has now been
outstanding for over a year, a ruling on the motion is expected at any
time.
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.
The Company cannot predict the outcome of this matter, but will vigorously
defend against the allegations.
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
26
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. The amount of Section 29 tax credits that the Company
is allowed to claim in any calendar year is limited by the amount of the
Company's regular federal income tax liability. Synthetic fuel tax credit
amounts allowed but not utilized are carried forward indefinitely as
deferred 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. However, these PLR's do not address the placed-in-service date
determinations. The PLRs do not limit the production on which synthetic
fuel credits may be claimed. Total Section 29 credits generated to date are
approximately $951 million, of which $436 million has been used to offset
regular federal income tax liability and $497 million are being carried
forward as deferred alternative minimum tax credits. Also $18 million has
not been recognized due to the decrease in tax liability from the 2004
hurricane damage and loss on sale of Progress Rail. The current Section 29
tax credit program expires at the end of 2007.
The sale of Progress Rail in 2005 resulted in a capital loss for tax
purposes. Capital losses that are not offset with capital gains generated
in 2005 will be carried back to reduce the regular federal income tax
liability in 2004. The estimated impact of the sale will result in
approximately $11 million in tax credits no longer being realized and
reflected as a deferred tax asset.
On November 2, 2004, PEF filed a petition with the FPSC to recover $252
million of storm costs plus interest from customers over a two-year period
(see Note 4). Based on the reasonable expectation at December 31, 2004,
that the FPSC will grant the requested recovery of the storm costs, the
Company's loss from the casualty was reduced. Therefore, the Company's 2004
tax liability was greater than originally anticipated, along with its
ability to record Section 29 tax credits from its synthetic fuel facilities
in 2004.
The Company believes its right to recover storm costs is well established,
however, the Company cannot predict the outcome of this matter. If the FPSC
should deny PEF's petition for the recovery of storm costs in 2005, there
could be a material impact on the amount of 2005 synthetic fuels production
and results of operations.
IRS PROCEEDINGS
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.
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 PFA program with respect to Colona.
In July 2004, Progress Energy was notified that the 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 IRS
auditors' position, the IRS has decided to exercise its right to withdraw
from the PFA program with Progress Energy. With the IRS's withdrawal from
the PFA program, the review of he Company's Earthco facilities is back on
the normal procedural audit path of the Company's tax returns.
On October 29, 2004, Progress Energy received the IRS field auditors'
preliminary report concluding that the Earthco facilities had not been
placed in service before July 1, 1998, and that the tax credits generated
by those facilities should be disallowed. The Company disagrees with the
field audit team's factual findings and believes that the Earthco
facilities were placed in service before July 1, 1998. The Company also
believes that the report applies an inappropriate legal standard concerning
what constitutes "placed in service." The Company intends to contest the
field auditors' findings and their proposed disallowance of the tax
credits.
Because of the disagreement between the Company and the field auditors as
to the proper legal standard to apply, the Company believes that it is
appropriate and helpful to have this issue reviewed by the National Office
of the IRS, just as the National Office reviewed the issues involving
chemical change. Therefore, the Company is asking the National office to
clarify the legal standard and has initiated this process with the National
27
Office. The Company believes that the appeals process, including
proceedings before the National Office, 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.
Through March 31, 2005, based on its ownership percentage, the Company has
used or carried forward $570 million of tax credits generated by Earthco
facilities. If these credits were disallowed, Florida Progress' one time
exposure for cash tax payments would be $67 million (excluding interest),
and earnings and equity would be reduced by $570 million, excluding
interest.
The Company believes that it 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, while the Company has adjusted its synthetic fuel
production for 2004 in response to the effects of the hurricane damage on
its 2004 tax liability, it has no current plans to alter its synthetic fuel
production schedule for future years as a result of the IRS field auditors'
report. However, should the Company fail to prevail in these matters, there
could be a material liability for previously used or carried forward
Section 29 tax credits, with a material adverse impact on earnings and cash
flows.
As discussed in Note 8D of the Company's annual report on Form 10-K for the
year ended December 31, 2004, PEF implemented changes in its capitalization
policies for its Energy Delivery business unit effective January 1, 2005.
As a result of the changes in accounting estimates for the outage and
emergency work and indirect costs, a lesser proportion of PEF's costs will
be capitalized on a prospective basis. The Company has requested a method
change from the IRS. If the IRS does not grant the Company's request, the
Company cannot predict how the IRS would suggest that the method change be
applied. However, the application of the method change to past periods
could be reflected in a cumulative adjustment to taxable income in 2005,
which likely would have a material impact on income from synthetic fuel tax
credits.
PROPOSED ACCOUNTING RULES FOR UNCERTAIN TAX POSITIONS
In July 2004, the FASB stated that it plans to issue an exposure draft of a
proposed interpretation of SFAS No. 109, "Accounting for Income Taxes,"
that would address the accounting for uncertain tax positions. The FASB has
indicated that the interpretation would require that uncertain tax benefits
be probable of being sustained in order to record such benefits in the
financial statements. The exposure draft is expected to be issued in the
second quarter of 2005. The Company cannot predict what actions the FASB
will take or how any such actions might ultimately affect the Company's
financial position or results of operations, but such changes could have a
material impact on the Company's evaluation and recognition of Section 29
tax credits.
PERMANENT SUBCOMMITTEE
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.
IMPACT OF CRUDE OIL PRICES
Although the Internal Revenue Code Section 29 tax credit program is
expected to continue through 2007, recent unprecedented increases in the
price of oil could limit the amount of those credits or eliminate them
entirely for one or more of the years following 2004. This possibility is
due to a provision of Section 29 that provides that if the average wellhead
price per barrel for unregulated domestic crude oil for the year (the
Annual Average Price) exceeds a certain threshold value (the Threshold
Price), the amount of Section 29 tax credits are reduced for that year.
Also, if the Annual Average Price increases high enough (the Phase Out
Price), the Section 29 tax credits are eliminated for that year. For 2004,
the Threshold Price was $51.35 per barrel and the Phase Out Price was
$64.47 per barrel. The Threshold Price and the Phase Out Price are adjusted
annually for inflation.
If the Annual Average Price falls between the Threshold Price and the Phase
Out Price for a year, the amount by which Section 29 tax credits are
reduced will depend on where the Average Annual Price falls in that
continuum. For example, for 2004, if the Annual Average Price had been
$57.91 per barrel, there would have been a 50% reduction in the amount of
Section 29 tax credits for that year.
28
The Secretary of the Treasury calculates the Annual Average Price based on
the Domestic Crude Oil First Purchases Prices published by the Energy
Information Agency (EIA). Because the EIA publishes its information on a
three month lag, the Secretary of the Treasury finalizes its calculations
three months after the year in question ends. Thus, the Annual Average
Price for calendar year 2004 was published on April 6, 2005, and the Annual
Average Price for 2004 did not reach the Threshold Price for 2004.
Consequently, the amount of the Company's 2004 Section 29 tax credits was
not adversely affected by oil prices.
The Company estimates that the 2005 Threshold Prices will be approximately
$52 and the Phase Out price will be approximately $65, based on an
estimated 2005 inflation adjustment. The monthly Domestic Crude Oil First
Purchases price published by the EIA has recently been $5 to $6 lower than
the corresponding monthly New York Mercantile Exchange (NYMEX) settlement
price for light, sweet crude oil. Through April 30, 2005, the average NYMEX
settlement prices for light, sweet crude oil were $50.55. The Company
estimates that NYMEX settlement prices would have to average approximately
$63 for the remainder of 2005 for the Threshold Price to be reached.
The Company cannot predict with any certainty the Annual Average Price for
2005 or beyond. Therefore, it cannot predict whether the price of oil will
have a material effect on it synthetic fuel business after 2004. However,
if during 2005 through 2007, oil prices remain at historically high levels
or increase, the Company's synthetic fuel business may be adversely
affected for those years and, depending on the magnitude of such increases
in oil prices, the adverse affect for those years could be material and
could have an impact on the Company's results of operations and synthetic
fuel production plans.
In response to the historically high oil prices to date in 2005, the
Company has adjusted its planned production schedule for its synthetic fuel
facilities by shifting some of its production planned for April and May
2005 to the second half of 2005. If oil prices rise and stay at levels high
enough to cause a phase out of tax credits, the Company may reduce planned
production or suspend production at some or all of its synthetic fuel
facilities.
SALE OF PARTNERSHIP INTEREST
In June 2004, the Company, through its subsidiary Progress Fuels, sold in
two transactions a combined 49.8% 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 as the facility produces and sells
synthetic fuel and when there is persuasive evidence that the sales
proceeds have become fixed or determinable and collectability is reasonably
assured. Based on projected production and tax credit levels, the Company
anticipates receiving total gross proceeds of approximately $24 million in
2005, approximately $31 million in 2006, approximately $32 million in 2007
and approximately $8 million through the second quarter of 2008. Gain
recognition is dependent on the synthetic fuel production qualifying for
Section 29 tax credits and the value of such tax credits as discussed
above. Until the gain recognition criteria are met, gains from selling
interests in Colona will be deferred. It is possible that gains will be
deferred in the first, second and/or third quarters of each year until
there is persuasive evidence that no tax credit phase out will occur for
the applicable calendar year. This could result in shifting earnings from
earlier quarters to later quarters in a calendar year. In the event that
the synthetic fuel tax credits from the Colona facility are reduced,
including an increase in the price of oil that could limit or eliminate
synthetic fuel tax credits, the amount of proceeds realized from the sale
could be significantly impacted.
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 and disclosures
have been made in accordance with SFAS No. 5, "Accounting for
Contingencies," to provide for such matters. Florida Progress and PEF
believe the ultimate disposition of these matters will not have a material
adverse effect upon either Company's consolidated financial position or
results of operation.
29
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements that involve estimates, projections, goals, forecasts, assumptions,
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Please review
"SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS" for a discussion of the factors
that may impact any such forward-looking statements made herein and the Risk
Factors section of the Florida Progress and Progress Energy Florida annual
report on Form 10-K for the year-ended December 31, 2004.
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 2004 Form
10-K. See Note 12 for a discussion of environmental matters.
OPERATING RESULTS
The Company's segments contributed segment profits or losses for the three
months ended March 31, 2005 and 2004 as follows:
- ---------------------------------------------------------------------
(in millions) Three Months Ended March 31,
Business Segment 2005 2004
- -------------------------------------------------------------------
PEF $ 43 $ 49
Energy and Related Services 10 10
Synthetic Fuels - 26
Other (8) (38)
- -------------------------------------------------------------------
Income from continuing operations 45 47
- -------------------------------------------------------------------
Discontinued operations, net of tax (27) 8
- -------------------------------------------------------------------
Net income $ 18 $ 55
- -------------------------------------------------------------------
Prior to 2005, Rail Services was reported as a separate segment. In connection
with the divestiture of Progress Rail (see Note 3), the operations of Rail
Services were reclassified to discontinued operations in the first quarter of
2005 and therefore are no longer a reportable segment. In addition, Synthetic
Fuel activities were reported in the Fuels segment prior to 2005 and now are
considered a reportable segment. These reportable segment changes reflect the
current reporting structure. For comparative purposes, the prior year results
have been restated to align with the current presentation.
COST MANAGEMENT INITIATIVE
On February 28, 2005, as part of a previously announced cost management
initiative, Progress Energy approved a workforce restructuring which is expected
to be completed in September of 2005. In addition to the workforce
restructuring, the cost management initiative includes a voluntary enhanced
retirement program. In connection with the cost management initiative, the
Company and PEF expect to incur estimated pre-tax charges of approximately $115
million. In addition, the Company and PEF expect to incur certain incremental
costs other than severance and postretirement benefits for recruiting, training
and staff augmentation activities that cannot be quantified at this time.
The Company recorded $15 million of expense during the first quarter of 2005 for
the estimated severance benefits to be paid as a result of the approximate
number of positions to be eliminated under the restructuring and due to the
implementation of an automated meter reading initiative at PEF. This amount
includes approximately $4 million of severance costs allocated from Progress
Energy Service Company. These amounts will be paid over time and are subject to
revision in future quarters based on the impact of the voluntary enhanced
retirement program. The severance expenses are primarily included in operations
and maintenance (O&M) expense on the Consolidated Statements of Income.
30
The Company has estimated that an additional $105 million charge will be
recognized in the second quarter of 2005 and relates primarily to postretirement
benefits that will be paid over time to those eligible employees who elected to
participate in the voluntary enhanced retirement program. The elections indicate
that 692 of the Company's employees have elected to participate in the voluntary
enhanced retirement program, which includes 680 PEF employees. The cost
management initiative charges could change significantly primarily due to the
demographics of the specific employees who elected enhanced retirement and its
impact on the postretirement benefit actuarial studies.
PROGRESS ENERGY FLORIDA
PEF contributed segment profits of $43 million and $49 million in the three
months ended March 31, 2005 and 2004, respectively. The decrease in profits for
the three months ended March 31, 2005 when compared to 2004 is primarily due to
the impact of milder weather, weaker industrial sales and higher O&M costs,
partially offset by higher wholesale sales and increased customer growth.
PEF's electric revenues for the three months ended March 31, 2005 and 2004, and
the amount and percentage change by customer class are as follows:
- ---------------------------------------------------------------------
(in millions of $) Three Months Ended March 31,
Customer Class 2005 Change % Change 2004
- ---------------------------------------------------------------------
Residential $ 431 $ 29 7.2 $ 402
Commercial 201 20 11.0 181
Industrial 63 - - 63
Governmental 53 7 15.2 46
Retail revenue sharing (2) 2 50.0 (4)
- ----------------------------------------------- ---------
Total retail revenues 746 58 8.4 688
Wholesale 73 6 9.0 67
Unbilled (5) 1 - (6)
Miscellaneous 34 (1) 2.9 35
- ----------------------------------------------- ---------
Total electric revenues $ 848 $ 64 8.2 $ 784
- ----------------------------------------------- ---------
Less:
- ----------------------------------------------- ---------
Pass-through revenues (501) (54) (12.1) (447)
- ----------------------------------------------- ---------
Revenues excluding pass-
through revenues $ 347 10 3.0 $ 337
- ---------------------------------------------------------------------
PEF's electric energy sales for the three months ended March 31, 2005 and 2004,
and the amount and percentage change by customer class are as follows:
- -------------------------------------------------------------------
(in millions of kWh) Three Months Ended March 31,
Customer Class 2005 Change % Change 2004
- -------------------------------------------------------------------
Residential 4,347 56 1.3 4,291
Commercial 2,571 80 3.2 2,491
Industrial 940 (83) (8.1) 1,023
Governmental 709 37 5.5 672
- --------------------------------------------- ---------
Total retail energy 8,567 90 1.1 8,477
sales
Wholesale 1,338 15 1.1 1,323
Unbilled (103) 32 - (135)
- --------------------------------------------- ---------
Total kWh sales 9,802 137 1.4 9,665
- -------------------------------------------------------------------
Revenues
PEF's revenues, excluding recoverable fuel and other pass-through revenues of
$501 million and $447 million for the three months ended March 31, 2005 and
2004, respectively, increased $10 million. The increase in revenues is due to
favorable customer growth and increased wholesale revenues of $7 million each.
Favorable customer growth was driven by a 35,000 increase in average retail
customers compared to prior year. Wholesale revenue favorability is attributable
primarily to new contracts entered into since March 31, 2004. These increases
were partially offset by the impacts of milder weather and weaker industrial
sales of $3 million each.
31
Expenses
Fuel and Purchased Power
Fuel and purchased power costs represent the costs of generation, which include
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 that are subject to recovery is
deferred for future collection or refund to customers.
Fuel and purchased power expenses were $433 million for the three months ended
March 31, 2005, which represents a $43 million increase compared to prior year.
This increase is due to increases in fuel used in electric generation and
purchased power expenses of $33 million and $10 million, respectively. Higher
system requirements and increased fuel costs in the current year account for $41
million of the increase in fuel used in electric generation. This increase was
partially offset by a decrease in deferred fuel expense as recovery of fuel
expenses in the prior year (that were previously deferred) was greater than in
the current year. In December 2004, the FPSC approved PEF's request for a cost
recovery adjustment in its annual filing due to the rising cost of fuel. Fuel
recovery rates increased effective January 1, 2005. The increase in purchased
power expense was primarily due to higher prices of purchases in the current
year as a result of increased fuel costs.
Operations and Maintenance (O&M)
O&M costs were $189 million for the three months ended March 31, 2005, which
represents an increase of $29 million, when compared to the $160 million
incurred during the three months ended March 31, 2004. Severance expense related
to the cost management initiative increased O&M costs by $14 million during
2005. In addition, PEF recorded a workers compensation adjustment of $8 million
during 2005 as a result of an annual actuarial study. O&M expense also increased
$8 million related to the change in Energy Delivery capitalization practice.
Please see discussion of change in Energy Delivery capitalization practice in
Note 8D of the Florida Progress annual report on Form 10-K for the year ended
December 31, 2004.
Taxes Other than on Income
Taxes other than on income were $67 million for the three months ended March 31,
2005, which represents an increase of $5 million compared to prior year. This
increase is due to increases in franchise and gross receipts taxes of $2 million
and $1 million, respectively, related to an increase in revenues and an increase
in property taxes of $1 million due to property additions.
ENERGY AND RELATED SERVICES
The Energy and Related Services' segment operations include natural gas
production, coal extraction and terminal operations. The following summarizes
Energy and Related Services' segment profits for the three months ended March
31, 2005 and 2004:
- ------------------------------------------------------
(in millions) 2005 2004
- ------------------------------------------------------
Gas production $ 12 $ 13
Coal fuel and other operations (2) (3)
- ------------------------------------------------------
Segment Profits $ 10 $ 10
- ------------------------------------------------------
Natural Gas Operations
Natural gas operations generated profits of $12 million and $13 million for the
three months ended March 31, 2005 and 2004, respectively. The decrease in gas
earnings compared to prior year is attributable to reduced production as a
result of the sale of gas assets in 2004 offset partially by higher natural gas
prices. In December 2004, the Company sold certain gas-producing properties and
related assets owned by Winchester Production Company, Ltd., a subsidiary of
Progress Fuels (North Texas gas operations). The following summarizes the gas
production, revenues and gross margins for the three months ended March 31, 2005
and 2004 by production facility:
32
- ------------------------------------------------------------
2005 2004
- ------------------------------------------------------------
Production in Bcf equivalent
East Texas/LA gas operations 5.4 4.0
North Texas gas operations - 2.7
- ------------------------------------------------------------
Total Production 5.4 6.7
- ------------------------------------------------------------
Revenues in millions
East Texas/LA gas operations $ 33 $ 22
North Texas gas operations - 13
- ------------------------------------------------------------
Total Production $ 33 $ 35
- ------------------------------------------------------------
Gross Margin
In millions of $ $ 28 $ 27
As a % of revenues 85% 77%
- ------------------------------------------------------------
Coal Fuel and Other Operations
Coal fuel and other operations generated segment losses of $2 million for the
three months ended March 31, 2005 compared to losses of $3 million for the three
months ended March 31, 2004. The decrease in losses of $1 million is due
primarily to increased revenues as a result of higher coal prices. This
favorability was partially offset by higher coal mining costs (due to rising
prices of fuel and steel), a workers compensation accrual adjustment booked
during 2005 and reduced rates related to the waterborne coal transportation
settlement in 2004. In addition, results were unfavorably impacted by the
severance expense of $1 million pre-tax recorded in 2005 related to the cost
management initiative.
SYNTHETIC FUEL
The synthetic fuel operations generated segment losses of less than $1 million
for the three months ended March 31, 2005 compared to segment profits of $26
million for the three months ended March 31, 2004. The production and sale of
synthetic fuel generate operating losses, but qualify for tax credits under
Section 29 of the Code, which typically more than offset the effect of such
losses. See Note 13 to the Interim Financial Statements.
The operations resulted in the following for the three months ended March 31,
2005 and 2004:
- ------------------------------------------------------------------
(in millions) 2005 2004
- ------------------------------------------------------------------
Tons sold 1.1 1.9
- ------------------------------------------------------------------
Operating losses, excluding tax credits $ (20) $ (24)
Tax credits generated, net 20 50
- ------------------------------------------------------------------
Segment profits $ - $ 26
- ------------------------------------------------------------------
Synthetic fuels' earnings were negatively impacted by lower sales, forfeiture of
tax credits as a result of the sale of Progress Rail and decreased margins. The
decrease in sales quarter over quarter is primarily attributable to an internal
change in the quarterly production schedule in 2005 compared to 2004. The sale
of Progress Rail resulted in a capital loss for tax purposes, therefore $11
million of previously recorded tax credits were forfeited during the quarter.
See Note 13 for further discussion.
In response to the historically high oil prices to date in 2005, the Company has
adjusted its planned production schedule for its synthetic fuel plant by
shifting some of its production planned for April and May 2005 to the second
half of 2005. If oil prices rise and stay at levels high enough to cause a phase
out of tax credits, the Company may reduce planned production or suspend
production at some or all of its synthetic fuel facilities.
OTHER
The Other segment includes telecommunications, holding company and financing
expenses.
Other segment profits increased $30 million for the three months ended March 31,
2005 compared to the same period in the prior year. This increase was due
primarily to the impact of tax levelization adjustments booked each quarter.
GAAP requires companies to apply a levelized effective tax rate to interim
periods that is consistent with the estimated annual effective tax rate. Income
33
tax expense was increased by $6 million and $33 million for the three months
ended March 31, 2005 and 2004, 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.
DISCONTINUED OPERATIONS
On March 24, 2005, the Company completed the sale of Progress Rail to One Equity
Partners LLC a private equity firm unit of J.P. Morgan Chase & Company. Gross
cash proceeds from the sale are estimated to be $433 million, consisting of $405
million base proceeds plus an estimated working capital adjustment. Proceeds
from the sale were used to reduce debt. The accompanying consolidated interim
financial statements have been restated for all periods presented for the
discontinued operations of Progress Rail. See Note 3 for additional discussion.
Rail discontinued operations resulted in losses of $27 million for the three
months ended March 31, 2005 compared to profits of $8 million for the three
months ended March 31, 2004. Earnings for 2005 include an estimated after-tax
loss on the sale of $32 million. The Company anticipates adjustments to the loss
on the divestiture during the second quarter of 2005 related to employee benefit
settlements and the finalization of working capital adjustments and other
operating estimates. The remaining unfavorability in earnings compared to prior
year is attributable primarily to increased transaction costs associated with
the sale.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operations
The Company's net cash provided by operating activities was $61 million for the
three months ended March 31, 2005, compared to $149 million for the three months
ended March 31, 2004. The decrease in operating cash flow was due primarily to
decreased net income, increased working capital requirements and storm
restoration expenditures at PEF, as explained below.
PEF's net cash provided by operating activities was $65 million for the three
months ended March 31, 2005, compared to $202 million for the three months ended
March 31, 2004. The decrease in operating cash flow was due primarily to
approximately $62 million in storm restoration expenditures and a $57 million
increase in working capital requirements, largely driven by timing of income tax
payments.
Investing Activities
The Company's net cash provided by investing activities was $206 million for the
three months ended March 31, 2005, compared to cash used in investing activities
of $77 million for the three months ended March 31, 2004. The increase is due to
proceeds of $405 million from the sale of Progress Rail (See Note 3).
PEF's net cash used in investing activities was $163 million for the three
months ended March 31, 2005, compared to $121 million for the three months ended
March 31, 2004. The increase in cash used in investing activities is primarily
due to nuclear fuel additions related to a planned outage later in 2005.
Financing Activities
In January 2005, PEF used proceeds from the issuance of commercial paper to pay
off $170 million of revolving credit agreement (RCA) loans. PEF subsequently
used money pool borrowings to reduce commercial paper outstanding. In February
2005, PEF used proceeds from money pool borrowings to pay off $55 million of RCA
loans.
34
On March 28, 2005, PEF entered into a new $450 million RCA with a syndication of
financial institutions. The RCA will be used to provide liquidity support for
PEF's issuances of commercial paper and other short-term obligations. The RCA
will expire on March 28, 2010. The new $450 million RCA replaced PEF's $200
million three-year RCA and $200 million 364-day RCA, which were each terminated
effective March 28, 2005. Fees and interest rates under the $450 million RCA are
to be determined based upon the credit rating of PEF's long-term unsecured
senior non-credit enhanced debt, currently rated as A3 by Moody's Investor
Services (Moody's) and BBB by Standard and Poor's (S&P). The RCA includes a
defined maximum total debt to capital ratio of 65%. The RCA also contains
various cross-default and other acceleration provisions, including a
cross-default provision for defaults of indebtedness in excess of $35 million.
The RCA does not include a material adverse change representation for borrowings
or a financial covenant for interest coverage, which had been provisions in the
terminated agreements.
The amount and timing of future sales of company securities will depend on
market conditions, operating cash flow, asset sales and the specific needs of
the Company. The Company may from time to time sell securities beyond the amount
needed to meet capital requirements in order to allow for the early redemption
of long-term debt, the redemption of preferred stock, the reduction of
short-term debt or for other generation corporate purposes.
Future Liquidity and Capital Resources
On April 29, 2005, PEF made its initial filing with the FPSC seeking annual base
revenue increase of $206 million (See Note 4). Hearings for this proceeding are
expected to occur during the third quarter of 2005. A final ruling from the FPSC
is expected in December 2005 with new rates in effect January 2006.
PEF's petition for recovery of $252 million of storm costs is scheduled for
final order July 5, 2005. PEF has filed for a two-year recovery of storm costs.
On May 4, 2005, a bill was approved by the Florida Legislature that would
authorize the FPSC to consider allowing the state's investor-owned utilities to
issue bonds that are secured by surcharges on utility customer bills. These
bonds would be issued for recovery of storm damage costs and potentially to
restore depleted storm reserves. The amount of funds established for recovery is
subject to the review and approval of the FPSC. The bill will now be sent to
Governor Bush for his consideration. The Governor has indicated that he supports
the bill. The Company cannot predict the outcome of this matter.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company and PEF's off-balance sheet arrangements and contractual obligations
are described below.
Guarantees
At March 31, 2005, the Company had issued guarantees and indemnifications of
certain legal, tax and environmental matters to third parties in connection with
sales of businesses and for timely payment of obligations in support of its
non-wholly owned synthetic fuel operations. Related to the sales of businesses,
the notice period extends until 2012 for the majority of matters provided for in
the indemnification provisions. For matters which the Company has received
timely notice, the Company's indemnity obligations may extend beyond the notice
period. Certain environmental indemnifications related to the sale of synthetic
fuel operations have no limitations as to time or maximum potential future
payments. Other guarantees and indemnifications have an estimated maximum
exposure of approximately $111 million. At March 31, 2005, the Company has
recorded liabilities related to guarantees and indemnifications to third-parties
of $22 million. Management does not believe conditions are likely for
significant performance under these agreements in excess of the recorded
liabilities.
Market Risk and Derivatives
The Company and PEF, are exposed to various risks related to changes in market
conditions. The Company has a risk management committee that is chaired by the
Chief Financial Officer and includes senior executives from various business
groups. The risk management committee is responsible for administering risk
management policies and monitoring compliance with those policies by all
subsidiaries.
The Company manages its market risk in accordance with its established risk
management policies, which may include entering into various derivative
transactions.
35
The Company and PEF may use a variety of instruments, including swaps, options
and forward contracts, to manage exposure to fluctuations in commodity prices
and interest rates. See Note 8 for a discussion of market risk and derivatives.
Contractual Obligations
As of March 31, 2005, the Company's and PEF's contractual cash obligations and
other commercial commitments have not changed materially from what was reported
in the 2004 Annual Report on Form 10-K.
NEW ACCOUNTING STANDARDS
See Note 2 to the Financial Statements for a discussion of the anticipated
impact of new accounting standards.
36
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, and with the participation of its management, including Florida
Progress' Chief Executive Officer and Chief Financial Officer, of the
effectiveness of Florida Progress' disclosure controls and procedures (as
defined under the Securities Exchange Act of 1934) as of the end of the period
covered by this report. Based upon that evaluation, Florida Progress' Chief
Executive Officer and Chief Financial Officer concluded that its disclosure
controls and procedures are effective to ensure that information required to be
disclosed by Florida Progress (including its consolidated subsidiaries) in the
reports that it files or submits under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to Florida
Progress' management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
There has been no change in Florida Progress' internal control over financial
reporting during the quarter ended March 31, 2005, 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,
and with the participation of its management, including PEF's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of PEF's disclosure
controls and procedures (as defined under the Securities Exchange Act of 1934)
as of the end of the period covered by this report. Based upon that evaluation,
PEF's Chief Executive Officer and Chief Financial Officer concluded that its
disclosure controls and procedures are effective to ensure that information
required to be disclosed by PEF in the reports that it files or submits under
the Exchange Act, is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to PEF's management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
There has been no change in PEF's internal control over financial reporting
during the quarter ended March 31, 2005, that has materially affected, or is
reasonably likely to materially affect, PEF's internal control over financial
reporting.
37
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Legal aspects of certain matters are set forth in Part I, Item 1. See Note 13 to
the Company's Consolidated Interim Financial Statements.
Item 6. EXHIBITS
(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 and
Chief Executive Officer
31(b) Certifications pursuant to Section 302 of the X X
Sarbanes-Oxley Action of 2002 - Executive Vice
President and Chief Financial Officer
32(a) Certifications pursuant to Section 906 of the X X
Sarbanes-Oxley Action of 2002 - Chairman and
Chief Executive Officer
32(b) Certifications pursuant to Section 906 of the X X
Sarbanes-Oxley Action of 2002 - Chief Financial
Officer
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLORIDA PROGRESS CORPORATION
FLORIDA POWER CORPORATION
(Registrants)
Date: May 6, 2005 By: /s/ Geoffrey Chatas
-------------------
Geoffrey Chatas
Executive Vice President and
Chief Financial Officer
By: /s/Robert H. Bazemore, Jr.
--------------------------
Robert H. Bazemore, Jr.
Controller and Chief Accounting Officer -
Florida Progress Energy Corporation
Controller - Florida Power Corporation
39