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, 1997
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 Registrant as specified in I.R.S. Employer
Commission its charter, state of incorporation, address Identification
File No. of principal executive offices, telephone Number
------------ -------------------------------------------- ---------------
1-8349 FLORIDA PROGRESS CORPORATION 59-2147112
A Florida Corporation
One Progress Plaza
St. Petersburg, Florida 33701
Telephone (813) 824-6400
1-3274 FLORIDA POWER CORPORATION 59-0247770
A Florida Corporation
3201 34th Street South
St. Petersburg, Florida 33711
Telephone (813) 866-5151
Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Description of Shares Outstanding
Registrant Class at March 31, 1997
---------- -------------- ------------------
Florida Progress Corporation Common Stock,
without par value 97,055,597
Florida Power Corporation Common Stock,
without par value 100 (all of which were
held by Florida
Progress Corporation)
This combined Form 10-Q represents separate filings by Florida Progress
Corporation and Florida Power Corporation. Florida Power makes no
representations as to the information relating to Florida Progress' diversified
operations.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLORIDA PROGRESS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA PROGRESS CORPORATION
Consolidated Statements of Income
(In millions, except per share amounts)
Three Months Ended
March 31,
1997 1996
-------- --------
(Unaudited)
REVENUES:
Electric utility $553.8 $547.3
Diversified 193.7 183.1
--------- ---------
747.5 730.4
EXPENSES: --------- ---------
Electric utility:
Fuel 94.9 85.0
Purchased power 127.2 122.8
Energy conservation cost 11.0 19.8
Operations and maintenance 110.3 100.3
Depreciation 74.3 77.6
Taxes other than income taxes 48.1 47.2
--------- ---------
465.8 452.7
--------- ---------
Diversified:
Cost of sales 171.8 155.1
Other 14.9 15.4
--------- ---------
186.7 170.5
--------- ---------
INCOME FROM OPERATIONS 95.0 107.2
--------- ---------
INTEREST EXPENSE AND OTHER:
Interest expense 34.3 34.6
Allowance for funds used during construction (2.1) (1.7)
Preferred dividend requirements of Florida Power 0.4 2.3
Other expense (income), net 0.4 (3.4)
--------- ---------
33.0 31.8
--------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 62.0 75.4
Income Taxes 20.0 27.1
--------- ---------
INCOME FROM CONTINUING OPERATIONS 42.0 48.3
DISCONTINUED OPERATIONS, NET OF INCOME TAXES - -
--------- ---------
NET INCOME $42.0 $48.3
========= =========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 97.0 96.5
========= =========
EARNINGS PER AVERAGE COMMON SHARE:
Continuing Operations $0.43 $0.50
Discontinued Operations - -
--------- ---------
$0.43 $0.50
========= =========
DIVIDENDS PER COMMON SHARE $0.525 $0.515
========= =========
Prior periods reflect the recapitalization of the spin-off company, Echelon
International, and its associated treatment as discontinued operations. The
accompanying notes are an integral part of these financial statements.
2
FLORIDA PROGRESS CORPORATION
Consolidated Balance Sheets
(In millions)
March 31, December 31,
1997 1996
----------- -----------
ASSETS (Unaudited)
PROPERTY, PLANT AND EQUIPMENT:
Electric utility plant in service and held
for future use $5,986.5 $5,965.6
Less - Accumulated depreciation 2,394.9 2,335.8
Accumulated decommissioning for nuclear plant 200.3 193.3
Accumulated dismantlement for fossil plants 123.8 119.6
---------- ----------
3,267.5 3,316.9
Construction work in progress 198.2 140.3
Nuclear fuel, net of amortization of $356.7
in 1997 and $356.7 in 1996 59.9 59.9
---------- ----------
Net electric utility property 3,525.6 3,517.1
Other property, net of depreciation of $178.1
in 1997 and $173.8 in 1996 314.3 309.3
---------- ----------
3,839.9 3,826.4
---------- ----------
CURRENT ASSETS:
Cash and equivalents 16.5 5.2
Accounts receivable, net 280.7 265.0
Inventories at average cost:
Fuel 80.1 67.1
Materials and supplies 95.4 95.4
Diversified materials 137.2 125.5
Underrecovery of fuel cost 105.6 82.6
Other 48.7 48.2
---------- ----------
764.2 689.0
---------- ----------
OTHER ASSETS:
Investments:
Loans receivable, net 57.6 68.1
Marketable securities 228.2 217.9
Nuclear plant decommissioning fund 219.2 207.8
Joint ventures and partnerships 51.0 41.9
Deferred insurance policy acquisition costs 123.0 120.9
Other 179.6 176.4
---------- ----------
858.6 833.0
---------- ----------
$5,462.7 $5,348.4
========== ==========
The accompanying notes are an integral part of these financial statements.
3
FLORIDA PROGRESS CORPORATION
Consolidated Balance Sheets
(In millions)
March 31, December 31,
1997 1996
----------- -----------
CAPITAL AND LIABILITIES (Unaudited)
COMMON STOCK EQUITY:
Common stock $1,208.9 $1,208.3
Retained earnings 707.5 716.5
Unrealized loss on securities available for sale (3.6) (0.6)
---------- ----------
1,912.8 1,924.2
CUMULATIVE PREFERRED STOCK OF FLORIDA POWER:
Without sinking funds 33.5 33.5
LONG-TERM DEBT 1,820.1 1,776.9
---------- ----------
TOTAL CAPITAL 3,766.4 3,734.6
---------- ----------
CURRENT LIABILITIES:
Accounts payable 189.2 193.2
Customers' deposits 94.3 81.8
Income taxes payable 37.0 27.8
Accrued other taxes 32.4 13.4
Accrued interest 39.1 48.3
Other 74.9 78.5
---------- ----------
466.9 443.0
Notes payable 55.9 4.1
Current portion of long-term debt and preferred stock 24.9 34.9
---------- ----------
547.7 482.0
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 465.3 475.4
Unamortized investment tax credits 91.5 93.5
Insurance policy benefit reserves 341.3 325.3
Other postretirement benefit costs 102.0 100.0
Other 148.5 137.6
---------- ----------
1,148.6 1,131.8
---------- ----------
$5,462.7 $5,348.4
========== ==========
The accompanying notes are an integral part of these financial statements.
4
FLORIDA PROGRESS CORPORATION
Consolidated Statements of Cash Flows
(In millions)
Three Months Ended
March 31,
1997 1996
---------- ----------
(Unaudited)
OPERATING ACTIVITIES:
Income from continuing operations $42.0 $48.3
Adjustments for noncash items:
Depreciation and amortization 83.2 88.0
Deferred income taxes and
investment tax credits, net (12.3) (6.9)
Increase in accrued other postretirement
benefit costs 2.0 1.7
Net change in deferred insurance policy
acquisition costs (2.1) (2.2)
Net change in insurance policy benefit reserves 16.0 12.8
Changes in working capital, net of effects
from acquisition or sale of businesses:
Accounts receivable (15.5) 11.5
Inventories (25.0) 3.0
Underrecovery of fuel cost (23.0) (19.0)
Accounts payable (4.0) (12.3)
Income taxes payable 9.4 39.0
Accrued other taxes 19.0 20.2
Other (2.2) (1.7)
Other operating activities 1.7 11.0
--------- ---------
Cash provided by continuing operations 89.2 193.4
--------- ---------
Adjustments for non-cash items from
discontinued operations - (12.5)
--------- ---------
89.2 180.9
--------- ---------
INVESTING ACTIVITIES:
Property additions (including allowance for
borrowed funds used during construction) (94.8) (70.7)
Purchase of loans and securities, net (4.5) (11.8)
Proceeds from sale of properties 2.2 3.3
Investing activities of discontinued operations - 6.7
Other investing activities (14.2) (13.3)
--------- ---------
(111.3) (85.8)
--------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt (21.5) (1.5)
Increase (decrease) in commercial paper with
long-term support 54.6 (40.7)
Sale of common stock - 9.3
Dividends paid on common stock (51.0) (49.7)
Increase in short-term debt 51.8 -
Financing activities of discontinued operations - (10.2)
Other financing activities (0.5) (0.7)
--------- ---------
33.4 (93.5)
--------- ---------
NET INCREASE (DECREASE)IN CASH AND EQUIVALENTS 11.3 1.6
Beginning cash and equivalents 5.2 4.3
--------- ---------
ENDING CASH AND EQUIVALENTS $16.5 $5.9
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $42.0 $34.0
Income taxes (net of refunds) $28.5 $7.9
Prior periods reflect the recapitalization of the spin-off company, Echelon
International, and its associated treatment as discontinued operations. The
accompanying notes are an integral part of these financial statements.
5
FLORIDA POWER CORPORATION
FINANCIAL STATEMENTS
FLORIDA POWER CORPORATION
Statements of Income
(In millions) Three Months Ended
March 31,
1997 1996
-------- --------
(Unaudited)
OPERATING REVENUES:
Residential $290.7 $316.0
Commercial 124.2 115.1
Industrial 51.9 47.8
Sales for resale 37.1 43.0
Other 49.9 25.4
--------- ---------
553.8 547.3
--------- ---------
OPERATING EXPENSES:
Operation:
Fuel 94.9 85.0
Purchased power 127.2 122.8
Energy conservation cost 11.0 19.8
Operations and maintenance 110.3 100.3
Depreciation 74.3 77.6
Taxes other than income taxes 48.1 47.2
Income taxes:
Currently payable 32.2 30.2
Deferred, net (8.0) (3.0)
Investment tax credits, net (2.0) (2.0)
--------- ---------
22.2 25.2
--------- ---------
488.0 477.9
--------- ---------
OPERATING INCOME 65.8 69.4
--------- ---------
OTHER INCOME AND DEDUCTIONS:
Allowance for equity funds used during construction 1.3 0.9
Miscellaneous other expense, net (1.0) (0.5)
--------- ---------
0.3 0.4
--------- ---------
INTEREST CHARGES
Interest on long-term debt 22.3 22.1
Other interest expense 3.0 3.3
--------- ---------
25.3 25.4
Allowance for borrowed funds used during construction (0.8) (0.8)
--------- ---------
24.5 24.6
--------- ---------
NET INCOME 41.6 45.2
DIVIDENDS ON PREFERRED STOCK 0.4 2.3
--------- ---------
NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $41.2 $42.9
========= =========
The accompanying notes are an integral part of these financial statements.
6
FLORIDA POWER CORPORATION
Balance Sheets
(In millions)
March 31, December 31,
1997 1996
----------- -----------
ASSETS (Unaudited)
PROPERTY, PLANT AND EQUIPMENT:
Electric utility plant in service and held
for future use $5,986.5 $5,965.6
Less - Accumulated depreciation 2,394.9 2,335.8
Accumulated decommissioning for nuclear plant 200.3 193.3
Accumulated dismantlement for fossil plants 123.8 119.6
---------- ----------
3,267.5 3,316.9
Construction work in progress 198.2 140.3
Nuclear fuel, net of amortization of $356.7
in 1997 and $356.7 in 1996 59.9 59.9
---------- ----------
3,525.6 3,517.1
Other property, net 12.3 13.3
---------- ----------
3,537.9 3,530.4
---------- ----------
CURRENT ASSETS:
Cash and equivalents 12.9 -
Accounts receivable, less reserve of $4.1
in 1997 and $4.1 in 1996 181.3 174.7
Inventories at average cost:
Fuel 53.8 47.2
Materials and supplies 95.4 95.4
Underrecovery of fuel cost 105.6 82.6
Deferred income taxes 33.7 35.6
Other 6.5 6.2
---------- ----------
489.2 441.7
---------- ----------
OTHER ASSETS:
Nuclear plant decommissioning fund 219.2 207.8
Unamortized debt expense, being amortized
over term of debt 24.5 25.0
Other 58.1 59.1
---------- ----------
301.8 291.9
---------- ----------
$4,328.9 $4,264.0
========== ==========
The accompanying notes are an integral part of these financial statements.
7
FLORIDA POWER CORPORATION
Balance Sheets
(In millions)
March 31, December 31,
1997 1996
----------- -----------
CAPITALIZATION AND LIABILITIES (Unaudited)
CAPITALIZATION:
Common stock $1,004.4 $1,004.4
Retained earnings 813.9 821.1
---------- ----------
1,818.3 1,825.5
CUMULATIVE PREFERRED STOCK:
Without sinking funds 33.5 33.5
LONG-TERM DEBT 1,296.5 1,296.4
---------- ----------
TOTAL CAPITAL 3,148.3 3,155.4
---------- ----------
CURRENT LIABILITIES:
Accounts payable 104.3 115.5
Accounts payable to associated companies 22.5 21.2
Customers' deposits 94.3 81.7
Income taxes payable 34.3 10.4
Accrued other taxes 29.1 10.0
Accrued interest 34.9 34.8
Other 40.8 47.3
---------- ----------
360.2 320.9
Notes payable 55.9 4.1
Current portion of long-term debt 1.3 21.3
---------- ----------
417.4 346.3
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 465.8 472.3
Unamortized investment tax credits 90.9 92.8
Other postretirement benefit costs 98.3 96.5
Other 108.2 100.7
---------- ----------
763.2 762.3
---------- ----------
$4,328.9 $4,264.0
========== ==========
The accompanying notes are an integral part of these financial statements.
8
FLORIDA POWER CORPORATION
Statements of Cash Flows
(In millions)
Three Months Ended
March 31,
1997 1996
---------- ----------
(Unaudited)
OPERATING ACTIVITIES:
Net income after dividends on preferred stock $41.2 $42.9
Adjustments for noncash items:
Depreciation and amortization 76.3 82.0
Deferred income taxes and investment
tax credits, net (10.0) (5.0)
Increase in accrued other postretirement
benefit costs 1.8 1.5
Allowance for equity funds used during construction (1.3) (0.9)
Changes in working capital:
Accounts receivable (6.6) 8.6
Inventories (6.6) 17.6
Underrecovery of fuel cost (23.0) (19.0)
Accounts payable (11.2) 0.2
Accounts payable to associated companies 1.3 (3.8)
Income taxes payable 23.9 25.3
Accrued other taxes 19.1 20.3
Other 5.9 5.0
Other operating activities 4.7 14.8
--------- ---------
115.5 189.5
--------- ---------
INVESTING ACTIVITIES:
Construction expenditures (81.2) (58.6)
Allowance for borrowed funds used during construction (0.8) (0.8)
Additions to nonutility property (0.4) (0.6)
Proceeds from sale of properties 1.2 1.2
Other investing activities (4.8) (13.3)
--------- ---------
(86.0) (72.1)
--------- ---------
FINANCING ACTIVITIES:
Repayment of long-term debt (20.0) -
Decrease in commercial paper with
long term support - (80.3)
Dividends paid on common stock (48.4) (46.9)
Equity contributions from parent - 12.5
Increase in short-term debt 51.8 -
--------- ---------
(16.6) (114.7)
--------- ---------
NET INCREASE IN CASH AND EQUIVALENTS 12.9 2.7
Beginning cash and equivalents - 0.8
--------- ---------
ENDING CASH AND EQUIVALENTS $12.9 $3.5
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $23.7 $18.9
Income taxes (net of refunds) $7.8 $4.8
The accompanying notes are an integral part of these financial statements.
9
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
NOTES TO FINANCIAL STATEMENTS
1) On November 21, 1996, the Board of Directors of Florida Progress
Corporation ("Florida Progress") declared a spin-off distribution to
common shareholders of record on December 5, 1996, of the common shares of
Echelon International Corporation ("Echelon"). Echelon comprised Florida
Progress' lending, leasing and real estate operations. As a result of the
spin-off, the former operations of Echelon are shown as discontinued
operations in the accompanying Consolidated Statements of Income for the
three months ended March 31, 1996. Net assets of Echelon as of December
18, 1996, the date of the spin-off, were $194.5 million. This amount has
been charged against Florida Progress' retained earnings in the
accompanying December 31, 1996 Consolidated Balance Sheet to reflect the
distribution of Echelon common shares. As used in this Form 10-Q, the
term Florida Progress includes its consolidated subsidiaries unless
otherwise indicated.
2) As ordered by the Florida Public Service Commission ("FPSC"), Florida
Power Corporation ("Florida Power") is in its third year of conducting a
three-year test for residential revenue decoupling which began in January
1995. The difference between target revenues and actual revenues is
included as a current asset or current liability on the balance sheet.
Revenue decoupling increased residential revenues by $7.5 million and
reduced residential revenues by $12.5 million for the three months ended
March 31, 1997 and 1996, respectively.
3) In February 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 128, "Earnings per Share"
("EPS"). It replaces the standards for computing EPS under Accounting
Principles Board Opinion No. 15, "Earnings per Share," and makes the
computations comparable to international EPS standards. Florida Progress
will be required to adopt this standard for financial statements issued
for the year ending December 31, 1997. Florida Progress' application of
FAS No. 128 is not expected to have a material impact on EPS.
Also in February 1997, the FASB issued FAS No. 129, "Disclosure of
Information about Capital Structure," which designates certain disclosure
requirements for public and nonpublic entities. Florida Progress
currently discloses the information required by FAS No. 129. Accordingly,
FAS No. 129 will not have any effect on the financial statements of
Florida Progress.
4) CONTINGENCIES
PURCHASED POWER COMMITMENTS - The purchased power contracts entered into
with qualifying facilities employ separate pricing methodologies for
capacity payments and energy payments. Four cogenerators filed suit
against Florida Power over the contract payment terms. Florida Power
entered into settlement agreements with three of the four cogenerators.
One of those agreements already has been finalized and litigation
terminated. The other two agreements are awaiting approvals from the FPSC
and others before being finalized. Management does not expect that the
results of these legal actions will have a material impact on Florida
Power's financial position, operations or liquidity.
Florida Power was threatened in late 1995 with litigation from another
cogeneration developer, which claimed interference involving an effort to
obtain a gas transportation contract with a third party. However, no legal
action has been taken by the developer.
10
OFF-BALANCE SHEET RISK - Several of Florida Progress' subsidiaries are
general partners in unconsolidated partnerships and joint ventures.
Florida Progress or subsidiaries have agreed to support certain loan
agreements of the partnerships and joint ventures. These credit risks are
not material to the financial statements and Florida Progress considers
these credit risks to be minimal, based upon the asset values supporting
the liabilities of these entities.
INSURANCE - Florida Progress and its subsidiaries utilize various risk
management techniques to protect assets from risk of loss, including the
purchase of insurance. Risk avoidance, risk transfer and self-insurance
techniques are utilized depending on Florida Progress' ability to assume
risk, the relative cost and availability of methods for transferring risk
to third parties, and the requirements of applicable regulatory bodies.
Florida Power self-insures its transmission and distribution lines against
loss due to storm damage and other natural disasters. Pursuant to a
regulatory order, Florida Power is accruing $6 million annually to a storm
damage reserve and may defer any losses in excess of the reserve.
Under the provisions of the Price Anderson Act, which limits liability for
accidents at nuclear power plants, Florida Power, as an owner of a nuclear
plant, can be assessed for a portion of any third-party liability claims
arising from an accident at any commercial nuclear power plant in the
United States. If total third-party claims relating to a single nuclear
incident exceed $200 million (the amount of currently available commercial
liability insurance), Florida Power could be assessed up to $79.3 million
per incident, with a maximum assessment of $10 million per year.
Florida Power is a member of NEIL, an industry mutual insurer, which
provides business interruption and extra expense coverage in the event of
a major accidental outage at a covered nuclear power plant. Florida Power
is subject to a retroactive premium assessment under this policy in the
event of adverse loss experience. Florida Power's present maximum share of
any such retroactive assessment is $2.5 million per policy year.
Florida Power also maintains nuclear property damage insurance and
decontamination and decommissioning liability insurance totaling $2.1
billion. The first layer of $500 million is purchased in the commercial
insurance market with the remaining excess coverage purchased from NEIL.
Florida Power is self-insured for any losses that are in excess of this
coverage. Under the terms of the NEIL policy agreements, Florida Power
could be assessed up to a maximum of $10.3 million in any policy year if
losses in excess of NEIL's available surplus are incurred.
Florida Power has never been assessed under these nuclear indemnities or
insurance policies.
CONTAMINATED SITE CLEANUP - Florida Progress is subject to regulation with
respect to the environmental effects of its operations. Florida Progress'
disposal of hazardous waste through third-party vendors can result in
costs to clean up facilities found to be contaminated. Federal and state
statutes authorize governmental agencies to compel responsible parties to
pay for cleanup of these hazardous waste sites.
Florida Power and former subsidiaries of Florida Progress, whose
properties were sold in prior years, have been identified by the
Environmental Protection Agency ("EPA") as potentially responsible
parties ("PRPs") at certain sites. In addition to these designated sites,
there are other sites where affiliates may be responsible for additional
environmental cleanup, including a coal gasification plant site that
11
Florida Power previously owned and operated. There are five parties that
have been identified as PRPs for this gas site, including Florida Power.
Liability for the cleanup costs of these sites is joint and several.
Florida Progress believes that its subsidiaries will not be required to
pay a disproportionate share of the costs for cleanup of these sites.
Florida Progress' best estimates indicate that its proportionate share of
liability for cleaning up all sites ranges from $3.7 million to $5.4
million. It has reserved $3.7 million against these potential costs. The
EPA is expected to further study the coal gasification plant site, which
could cause Florida Power to increase its reserve for its portion of
liability for cleanup costs. Although estimates of any additional costs
are not available, the results of the tests are not expected to have a
material effect on Florida Progress' financial position, results of
operations or liquidity.
AGE DISCRIMINATION SUIT - Florida Power and Florida Progress have been
named defendants in an age discrimination lawsuit involving 117 former
Florida Power employees. While no dollar amount was requested, each
plaintiff seeks back pay, reinstatement or front pay through their
projected dates of normal retirement, costs and attorneys' fees. In
October 1996, the court approved an agreement between parties to
provisionally certify this case as a class action suit under the Age
Discrimination in Employment Act. The court determined that the final day
to opt into the case would be May 28, 1997. Estimates of the potential
liability associated with this lawsuit cannot be determined until the size
of the potential class has been determined, and the final decision on
whether to certify the case as a class action suit has been made.
MID-CONTINENT LIFE INSURANCE COMPANY - On April 14, 1997, the Insurance
Commissioner of the state of Oklahoma received approval from the Oklahoma
County District Court to temporarily seize control of the operations of
Mid-Continent Life Insurance Company ("Mid-Continent"), a wholly owned
subsidiary of Florida Progress. The Insurance Commissioner alleged, among
other things, that Mid-Continent has made misrepresentations with respect
to the sale of its extra-life policies, and that actuarial studies reflect
that if Mid-Continent is unable to raise the premiums on its policies,
Mid-Continent's statutorily required reserves are inadequate by an amount
in excess of $125 million. Mid-Continent denies the misrepresentation
allegations and believes it is currently solvent, but would have a reserve
deficiency after 2020 unless premium rates are increased or other actions
are taken to address the deficiency. A hearing has been set for May 21,
1997 in Oklahoma City for Mid-Continent to appear before the court to
show cause why an order of rehabilitation should not be entered against
Mid-Continent and a receiver appointed. The outcome of the proceeding
is uncertain. However, if the court orders a receiver to be appointed
and the order is sustained on appeal, Florida Progress would likely
lose a substantial portion of its investment in Mid-Continent.
Alternatively, if the court denies the request for a receiver to be
appointed, this proceeding and its attendant publicity is expected to make
it difficult for Mid-Continent to address its future premium deficiency
problem, and for Florida Progress to recover its investment in Mid-
Continent. In either case, litigation against Florida Progress could
ensue. However, management believes that there is no basis for any
material claims against Florida Progress in connection with this matter.
Mid-Continent's earnings in 1996 were $1.9 million, which represents less
than 1% of Florida Progress' 1996 consolidated earnings. As of March 31,
1997, Florida Progress' equity investment in Mid-Continent was
approximately $85 million, and its tax basis is significantly less.
RATE INCREASE INVESTIGATION - In February 1997, the FPSC approved Florida
Power's request to increase fuel rates to recover the deferred costs of
12
replacement power which was associated with the outage at Florida Power's
CR3 nuclear plant and incurred from September 2, 1996 through March 1997.
In conjunction with this approval, the FPSC ordered its staff to begin an
immediate investigation concerning the reasons for CR3's current outage.
The additional revenues needed to pay for these increased costs for
replacement power are subject to refund pending the outcome of this
investigation. Florida Power estimates that replacement power costs
related to the outage are approximately $10 million per month, with
weather and the availability of alternative energy sources being the
principal factors that can affect actual costs. The FPSC has scheduled a
hearing for June 1997, with a final FPSC decision expected in August 1997.
Florida Power expects to file an additional request with the FPSC for
replacement power costs that are incurred after March 1997 to the date the
unit eventually restarts, which is expected to occur by year-end 1997.
The outage is needed for modifications required to address certain backup
safety issues. These modifications have already been made for similarly
designed plants at other utilities. Accordingly, management believes it
is probable that the FPSC, after completing its investigation, will
approve the recovery of replacement power costs incurred during the
outage.
5) In the opinion of management, the accompanying financial statements
include all adjustments deemed necessary to summarize fairly and reflect
the financial position and results of operations of Florida Progress and
Florida Power for the interim periods presented. Results for the first
quarter are not necessarily indicative of results for the full year. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto in the combined Form 10-K of
Florida Progress and Florida Power for the year ended December 31, 1996
(the "1996 Form 10-K").
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OPERATING RESULTS
Florida Progress' earnings per share from continuing operations for the three-
month period ended March 31, 1997, were $.43 compared to $.50 for the same
period in 1996. Florida Power, Florida Progress' largest operating unit,
reported earnings of $.42 per share compared to $.44 per share for the same
period last year. The decrease is primarily due to higher costs associated
with the extended outage of Florida Power's Crystal River nuclear power plant
("CR3"), and costs associated with planned outages of fossil-fuel plants.
Diversified earnings per share were $.01 compared to $.06 last year. The
decrease resulted primarily from lower earnings at Electric Fuels Corporation
("Electric Fuels"), Florida Progress' energy and transportation subsidiary.
Electric Fuels' gross margins were down for the quarter primarily due to
increased operating expenses associated with flood conditions along the Ohio and
Mississippi rivers, and increased diesel fuel costs.
Florida Power - Operating Revenues
Florida Power's operating revenues were $6.5 million or 1.2% higher for
the three-month period ended March 31, 1997, compared to the same period in
1996. Although kilowatt hour sales were lower for the three months ended March
31, 1997 compared to last year, due primarily to mild weather in 1997,
residential revenue decoupling adjustments increased residential revenues by
$7.5 million for the first quarter of 1997. Revenue decoupling reduced
residential revenues by $12.5 million for the three months ended March 31, 1996,
13
due to abnormally cold weather in 1996. Residential revenue decoupling
eliminates the earnings impact abnormal weather has on residential revenues,
Florida Power's largest customer group. See Note 2 to the Financial Statements
and Note 4 to the Financial Statements under the heading "Rate Increase
Investigation".
Florida Power - Operating Expenses
Fuel and purchased power costs were $14.3 million or 6.9% higher for the quarter
ended March 31, 1997 compared to the same period in 1996 due primarily to
increased replacement fuel costs incurred because of the extended shutdown of
the CR3 nuclear unit and increased capacity payments. Florida Power recovers
substantially all of its fuel and purchased power costs through a FPSC ordered
fuel adjustment clause, thereby eliminating any significant impact on net
income. See "Florida Power - Purchased Power" below and Note 4 to the Financial
Statements under the heading "Rate Increase Investigation".
Other operation and maintenance expenses for the three months ended March 31,
1997, were $10 million or 10% higher than the same period last year due
primarily to additional maintenance costs associated with the prolonged outage
of CR3 and maintenance costs associated with planned outages of certain
fossil-fuel plants. For further information regarding the outage of CR3, see
"Florida Power - Nuclear Operations" below.
Florida Power - Purchased Power
As previously reported in the 1996 Form 10-K, Part II, Item 7, under "Operating
Results - Florida Power - Fuel and Purchased Power", costs associated with
purchased power contracts with qualifying facilities raised Florida Power's
system average cost for generation in 1995 and 1996, and this trend is expected
to continue. While the higher costs are being recovered, there is concern for
the impact on future financial results due to uncertainty associated with
industry deregulation and increased competition. Florida Power is continuing to
seek ways to mitigate the impact of escalating payments required under contracts
it was obligated to sign under provisions of the Public Utilities Regulatory
Policies Act of 1978.
On April 1, 1997, the FPSC approved the negotiated settlement agreement relating
to a cogeneration contract between Florida Power and Pasco Cogen, Ltd. ("Pasco
Cogen"). The negotiated settlement agreement is expected to result in net
savings to customers of $183 million for the period from 2002 to the end of the
contract due to the buy-out of the last four years and seven months of the
contract. The settlement includes a reduction of energy during off-peak hours
from 109 megawatts ("MWs") to 96 MWs and a revised energy pricing mechanism.
Florida Power has two other agreements pending before the FPSC that are similar
to the buy-out of the Pasco Cogen contract. These two contracts represent
approximately 190 MWs or 18% of the 1050 MWs of total capacity Florida Power
receives from 16 qualifying facilities. See prior discussion related to these
contracts in the 1996 Form 10-K, Item 3, paragraphs 3 and 4.
In January 1997, Florida Power agreed, subject to FPSC approval, to acquire the
220-megawatt Tiger Bay cogeneration facility near Ft. Meade, Florida ("Tiger
Bay") for a purchase price of $445 million. The agreement includes the plant,
equipment, spare parts and assigned contracts. In the first quarter 1997, the
Florida Industrial Power Users Group and the Office of Public Counsel for the
state of Florida intervened to oppose the purchase, but in April 1997 Florida
Power entered into a stipulation agreement which resolves all disputes with
these parties. On May 7, 1997, the staff of the FPSC recommended that the
stipulation agreement be approved. The FPSC is scheduled to vote on the
14
agreement on May 19, 1997. The proposed transaction is expected to close in
July 1997. Tiger Bay is Florida Power's largest cogeneration power supplier,
representing more than 20% of the capacity it receives from qualifying
facilities. Net savings to customers from this transaction are estimated to be
between $2 billion and $2.4 billion. In addition to the savings, the Tiger Bay
facility is a new gas-fired combined cycle plant that is well engineered and
located close to Florida Power's Hines Energy Complex in Polk County.
If the FPSC approves the purchase of the Tiger Bay facility and the purchase
closes, Florida Power believes that the cumulative effect of all agreements
reached with operators of qualifying facilities would be to reduce the estimated
total amount of above-market costs associated with its qualifying facility
purchase power commitments over the lives of those contracts by approximately
30%. For further information concerning the Tiger Bay purchase, see paragraph 2
under Part II, Item 1 "Legal Proceedings".
Florida Power - Nuclear Operations
In September 1996, Florida power shut down its CR3 nuclear plant to fix a broken
oil pipe in the main turbine. When the repairs were completed in October 1996,
Florida Power determined modifications were required to address certain backup
safety system design issues. Implementing the required safety system
modifications necessitated that CR3 remain shut down.
As safety standards evolved over the last twenty years, all nuclear plants were
faced with decisions on how to meet Nuclear Regulatory Commission ("NRC")
regulatory requirements. While some utilities made extensive plant
modifications, Florida Power chose engineering approaches that satisfied NRC
regulatory requirements while reducing shut-down periods and costs to its
customers.
This approach worked satisfactorily until 1996 when it was determined that some
of the changes made during a scheduled refueling outage in early 1996 could not
fully meet prescribed safety margins under certain postulated emergency
situations. Florida Power has determined that the only way to meet the required
safety margins under all circumstances is to make equipment modifications.
Florida Power and CR3 have received much adverse publicity regarding fines and
critical evaluations made by the NRC, including placement of CR3 on the NRC's
"Watch List" on January 27, 1997. Although the media made a link between the
shutdown and the Watch List, the Watch List is not the reason for the outage and
is not expected to lengthen the shutdown.
Florida Power has hired several senior nuclear professionals, experienced in
plant recoveries, to lead the return of CR3 to service. The new nuclear
management team has established a restart plan to return CR3 to service by year-
end 1997. For additional information related to the details of this plan and
the work to be performed during the outage, see Florida Power's Form 8-K dated
May 12, 1997.
As a result of further evaluations of the work to be performed during the
outage, Florida Power now estimates operations and maintenance ("O&M") expenses
could range from $80 million to $100 million higher than its original target for
1997 nuclear O&M expenses. Total nuclear O&M expenses for CR3 could range from
$170 million to $190 million in 1997. Capital expenditures for 1997 could range
from $30 million to $45 million higher than the original budget for 1997 nuclear
capital expenditures. Total nuclear capital expenditures for 1997 could range
from $40 million to $55 million.
The impact of the nuclear outage on O&M expenses is expected to be limited to
1997 since the additional expenses are expected to be nonrecurring items. These
15
outage expenses will impact 1997 earnings. However, Florida Power's strong
fundamentals remain unchanged. Management continues to take a long-term view
of dividend policy and makes its recommendation to the board of directors after
considering the company's business plan, projected earnings growth and outlook
for the electric utility industry.
In February 1997, the FPSC approved Florida Power's request to increase fuel
rates to recover the deferred costs of replacement power incurred through March
1997 associated with the outage at CR3. In conjunction with this approval, the
FPSC ordered its staff to begin an immediate investigation concerning the
reasons for CR3's current outage. See Note 4 to the financial statements under
the heading "Rate Increase Investigation".
For further information concerning the outage at CR3, see paragraph 3 under Part
II, Item 1 "Legal Proceedings" herein, and the 1996 Form 10-K, Part II, Item 7,
under "Operating Results - Florida Power - Nuclear Operations" and "Operating
Results - Florida Power - Fuel and Purchased Power".
Florida Progress Diversified Operations
Florida Progress' diversified revenues were $10.6 million higher for the three
months ended March 31, 1997 compared to the same period last year due primarily
to recent acquisitions and increased sales from rail services operations at
Electric Fuels. Gross margins were down for the quarter primarily due to
increased operating expenses associated with flood conditions along the Ohio and
Mississippi rivers, and increased diesel fuel costs.
On April 14, 1997, the Insurance Commissioner of the state of Oklahoma received
approval from the Oklahoma County District Court to temporarily seize control of
the operations of Mid-Continent. See Note 4 to the financial statements under
the heading "Mid-Continent Life Insurance Company" and paragraph 6 under Part
II, Item 1 "Legal Proceedings".
LIQUIDITY AND CAPITAL RESOURCES
Florida Power budgeted $372 million, excluding allowance for funds used during
construction, for its 1997 construction program, of which $81.1 million was
spent during the first three months of the year. These expenditures were
financed primarily with funds from operations. As reported under the heading
"Operating Results - Florida Power - Nuclear Operations" herein, nuclear capital
expenditures for 1997 could range between $30 to $45 million higher than the
original budget for nuclear capital expenditures because of CR3 nuclear plant
modifications. Florida Power anticipates using debt financing for these
additional capital expenditures.
On January 15, 1997, Florida Power redeemed all $20 million of its maturing
8.55% series medium-term notes using funds from operations.
Florida Power's ratio of earnings to fixed charges was 4.73 for the twelve
months ended March 31, 1997. See Exhibit 12 filed herewith.
"SAFE HARBOR" STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In this report, Florida Power has projected that CR3 will return to service by
year-end 1997, and that it is probable that the FPSC will approve the recovery
of replacement fuel during the outage. Also, Florida Power has estimated the
O&M expenses and capital expenditures for CR3 nuclear plant modifications during
1997, and has anticipated that the O&M expenses incurred during the outage will
be limited to 1997. Florida Power has estimated the savings associated with
16
various transactions to mitigate the forecasted above-market costs associated
with commitments to purchase power from qualifying facilities. In so doing,
Florida Power has forecasted future market prices for wholesale electricity as
well as the prices to be paid under its commitments to purchase power from
qualifying facilities in arriving at estimates of savings it believes it will
realize from those transactions.
Risk Factors
These statements, and any other statements contained in this report that are not
historical facts, are forward-looking statements that are based on a series of
projections and estimates regarding the economy, the electric utility industry
and Florida Progress' other businesses in general, and on key factors which
impact Florida Progress directly. The projections and estimates relate to the
pricing of services, the actions of regulatory bodies, the success of new
products and services, and the effects of competition.
Key factors that have a direct bearing on Florida Progress' ability to attain
these projections include continued annual growth in customers, successful
execution of the CR3 restart plan, successful cost containment efforts and the
efficient operation of Florida Power's existing and future generating units.
Also, in developing its forward-looking statements, Florida Progress has made
certain assumptions relating to productivity improvements and the favorable
outcome of various commercial, legal and regulatory proceedings, the lack of
unforeseen new CR3 plant modifications that could extend the outage beyond 1997,
and the lack of disruption to its markets.
If Florida Progress' projections and estimates regarding the economy, the
electric utility industry and key factors differ materially from what actually
occurs, or if various proceedings have unfavorable outcomes, Florida Progress'
actual results could vary significantly from the performance projected in the
forward-looking statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
1. Pasco Cogen, Ltd. v. Florida Power Corporation, Florida Circuit Court,
Sixth Judicial Circuit for Pasco County, Case No. 94-5331-CA-DIV-Y.
In re: Petition for Expedited Approval of Settlement with Pasco Cogen,
Ltd., Florida Public Service Commission, Docket No. 961407-EI.
See prior discussion of this matter in the 1996 Form 10-K, Item 3, paragraph
2. On April 1, 1997, the FPSC approved the negotiated settlement agreement
between Florida Power and Pasco Cogen.
2. In re: Petition for expedited approval of an agreement to purchase the
Tiger Bay cogeneration facility and terminate the related purchased power
contracts, FPSC Docket No. 970096-EQ.
See prior discussion of this matter in the 1996 Form 10-K, Item 3, paragraph
8. In April 1997, Florida Power, the Office of Public Counsel ("OPC") and
the Florida Industrial Power Users Group ("FIPUG") entered into a
stipulation agreement pursuant to which OPC and FIPUG withdrew all
objections to Florida Power's petition for approval of its agreement to
purchase the Tiger Bay facility. Under the terms of the agreement, Florida
Power will rate base a portion of the Tiger Bay purchase price. In return,
Florida Power agreed to record the remainder of the purchase cost as a
regulatory asset, and recover this amount using Tiger Bay purchase power
17
contract revenues as if the purchase contracts were still in effect. These
revenues will be applied toward payments owed under a gas supply contract
which will be assigned from the cogeneration project to Florida Power. When
the regulatory asset is fully recovered and the gas supply contract is
terminated, recovery of power purchase contract revenues will cease and
natural gas costs associated with the Tiger Bay facility will be collected
under Florida Power's fuel adjustment clause. On May 7, 1997, the staff of
the FPSC recommended that the stipulation agreement be approved. The FPSC
is scheduled to vote on the agreement on May 19, 1997.
3. Charlie Crist, Jr. v. Julia Johnson, et al and Florida Power Corporation,
Florida Supreme Court, Case No. 90,346.
On April 10, 1997, Charlie Crist, a ratepayer, member of the Florida senate
and candidate for the U.S. Senate (the "Appellant"), filed a petition for
review of a March 31, 1997 FPSC order granting Florida Power the right to
increase the fuel charge portion of its rates. Appellant contends that the
FPSC has no basis in the record upon which to approve the increase. Florida
Power moved to dismiss the petition on the grounds that Appellant lacks
standing to seek review of the challenged order because he was not a party
to the agency proceeding, that the agency action is not a final agency
action, and that Appellant has not sustained irreparable injury that would
permit review of non-final agency action. The FPSC filed a motion to
dismiss based on similar grounds. Also see discussion of a related legal
proceeding filed by Senator Crist as reported in the combined Form 8-K of
Florida Progress and Florida Power dated March 28, 1997.
4. Wanda L. Adams, et al v. Florida Power Corporation and Florida Progress
Corporation, U.S. District Court, Middle District of Florida, Ocala
Division; Case No. 95-123-CIV-OC-10.
See prior discussion of this matter in the 1996 Form 10-K, Item 3, paragraph
11. In April 1997, it was confirmed that 61 additional former employees had
opted into the case for a total of 117 plaintiffs. The Court determined
that the final day to opt into the case would be May 28, 1997.
5. Gulf Power et al v. United States and the Federal Communications
Commission, U.S. District Court, Northern District of Florida, Pensacola
Division, Case No. 3:96-CV-381-LAC.
See prior discussion of this matter in the 1996 Form 10-K, Item 3, paragraph
12. The Association for Local Telecommunications Services, and American
Communications Services, Inc., have intervened as defendants in the case,
and various cable television associations have moved for leave to
participate as friends of the court. Plaintiffs and defendants have each
filed motions for summary judgement.
6. State of Oklahoma, ex rel. John P. Crawford, Insurance Commissioner v.
Mid-Continent Life Insurance Company, District Court of Oklahoma County,
State of Oklahoma, Case No. CJ-97-2518-62
On April 14, 1997, the Insurance Commissioner of the state of Oklahoma
received approval from the Oklahoma County District Court to temporarily
seize control of the operations of Mid-Continent. The Insurance
Commissioner alleged, among other things, that Mid-Continent has made
misrepresentations with respect to the sale of its extra-life policies, and
that actuarial studies reflect that if Mid-Continent is unable to raise the
premiums on its policies, Mid-Continent's statutorily required reserves are
inadequate by an amount in excess of $125 million. Mid-Continent denies the
misrepresentation allegations and believes it is currently solvent, but
would have a reserve deficiency after 2020 unless premium rates are
18
increased or other actions are taken to address the deficiency. A hearing
has been set for May 21, 1997 for Mid-Continent to appear before the court
to show cause why an order of rehabilitation, should not be entered against
Mid-Continent and a receiver appointed. The outcome of the proceeding is
uncertain. However, if the court orders a receiver to be appointed and
the order is sustained on appeal, Florida Progress would likely lose a
substantial portion of its investment in Mid-Continent. Alternatively,
if the court denies the request for a receiver to be appointed, this
proceeding and its attendant publicity is expected to make it difficult
for Mid-Continent to address its future premium deficiency problem, and
for Florida Progress to recover its investment in Mid-Continent. In
either case, litigation against Florida Progress could ensue. However,
management believes that there is no basis for any material claims against
Florida Progress in connection with this matter. See Note 4 to the
financial statements under the heading "Mid-Continent Life Insurance
Company".
Item 4. Submission of Matters to a Vote of Security-Holders.
The Annual Meeting of Shareholders of Florida Progress was held on April 17,
1997. There were 96,997,009 shares of common stock entitled to vote. The
following matters were voted upon at the meeting:
1) Election of Directors
Class I - Terms Expiring in 2000
Votes Votes
For Withheld
Michael P. Graney 79,786,309 2,892,245
Richard Korpan 79,970,695 2,707,859
Joan D. Ruffier 80,409,488 2,269,066
Robert T. Stuart, Jr. 80,422,199 2,256,355
2) Shareholder proposal to require shareholder approval of annual salary
increases for executive officers that are greater than 3%.
For the proposal: 13,083,772
Against the proposal: 52,823,135
Abstentions: 2,110,768
Broker Non-votes: 14,660,879
3) Shareholder proposal to limit the Management Incentive Compensation
Plan and the Long-Term Incentive Plan to amounts not greater than
5% of the annual base salaries of each of the top five executive
officers and lesser amounts to others.
For the proposal: 13,567,045
Against the proposal: 52,671,469
Abstentions: 1,839,594
Broker Non-votes: 14,600,446
19
Item 5. Other
As previously reported in Item 1 "Business - Utility Operations - Florida Power
- - Employees" in the 1996 Form 10-K, the current union contract with the
International Brotherhood of Electrical Workers ("IBEW") was to have expired in
December 1996, but both the IBEW and Florida Power agreed to continue working
beyond that date under the terms of the existing contract while negotiations,
which began in September 1996, proceeded. On April 30, 1997, Florida Power and
IBEW committees agreed on a new three-year contract, subject to ratification by
the members of the IBEW. Ratification votes are scheduled for May 1997 for each
local.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Florida Florida
Number Exhibit Progress Power
------ ------- -------- -------
12 Statement Regarding Computation of Ratio X
of Earnings to Fixed Charges for Florida
Power.
27.(a) Florida Progress Financial Data Schedule. X
27.(b) Florida Power Financial Data Schedule. X
X = Exhibit is filed for that respective company.
(b) Reports on Form 8-K:
During the first quarter 1997, Florida Progress and Florida
Power filed the following reports on Form 8-K:
Form 8-K dated January 7, 1997, reporting under Item
5 "Other Events" the replacements in top nuclear
positions at Florida Power and a request to recover
higher fuel costs.
Form 8-K dated January 23, 1997, reporting under Item
5 "Other Events" the signing of an agreement to
acquire the Tiger Bay cogeneration facility and 1996
earnings.
Form 8-K dated January 29, 1997, reporting under Item
5 "Other Events" that CR3 had been added to the NRC
watch list.
Form 8-K dated February 20, 1997, reporting under Item
5 "Other Events" the approval by the board of a dividend
increase and the approval by the FPSC of an increase in
Florida Power's fuel costs.
Form 8-K dated March 28, 1997, reporting under
Item 5 "Other Events" an update on the CR3 nuclear unit
restart plan and the FPSC approval of the Pasco Cogen
settlement.
20
In addition, Florida Progress and Florida Power filed the
following report on Form 8-K subsequent to the first quarter
1997:
Form 8-K dated April 15, 1997, reporting under Item
5 "Other Events" first quarter 1997 earnings, the
Tiger Bay cogeneration plant joint motion and the
temporary seizure of Mid-Continent by the Insurance
Commissioner of the state of Oklahoma.
Form 8-K dated May 12, 1997, reporting under Item
5 "Other Events" an update on the CR3 nuclear unit
restart plan.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of each of the undersigned
on behalf of each listed company shall be deemed to relate only to matters
having reference to such company.
FLORIDA PROGRESS CORPORATION
FLORIDA POWER CORPORATION
Date: May 15, 1997 /s/ John Scardino, Jr.
-----------------------------
John Scardino, Jr.
Vice President and Controller
Date: May 15, 1997 /s/ Jeffrey R. Heinicka
-----------------------------
Jeffrey R. Heinicka
Senior Vice President and
Chief Financial Officer
Exhibit Index
Florida Florida
Number Exhibit Progress Power
------ ------- -------- -------
12 Statement Regarding Computation of Ratio X
of Earnings to Fixed Charges for Florida
Power.
27.(a) Florida Progress Financial Data Schedule. X
27.(b) Florida Power Financial Data Schedule. X
X = Exhibit is filed for that respective company.