UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
I.R.S.
Exact name of each Registrant as specified in 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 (727) 824-6400
1-3274 FLORIDA POWER CORPORATION 59-0247770
A Florida Corporation
One Progress Plaza
St. Petersburg, Florida 33701
Telephone (727) 820-5151
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
-------------------------------------- ----------------------
Florida Progress Corporation:
Common Stock without par value and New York Stock Exchange
Preferred Stock Purchase Rights Pacific Stock Exchange
Florida Power Corporation: None
Securities registered pursuant to Section 12(g) of the Act:
Florida Progress Corporation: None
Florida Power Corporation: Cumulative Preferred Stock,
par value $100 per share
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
registrants were 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ] (continued)
The aggregate market value of the voting stock held by non-affiliates of Florida
Progress Corporation as of December 31, 1998 was $4,288,659,140 (determined by
subtracting the number of shares held by directors and executive officers of
Florida Progress Corporation from the total number of shares outstanding, then
multiplying the difference times the closing sale price from the New York Stock
Exchange Composite Transactions).
The aggregate market value of the voting stock held by non-affiliates of Florida
Power Corporation as of February 28, 1999 was $-0-. As of February 28, 1999,
there were issued and outstanding 100 shares of Florida Power Corporation's
common stock, without par value, all of which were held, beneficially and of
record, by Florida Progress Corporation.
The number of shares of Florida Progress Corporation common stock without par
value outstanding as of December 31, 1998 was 97,336,826.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for Florida Progress Corporation
dated March 11, 1999, relating to the 1999 Annual Meeting of Shareholders, are
incorporated by reference in Part III hereof.
----------------------------
This combined Form 10-K represents separate filings by Florida Progress
Corporation and Florida Power Corporation. Florida Power Corporation makes no
representations as to the information relating to Florida Progress Corporation's
diversified operations.
TABLE OF CONTENTS
PART I.
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . 21
PART II.
Item 5. Market for the Registrants' Common Equity
and Related Stockholder Matters . . . . . . . . . . . 22
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 24
Item 7a. Quantitative and Qualitative Disclosures About
Market Risks. . . . . . . . . . . . . . . . . . . . . 41
Item 8. Financial Statements and Supplementary Data . . . . . . 42
Combined Report of Independent Certified Public
Accountants . . . . . . . . . . . . . . . . . . . . 42
Consolidated Financial Statements of Florida Progress 43
Financial Statements of Florida Power . . . . . . . . 48
Combined Notes to the Financial Statements. . . . . . 53
Quarterly Financial Data (unaudited). . . . . . . . . 74
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . 74
PART III.
Item 10. Directors and Executive Officers of the Registrants . . 75
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . 77
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . 81
Item 13. Certain Relationships and Related Transactions. . . . . 82
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . 82
Signatures - Florida Progress Corporation . . . . . . . . . . . . 89
Signatures - Florida Power Corporation. . . . . . . . . . . . . . 91
Financial Statement Schedules . . . . . . . . . . . . . . . . . . 93
GLOSSARY
When used herein, the following terms will have the meanings indicated:
TERM MEANING
1935 Act. . . . . . . . . . . . .Public Utility Holding Company Act of 1935
ABC . . . . . . . . . . . . . . .ABC Rail Products Corporation
AOC . . . . . . . . . . . . . . .Administrative Order on Consent
AST . . . . . . . . . . . . . . .Advanced Separation Technologies, Incorporated
Btu . . . . . . . . . . . . . . .British thermal units
CAAA. . . . . . . . . . . . . . .Clean Air Act Amendments of 1990
Calgon. . . . . . . . . . . . . .Calgon Carbon Corporation
CERCLA or Superfund . . . . . . .Comprehensive Environmental Response
Compensation and Liability Act
Commissioner. . . . . . . . . . .Insurance Commissioner of the State of Oklahoma
CR3 or the nuclear plant . . . . .Florida Power's nuclear generating plant,
Crystal River Unit No. 3
Dade. . . . . . . . . . . . . . .Metropolitan Dade County
DOE . . . . . . . . . . . . . . .United States Department of Energy
Echelon . . . . . . . . . . . . .Echelon International Corporation
Electric Fuels. . . . . . . . . .Electric Fuels Corporation
EMF . . . . . . . . . . . . . . .electromagnetic fields, or electric and
magnetic fields
EPA . . . . . . . . . . . . . . .United States Environmental Protection Agency
EPS . . . . . . . . . . . . . . .Earnings per share
FDEP. . . . . . . . . . . . . . .Florida Department of Environmental Protection
FERC. . . . . . . . . . . . . . .Federal Energy Regulatory Commission
Financial Statements. . . . . . .Florida Progress' Consolidated Financial
Statements and Florida Power's Financial
Statements, for the year ended December 31,
1998 contained under Item 8 herein
Florida Power or the utility. . .Florida Power Corporation
Florida Progress. . . . . . . . .Florida Progress Corporation
FOCAS . . . . . . . . . . . . . .FOCAS, Inc.
FPSC. . . . . . . . . . . . . . .Florida Public Service Commission
FRCC. . . . . . . . . . . . . . .Florida Reliability Coordinating Council
Georgia Power . . . . . . . . . .Georgia Power Company
KV. . . . . . . . . . . . . . . .kilovolts
KVA . . . . . . . . . . . . . . .kilovolt amperes
KWH . . . . . . . . . . . . . . .kilowatt hours
Lake. . . . . . . . . . . . . . .NCP Lake Power, Inc.
Louisville. . . . . . . . . . . .Louisville Scrap Material Co., Inc.
LTIP. . . . . . . . . . . . . . .Florida Progress Long-Term Incentive Plan
MD&A. . . . . . . . . . . . . . .Management's Discussion and Analysis of
Financial Condition and Results of Operations
MEMCO . . . . . . . . . . . . . .MEMCO Barge Line, Inc.
MICP. . . . . . . . . . . . . . .Management Incentive Compensation Plan
Mid-Continent . . . . . . . . . .Mid-Continent Life Insurance Company
Montenay. . . . . . . . . . . . .Montenay Power Corporation
MW. . . . . . . . . . . . . . . .megawatts
NEIL. . . . . . . . . . . . . . .Nuclear Electric Insurance Limited
NERC. . . . . . . . . . . . . . .North American Electric Reliability Council
NRC . . . . . . . . . . . . . . .United States Nuclear Regulatory Commission
PCBs. . . . . . . . . . . . . . .polychlorinated biphenyls
Progress Capital. . . . . . . . .Progress Capital Holdings, Inc.
Progress Credit . . . . . . . . .Progress Credit Corporation
Progress Rail . . . . . . . . . .Progress Rail Services Corporation
Proxy Statement . . . . . . . . .The definitive proxy statement dated March 11,
1999, relating to Florida Progress' 1999
Annual Meeting of Shareholders
PRP . . . . . . . . . . . . . . .potentially responsible party, as defined in
CERCLA
PURPA . . . . . . . . . . . . . .Public Utility Regulatory Policies Act of 1978
QFs . . . . . . . . . . . . . . .qualifying facilities
Retirement Plan . . . . . . . . . Florida Progress Corporation Retirement Plan
for Exempt and Nonexempt Employees
RI/FS . . . . . . . . . . . . . .Remedial Investigation and Feasibility Study
Sanford site. . . . . . . . . . .gasification plant site, Sanford, Florida
SEC . . . . . . . . . . . . . . .United States Securities and Exchange
Commission
Seminole. . . . . . . . . . . . .Seminole Electric Cooperative, Inc.
SERP. . . . . . . . . . . . . . .Florida Progress Corporation Supplemental
Executive Retirement Plan
SNF . . . . . . . . . . . . . . .spent nuclear fuel
Title VI. . . . . . . . . . . . .Title VI, Acid Rain Control
TRI . . . . . . . . . . . . . . .Toxic Release Inventory
PART I
ITEM 1. BUSINESS
FLORIDA PROGRESS
Florida Progress Corporation ("Florida Progress", which term includes
consolidated subsidiaries unless otherwise indicated), is a diversified electric
utility holding company. Florida Progress' revenues for the year ended December
31, 1998, were $3.6 billion and assets at year-end were $6.2 billion. Its
principal executive offices are located at One Progress Plaza, St. Petersburg,
Florida 33701, telephone number (727) 824-6400. The Florida Progress home page
on the Internet's World Wide Web is located at http://www.fpc.com. Florida
Progress was incorporated in Florida on January 21, 1982.
Florida Progress defines its principal business segments as utility and
diversified operations. Florida Power Corporation ("Florida Power" or "the
utility"), Florida Progress' largest subsidiary, is the utility segment and
encompasses all regulated public utility operations. (See Item 1 "Business
Utility Operations - Florida Power".) Progress Capital Holdings, Inc. ("Progress
Capital") is the downstream holding company for Florida Progress' diversified
subsidiaries which consolidates the financing of non-utility operations. The
diversified operations segment includes Electric Fuels Corporation ("Electric
Fuels"), an energy and transportation company. The primary segments of Electric
Fuels are: Energy and Related Services, Rail Services, and Inland Marine
Transportation. (See Item 1 "Business-Diversified Operations.") For information
concerning the revenues, operating profit and assets attributable to Florida
Progress' business segments, see Note 8 to Florida Progress' consolidated
financial statements and Florida Power's financial statements for the year ended
December 31, 1998, contained herein under Item 8 (the "Financial Statements").
Cash from operations has been the primary source of working capital for Florida
Progress. (See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" ("MD&A") under the heading "Liquidity and
Capital Resources.")
Florida Progress is a public utility holding company under the Public
Utility Holding Company Act of 1935 ("1935 Act"). Florida Progress is exempt
from registration with the United States Securities and Exchange Commission
("SEC") under the 1935 Act and attendant regulation because its utility
operations are primarily intrastate.
UTILITY OPERATIONS - FLORIDA POWER
Florida Power was incorporated in Florida in 1899, and is an operating public
utility engaged in the generation, purchase, transmission, distribution and sale
of electricity. Florida Power has a system generating capacity of 7,727
megawatts ("MW"). In 1998, the utility accounted for 73% of Florida Progress'
consolidated revenues, 80% of its assets and 89% of its net income.
Florida Power provided electric service during 1998 to an average of 1.3 million
customers in west central Florida. The service area covers approximately 20,000
square miles and includes the densely populated areas around Orlando, as well as
the cities of St. Petersburg and Clearwater. Of Florida Power's 1998 electric
revenues billed, approximately 55% were derived from residential sales, 23% from
commercial sales, 8% from industrial sales, 8% from wholesale sales and 6% from
1
other retail sales. Important industries in the territory include phosphate and
rock mining and processing, electronics design and manufacturing, and citrus and
other food processing. Other important commercial activities are tourism, health
care, construction and agriculture.
COMPETITION
For a general discussion of Florida Power and competition, see Item 7 "MD&A"
under the headings "Industry Restructuring" and "Industry Restructuring -
Florida Progress' Strategic Initiatives".
In March 1999, the Florida Public Service Commission ("FPSC") approved the
petition by Duke Energy to build a merchant plant in New Smyrna Beach, Florida.
The unit will have the capability to produce approximately 500 MW of power. The
output will be sold in the wholesale power market. (See Item 3 "Legal
Proceedings", paragraph 11.)
FUEL AND PURCHASED POWER
GENERAL: Florida Power's consumption of various types of fuel depends on several
factors, the most important of which are the demand for electricity by Florida
Power's customers, the availability of various generating units, the
availability and cost of fuel, and the requirements of federal and state
regulatory agencies. Florida Power's energy mix for the last three years is
presented in the following table:
ENERGY MIX PERCENTAGES
Fuel Type 1998 1997 1996
--------- ---- ---- ----
Coal 38% 45% 43%
Oil 20% 18% 16%
Nuclear* 15% 0% 6%
Gas 6% 6% 3%
Purchased Power 21% 31% 32%
* See "NUCLEAR" below for information regarding an extended outage at Florida
Power's nuclear generating plant beginning in September 1996 and continuing
until February 1998.
Florida Power is generally permitted to pass the cost of recoverable fuel and
purchased power to its customers through fuel adjustment clauses. In June 1997,
Florida Power reached an agreement with all parties who intervened, which was
approved by the FPSC, regarding costs related to its extended nuclear outage.
This agreement resulted in charges to Florida Power's 1997 results. (See Note 9
to the Financial Statements.)
The future prices for and availability of various fuels discussed in this report
cannot be predicted with complete certainty. However, Florida Power believes
that its fuel supply contracts, as described below, will be adequate to meet its
fuel supply needs.
2
Florida Power's average fuel costs per million British thermal units ("Btu") for
each year of the five-year period ended December 31, 1998, were as follows:
AVERAGE FUEL COST
(per million Btu)
1998 1997 1996 1995 1994
Coal $1.89 $1.91 $1.91 $1.93 $1.96
Oil 2.18 2.75 2.80 2.70 2.39
Nuclear .46 -- .50 .49 .55
Gas 3.22 2.87 2.78 1.98 2.46
Weighted Average 1.81 2.24 2.04 1.69 1.75
OIL AND GAS: Oil is purchased under contracts and in the spot market from
several suppliers. The cost of Florida Power's oil is determined by world market
conditions. Management believes that Florida Power has access to an adequate
supply of oil for the reasonably foreseeable future. Florida Power's natural gas
supply is purchased under firm contracts and in the spot market from numerous
suppliers and is delivered under firm, released firm and interruptible
transportation contracts. Florida Power believes that existing contracts for oil
are sufficient to cover its requirements when natural gas transmission that is
purchased on an interruptible basis is not available.
NUCLEAR: Florida Power has one nuclear generating plant, Crystal River Unit No.
3 ("CR3" or "the nuclear plant"). After completing a record performance in 1995
by achieving a capacity factor of 100%, CR3 was shut down for much of 1996 and
all of 1997. Beginning in February 1996, the plant underwent a scheduled
refueling outage that lasted until May 1996, when the plant returned to service.
In September 1996, an oil pressure problem in the main turbine forced the plant
to shut down until repairs could be made. After the repairs were completed in
October, the plant remained down while certain backup safety system design
issues were addressed. CR3 returned on-line in February 1998 and achieved a
capacity factor of 100% for the remaining portion of 1998. For more information
regarding the outage, see Item 7 "MD&A - Operating Results" and Note 9 to the
Financial Statements.
Nuclear fuel is processed through four distinct stages. Stage I and Stage II
involve the mining and milling of the natural uranium ore to produce a
concentrate and the conversion of this uranium concentrate into uranium
hexafluoride. Stage III and Stage IV entails the enrichment of the uranium
hexafluoride, and the fabrication of the enriched uranium hexafluoride into
usable fuel assemblies. Florida Power has contracts in place which provide for a
supply of enriched uranium and fuel fabrication through 2004.
It will be necessary for Florida Power to enter into future fuel contracts to
cover the differences between the total unit lifetime requirements of CR3 and
the requirements covered by existing contracts. Although no assurances can be
given as to the future availability or costs of such contracts, Florida Power
expects that future contract commitments will be obtained at the appropriate
time.
Spent nuclear fuel ("SNF") is stored at CR3 pending disposal under a contract
with the United States Department of Energy ("DOE"). (See Note 4 to the
Financial Statements.) At the present time, Florida Power has facilities on site
for the temporary storage of SNF generated through the year 2011. Florida Power
will expand the capacity of its facilities on site in 2000 to allow for the
3
temporary storage of SNF generated through the end of the license in 2016.
Florida Power and 15 other utilities are involved in litigation against the
United States challenging certain retroactive assessments imposed by the federal
government on domestic nuclear power companies to fund the decommissioning and
decontamination of the government's uranium enrichment facilities. (See Item 5
"Legal Proceedings", paragraph 4.)
COAL: Florida Power anticipates a requirement of approximately 5.0 million to
5.5 million tons of coal in 1999. Most of the coal is expected to be supplied
from the Appalachian coal fields of the United States. Approximately two-thirds
of the coal is expected to be delivered by rail and the remainder by barge. The
coal is supplied by Electric Fuels pursuant to contracts between Florida Power
and Electric Fuels which expire in 2002 and 2004. (See Note 11 to the Financial
Statements.)
For 1999, Electric Fuels has long-term contracts with various sources for
approximately 40% of the coal requirements of Florida Power's coal units. These
long-term contracts have price adjustment provisions. Electric Fuels expects to
acquire the remainder in the spot market and under short-term contracts.
Electric Fuels does not anticipate any problems obtaining the remaining Florida
Power requirements for 1999 through short-term contracts and purchases in the
spot market. (See Note 11 to the Financial Statements.)
PURCHASED POWER: Florida Power, along with other Florida utilities, buys and
sells economy power through the Florida energy brokering system. In addition,
Florida Power has long-term contracts for the purchase of approximately 460 MW
of purchased power with other utilities, including a contract with The Southern
Company for approximately 400 MW. Also, Florida Power has entered into purchased
power contracts with certain qualifying facilities ("QFs") for approximately 871
MW of capacity. Facilities representing approximately 831 MW of the 871 MW have
come on line and are currently operating. The capacity currently available from
QFs represents about 9% of Florida Power's total system capacity. The purchased
power component was reduced in 1997 primarily through the purchase of the Tiger
Bay Cogeneration Facility. (See Item 2 "Properties - Utility Operations", Item 7
"MD&A - Fuel and Purchased Power" and Note 9 to the Financial Statements.)
REGULATORY MATTERS AND FRANCHISES
Florida Power is subject to the jurisdiction of the FPSC with respect to retail
rates, customer service, planning, construction of facilities, accounting,
issuance of securities and other matters. In addition, Florida Power is subject
to regulation by the Federal Energy Regulatory Commission ("FERC") with respect
to transmission and sales of wholesale power, accounting and certain other
matters. The underlying concept of utility ratemaking is to set rates at a level
that allows the utility to collect revenues equal to its cost of providing
service plus a reasonable rate of return on its equity. Increased competition,
as a result of industry restructuring, may affect the ratemaking process. (See
Item 7 "MD&A - Industry Restructuring".)
The FPSC oversees the retail sales of the state's investor-owned utilities. The
FPSC authorizes retail "base rates" that are designed to provide a utility with
the opportunity to earn a specific rate of return on its "rate base", or average
investment in utility plant. These rates are intended to cover all reasonable
and prudent expenses of utility operations and to provide investors with a fair
rate of return. The FPSC generally allows utilities to recover fuel, purchased
power and conservation costs through an adjustment charge on monthly electric
bills. In June 1997, a settlement agreement pertaining to the extended nuclear
4
outage, with all parties who intervened, was approved by the FPSC. The parties
to the agreement agreed not to seek or support any increase or reduction in
Florida Power's base rates or the authorized range of its return on equity
during a four year period beginning in mid-1997. For additional information on
this agreement, see Note 9 to the Financial Statements. In other regulatory
matters, beginning in 1995, the FPSC ordered Florida Power to conduct a
three-year test of revenue decoupling for its residential customers. This test
ended December 31, 1997. (See Item 7 "MD&A - Utility Revenues and Sales" and
Note 1 to the Financial Statements.) In December 1998, Florida Power received
approval from the FPSC to defer non-fuel revenues towards the development of a
plan that would allow customers to realize benefits earlier than if they are
used to accelerate the amortization of the Tiger Bay regulatory asset. (See Note
9 to the Financial Statements.) Florida Power is interconnected with 22
municipal and 9 rural electric cooperative systems. Major wholesale power sales
customers include Seminole Electric Cooperative, Inc. ("Seminole"), Florida
Municipal Power Agency and Reedy Creek Utilities District. During 1998, about 8%
of Florida Power's electric revenues were from wholesale customers whose rates
are subject to the jurisdiction of the FERC. For further information with
respect to rates, see Note 9 to the Financial Statements.
Florida Power's CR3 nuclear plant is subject to regulation by the United States
Nuclear Regulatory Commission ("NRC"). The NRC's jurisdiction encompasses broad
supervisory and regulatory powers over the construction and operation of nuclear
reactors, including matters of health and safety, antitrust considerations and
environmental impact. Florida Power currently has a 90.4% ownership interest in
CR3. The purchase of the ownership interest of the city of Tallahassee (1.3%) is
currently awaiting regulatory approval from the FPSC, FERC, and NRC. It is
anticipated the purchase will be complete in the third quarter of 1999. There is
no capital expenditure related to this purchase. (See Note 4 to the Financial
Statements.)
By virtue of state and municipal legislation, Florida Power holds franchises
with varying expiration dates in nearly all municipalities in which it
distributes electric energy. Approximately 40% of total utility revenues in 1998
is covered under the terms of 111 franchise agreements with various
municipalities. The general effect of these franchises is to grant Florida Power
the right to enter upon and use streets, alleys and other public places for
erecting and maintaining poles, wires and other apparatus for the sale and
distribution of electric energy. All but one of the existing franchises cover a
30-year period from the date granted, the maximum allowed by Florida law. The
one exception is a franchise that covers a 10-year period from the date granted,
and expires in 2005. Of the 111 franchises, 5 expire during 2000, 23 expire
before December 31, 2001, 32 expire between January 1, 2002 and December 31,
2012, and 51 expire between January 1, 2013 and December 31, 2028. For
additional information on franchises, see Item 7 "MD&A - Industry
Restructuring".
ENVIRONMENTAL MATTERS
Florida Power is subject to federal, state and local regulations dealing with
air and water quality and other environmental matters. Beginning July 1, 1999,
seven new industries, including the electric utility industry, will submit for
the first time, chemical release data to the United States Environmental
Protection Agency ("EPA") as part of its Toxic Release Inventory ("TRI")
reporting requirement. This process requires electric utilities that burn coal
or oil for power generation to identify and report releases of more than 650
designated chemicals and chemical compounds, to the environment. Based on the
5
reporting criteria, Florida Power estimates that it will be required to report
on approximately 18 to 20 compounds. Four facilities are currently subject to
the reporting criteria. The total estimated cost to Florida Power of reporting
under TRI rules is estimated to be approximately $350,000 in the first year and
$250,000 each subsequent year.
AIR: All of Florida Power's air emission sources meet the air quality standards
currently set by the Florida Department of Environmental Protection ("FDEP")
and/or the EPA.
The Clean Air Act Amendments of 1990 ("CAAA"), under Title IV, Acid Rain Control
("Title IV"), set a permanent cap on emissions of sulfur dioxide. The cap is to
be implemented in two phases. Phase I limitations became effective in 1995.
Florida Power does not have any Phase I units and is not affected. Phase II,
which begins in 2000 will impose an annual cap on sulfur dioxide emissions.
Florida Power expects to be able to meet its emission limitations without
significant capital investments. Florida Power will use a combination of lower
emitting fuels, such as natural gas, low sulfur coal and oil, along with limited
use of allowance credits to meet its annual emission obligations.
Also in Phase II, emissions of nitrogen oxides from coal fired power plants are
limited. Florida Power is already meeting federal limits on three of its four
coal units. To meet Phase II limitations on the fourth unit, Florida Power is
planning to make burner modifications to lower emissions. The capital cost of
this project is approximately $5 million, of which the majority of costs were
incurred prior to 1999. The project is scheduled for completion in 1999.
Under Title III of the CAAA, the EPA is studying the emission of hazardous air
pollutants and, where appropriate, promulgating emission limitations for
specific source categories. Depending on the results of these studies and the
EPA's determination of the need for additional limitations, Florida Power could
be required to incur additional capital expenditures and operating expenses.
Under Title V of the CAAA, Florida Power is required to pay annual operating
fees based on the previous year's emissions. For 1998, these fees totaled
approximately $790,000. It is anticipated that the costs for 1999 will be a
similar amount.
In addition to the Title IV projects discussed above, Florida Power's
construction program includes approximately $4 million of planned environmental
expenditures for air quality improvement projects for the two-year period ending
December 31, 2000.
WATER: To help meet the future electricity needs of its customers, Florida Power
has built a new power plant complex in Polk County, Florida, named the Hines
Energy Complex. (See Item 2, "Properties - Utility Operations - Planned
Generation".) Approximately $28.4 million was spent through December 31, 1998 on
environmental projects related to site development at the Hines Energy Complex,
mainly for water resource related facilities. Florida Power's construction
program includes approximately $1.4 million of environmental expenditures for
water resource projects at other Florida Power facilities for the two-year
period ending December 31, 2000.
WASTE MATERIALS: Florida Power is nearing completion of its program to reduce
electrical equipment utilizing polychlorinated biphenyls ("PCB"). All regulatory
compliance dates have been met. All PCB transformers (i.e. those havin greater
than 500 ppm PCB) have been removed from Florida Power's electric generating
plants, except for one small plant. Removal of PCB transformers from this final
6
plant will be delayed until Florida Power decides whether and for how long the
plant will remain in operation.
STORAGE TANK PROGRAM: The regulation of underground and aboveground storage
tanks has expanded to affect virtually every Florida Power pollutant storage
tank with a capacity of 100 gallons or greater, including vehicular fuel tanks,
bulk fuel storage tanks, mineral acid tanks, hazardous material tanks and
compression vessels. The FDEP's storage tank regulations require the replacement
or upgrading of tanks that are not protected from corrosion, and the
installation of release detection and secondary containment systems. These
requirements must be met by the end of 1999. Florida Power expects the annual
operating expense to be immaterial and construction expenditures through 1999
related to compliance with these regulations to be approximately $300,000.
As of January 1, 1999, there no longer exists any state funded petroleum cleanup
programs for new contaminations. However, Florida Power believes that for the
majority of past storage tank contamination cleanup expenditures it will qualify
under one of two programs. Under one program, Florida Power is required to pay a
deductible and the State of Florida will pay for the remaining portion of the
cleanup. Under the second program, Florida Power would be responsible for a
Contamination Assessment and 25% of the total remediation, with the state of
Florida funding the remaining 75% of the cleanup.
ELECTROMAGNETIC FIELDS: The potential adverse effect of electromagnetic fields,
or electric and magnetic fields ("EMF"), upon human health continues to be an
important issue in the siting, construction and operation of electric
transmission and distribution systems. EMF from a variety of sources, including
transmission and distribution lines, has been the subject of many studies and
much public discussion in recent years. The National EMF Research and Public
Information Dissemination Program has completed an in depth research program.
This program was co-funded by federal and private utilities, including Florida
Power. The findings, to be presented to the U.S. Congress in 1999, could have a
major impact on the EMF issue.
Because of its exclusive jurisdiction to regulate EMF associated with electric
transmission and distribution lines and substation facilities in Florida, the
Florida Department of Environmental Protection ("FDEP") has adopted rules that
establish certain EMF limits for new transmission lines and substations. The
rules also require an annual review of the state of the scientific research into
the potential adverse effects of EMF upon human health. The staff of the FDEP
provides an annual progress report to the Environmental Regulation Commission.
In February 1998, based on its review of the scientific research, the staff
recommended that no revision of the current EMF standards be made at that time.
The 1999 report has not yet been released. The Environmental Regulation
Commission adopted the staff's recommendation and made no revision to EMF
standards.
Florida Power believes that compliance with these EMF rules, which at present
essentially maintain the status quo with respect to regulated EMF exposure
levels, will not have a material adverse effect on the cost of constructing or
maintaining new transmission lines or substations. However, there always is a
potential for lawsuits brought by plaintiffs alleging damages caused by EMF.
Florida Power's management monitors developments in research concerning the
potential health effects of EMF, EMF mitigation technologies and procedures, and
significant actions by principal federal and Florida agencies related to EMF.
7
OTHER ENVIRONMENTAL MATTERS: Florida Power has received notices from the EPA
that it is or could be a potentially responsible party ("PRP") under the
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA" or
"Superfund") and the Superfund Amendment and Reauthorization Act ("SARA") and
may be liable, together with others, for the costs of cleaning up several
contaminated sites identified by the state and federal agencies. In addition to
these designated sites, there are other sites where Florida Progress affiliates
may be responsible for additional environmental cleanup. For further information
concerning certain environmental matters relating to Florida Power, see
paragraphs 5 and 7 under Item 3 "Legal Proceedings" and Note 11 to the Financial
Statements.
EMPLOYEES
As of December 31, 1998, Florida Power had 4,740 full-time employees. The
International Brotherhood of Electrical Workers represents approximately 2,016
of these full-time employees. The current union contract was ratified in May
1997 and expires in December 1999.
DIVERSIFIED OPERATIONS
Florida Progress' diversified operations are owned directly or indirectly
through Progress Capital, a Florida corporation and wholly owned subsidiary of
Florida Progress. Progress Capital holds the capital stock of, and provides
funding for, Florida Progress' non-utility subsidiaries. Its primary subsidiary
is Electric Fuels. Formed in 1976, Electric Fuels is an energy and
transportation company with operations organized into three business units.
Electric Fuels' energy and related services business unit supplies coal to
Florida Power's Crystal River Energy Complex and other utility and industrial
customers. Electric Fuels' inland marine transportation business unit, MEMCO
Barge Line, Inc. ("MEMCO"), transports coal and dry-bulk cargoes primarily along
the Mississippi and Ohio rivers. The rail services business unit, led by
Progress Rail Services Corporation ("Progress Rail"), is one of the largest
integrated processors and suppliers of railroad materials in the country. With
operations in 20 states, Progress Rail offers a full range of railcar parts,
maintenance-of-way equipment, rail and other track material, railcar repair
facilities, railcar scrapping and metal recycling as well as railcar sales and
leasing.
In November 1998, Florida Progress formed a new subsidiary, Progress
Telecommunications Corporation. This subsidiary was formed to sell wholesale
fiber-optic-based capacity service in Florida to long-distance carriers,
Internet service providers, and other telecommunications companies, as well as
large industrial, commercial and government entities. Progress
Telecommunications will also sell wireless structure attachments to wireless
communication companies and government entities.
As of December 31, 1998, Progress Capital and its subsidiaries had 4,385
full-time employees. (For additional information with respect to Progress
Capital and its subsidiaries, see Item 7 "MD&A - Operating Results - Diversified
Operations"), Note 8 to the Financial Statements and paragraph 10 of Item 3
"Legal Proceedings.")
COMPETITION
Florida Progress' non-utility subsidiaries compete in their respective
marketplaces in terms of price, quality of service, location and other factors.
Electric Fuels competes in several distinct markets: its coal operations compete
8
in the eastern United States utility and industrial coal markets; its marine
transportation and barge operations compete in the coal, grain and bulk products
transportation markets on the Ohio and lower Mississippi rivers; its marine
equipment repair business competes in the inland river and gulf coast repair
markets; and its rail operations compete in the railcar repair, parts and
associated services markets in the eastern United States, in the midwest and
west. Factors contributing to Electric Fuels' success in these markets include a
competitive cost structure, strategic locations and, in the case of its marine
transportation operations, a modern fleet. There are, however, numerous
competitors in each of these markets, although no one competitor is dominant in
any industry. The business of Electric Fuels and its subsidiaries, taken as a
whole, is not subject to significant seasonal fluctuation. For further
information with respect to Florida Progress' non-utility subsidiaries and
competition, see Item 7 "MD&A - Diversified Operations".
ENVIRONMENTAL MATTERS
Electric Fuels is subject to federal, state and local regulations which govern
air and water quality, waste disposal and other environmental matters. The coal
mining business is affected primarily by the Clean Water Act, the Clean Air Act
and the Surface Mining Control and Reclamation Act of 1977. The transportation
and the railcar and marine repair businesses are primarily affected by the
Resource Conservation and Recovery Act, the Emergency Planning and Community
Right-To-Know Act and the Clean Water Act.
The Environmental Services Department of Electric Fuels reviews existing and
emerging environmental regulations, disseminates applicable environmental
information throughout the organization and conducts site specific environmental
compliance audits. Transactional environmental assessments are performed on new
acquisitions to determine the potential environmental liabilities associated
with the facilities being considered. Compliance with environmental laws and
regulations has not had a material effect on Electric Fuels' capital
expenditures, earnings or competitive position, and Electric Fuels does not
anticipate making any material capital expenditures for environmental facilities
through the end of 2000.
For further information concerning certain environmental matters relating to
Florida Progress' diversified operations, see Note 11 to the Financial
Statements.
9
EXECUTIVE OFFICERS
Roy A. Anderson, Senior Vice President, Energy Supply of Florida Power, Age 50.
Mr. Anderson became Senior Vice President, Nuclear Operations, effective January
20, 1997, and now serves as the Senior Vice President of Energy Supply. From
April 1, 1997 to April 17, 1998, he served as Chief Nuclear Officer. Prior to
joining Florida Power, Mr. Anderson was employed by Carolina Power and Light,
where he held numerous executive officer positions since 1993 in the areas of
nuclear operations, fossil generation, and distribution and customer service.
From 1987 to 1993, he was employed by Boston Edison Company, where he served as
Plant Manager, Vice President and ultimately as Senior Vice President, Nuclear
Operations.
Kenneth E. Armstrong, Vice President and General Counsel of Florida Progress
and Florida Power, Age 51.
Mr. Armstrong has served as General Counsel of Florida Progress since July 1990
and as Vice President since April 1992. In April 1995, he became Vice President
and General Counsel of Florida Power. In addition to these positions, Mr.
Armstrong served as Assistant Secretary of Florida Progress from April 1992 to
April 1993 and as Secretary from April 1993 to April 1996. He also served as
Assistant Secretary of Florida Power from 1987 until April 1993 and as Secretary
from April 1993 until April 1996.
Janice B. Case, Senior Vice President, Energy SolutionsSM of Florida Power,
Age 46.
Mrs. Case was named Senior Vice President, Energy SolutionsSM effective June 1,
1997, after serving as Vice President since 1996. From October 1990 until July
1996, she served as Vice President, Suncoast Florida Region of Florida Power.
Michael B. Foley, Jr., Senior Vice President, Energy Delivery of Florida Power,
Age 55.
Since July 1996, Mr. Foley's principal occupation has been as shown above. Mr.
Foley served as Vice President in that position since February 1995. From
October 1988 until February 1995, Mr. Foley served as Director of System
Planning of Florida Power.
Jeffrey R. Heinicka, Senior Vice President and Chief Financial Officer of
Florida Power, Age 44.
Since March 15, 1999, Mr. Heinicka's principal occupation has been as shown
above. From March 1994 to March 1999, Mr. Heinicka was Chief Financial Officer
of both Florida Progress and Florida Power. From December 1990 to March 1994,
Mr. Heinicka served as Vice President and Treasurer of Florida Progress. Mr.
Heinicka also served as Vice President and Treasurer of Florida Power from April
1993 to March 1994, a position he held concurrently with his Vice President and
Treasurer position at Florida Progress.
Richard D. Keller, Group Vice President, Energy and Transportation of Florida
Progress, and President and Chief Executive Officer, Electric Fuels, Age 45.
Since May 1990, Mr. Keller's principal occupation has been as shown above.He has
served as President and Chief Executive Officer of Electric Fuels since February
1988.
10
William G. Kelley, Vice President, Human Resources of Florida Progress and
Florida Power, Age 51.
Mr. Kelley was appointed Vice President, Human Resources of Florida Progress and
Florida Power, effective October 27, 1997. From 1992 to 1997, he was employed by
Goulds Pumps,Inc., an international pump company, as Vice President of Human
Resources. From 1989 to 1992 he served as Director of Human Resources for The
Quaker Oats Company and headed the human resources function of the European
Headquarters in the United Kingdom of its Fisher Price Division.
Richard Korpan, Chairman, President and Chief Executive Officer of Florida
Progress, and Chairman of the Board of Florida Power, Age 57.
Mr. Korpan was appointed Chairman of the Board of Florida Progress, effective
July 1, 1998. He has held the position of President since 1991, and became Chief
Executive Officer of Florida Progress in June 1997. Since April 1996 he has also
served as Chairman of the Board of Florida Power, and until June 1, 1997, as
Chief Executive Officer of Florida Power. He joined Florida Progress in 1989 as
Executive Vice President and Chief Financial Officer. He is a director of
SunTrust Bank of Tampa Bay and a member of the Business Roundtable.
Edward W. Moneypenny, Senior Vice President and Chief Financial Officer of
Florida Progress, Age 57.
Edward W. Moneypenny became Senior Vice President and Chief Financial Officer of
Florida Progress, effective March 15, 1999. Prior to joining Florida Progress,
Mr. Moneypenny was employed by Oryx Energy Company, an independent oil and
natural gas exploration company, where he held numerous executive officer and
chief financial positions since 1988. He served as a member of Oryx's board of
directors from 1994 until February 1999.
Joseph H. Richardson, Group Vice President, Utility Group of Florida Progress
and President and Chief Executive Officer of Florida Power, Age 49.
Since 1996, Mr. Richardson's principal occupation has been as shown above.
Effective June 1, 1997, he was appointed Chief Executive Officer, in addition to
President, of Florida Power. From April 1995 to April 1996, he served as Senior
Vice President, Energy Distribution of Florida Power. From October 1993 to April
1995, he served as Senior Vice President, Legal and Administrative Services, and
General Counsel of Florida Power. From August 1991 through April 1995, Mr.
Richardson also held the position of Senior Vice President of Florida Progress.
He is a director of Echelon.
Dr. Jack Critchfiled retired as Chairman of the Board of Florida Progress
effective July 1, 1998.
There are no family relationships between any director or any executive officer
of Florida Progress or Florida Power. The executive officers serve at the
pleasure of their respective Boards of Directors. Each executive officer is
appointed annually.
ITEM 2. PROPERTIES
Florida Progress believes that its physical properties and those of its
subsidiaries are adequate to carry on its and their businesses as currently
conducted. Florida Progress and its subsidiaries maintain property insurance
against loss or damage by fire or other perils to the extent that such property
11
is usually insured. (See Note 11 to the Financial Statements.) Substantially all
of Florida Power's utility plant is pledged as collateral for Florida Power's
First Mortgage Bonds. Certain river barges and tug/barge units owned or operated
by Electric Fuels are subject to liens in favor of certain lenders.
UTILITY OPERATIONS
GENERATION: As of December 31, 1998, the total net winter generating capacity of
Florida Power's generating facilities, including CR3, was 7,727 MW. This
capacity was generated by 13 steam units with a capacity of 4,661 MW and 45
combustion turbine units with a capacity of 3,066 MW. Florida Power's ability to
use its generating units may be adversely impacted by various governmental
regulations affecting nuclear operations and other aspects of Florida Power's
business. (See "Regulatory Matters and Franchises" and "Environmental Matters"
under Item 1 "Business Utility Operations - Florida Power.") Operation of these
generating units may also be substantially curtailed by unanticipated equipment
failures or interruption of fuel supplies. Florida Power expects to have
sufficient system capacity, access to purchased power and demand-side management
capabilities to meet anticipated future demand. (See Item 2 "Planned Generation
and Energy Sales" below.)
Florida Power's generating plants (all located in Florida) and their capacities
at December 31, 1998, were as follows:
Winter Net
Maximum
Primary/ Combustion Dependable
Alternate Location Steam Turbine Capacity
Plants Fuel (County) MW MW MW
- ---------------- ------- ------------- ------- ------- ----------
Crystal River: Citrus
Unit #1 Coal 373 - 373
Unit #2 Coal 469 - 469
Unit #3 Uranium 755* - 755
Unit #4 Coal 717 - 717
Unit #5 Coal 717 - 717
----- -----
3,031 3,031
Anclote: Pasco
Unit #1 Oil 517 - 517
Unit #2 Oil/Gas 517 - 517
Bartow Oil/Gas Pinellas 449 217 666
Turner Oil Volusia - 200 200
Intercession City** Oil/Gas Osceola - 912 912
DeBary Oil/Gas Volusia - 786 786
Higgins Gas Pinellas - 148 148
Bayboro Oil Pinellas - 232 232
Avon Park Oil/Gas Highlands - 64 64
Rio Pinar Oil Orange - 18 18
Suwannee River Gas/Oil Suwannee 147 201 348
Tiger Bay Gas Polk - 246 246
University of Fla. Gas Alachua - 42 42
----- ----- -----
4,661 3,066 7,727
===== ===== =====
* Represents 90.4% of total plant capacity. The remaining 9.6% of capacity is
owned by other parties.
12
** Florida Power and Georgia Power Company ("Georgia Power") are co-owners of a
168-MW advanced combustion turbine located at Florida Power's Intercession City
site. Georgia Power has the exclusive right to the output of this unit during
the months of June through September. Florida Power has that right for the
remainder of the year.
PLANNED GENERATION AND ENERGY SALES: Through a competitive bidding process,
Florida Power signed a contract with the city of Bartow to supply wholesale
power and energy-related services for another five years, beginning in November
1999. Current requirements for Bartow are 55 MW, which is expected to grow to
over 70 MW over the life of the contract. In 1995, Florida Power agreed to sell
605 MW of year round capacity to Seminole from 1999 through 2001. While 150 MW
of this transaction represents a continuation of existing business, 455 MW
represents new sales to Seminole. In addition, Florida Power has agreed to sell
from 150 to 300 MW to Seminole from 2000-2002. This contract was awarded to
Florida Power as a result of a competitive bidding process initiated by
Seminole. Additionally, Florida Power is in the final year of a three year
contract to sell between 150 and 400 MW of summer-peaking capacity annually to
Georgia Power. The committed capacity for 1999 is 200 MW.
In 1992, the FPSC granted Florida Power a certificate of need to build 470 MW of
new generation using combined cycle technology. In September 1994, Florida Power
purchased approximately 8,100 acres of mined-out phosphate land for the new
power plant site. The site is located in Polk County, Florida, approximately 50
miles east of Tampa, and has been designated the Hines Energy Complex.
Construction of the unit was completed in December 1998. The first power block
is a nominal 500 MW combined cycle unit which is expected to be placed into
commercial operation in the spring of 1999. Florida Power plans to use natural
gas to fuel the unit.
Florida Power has obtained capacity on the Florida Gas Transmission Company's
system for the transportation of natural gas to the Hines Energy Complex in Polk
County. Florida Power began using the capacity in January 1998. This
transportation will serve a portion of the plant's requirements. Florida Power
also has contracted for natural gas supply and its transportation for the
remaining portion of the plant's requirements.
Some of the capacity at the Hines Energy Complex will be used to meet the
requirements of a wholesale contract signed in 1995, in which Florida Power
agreed to sell an additional 455 MWs to Seminole, beginning in 1999(previously
mentioned herein).
In February 1999, Florida Power announced that it plans to build three peaking
power generation units at Florida Power's Intercession City site. The units are
designed to provide electricity during periods of peak customer demand and are
projected to provide a total of 300 MW of power beginning in December 2000. The
new units are combustion turbine units capable of using either natural gas or
oil, depending on cost and availability of those fuel sources.
In connection with the construction of new power plants in Florida, the FPSC
requires each investor-owned electric utility to engage in a competitive bidding
process for the construction of new generation, unless the utility demonstrates
on a case-by-case basis that such a process is not in the best interests of the
utility's ratepayers. See Item 3 "Legal Proceedings", Paragraph 12. The
construction of peaking units does not fall under this requirement.
13
NUCLEAR PLANT AND NUCLEAR INSURANCE: Information regarding nuclear plant and
nuclear insurance is contained in Note 4 and Note 11 to the Financial
Statements.
TRANSMISSION AND DISTRIBUTION: As of December 31, 1998, Florida Power
distributed electricity through 363 substations with an installed transformer
capacity of 43,255,840 kilovolt amperes ("KVA"). Of this capacity, 29,399,250
KVA is located in transmission substations and 13,856,590 KVA in distribution
substations. Florida Power has the second largest transmission network in
Florida. Florida Power has 4,669 circuit miles of transmission lines, of which
2,646 circuit miles are operated at 500, 230, or 115 kilovolts ("KV") and the
balance at 69 KV. Florida Power has 24,723 circuit miles of distribution lines
which operate at various voltages ranging from 2.4 to 25 KV.
Florida Power along with 21 other in-state electric utilities and 14
non-utilities comprise the Florida Reliability Coordinating Council ("FRCC"),
which was approved by the North American Electric Reliability Council ("NERC")
as the tenth region of NERC. The FRCC is responsible for ensuring the
reliability of the bulk power electric system in peninsular Florida.
Florida Power and five other FRCC transmission providers have established
Florida Open Access Sametime Information System. This is an internet location
where transmission customers may obtain transmission information and submit
requests for service or resell service rights.
DIVERSIFIED OPERATIONS
Electric Fuels owns and/or operates approximately 5,000 railcars, 50
locomotives, 1,100 river barges and 27 river towboats that are used for the
transportation and shipping of coal, steel and other bulk products. Through
joint ventures, Electric Fuels has five oceangoing tug/barge units. An Electric
Fuels subsidiary, through another joint venture, owns one third of a large bulk
products terminal located on the Mississippi River south of New Orleans, which
handles coal and other products. Electric Fuels provides drydocking and repair
services to towboats, offshore supply vessels and barges through operations it
owns near New Orleans, Louisiana.
Electric Fuels controls, either directly or through subsidiaries, coal reserves
located in eastern Kentucky and southwestern Virginia. Electric Fuels owns, in
fee, properties that contain estimated proven and probable coal reserves of
approximately 185 million tons and controls, through mineral leases, additional
estimated proven and probable coal reserves of approximately 30 million tons.
The reserves controlled by Electric Fuels include substantial quantities of high
quality, low sulfur coal that is appropriate for use at Florida Power's existing
generating units. Electric Fuels' total production of coal during 1998 was
approximately 3.0 million tons.
In connection with its coal operations, Electric Fuels subsidiaries own and
operate an underground mining complex located in southeastern Kentucky and
southwestern Virginia. Other Electric Fuels subsidiaries own and operate surface
and underground mines, coal processing and loadout facilities and a river
terminal facility in eastern Kentucky, a railcar-to-barge loading facility in
West Virginia, and three bulk commodity terminals: one on the Ohio River in
Cincinnati, Ohio, and two on the Kanawha River near Charleston, West Virginia.
Electric Fuels and its subsidiaries employ both company and contract miners in
their mining activities.
14
Another Electric Fuels subsidiary owns an interest in a partnership, located in
eastern Kentucky, which produces synthetic fuels that qualify for Federal tax
credits under Section 29 of the Internal Revenue Code.
A subsidiary of Electric Fuels has acquired oil and gas leases on 1,920 acres in
Garfield County, Colorado, containing proven natural gas reserves of 37.6
billion cubic feet.
Progress Rail, an Electric Fuels subsidiary is one of the largest integrated
processors of railroad materials in the United States, and is a leading supplier
of new and reconditioned freight car parts, rail, rail welding and track work
components, railcar repair facilities, railcar and locomotive leasing,
maintenance-of-way equipment and scrap metal recycling. It has facilities in 20
states, Mexico and Canada.
Another subsidiary of Electric Fuels owns and operates a manufacturing facility
at the Florida Power Energy Complex in Crystal River, Florida. The manufacturing
process utilizes the fly ash generated by the burning of coal as the major raw
material in the production of lightweight aggregate used in construction
building blocks. Electric Fuels also operates an environmental testing
laboratory in Tampa, Florida.
ITEM 3. LEGAL PROCEEDINGS
Purchased Power Contracts with Qualifying Facilities
Florida Power has interpreted the pricing provision in its QF contracts to allow
it to pay an as-available energy price rather than a higher firm energy price
when the avoided unit upon which the contract is based would not have been
operated. Two QFs have suits pending against Florida Power over the level of
payments made by Florida Power under the contracts, as discussed in paragraphs 1
and 2 below:
1. Metropolitan Dade County and Montenay Power Corp. v. Florida Power
Corporation, Circuit Court of the Eleventh Circuit for Dade County,
Florida, Case No. 96-09598-CA-30
Metropolitan Dade County and Montenay Power Corp. v. Florida Power
Corporation, U.S. District Court, Southern District, Miami Division,
Case No. 96-0594-C.V.-LENNARD
In re: Petition for Declaratory Statement That Energy Payments Are
Limited to Analysis of Avoided Unit's Contractually Specified
Characteristics, Florida Public Service Commission, Docket
No.980283-EQ.
On February 13, 1996, Metropolitan Dade County ("Dade") and Montenay Power Corp.
("Montenay") filed a complaint in the above-referenced state court seeking a
declaratory judgment that their interpretation of the energy pricing provision
in their QF contract is correct, and damages in excess of $1.3 million for
breach of that contract. No trial date has as yet been set in the State Court
action.
On May 14, 1996, Dade and Montenay filed suit against Florida Power in the
above-referenced federal district court based on essentially the same facts as
presented in the state court case, but alleging violations of federal antitrust
laws and demanding unspecified treble damages. In March 1997, the plaintiffs
15
amended the federal court case to include Florida Progress and Electric Fuels.
In June 1998, the judge granted the defendants' Motion for Summary Judgement and
dismissed the case. Dade and Montenay filed a Notice of Appeal with the 11th
Circuit Court of Appeals in October 1998.
On February 23, 1998, Florida Power filed a petition with the FPSC for a
Declaratory Statement that the previous FPSC - approved negotiated contract
between the parties limits energy payments thereunder to the avoided costs based
upon an analysis of a hypothetical unit having the characteristics specified in
the contract. In October 1998, the FPSC denied the Florida Power petition for
declaratory statement. In January 1999, Florida Power filed a Notice of Appeal
of the FPSC denial with the Florida Supreme Court. (See Note 11 to the Financial
Statements.)
2. NCP Lake Power, Inc. v. Florida Power Corporation, Florida Circuit
Court, Fifth Judicial Circuit for Lake County, Case No. 94-2354-CA-01
In re: Petition for Declaratory Statement Regarding the Negotiated
Contract for Purchase of Firm Capacity and Energy between Florida Power
Corporation and Lake Cogen, LTD., Florida Public Service Commission,
Docket No. 980509-EQ.
On October 21, 1994, NCP Lake Power, Inc. ("Lake"), a general partner of Lake
Cogen, Ltd., filed the above-referenced suit against Florida Power asserting
breach of its QF contract and requesting a declaratory judgment. A bench trial
in the case concluded in December 1998, but the court has not yet ruled.
On April 9, 1998, Florida Power filed a petition with the FPSC for a Declaratory
Statement that the contract between the parties limits energy payments
thereunder to the avoided costs based upon an analysis of a hypothetical unit
having the characteristics specified in the contract. In October 1998, the FPSC
denied the petition. In January 1999, Florida Power filed a Notice of Appeal of
this FPSC order with the Florida Supreme Court. (See Note 11 to the Financial
Statements.)
3. Wanda L. Adams, et al. v. Florida Power Corporation and Florida
Progress Corporation, U.S. District Court, Middle District of Florida,
Ocala Division, Case No. 95-123-C.V.-OC-10.
On October 13, 1995, Florida Power and Florida Progress were served with a
multi-party lawsuit involving 17 former Florida Power employees. The plaintiffs
generally alleged discrimination in violation of the Age Discrimination and
Employment Act and wrongful interference with pension rights in violation of the
Employee Retirement Income Security Act as a result of their involuntary
terminations during Florida Power's reduction in force. While no dollar amount
is specified, each Plaintiff seeks back pay, reinstatement or front pay through
their projected dates of normal retirement, costs and attorney's fees. The
Plaintiffs subsequently filed motions adding 39 additional plaintiffs.
In November 1995, Florida Power filed its answer, a motion to dismiss Florida
Progress, and a counterclaim against five of the plaintiffs who signed releases,
promising, among other things, not to sue Florida Power with respect to matters
involving their employment or termination. The counterclaim sought enforcement
of the agreement, dismissal of plaintiffs' complaints, and an award of attorneys
fees and costs of litigation.
In October 1996, a joint stipulation to provisionally certify the case as a
class action pursuant to the Age Discrimination in Employment Act was approved.
16
By May 28, 1997, the final day for individuals to "opt into" this action, 61
additional former employees elected to do so, for a total of 117 plaintiffs.
In June 1998, the judge issued an order on several pending motions. The motion
to dismiss Florida Progress was denied, but all the ERISA claims were dismissed
and the state age claims of 5 plaintiffs were dismissed. The Motion to Dismiss 4
plaintiffs' federal age claims based on Statute of Limitations violations was
granted.
In October 1998, Florida Power filed a motion for summary judgement on its
counterclaim and on the state law claims of 69 plaintiffs, who are similarly
situated to the 5 plaintiffs who have had their state claims dismissed. In
December 1998, Florida Power and the plaintiff's engaged in informal settlement
discussions, which were terminated on December 22, 1998. However, plaintiffs
have filed a motion to enforce a purported $11 million settlement agreement.
Florida Power denies that such an agreement exists and has filed responsive
pleadings to that effect.(See Note 11 to the Financial Statements.)
4. Florida Power Corporation v. United States, U.S. Court of Federal
Claims, Civil Action No. 96-702C. Consolidated Edison Co., et al v.
United States, United States District Court, Southern District of New
York, Case No. 98-CIV-4115
On November 1, 1996, Florida Power filed suit against the U.S. Government in the
U.S. Federal Court of Claims alleging breach of contract and illegal taking of
property without just compensation. The suit arises out of several contracts
under which the government provided uranium enrichment services at fixed prices.
After Florida Power paid for all services provided under the contracts, the
government, through federal legislation enacted in 1992, imposed a retroactive
price increase in order to fund the decontamination and decommissioning of the
government's gaseous diffusion uranium enrichment facilities. The government is
collecting this increase through an annual "special assessment" levied upon all
utilities that had enrichment services contracts with the government. Collection
of the special assessments began in 1992 and is scheduled to continue for a
fifteen-year period.
To date, Florida Power has paid more than $11.0 million in special assessments,
and if continued throughout the anticipated fifteen-year life, the special
assessments would increase the cost of Florida Power's contracts by more than
$23 million. Florida Power seeks an order declaring that all such special
assessments are unlawful, and an injunction prohibiting the government from
collecting future special assessments, and damages of approximately $11.0
million, plus interest.
In February 1999, the court granted Florida Power's motion to stay, pending
resolution of the Consolidated Edison case, sited below.
In June 1998, Florida Power, Consolidated Edison Co. and 15 other utilities
filed a declaratory judgement action against the United States in the Southern
District Court of New York, challenging the constitutionality of the $2.25
billion retroactive assessment imposed by the federal government on domestic
nuclear power companies to fund the decommissioning and decontamination of the
government's uranium enrichment facilities.
17
5. Sanford Gasification Plant Site, Sanford, Florida ("Sanford Site")
The Sanford Site is a former manufactured gas site located in the city of
Sanford, Florida. Sanford Gas Company, which merged into Florida Power in 1944,
operated the plant until 1946 when it was sold to South Atlantic Gas Company
(later Atlanta Gas Company). The plant was conveyed three more times, being
purchased by the current owner, Florida Public Utilities, in 1965.
In June 1996, the EPA completed an Expanded Site Investigation/Remedial
Investigation at the site. In July 1997, the EPA sent a general and special
notice letter which advised Florida Power and other PRPs of their potential
liability for cleanup. The investigation concluded that the release or
threatened release of contaminants includes the site itself and down gradient
contamination of an unnamed tributary used for storm water drainage. Water flows
from the tributary into Cloud Branch Creek and ultimately Lake Monroe.
Florida Power, Florida Power and Light Company, Atlanta Gas Company, Florida
Public Utilities Company and the City of Sanford executed an Administrative
Order on Consent ("AOC") and a Site Participation Agreement with EPA. By signing
the AOC, the PRPs agreed, jointly and severally, to perform the Remedial
Investigation and Feasibility Study ("RI/FS") at the Sanford site. By executing
the Site Participation Agreement, the PRPs agreed to an allocation of costs for
a RI/FS for up to $1.5 million. Florida Power's share is approximately 39.7% of
these costs.
In September 1998, the EPA formally approved the PRP RI/FS Work Plan. The RI
field work was completed in January 1999. The EPA is expected to review the
final Treatability Study report and provide further guidance to the PRPs by
August 1999. Additional contributions for subsequent cleanup costs will be
negotiated among the PRPs as the scope of clean-up efforts become more defined.
(See Note 11 to the Financial Statements.)
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
State of Oklahoma, ex rel, John P. Crawford, Insurance Commissioner as
Receiver for Mid-Continent Life Insurance Company v. Florida Progress
Corporation, a Florida corporation, Jack Barron Critchfield, George
Ruppel, Thomas Steven Krzesinski, Richard Korpan, Richard Donald
Keller, James Lacy Harlan, Gerald William McRae, Thomas Richard Dlouhy,
Andrew Joseph Beal and Robert Terry Stuart, Jr., District Court of
Oklahoma County, State of Oklahoma, Case No. CJ-97-2518-62 (part of the
same case noted above).
Michael Farrimond, Pamela S. Farrimond, Angela Fry, Jowhna Hill, and
Barbara Hodges, for themselves and all others similarly situated v.
Florida Progress Corporation, a Florida corporation, Jack Barron
Critchfield, George Ruppel, Thomas Steven Krzesinski, Richard Korpan,
Richard Donald Keller, James Lacy Harlan, Gerald William McRae, Thomas
Richard Dlouhy, Andrew Joseph Beal and Robert Terry Stuart, Jr.,
District Court of Oklahoma County, State of Oklahoma, Case No.
CJ-99-130-65
On April 14, 1997, the Insurance Commissioner of the State of Oklahoma
("Commissioner") received approval from the Oklahoma County District Court to
temporarily seize control of the operations of Mid-Continent Life Insurance
Company ("Mid-Continent"). On May 23, 1997, the District Court of Oklahoma
County granted the application of the Commissioner to place Mid-Continent into
receivership and ordered the Commissioner to develop a plan of rehabilitation
for Mid-Continent. Inconsistently, the court ruled that premiums could be raised
18
on Mid-Continent policies. Both parties appealed to the Oklahoma Supreme Court,
but these appeals were withdrawn in February 1999.
On December 22, 1997, the Commissioner filed with the court a petition for
damages against Florida Progress and certain former Mid-Continent directors and
officers of Florida Progress, alleging alter ego, negligence, breach of
fiduciary duty, misappropriation of funds, unjust enrichment, ultra vires,
violation of Oklahoma statutory insurance law, violation of Oklahoma statutory
corporate law, and seeking equitable relief. On April 17, 1998, the court
granted motions to dismiss the individual defendants, leaving Florida Progress
as the sole remaining defendant in the lawsuit. This lawsuit has been stayed by
agreement of the parties and is expected to be resolved in the context of the
rehabilitation plan.
A new Commissioner was elected in November 1998 and has stated his intention to
work with Florida Progress and others to develop a plan to rehabilitate
Mid-Continent rather than pursue litigation against Florida Progress. Florida
Progress is working with the new Commissioner to develop a viable plan to
rehabilitate Mid-Continent, which would include a sale of that company.
On January 19, 1999, five Mid-Continent policyholders filed a purported class
action against Mid-Continent and the same defendants named in the former case
filed by Commissioner Crawford. The complaint contains substantially the same
factual allegations as the December 22, 1997 case. Defendants have filed a
motion to transfer the case to the receivership court and will seek to have it
resolved in the context of the rehabilitation plan.
Florida Progress intends to vigorously defend itself and other defendants
against outstanding charges and cooperate with the receiver to gain the court's
approval of a rehabilitation plan that serves its best interests and those of
the policy holders. (See Item 7 MD&A, "Diversified Operations - Mid-Continent
Life Insurance Company" and Note 11 to the Financial Statements.)
7. Peak Oil Company, Missouri Electric Works, 62nd Street, AKO Bayside,
Bluff Electric and Holloway Superfund Sites.
Florida Power has been notified by the EPA that it is or could be a PRP with
respect to each of the above Superfund sites. Based upon the information
presently available, Florida Power has no reason to believe that its total
liability for the cleanup of these sites will be material or that it will be
required to pay a significantly disproportionate share of those costs. However,
these matters are being reported because liability for cleanup of certain sites
is technically joint and several, and because the extent to which Florida Power
may ultimately have to participate in those cleanup costs is not presently
determinable.
8. Calgon Carbon Corporation v. Potomac Capital Investment Corporation, Potomac
Electric Power Company, Progress Capital Holdings, Inc., and Florida Progress
Corporation, United States District Court for the Western District of
Pennsylvania, Civil Action No. 98-0072.
Calgon Carbon Corporation ("Calgon") filed a complaint on January 12, 1998,
asserting securities fraud, breach of contract and other claims in connection
with the sale to it by two of the defendants in December 1996 of their interests
in Advanced Separation Technologies, Incorporated ("AST"), a corporation engaged
in the business of designing and assembling proprietary separation equipment.
Prior to closing, Progress Capital, a wholly owned subsidiary of Florida
Progress, owned 80 percent of the outstanding stock of AST and Potomac Capital
Investment Corporation (an entity unaffiliated with PCH or Florida Progress)
19
owned 20 percent. Calgon paid PCH an aggregate of approximately $57.5 million
(producing net proceeds of approximately $56 million after certain fees and
expenses) in respect of PCH's share of AST's stock. Calgon claims that AST's
assets and revenues were overstated and liabilities and expenses were
understated for 1996. Calgon also alleges undisclosed facts relating to
accounting methodology, poor products, manufacturing and quality control
problems and undisclosed warranty claims. Calgon seeks damages, punitive damages
and the right to rescind the purchase. The defendants have filed a motion to
dismiss all claims, which is pending.
9. FOCAS, Inc. v. Florida Power Corporation, U.S. District Court, Northern
District of Georgia, Atlanta Division, Case No. CV-822-CC
Florida Power entered into a contract with FOCAS, Inc. ("FOCAS") for the supply
of fiberoptic cable. A portion of the cable was found to be defective, and was
replaced. FOCAS invoiced Florida Power for the defective cable in the amount of
approximately $2 million. While discussions proceeded regarding the matter,
FOCAS sued Florida Power alleging breach of contract, unjust enrichment and
fraudulent inducement, and requesting up to approximately $76 million in
damages, representing, among other things, Florida Power's alleged profits over
the estimated fifteen year life of the cable. Florida Power filed its Answer on
December 12, 1998, generally denying the allegations.
10. ABC Rail Products Corporation v. Progress Rail Services Corporation and
Louisville Scrap Material Co., Inc., U.S. District Court, Northern
District of Illinois, Eastern Division, Civ. Action No. 98C3663.
On June 12, 1998, ABC Rail Products Corporation ("ABC") brought an action
against Progress Rail and Louisville Scrap Material Co., Inc. ("Louisville")
seeking injunctive and declaratory relief and treble damages based on alleged
violations of federal and state antitrust statutes as well as damages under
other state law claims. The complaint sought to enjoin Progress Rail's
acquisition of certain assets and business of Louisville and several affiliated
corporations known as the Blue Industrial Group. The parties subsequently agreed
on the terms of settlement, and the case was dismissed. This concludes this
matter for reporting purposes.
11. In Re: Joint Petition for Determination of Need for an Electrical Power
Plant in Volusia County by the Utilities Commission, City of New Smyrna
Beach, and Duke Energy New Smyrna Beach Power Company Ltd., L.L.P.
Public Service Commission, Docket No. 981042-EM.
On August 28, 1998, Duke Energy New Smyrna Beach Power Company and the Utilities
Commission of New Smyrna Beach filed a petition with the FPSC seeking a
determination of need to build a 514 MW combined cycle electric power plant with
an in-service date of November 1, 2001. In September 1998, Florida Power filed a
Motion to Intervene and a Motion to Dismiss in that action. Florida Power
believed that granting the petition would profoundly restructure Florida's
statutorily mandated approach to planning and siting generating capacity by
contradicting a long standing FPSC interpretation of the Florida Power Plant
Siting Act that has been affirmed by the Florida Supreme Court. Florida Power
also believed that granting the petition would raise a host of significant
related policy issues that are beyond the scope of this proceeding. On March 4,
1999, the FPSC voted to grant the Duke petition. Florida Power intends to appeal
this decision.
20
12. In Re: Petition of Florida Power Corporation for Waiver of Rule
25-22.082 F.A.C. Selection of Generating Capacity, Florida Public
Service Commission, Docket No. 98-1360-EI.
On October 20, 1998, Florida Power filed a Petition with the FPSC seeking a
waiver of the Commission rules which require an electric utility to solicit and
evaluate bids for new generating capacity as a prerequisite to constructing a
power plant with steam capacity in excess of 75 MW. This petition was filed to
facilitate the start of construction of a second unit at the Hines Energy
Complex in Polk County. On January 19, 1999, the FPSC voted to deny the Florida
Power Petition. This report concludes this matter for reporting purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
FLORIDA PROGRESS
Florida Progress' common stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange. The high and low price per share of Florida Progress'
common stock for each quarterly period and the dividends per common share paid
on shares of Florida Progress' common stock during the last two fiscal years
appear in Item 8 on the "Quarterly Financial Data" table for Florida Progress at
the end of the Notes to the Financial Statements, and is incorporated herein by
reference.
In February 1999, Florida Progress' Board announced an increase of one cent per
share in the common stock quarterly dividend, which on an annual basis would
increase the dividend from $2.14 to $2.18 per share. This represents an annual
dividend growth rate of 1.9%. In 1998, Florida Progress' dividend payout ratio
was approximately 74% of earnings. Information concerning the Florida Progress
dividend policy is set forth in Item 7 "MD&A - Liquidity and Capital Resources".
Florida Progress' Restated Articles of Incorporation do not limit the dividends
that may be paid on its common stock. However, the primary source for payment of
Florida Progress' dividends consists of dividends paid to it by Florida Power.
Florida Power's Amended Articles of Incorporation and its Indenture dated as of
January 1, 1944, under which it issues first mortgage bonds, contain provisions
restricting dividends in certain circumstances. At December 31, 1998, Florida
Power's ability to pay dividends was not limited by these restrictions.
Florida Progress and Progress Capital have entered into a Second Amended and
Restated Guaranty and Support Agreement dated as of August 7, 1996, pursuant to
which Florida Progress has unconditionally guaranteed the payment of Progress
Capital's debt (as defined in the agreement).
Florida Progress did not issue any equity securities during 1998 that were not
registered under the Securities Act. Progress Capital, however, has a
privately-placed medium-term note program. (See Item 7 "Liquidity and Capital
Resources-Diversified Operations", and Note 6 to the Financial Statements.)
The approximate number of equity security holders of Florida Progress is as
follows:
Number of Registered Holders*
Title of Class as of December 31, 1998
- ------------------------------- ----------------------------
Common Stock without par value 44,757
* The computation of registered holders includes record holders as well as
individual positions in the Progress Plus Stock Plan.
22
FLORIDA POWER
All of Florida Power's common stock is owned by Florida Progress, and as a
result there is no established public trading market for the stock. For the past
three years, Florida Power has paid quarterly dividends to Florida Progress
totaling the amounts shown in the Statements of Shareholder's Equity in the
Financial Statements.
Florida Power's amended articles of incorporation, and its Indenture dated as of
January 1, 1944, as supplemented, under which it issues first mortgage bonds,
contain provisions restricting dividends in certain circumstances. At December
31, 1998, Florida Power's ability to pay dividends was not limited by these
restrictions.
ITEM 6. SELECTED FINANCIAL DATA
Annual Growth Rates
(in percent)
1993-1998 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
FLORIDA PROGRESS CORPORATION
Summary of operations (in millions)
Utility revenues 6.2 $2,648.2 $2,448.4 $2,393.6 $2,271.7 $2,080.5 $1,957.6
Diversified revenues (continuing) 17.7 972.1 868.0 764.3 736.1 644.8 430.3
Income from continuing operations
Before non-recurring items 7.5 281.7 254.3 252.4 238.9 212.0 196.0
Income from continuing operations 7.5 281.7 54.3 250.7 238.9 212.0 196.0
Income (loss)from discontinued
operations and change in accounting (26.3) 0.6
Net income 7.5 281.7 54.3 224.4 238.9 212.0 196.6
-------------------------------------------------------------------------------------------------------------------------
Balance sheet data (in millions):
Total assets 2.9 $6,160.8 $5,760.0 $5,348.4 $5,550.4 $5,453.1 $5,338.0
Capitalization:
Short-term capital 14.4 $ 382.1 $ 230.0 $ 39.0 $173.7 $ 99.9 $195.2
Long-term debt 4.1 2,250.4 2,377.8 1,776.9 1,662.3 1,835.2 1,840.5
Preferred stock (25.8) 33.5 33.5 33.5 138.5 143.5 148.5
Common stock equity .5 1,862.0 1,776.0 1,924.2 2,078.1 1,984.4 1,820.5
-------------------------------------------------------------------------------------------------------------------------
Total capitalization 2.5 $4,528.0 $4,417.3 $3,773.6 $4,052.6 $4,063.0 $4,004.7
- --------------------------------------------------------------------------------------------------------------------------
Common stock data:
Average shares outstanding (in millions) 1.9 97.1 97.1 96.8 95.7 93.0 88.3
Earnings per share:
Utility before non-recurring 4.4 $2.56 $2.48 $2.40 $2.27 $2.05 $2.06
Diversified continuing
before non-recurring items 16.3 .34 .14 .21 .23 .23 .16
Consolidated continuing
before non-recurring items 5.5 2.90 2.62 2.61 2.50 2.28 2.22
Consolidated continuing 5.5 2.90 .56 2.59 2.50 2.28 2.22
Discontinued operations and
change in accounting - - (.27) - - .01
Consolidated 5.4 2.90 .56 2.32 2.50 2.28 2.23
Dividends per common share 1.9 2.14 2.10 2.06 2.02 1.99 1.95
Dividend payout 73.8% 375.3% 88.9% 81.0% 87.7% 87.6%
Dividend yield 4.8% 5.4% 6.4% 5.7% 6.7% 5.9%
Book value per share of common stock (1.3) $19.13 $18.30 $19.84 $21.55 $20.85 $20.40
Return on common equity 15.6% 2.9% 10.9% 11.8% 11.1% 11.1%
-------------------------------------------------------------------------------------------------------------------------
Common stock price per share:
High 47 1/8 39 1/4 36 1/2 35 3/4 33 5/8 36 3/8
Low 37 11/16 27 3/4 31 1/2 29 3/8 24 3/4 31 1/4
Close 5.9 44 13/16 39 1/4 32 1/4 35 3/8 30 33 5/8
Price earnings ratio (year-end) 15.5 70.1 13.9 14.2 13.2 15.1
- --------------------------------------------------------------------------------------------------------------------------
Other year-end data:
Number of employees 3.1 9,125 7,990 7,291 7,174 7,394 7,825
- --------------------------------------------------------------------------------------------------------------------------
[CONTINUED ON NEXT PAGE]
23
Annual Growth Rates
(in percent)
1993-1998 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
FLORIDA POWER CORPORATION
Electric sales (million of KWH)
Residential 4.3 16,526.3 15,079.8 15,481.4 14,938.0 13,863.4 13,372.6
Commercial 4.9 9,999.3 9,257.3 8,848.0 8,612.1 8,252.1 7,884.8
Industrial 5.3 4,375.4 4,187.8 4,223.7 3,864.4 3,579.6 3,380.8
Total retail sales 4.7 33,386.6 30,850.3 30,784.8 29,499.5 27,675.2 26,528.3
Total electric sales 5.4 37,251.1 33,289.9 33,492.5 32,402.6 30,014.6 28,647.8
- --------------------------------------------------------------------------------------------------------------------------
Residential service (average annual):
KWH sales per customer 2.4 13,972 12,993 13,560 13,282 12,597 12,420
Revenue per customer 4.1 $1,204 $1,115 $1,138 $1,114 $1,038 $983
Revenue per KWH 1.7 $0.0862 $0.0858 $0.0839 $0.0839 $0.0824 $0.0792
- --------------------------------------------------------------------------------------------------------------------------
Financial Data:
Operating revenues 6.2 $2,648.2 $ 2448.4 $2,393.6 $2,271.7 $2,080.5 $1,957.6
Net income after dividends
on preferred stock 6.5 $248.6 $ 134.4 $ 232.6 $217.3 $190.7 $181.5
Total assets 3.0 $4,928.1 $4,900.8 $4,264.0 $4,284.9 $4,284.5 $4,259.5
Long-term debt and preferred stock
subject to mandatory redemption 1.6 $1,555.1 $1,745.4 $1,296.4 $1,304.1 $1,393.8 $1,433.6
Total capitalization including
short-term debt (in millions) 1.8 $3,547.6 $3,727.7 $3,180.8 $3,202.2 $3,265.4 $3,240.4
Capitalization ratios:
Short-term capital (6.0) 3.9% 4.9% 0.8% 1.0% 2.8% 5.3%
Long-term debt .3 43.8% 46.8% 40.8% 39.9% 41.7% 43.1%
Preferred stock (27.8) 0.9% 0.9% 1.1% 4.3% 4.4% 4.6%
Common stock equity 1.8 51.3% 47.4% 57.4% 54.8% 51.1% 47.0%
Ratio of earnings to fixed charges
(SEC method) .2 3.87 2.75 4.80 4.41 3.90 3.83
Embedded cost of long-term debt 6.8% 7.0% 7.2% 7.2% 7.1% 6.8%
Embedded cost of preferred stock (7.5) 4.6% 4.6% 4.6% 6.8% 6.8% 6.8%
- --------------------------------------------------------------------------------------------------------------------------
Operating Data:
Net system capacity (MW) .4 7,727 7,717 7,341 7,347 7,295 7,563
Net system peak load (MW) 3.5 8,004 8,066 8,807 7,722 6,955 6,729
Capital expenditures (in millions) (6.2) $310.2 $387.2 $217.3 $283.4 $319.5 $426.4
Net cash flow to capital expenditures 21.8 169% 76% 175% 125% 103% 63%
Average number of customers 2.0 1,340,853 1,314,508 1,292,075 1,271,784 1,243,891 1,214,653
Number of full-time employees (4.0) 4,740 4,799 4,629 4,658 4,972 5,807
- --------------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Florida Progress' 1998 consolidated earnings from continuing operations were
$281.7 million. This compared with $54.3 million in 1997 and $250.7 million in
1996. Florida Progress' 1998 earnings per share of $2.90 increased 10.7 percent
over 1997's earnings of $2.62 per share, before nonrecurring charges. The
increase reflected the customer growth in the utility's service territory and
the growth of its diversified operations.
Operating results for 1997 were negatively impacted by the extended outage of
Florida Power's Crystal River nuclear plant and the provision for loss on the
company's investment in Mid-Continent. These two events reduced Florida
Progress' 1997 earnings by $200 million, or $2.06 per share.
In 1996, Florida Progress reported an after-tax charge of $25.2 million for a
provision for loss on unprofitable coal properties owned by Electric Fuels, and
an after-tax gain of $23.5 million for the sale of AST.
24
Excluding the nonrecurring items, Florida Progress' 1997 and 1996 consolidated
earnings from continuing operations were $254.3 million and $252.4 million,
respectively.
Florida Power earned $248.6 million in 1998, compared with $240.9 million,
before nuclear outage costs in 1997 and $232.6 million in 1996. Earnings from
recurring diversified operations were $33.1 million in 1998, compared with $13.4
million in 1997 and $19.8 million in 1996.
EARNINGS PER SHARE
1998 1997 1996
- ---------------------------------------------------------------------------
Florida Power Corporation $2.56 $2.48 $2.40
- ---------------------------------------------------------------------------
Electric Fuels Corporation .44 .33 .28
Mid-Continent Life Ins. Co. - - .02
Other (.10) (.19) (.09)
- ---------------------------------------------------------------------------
Diversified .34 .14 .21
- ---------------------------------------------------------------------------
Continuing operations before
nonrecurring items 2.90 2.62 2.61
Nuclear outage costs - (1.10) -
Loss related to
Mid-Continent Life Ins. Co. - (.96) -
Provision for loss on
coal properties - - (.26)
Gain on sale of business - - .24
- ---------------------------------------------------------------------------
Total continuing operations 2.90 .56 2.59
Discontinued operations - - (.27)
- ---------------------------------------------------------------------------
Consolidated $2.90 $ .56 $2.32
- ---------------------------------------------------------------------------
Florida Power's 1998 earnings per share were up 3.2 percent over 1997, before
nuclear outage costs, primarily due to strong customer growth and usage growth.
Demand for electricity during 1998 reached record levels as hotter-than-normal
weather during much of the year resulted in record annual usage by residential
and commercial customers. The benefit of the hotter-than-normal weather was
offset by several items including the accelerated amortization of certain
regulatory assets, additional spending for maintenance and reliability projects,
and the deferral of revenues as allowed by state regulators.
Electric Fuels' earnings per share were up 33 percent over 1997. This increase
was driven by improved results from all three of its business units, including
an expanded barge fleet, increased coal deliveries and an increase in demand for
railcar and track parts and services.
Florida Power's Crystal River nuclear plant was out of service during 1997 to
address design issues related to the plant's safety systems. As a result of the
outage, Florida Power's 1997 earnings were reduced by $1.10 per share. This
resulted from $100 million in additional nuclear operations and maintenance
expenses and $73 million of nonrecoverable replacement power costs. (See Item 7,
MD&A - "Extended Nuclear Outage Costs".)
In 1997, Florida Progress recorded a provision for the loss on its investment in
Mid-Continent as well as an accrual for legal fees for pending litigation. This
resulted in a $.96 per share after-tax charge to 1997 earnings. (See Item 7,
MD&A - "Mid-Continent Life Insurance Company".)
25
In 1996, Florida Progress divested Echelon, formerly Progress Credit, through a
tax-free stock dividend. This resulted in a $.27 per share charge to earnings
for the write-down of certain assets of Echelon and other costs. Also in 1996,
Florida Progress sold its 80-percent interest in AST for $56 million and
realized an after-tax gain of $.24 per share.
In 1996, Electric Fuels recorded a $.26 per share after-tax charge to earnings
to establish a provision for loss on its unprofitable coal properties. The
provision was necessary because management did not consider the unfavorable
market conditions for low-sulfur coal to be temporary.
Florida Progress' 1998 results reflected the strong fundamentals inherent in
Florida Power's growing customer base and the expanding operations of Electric
Fuels. This growth should help Florida Progress achieve its aggressive five-year
objective of consistent annual earnings per share growth of 5 percent or better.
The financial return on Florida Power's common equity was 13.7 percent in 1998,
compared with 13 percent in 1997, before considering nonrecurring items, and
12.9 percent in 1996. Florida Power expects its average annual customer growth
rate of 2 percent to continue in the near future. When combined with good cost
control, Florida Power should be able to maintain an earnings growth rate of
about 3 percent. Return on equity for Electric Fuels was 19.6 percent in 1998,
17.3 percent in 1997 and 14 percent in 1996, before its provision for loss on
coal properties.
Industry Restructuring
The electric utility industry is undergoing changes designed to increase
competition in the wholesale and retail electricity markets. The wholesale power
market includes sales of electricity to utilities from other utilities and
non-utility generators. The wholesale market is regulated by the FERC. The
retail electricity market includes sales of electricity to end-use customers,
i.e., residential, commercial and industrial customers, and is regulated by
state public utility commissions.
As a result of the Public Utilities Regulatory Policies Act of 1978 ("PURPA")
and the Energy Policy Act of 1992, competition in the wholesale electricity
market has greatly increased, especially from non-utility generators of
electricity. In 1996, FERC issued new rules on transmission service to
facilitate competition in the wholesale market on a nationwide basis. The rules
give greater flexibility and more choices to wholesale power customers.
The effect of these changes on the wholesale market has been significant. From
1990 through 1997, non-utility generation capacity grew in the U.S. at a rate of
54 percent, compared with utility generation capacity, which grew at a rate of 2
percent. The development of merchant plants, which is a non-utility generating
plant without the benefit of a long-term contract for the sale of most of the
plant's generating capacity, has contributed to the growth of capacity in this
market.
In a move the company believes is contrary to existing state law, Duke Energy
filed a petition with the FPSC in August 1998 to build Florida's first merchant
power plant. The FPSC voted to grant the Duke petition in March 1999. Florida
Power intends to contest this decision. (See Item 3 "Legal Proceedings",
paragraph 11).
26
To date, several states have adopted legislation that would give retail
customers the right to choose their electricity provider (retail choice) and
essentially every other state has, in some form, considered the issue.
In 1998, Rhode Island, California and Massachusetts implemented retail
competition while in a number of other states, either the legislature or the
state commission developed a plan for retail competition.
In states where electricity rates are more competitive, such as in Florida,
there has been less incentive to push forward legislative proposals concerning
retail choice. During Florida's 1998 legislative session, a bill to restructure
the industry was sponsored by one senator but was never considered by the
legislative body. The FPSC monitors, through a staff committee, the
restructuring activities in other states.
In addition to restructuring activity in various states, there have been several
industry restructuring bills introduced in Congress. Several of the federal
bills being considered would require states to implement retail choice sometime
between 2000 and 2003.
In March 1998, the Department of Energy announced the Administration's
"Comprehensive Electricity Competition Plan," which would require retail
competition by 2003 but permit states to opt out under certain conditions.
Another issue encompassed by industry restructuring concerns franchise
agreements. Most investor-owned utilities pay franchise fees to governments,
including municipalities, for the right to install equipment to deliver
electricity to retail customers. Industry restructuring (and other factors, such
as reliability) could encourage municipalities to consider not renewing existing
franchise agreements, and thus provide an opportunity for others to provide
electric service to retail customers.
A major portion of Florida Power's retail business, representing approximately
40 percent of total 1998 utility revenues, is covered under the terms of 111
franchise agreements with various municipalities. Although no franchise
agreements are due to expire in 1999, five are due to expire in 2000
(representing about 1 percent of total 1998 utility revenues), 23 are due to
expire in 2001 (about 6.9 percent of total utility revenues), 14 are due to
expire in 2002(about 4.7 percent of total utility revenues), one is due to
expire in 2003(about .4 percent of total utility revenues) and four are due to
expire in 2004(about 1.9 percent of total utility revenues). All of the
franchise agreements that expire by 2004 contain a clause that gives the
municipality the right to purchase Florida Power's distribution system within
the municipality at the expiration of the franchise. Although the exercise of
that right would require complex financial arrangements and otherwise might be
difficult, Florida Power believes that quality service and competitive rates
will continue to be important factors as franchise agreements come up for
renewal.
The issue of industry restructuring has caused many companies to develop new
corporate strategies. Some of these strategies include alliances, mergers with
or acquisitions of other electric or gas utilities, or other types of service
providers, that can offer not only the commodity but other unregulated products
and services.
Many electric utility analysts expect that, once existing regulatory barriers
are removed, a significant amount of consolidation will occur among the nearly
100 investor-owned electric utilities that exist today. During the last five
27
years, approximately 40 electric utilities have announced either mergers with or
acquisitions of other electric or gas utilities. About half of these
transactions have been completed; the others are either pending regulatory
approval or have been withdrawn.
Industry Restructuring - Florida Progress' Strategic Initiatives
While it may be several years before retail choice exists in Florida, Florida
Progress believes that retail choice will eventually exist in every state.
Anticipating this change, Florida Progress has developed a corporate strategy to
position itself for a more competitive marketplace.
Long term, Florida Progress is focused on establishing a national retail energy
services business - which includes transportation of the commodity to the
customer as well as offering nonregulated products and services. To be
successful in this market, a retail services company will likely need a sizable
number of customers in order to realize the economies of scale necessary to keep
its costs competitive. As such, part of Florida Progress' corporate strategy
includes the possibility of mergers or acquisitions that would expand its
customer base.
In addition to considering mergers and acquisitions, Florida Progress has
entered into two joint ventures with two other utilities, Cinergy Corp. and New
Century Energies. The first joint venture, formed in September 1997 and named
Cadence, is a marketing alliance aimed at providing national chain account
customers with energy management and energy information systems. The other joint
venture, Centrus, began operating in July 1998 and was established to develop
products and services for residential and small commercial customers. In March
1999, Florida Progress and its utility partners decided to dissolve the Centrus
joint venture, due in part to changing strategic viewpoints among the partners.
Florida Progress remains committed, however, to its long-term objective to
establish a national retail energy services business, and intends to continue
developing products and services for residential and small commercial customers.
In May 1998, Florida Power formed a power marketing alliance with Dynegy to
capitalize on developing wholesale energy markets in Florida and in the
Southeast U.S.
Forming joint ventures and alliances can be a quicker way to achieve many of the
benefits sought through mergers and acquisitions including economies of scale,
scope and new market presence and skills.
An important issue encompassed by industry restructuring is the recovery of
"stranded costs." Stranded costs include the generation assets of utilities
whose value in a competitive marketplace would be less than their current book
value as well as above-market purchased power commitments to the QFs. Thus far,
all states that have passed restructuring legislation have provided for the
opportunity to recover a substantial portion of stranded costs.
Assessing the amount of stranded costs for a utility requires various
assumptions about future market conditions including the future price of
electricity. For Florida Power, the single largest stranded cost exposure is its
commitments to QFs.
Florida Power has taken a proactive approach to this industry issue. Since 1996,
Florida Power has been seeking ways to address the impact of escalating payments
from contracts it was obligated to sign under provisions of PURPA.
28
These efforts have resulted in Florida Power successfully mitigating, through
buy-outs and buy-downs of these contracts, more than 20 percent of its purchased
power commitments to QFs. (See Note 9 and Note 11 to the Financial Statements.)
Florida Power Corporation
Florida Power's operating results and capital requirements are largely
influenced by its customers' demand for electricity. That annual demand for
electricity is based on the number of customers and their annual usage; usage is
largely influenced by weather. During 1998, Florida Power, as well as other
electric utilities in Florida and in the Southeast, experienced periods of
extreme demand for electricity due to hotter-than-normal summer temperatures.
In planning for its future generation needs, Florida Power develops a forecast
of annual demand for electricity, including a forecast of the level and duration
of peak demands during the year.
Florida Power relies, in part, upon the use of its Energy Management program
during peak demands. This program enables Florida Power to reduce the amount of
demand for electricity by remotely reducing energy usage of residential
customers who agree to participate in the program. Florida Power utilized Energy
Management last summer to a much greater degree than in the past, which resulted
in a number of complaints from customers on the program. Florida Power is
exploring several alternatives to add new generation that will provide greater
flexibility in meeting the electricity needs of its customers.
Utility Revenues and Sales
Florida Power's operating revenues were $2.6 billion in 1998, and $2.4 billion
in 1997 and in 1996.
The utility's kilowatt-hour sales were up 11.9 percent in 1998 over 1997. The
increase in sales was largely due to the hotter-than-normal weather experienced
from May through October. As a result of the unusually hot weather, usage by
residential customers, the single-largest customer class, increased
approximately 9 percent over 1997. Kilowatt-hour sales in 1997 were essentially
level with 1996. Mild weather in 1997, compared with 1996, offset the increase
in kilowatt-hour sales that would have been realized from normal customer
growth, which is around 2 percent or more than 20,000 new customers each year.
Florida Power's wholesale kilowatt-hour sales were up 57.2 percent in 1998,
compared with 1997. The primary reason for the increase was, unlike 1997, that
the company's nuclear power plant was in service for most of 1998. This enabled
Florida Power to sell excess generating capacity in the short-term wholesale
energy market, after meeting the needs of its customers. However, the impact on
earnings of these short-term bulk sales was minimal because essentially all
revenues and costs associated with this activity are passed through to retail
customers whose rates are adjusted accordingly.
The increase in revenues resulting from the higher demand for electricity was
offset by several actions taken in 1998, including steps taken to improve the
utility's overall quality of service to its customers. (See Item 7 "MD&A - Other
Utility Expenses".) In addition to these costs, Florida Power deferred $10
million of non-fuel revenues for either future accelerated amortization of the
Tiger Bay regulatory asset or other regulatory initiatives, as approved by the
FPSC.
29
As indicated above, the impact of extreme weather on Florida Power's sales can
be significant. However, the impact of weather on non-fuel revenues for 1997 and
1996 was minimized because of a ratemaking concept called residential revenue
decoupling.
This concept was designed to eliminate the direct link between kilowatt-hour
sales and non-fuel revenues. Under revenue decoupling, abnormal weather does not
impact earnings from residential sales.
Over the three-year period, which ended December 31, 1997, the earnings impact
of residential revenue decoupling was not material. The termination of
residential revenue decoupling will likely result in Florida Power's earnings
being subject to greater fluctuation due to changes in weather. (See Note 1 to
the Financial Statements.)
Fuel and Purchased Power
Fuel and purchased power costs are recovered primarily through a fuel cost
recovery clause established by state and federal regulators. Fluctuations in
these costs have little impact year to year on net income, but might impact net
income in a more competitive environment. (See Item 7 "MD&A - Extended Nuclear
Outage Costs" for discussion of replacement power costs not recovered through
the fuel cost recovery clause.)
Factors influencing fuel and purchased power costs include demand for
electricity, fuel prices, the availability of generating plants and the amount
and price of electricity purchased from QFs and other utilities.
Total fuel and purchased power expenses were $1.03 billion in 1998, less than 1
percent higher than 1997's fuel and purchased power costs. The slight increase,
despite an 11.9-percent increase in total kilowatt-hours sold, was due largely
to the availability of Florida Power's Crystal River nuclear plant. The lack of
nuclear generation throughout 1997 forced Florida Power to replace this
generation with other, higher-cost replacement power.
As previously discussed, a key factor influencing Florida Power's purchased
power costs are the prices paid to QFs for electricity. Currently, Florida Power
receives 831 MW of total capacity from QFs.
In 1998, Florida Power spent $204.6 million for purchased power capacity
payments under all QF contracts. This represented approximately 20 percent of
system fuel and purchased power expenses for the year. Costs associated with
these contracts raised Florida Power's system average cost for generation in
1998 and 1997, and this trend is expected to continue based on the contracts
currently in place and the escalating payment schedules associated with each
contract.
Florida Power will continue its effort to mitigate the impact of escalating
payments from its QF contracts.
30
Other Utility Expenses
The increase in revenues in 1998, as previously discussed, enabled Florida Power
to take several actions to better position itself for the future. The following
items largely offset the increase in revenues attributable to the
hotter-than-normal weather ($ in millions):
Accelerated amortization of regulatory assets
and write-off of related taxes $21
Accelerated 1999 expenditures to enhance reliability $17
Accelerated 1999 lump-sum pay increase $ 7
Utility operations and maintenance expenses increased by $49 million during
1998, compared with 1997. The increase was due to the acceleration of certain
expenses noted above and additional operations and maintenance costs related to
the Tiger Bay plant acquired in July 1997. In addition, Florida Power wrote off
$7 million of inventory deemed obsolete.
In 1997, operations and maintenance expenses, before nuclear outage costs,
increased by $8.9 million over 1996. The increase was due primarily to costs
associated with planned fossil plant outages and expenditures designed to
improve reliability and customer service.
Changes from year to year in the amount of energy conservation costs have no
significant impact on earnings because Florida Power recovers substantially all
of these costs through a clause in electric rates similar to the fuel recovery
clause. Florida Power does not expect the level of energy conservation costs to
vary materially in the future.
Depreciation of $347.1 million for 1998 included $19 million of accelerated
amortization of regulatory assets, $14 million of which was related to contract
termination costs for the Tiger Bay buy-out. (See Item 7 "MD&A - Impact of Tiger
Bay Buy-Out.") In 1997, Florida Power wrote off approximately $20 million
related to these costs. In 1996, Florida Power amortized approximately $31
million related to two oil-fired power plants and a canceled transmission line.
Excluding these and other write-offs, Florida Power's annual depreciation for
1998, 1997 and 1996 would have been $328.6 million, $305.9 million and $293.2
million, respectively.
Florida Power's interest expense in 1998 increased over 1997 primarily due to
higher debt balances resulting from the July 1997 Tiger Bay transaction. The
higher debt balances from the Tiger Bay transaction, as well as additional costs
associated with the 1997 extended nuclear outage, also resulted in increased
1997 interest expense, compared with 1996.
Extended Nuclear Outage Costs
In September 1996, Florida Power's Crystal River nuclear plant was taken out of
service to fix an oil pressure problem in the main turbine. When the repairs
were completed in October 1996, Florida Power decided to keep the plant shut
down to address certain backup safety system design issues.
31
The NRC had been critical of the plant's overall performance in 1996, and in
January 1997 placed the nuclear plant on its "Watch List" as a plant whose
operations would be monitored closely until Florida Power demonstrated a period
of improved performance.
The nuclear plant was returned to service in February 1998 after being out of
service about 16 months. In July 1998, the NRC removed the plant from its "Watch
List," citing the unit's improved physical condition, more effective management
oversight and improved operator training.
Florida Power's operating results for 1997 were significantly impacted by the
costs associated with the extended outage. These costs included $100 million in
additional operations and maintenance expenses and approximately $173 million in
replacement power costs. Capital expenditures related to the outage were $42
million in 1997. (See Note 9 to the Financial Statements.)
Impact of Tiger Bay Buy-Out
In July 1997, Florida Power bought out the purchased power contracts related to
a 220-megawatt cogeneration facility (Tiger Bay). In addition to buying out the
purchased power contracts, Florida Power acquired the facility. Costs associated
with the termination of the purchased power contracts and the acquisition of the
facility totaled $445 million.
The FPSC-approved purchase allowed Florida Power to record a regulatory asset of
approximately $350 million for contract termination costs and add $75 million to
its electric plant.
Florida Power continues to collect from customers an amount equal to what it
would have been allowed to recover for capacity and energy payments made in
accordance with the original Tiger Bay purchased power contract. Based on these
payments, Florida Power is projected to recover enough revenues by the year 2008
to fully amortize the regulatory asset and related interest charges. The
regulatory asset balance as of December 31, 1998, was $321 million and reflected
normal amortization of $13.2 million and $4.4 million in 1998 and 1997,
respectively, and accelerated amortization of $14 million in 1998. (See Note 9
to the Financial Statements.)
DIVERSIFIED OPERATIONS
Overview
In 1998, Electric Fuels earned $42.3 million, or $.44 per share, compared with
$32.1 million, or $.33 per share, in 1997 and $27.1 million, or $.28 per share,
in 1996. Electric Fuels' operations include Rail Services, Inland Marine
Transportation and Energy and Related Services.
In 1997, Florida Progress established a provision for loss on its $87 million
investment in Mid-Continent and accrued for litigation costs. (See Item 7 "MD&A
- - Mid-Continent Life Insurance Company") In 1996, Florida Progress made two
restructuring decisions that had a significant impact on earnings from
diversified operations. The spin-off of Echelon resulted in a $26.3 million
after-tax charge to earnings while the sale of AST contributed an after-tax gain
of $23.5 million. Another item that affected 1996 diversified earnings was the
provision for loss on unprofitable coal properties owned by Electric Fuels. This
resulted in an after-tax charge of $25.2 million.
The diversified operations of Electric Fuels can be more volatile when compared
to the operations of an electric utility. Factors that can influence its
32
operating results include weather conditions that affect barge transportation
along the Mississippi and Ohio rivers, and economic conditions that affect the
supply and demand for the various products and services offered by the three
business units.
Electric Fuels Corporation
The expansion of Electric Fuels is one of Florida Progress' key strategic
objectives. Double-digit earnings growth of Electric Fuels would enable Florida
Progress to achieve its five-year objective of consistent annual earnings per
share growth of 5 percent or better.
Over the last five years Electric Fuels has grown significantly:
Five-Year
1998 1997 1996 1995 1994 Growth Rate
(In millions)
Revenues $1,234 $1,037 $ 881 $ 844 $ 784 16.3%
Earnings $42.3 $32.1 $27.1* $24.0 $ 22.6 23.2%
*Before provision for loss on coal properties
The growth of Electric Fuels has come from growth in its Rail Services business
unit, expansion of its Inland Marine Transportation fleet and improved
operations in its Energy and Related Services group.
During 1998, Progress Rail completed approximately $200 million in acquisitions
across its various business segments. This level of activity was substantially
higher than previous years. During 1997 and 1996, Progress Rail's acquisitions
totaled $71 million.
Today, Progress Rail is one of the largest integrated suppliers of rail services
in the United States, with locations in 20 states, Mexico and Canada. Earnings
from the Rail Services unit were $15.9 million, $13.3 million and $9.7 million
in 1998, 1997 and 1996, respectively. The growth in earnings has come mostly
from acquisitions and internal expansion.
In 1998, this group was negatively impacted by substantial declines in scrap
steel prices during the second half of the year. However, the earnings
improvement from increased demand for its railcar and track parts and services,
sales of railcars from its lease portfolio and increases resulting from its 1997
acquisitions more than offset the effects of the lower scrap steel prices.
Expansion of MEMCO, Electric Fuels' Inland Marine Transportation unit, has been
achieved primarily through the purchase of river barges. Since 1992, MEMCO's
fleet of barges, which haul coal, agricultural products and other dry bulk
products along the Ohio and lower Mississippi rivers, has nearly tripled. During
1998, MEMCO acquired approximately 200 new barges and two new towboats, raising
its fleet to 1,100 barges and 27 towboats. During 1999, MEMCO plans to acquire
approximately 100 more barges and one new towboat.
Further expansion of the barge fleet after 1999 depends largely on the future
demand for barge capacity and MEMCO's ability to secure additional long-term
contracts. MEMCO's objective is to achieve and maintain approximately 70 percent
of its barge capacity under long-term contracts typically ranging from three to
five years. The remaining capacity is used to take advantage of new market
opportunities as they arise.
33
Earnings from the Inland Marine Transportation unit were $10.3 million in 1998,
compared with $5.9 million in 1997. The increase was due to the expanded fleet
and the negative impact high-water conditions in March 1997 had on 1997's
results. The March floods temporarily disrupted barge traffic and terminal
services and kept 1997 earnings below 1996 earnings of $7.1 million.
Electric Fuels' Energy and Related Services business unit includes coal mining,
river terminal services and off-shore marine transportation. Annual sales of
coal average about 12 million tons, of which 5 to 6 million tons are sold to
Florida Power and the rest is sold to unaffiliated customers.
Earnings from this unit were $20.4 million in 1998, compared with $16.8 million
in 1997. The increase was due to improved productivity, higher coal deliveries
and an increase in river terminal services. In September 1997, Electric Fuels
bought out its 50-percent partner in a coal mining joint venture and now
recognizes 100 percent of the sales and earnings from that property. In the
first half of 1998, Electric Fuels completed the expansion of its Ceredo River
terminal in West Virginia, increasing its capacity by 33 percent.
In 1996, the earnings from this unit were $12.7 million, before a provision for
loss on unprofitable coal properties. In December 1996, Electric Fuels
established a provision for loss on certain coal properties after it determined
that depressed market conditions for low-sulfur coal were not temporary. The
impact of the write-down was a one-time after-tax charge to earnings of $25.2
million.
Mid-Continent Life Insurance Company
In 1997, Florida Progress recorded a provision for a loss on its investment in
Mid-Continent and accrued for estimated legal expenses, reducing 1997 earnings
by $.96 per share. This action was prompted by Mid-Continent being placed in
receivership in the spring of 1997 and subsequent events in 1997. The
receivership was based on Oklahoma Insurance Commissioner John Crawford's
contention that Mid-Continent's policy reserves were understated and that it
could not raise premiums to address the issue. Although the Oklahoma District
Court granted the Commissioner's request to place Mid-Continent in receivership,
the court ruled that premiums could be raised. Mid-Continent had planned to
raise premiums and eliminate policyholder dividends in order to avoid a
projected reserve shortfall in 2020. After placing the company in receivership,
Commissioner Crawford's principal action towards rehabilitation was to file a
lawsuit seeking to use the assets of Florida Progress for the benefit of
policyholder and creditor claims. Commissioner Crawford was defeated in his bid
for re-election in November 1998 and new Commissioner, Carroll Fisher, has
stated his intention to work with Florida Progress and others to develop a plan
to rehabilitate Mid-Continent rather than pursue litigation against Florida
Progress. Although Florida Progress hasn't had access to recent Mid-Continent
data, its estimate of the present value of the projected deficiency, after
applying Mid-Continent's statutory surplus, is in the range of $100 million,
rather than the $348 million alleged by former Commissioner Crawford. Florida
Progress is working with Commissioner Fisher to develop a viable plan to
rehabilitate Mid-Continent, which would include the sale of that company. (See
Note 11 to the Financial Statements.)
34
Year 2000
Florida Progress is in the process of addressing Year 2000 (Y2K) issues and
establishing procedures to mitigate its risks. Y2K issues exist because,
historically, many computer systems have used two digits to represent a year.
With the change of the century, a two-digit year may present calculation or
sequencing errors in computer software and embedded technology.
The Florida Progress Y2K effort is overseen by the Vice President, Information
Technology of Florida Power, who provides status reports to Florida Progress'
board of directors and outside regulatory agencies and other entities such as
the FPSC, the NRC and the NERC.
Florida Progress has taken a comprehensive approach in developing its Y2K plans.
Resources have been dedicated to reviewing systems throughout all areas of the
company, with an emphasis on testing of systems, to the extent possible. Florida
Progress expects that preparations for Y2K issues, including contingency plans,
will be completed by the end of the third quarter of 1999 for Florida Power and
during the fourth quarter of 1999 for Electric Fuels.
All areas of Florida Progress are involved in identifying and addressing
software, infrastructure and embedded technology issues.
The Information Technology (IT) focus is on application and operating software,
data storage capabilities and technology infrastructure (workstations, servers,
voice and data networks, and communications equipment).
Embedded systems are internal components used to control, monitor or assist the
operation of equipment, machinery and plants including process controls used for
energy production and delivery. They are integral parts of systems, and in many
cases their presence is not obvious.
Florida Progress' methodology for identification and remediation of Y2K issues
is a five-step process, which includes:
1.) Awareness - The communication of Y2K issues and their importance
throughout Florida Power and Electric Fuels.
2.) Inventory - The itemized tabulation of all Y2K-suspect software,
infrastructure and embedded systems.
3.) Assessment and prioritization - Performing an evaluation of all
technology components, obtaining compliance information through analysis
and certifications from suppliers, product vendors, and other third
parties, to the extent possible, with which Florida Progress conducts
business, reviewing interfaces and categorizing whether identified issues
are mission critical.
4.) Remediation and verification - Correcting or upgrading systems and
components, and where possible, end-to-end integration testing.
5.) Contingency planning - Establishing contingency plans for all key
operating functions.
35
The following chart represents an estimate of the current status of Florida
Progress' Y2K progress and planned completion dates for each phase as of
December 31, 1998:
Florida Power Electric Fuels
Percent Planned Percent Planned
Complete Completion Complete Completion
(12/31/98) Date (12/31/98) Date
Awareness - * * * *
Inventory - 98% Jan. 1999 70% Mar. 1999
Assessment and
prioritization - 75% Mar. 1999 50% Jun. 1999
Remediation and
verification - 40% Sep. 1999 30% Sep. 1999
Contingency
planning - 20% Sep. 1999 10% Dec. 1999
* To continue through duration of project.
Florida Progress has given the highest priority to addressing mission critical
processes for Y2K readiness. At Florida Power, these include systems and
processes that support the monitoring and control of the electric grid, maintain
generating facility control, output and safety, facilitate security and
telecommunications capabilities, and provide critical customer service
functions.
While the diversified operations of Electric Fuels have some of the same
technology-related issues as Florida Power, the risk is substantially less due
to the fact that its operations are less reliant upon integrated
technology-driven processes.
Florida Progress is in the process of developing corporate-wide contingency
plans. The objective of contingency planning is to minimize the duration and
extent of any material impacts resulting from a Y2K-induced problem.
Due to the speculative nature of contingency planning, Florida Progress cannot
ensure the extent to which such plans will in fact mitigate the risk of material
impacts on Florida Progress' operations due to Y2K issues.
Florida Progress is in the process of identifying and assessing third-party
vulnerabilities. Highest vulnerabilities from third-party vendors for Florida
Power exist in the fuel supply and telecommunications industries. Florida Power
has begun a program of working with these vendors to try to determine potential
risks and Y2K readiness. Also, Florida Power is working with industry groups
such as the FRCC, Nuclear Energy Institute/Nuclear Utility Software Management
Group, and Electric Power Research Institute to ensure the safety and
reliability of power generation and the integrity of the transmission grid. In
addition, Florida Power has initiated and participated in utility sharing
strategy sessions to identify issues with third parties. Florida Power has also
begun to request status information from significant vendors to determine
potential third-party Y2K risks.
Florida Progress' current estimate of the total costs of addressing Y2K issues,
including expenses to remedy both embedded systems and computer information
systems, is between $15 million and $25 million. No Florida Progress systems
36
have been replaced on an accelerated basis due to the Y2K issue. As of December
31, 1998, Florida Progress has incurred a total of approximately $6 million of
internal and external costs related to Y2K. Currently, the company does not
separately track internal costs related to this issue. Florida Progress has
expensed all Y2K costs as incurred.
In the electric utility industry, there are many computers and software programs
that are susceptible to Y2K issues, as well as a multitude of individual
computer chips within equipment that may have Y2K implications. Computers and
computer chips are used in power plants that generate electricity, in systems
that handle billing and customer information, and in many other common devices
such as telephones, security systems and building elevators. While the potential
effects could be widespread and the exact nature of those effects is unknown,
Florida Progress does not expect the potential effect to be severe. Florida
Progress is making every effort to remediate issues and provide contingency
plans for the possibility of any disruption that could occur.
Nevertheless, achieving Y2K readiness is subject to various risks and
uncertainties, many of which are described above. It is difficult to provide a
detailed, meaningful description of the most reasonably likely worst case Y2K
scenarios. Florida Progress is not able to predict all of the factors that could
cause actual results to differ materially from its current expectations as to
its Y2K readiness.
If Florida Progress, or third parties with whom it has significant business
relationships, fail to achieve Y2K readiness with respect to critical systems,
there could be a material adverse impact on Florida Progress' financial
position, results of operations and cash flows. However, based on the milestones
that have been achieved to date and the planned completion of the Y2K project,
Florida Progress is confident that it is taking the necessary steps to minimize
the impact of Y2K.
Other
Florida Progress adopted several new accounting standards during 1998. (See
Note 1 to the Financial Statements.)
Florida Power and a former subsidiary of Florida Progress have been notified by
the EPA that each is or may be a potentially responsible party for the cleanup
costs of several contaminated sites. (See Note 11 to the Financial Statements.)
Florida Progress has off-balance sheet risk related to debt of unconsolidated
partnerships. (See Note 11 to the Financial Statements.)
Florida Progress is involved in other litigation. (See Note 11 to the Financial
Statements.)
Even though the inflation rate has been relatively low during the last three
years, inflation continues to affect Florida Progress by reducing the purchasing
power of the dollar and increasing the cost of replacing assets used in the
business. This has a negative effect on Florida Power because regulators
generally do not consider this economic loss when setting utility rates.
However, such losses are partly offset by the economic gains that result from
the repayment of long-term debt with inflated dollars.
37
LIQUIDITY AND CAPITAL RESOURCES
Cash from operations has been the primary source of capital for Florida
Progress. Cash from operations in 1998 increased $435.3 million over 1997. The
significant increase was due largely to the absence of costs associated with the
1997 extended nuclear outage and tax benefits received in 1998 related to the
1997 Tiger Bay transaction.
Other sources of capital over the last three years include debt financing,
proceeds from the sale and leaseback of equipment, proceeds from the sale of
properties and businesses, and the issuance of common stock.
Florida Progress' capital requirements are primarily influenced by Florida
Power's construction program and the expansion activities of Electric Fuels.
Florida Power's construction program is not expected to require any significant
increase in equity or debt over the next several years.
The expansion activities of Electric Fuels will be financed with internally
generated funds, debt and equity contributions.
In November 1998, the Progress Plus Stock Plan and Employee Savings Plan (the
Plans) began issuing new shares of common stock instead of purchasing shares in
the open market. Florida Progress expects to receive about $50 million of new
equity annually through the Plans.
Florida Progress also is considering issuing other equity alternatives during
1999. The funds from these sources will be used primarily to reduce debt at
Progress Capital, the holding company for the diversified operations.
Florida Progress' capital structure as of December 31, 1998, was 41.1 percent
common equity, 58.1 percent debt and .8 percent preferred stock. Total debt at
Florida Power was reduced by $233 million in 1998. This decrease was offset by
an increase of $257 million at Progress Capital. Listed below are the credit
ratings for Florida Power and Progress Capital as of December 31, 1998:
CREDIT RATINGS
Standard Duff &
& Poor's Moody's Phelps
Florida Power Corporation
First mortgage bonds AA- Aa3 AA-
Medium-term notes A+ A1 A+
Commercial paper A-1+ P-1 D-1+
Progress Capital Holdings, Inc.
Medium-term notes A A2
Commercial paper A-1 P-1
Florida Power Corporation
Florida Power's construction expenditures in 1998 totaled about $310 million.
This was primarily for distribution lines related to the utility's growing
customer base and the construction of a new 500-megawatt power plant that is
planned for commercial operation in the first quarter of 1999. Florida Power's
three-year construction program totals approximately $1 billion for the
1999-2001 forecast period. It includes planned expenditures of $323 million,
$342 million and $300 million for 1999 through 2001. Florida Power expects these
38
construction expenditures will be financed primarily with internally generated
funds.
In 1998, Florida Power redeemed $250 million of first mortgage bonds. The
redemption of these bonds was principally funded through the issuance of $150
million of 30-year medium-term notes bearing an interest rate of 6 3/4 percent
and commercial paper.
In July 1997, Florida Power issued $450 million of medium-term notes primarily
to finance the buy-out of purchased power contracts associated with the
220-megawatt Tiger Bay cogeneration facility. (See "MD&A - Impact of Tiger Bay
Buy-Out".)
Amendments to the Clean Air Act in 1990 require electric utilities to reduce
sulfur dioxide emissions. Florida Power is meeting these requirements with
minimal capital expenditures.
In addition to funding its construction commitments with cash from operations,
Florida Power accesses the capital markets through the issuance of commercial
paper and medium-term notes.
Florida Power's interim financing needs are funded primarily through its
commercial paper program. The utility has a $200-million, 364-day revolving bank
credit facility and a $200-million, five-year facility, which are used to back
up commercial paper. (See Note 6 to the Financial Statements.)
Florida Power's medium-term note program provides for the issuance of either
fixed or floating interest rate notes, with maturities that may range from nine
months to 30 years. Florida Power has available for issuance $250 million of
medium-term notes.
In 1998, debt levels decreased at Florida Power largely due to the improved
operating results stemming from hotter-than-normal weather, which increased
funds from operations.
In 1997, debt levels increased over 1996 at Florida Power largely due to the
costs associated with the extended nuclear outage and the buy-out of purchased
power contracts with the Tiger Bay plant.
Florida Power's embedded cost of long-term debt was 6.8 percent as of December
31, 1998, and 7 percent as of December 31, 1997.
Diversified Operations
Progress Capital provides short- and long-term financing facilities for Florida
Progress' diversified operations and, with the benefit of a guaranty and support
agreement with Florida Progress, helps to lower the cost of capital of the
diversified businesses. Progress Capital funds diversified operations primarily
through the issuance of commercial paper and medium-term notes. (See Note 6 to
the Financial Statements.)
Progress Capital has a medium-term note program for the issuance of either fixed
or floating interest rate notes, with maturities that may range from nine months
to 30 years.
In 1998 and 1997, Progress Capital issued $115 million and $35 million of
medium-term notes, respectively, with maturities ranging from two to 10 years,
leaving $185 million of medium-term notes available for issuance. The proceeds
39
were primarily used to repay maturing medium-term notes and for other corporate
purposes.
In 1998, MEMCO entered into a $200-million synthetic lease financing for
approximately $175 million in barges and $25 million in towboats. The lease
financing was accomplished through a sale and leaseback, and involved the
issuance of $126 million of secured notes and $74 million in equipment trust
certificates by a special purpose Delaware trust. The notes and certificates
bear a weighted average interest rate of 6.8 percent with a final maturity in
2014. MEMCO's payment obligations under the operating lease are guaranteed by
Progress Capital. (See Note 11 to the Financial Statements.)
Progress Capital has two revolving bank credit facilities: a 364-day,
$100-million facility and a five-year, $300-million facility. These facilities
are used to back up commercial paper. (See Note 6 in Notes to the Financial
Statements.) Progress Capital also has uncommitted bank bid facilities that
authorize it to borrow and re-borrow, and have outstanding at any time, up to
$300 million. As of December 31, 1998, $150 million was outstanding. The
facilities were established to temporarily supplement commercial paper
borrowings.
In 1998, total diversified capital expenditures were $217 million, including
approximately $92 million for the purchase of barges and towboats and $125
million for property additions at Electric Fuels' diversified operations.
In 1997, diversified capital expenditures were about $120 million, primarily for
the purchase of barges.
In 1999, diversified capital expenditures are expected to be approximately $155
million, most of which is for Electric Fuels. The Inland Marine Transportation
unit plans to add approximately 100 new barges and one towboat in 1999 as it
continues to take advantage of market opportunities to expand its business.
Electric Fuels' Rail Services unit is expected to continue to grow by expanding
geographically. These expenditures are expected to be funded through cash
generated internally, through Progress Capital from outside financing sources,
and through equity contributions from Florida Progress.
Dividend Policy and Earnings Outlook
Florida Progress evaluates its dividend policy on an annual basis to ensure that
the dividend payout and dividend rate are appropriate given the business plan,
projected earnings growth and outlook for the electric utility industry. Florida
Progress' business plan forecasts sustained earnings per share growth, a key
factor in determining dividend policy.
FORWARD-LOOKING STATEMENTS
In this report, Florida Progress has stated an aggressive five-year objective of
consistent annual earnings per share growth of 5 percent or better, and
established goals to build a national retail energy services business in the
utilities sector, and continue to support the growth at Electric Fuels. Florida
Progress has made various estimates regarding its Y2K preparedness, projected
that retail choice eventually will exist in every state, and indicated its
assessment that the lawsuits related to Mid-Continent are without merit. Florida
Power has indicated that it expects to have sufficient system capacity to meet
anticipated future demand.
40
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 the company's other businesses in general, actions of regulatory bodies and
courts, and on key factors which impact the company directly. The projections
and estimates relate to the pricing of services, the actions of courts and
regulatory bodies, the success of new products and services, and the effects of
competition.
Key factors that have a direct bearing on the company's ability to attain these
projections include continued annual growth in customers; economic and weather
conditions affecting the demand for and supply of not only electricity but also
Electric Fuels' barge, rail and other services; successful cost containment
efforts; and the efficient operation and/or construction of Florida Power's
existing and planned generating units. Also, in developing its forward-looking
statements, the company has made certain assumptions relating to productivity
improvements and the favorable outcome of various commercial, legal and
regulatory proceedings, and the lack of disruption to its markets.
If the company's 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, the company's actual results
could vary significantly from the performance projected.
Market Risks
Interest rate risk
Florida Progress is exposed to changes in interest rates primarily as a result
of its borrowing activities.
A hypothetical 54 basis point increase in interest rates (10 percent of Florida
Progress' weighted average interest rate) affecting its variable rate debt
($739.7 million as of December 31, 1998) would have an immaterial effect on
Florida Progress' pre-tax earnings over the next fiscal year. A hypothetical
10-percent decrease in interest rates would also have an immaterial effect on
the estimated fair value of Florida Progress' long-term debt as of December 31,
1998.
Commodity price risk
Currently at Florida Power, commodity price risk due to changes in market
conditions for fuel and purchased power are recovered through the fuel cost
recovery clause, with no effect on earnings.
Electric Fuels is exposed to commodity price risk through coal sales, the scrap
steel market and fuel for its marine transportation business. A 10-percent
change in the market price of those commodities would have an immaterial effect
on the earnings of Florida Progress.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For discussion of interest rate risk and commodity risk, see "MD&A - Market
Risks".
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AUDITORS' REPORT
To the Shareholders of Florida Progress Corporation
and Florida Power Corporation:
We have audited the accompanying consolidated balance sheets of Florida Progress
Corporation and subsidiaries, and of Florida Power Corporation, as of December
31, 1998 and 1997, and the related consolidated statements of income, cash
flows, and common equity and comprehensive income for each of the years in the
three-year period ended December 31, 1998. In connection with our audits of the
financial statements, we also have audited the financial statement schedules
listed in Item 14 therein. These financial statements and financial statement
schedules are the responsibility of the respective managements of Florida
Progress Corporation and Florida Power Corporation. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Florida Progress Corporation
and subsidiaries, and Florida Power Corporation, as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedules when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/KPMG LLP
- ---------------------------
KPMG LLP
St. Petersburg, Florida
January 25, 1999
42
FLORIDA PROGRESS
Consolidated Financial Statements
FLORIDA PROGRESS CORPORATION
Consolidated Statements of Income For the years ended December 31, 1998, 1997
and 1996 (In millions, except per share amounts)
1998 1997 1996
--------- --------- ---------
REVENUES:
Electric utility $2,648.2 $2,448.4 $2,393.6
Diversified 972.1 868.0 764.3
--------- --------- ---------
3,620.3 3,316.4 3,157.9
--------- --------- ---------
EXPENSES:
Electric utility:
Fuel 595.7 458.1 409.7
Purchased power 433.8 490.6 531.6
Energy conservation cost 79.6 67.0 62.6
Operation and maintenance 471.6 422.3 413.4
Extended nuclear outage -
O&M and replacement power costs 5.1 173.3 -
Depreciation 347.1 325.9 324.2
Taxes other than income taxes 203.6 193.6 183.6
---------- --------- ---------
2,136.5 2,130.8 1,925.1
---------- --------- ---------
Diversified:
Cost of sales 827.2 753.9 642.9
Provision for loss on coal properties - - 40.9
Loss related to life insurance subsidiary - 97.6 -
Other 56.3 60.4 66.6
---------- --------- ---------
883.5 911.9 750.4
---------- --------- ---------
INCOME FROM OPERATIONS 600.3 273.7 482.4
---------- --------- ---------
INTEREST EXPENSE AND OTHER:
Interest expense 187.1 158.7 135.9
Allowance for funds used during
construction (16.9) (9.7) (7.5)
(Gain) on sale of business - - (44.2)
Other expense (income), net (.2) 4.0 1.6
---------- --------- ---------
170.0 153.0 85.8
---------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 430.3 120.7 396.6
Income taxes 148.6 66.4 145.9
---------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 281.7 54.3 250.7
DISCONTINUED OPERATIONS, NET OF INCOME TAXES - - (26.3)
---------- --------- ---------
NET INCOME $ 281.7 $ 54.3 $ 224.4
========== ========= =========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 97.1 97.1 96.8
========== ========= =========
EARNINGS PER AVERAGE COMMON SHARE:
Continuing operations $ 2.90 $ .56 $ 2.59
Discontinued operations - - (.27)
---------- --------- ---------
$ 2.90 $ .56 $ 2.32
========== ========= =========
The accompanying notes are an integral part of these financial statements.
43
FLORIDA PROGRESS CORPORATION Consolidated Balance Sheets December 31, 1998 and
1997 (Dollars in millions)
1998 1997
--------- ---------
ASSETS
PROPERTY, PLANT AND EQUIPMENT:
Electric utility plant in service and
held for future use $6,307.8 $6,166.8
Less: Accumulated depreciation 2,716.0 2,511.0
Accumulated decommissioning
for nuclear plant 254.8 223.7
Accumulated dismantlement for fossil plants 130.7 128.5
--------- ---------
3,206.3 3,303.6
Construction work in progress 378.3 279.4
Nuclear fuel, net of amortization of $377.2
in 1998 and $356.7 in 1997 45.9 66.5
--------- ---------
Net electric utility plant 3,630.5 3,649.5
Other property, net of depreciation of $234.6
in 1998 and $219.3 in 1997 560.1 437.7
--------- ---------
4,190.6 4,087.2
--------- ---------
CURRENT ASSETS:
Cash and equivalents 2.5 3.1
Accounts receivable, net 413.4 373.7
Inventories, primarily at average cost:
Fuel 69.8 77.6
Utility materials and supplies 83.3 91.9
Diversified materials 137.0 126.8
Underrecovered utility fuel costs - 34.5
Income taxes receivable 23.4 16.8
Deferred income taxes 55.9 5.8
Prepayments and other 68.8 45.1
--------- ---------
854.1 775.3
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS:
Costs deferred pursuant to regulation:
Deferred purchase power contract termination costs 321.0 348.2
Other 113.6 126.4
Investments in nuclear decommissioning fund 332.1 266.7
Goodwill 139.8 55.2
Joint ventures and partnerships 71.5 54.6
Other 138.1 46.4
---------- ---------
1,116.1 897.5
---------- ---------
$6,160.8 $5,760.0
========== =========
The accompanying notes are an integral part of these financial statements.
44
FLORIDA PROGRESS CORPORATION Consolidated Balance Sheets December 31, 1998 and
1997 (Dollars in millions)
1998 1997
-------- --------
CAPITAL AND LIABILITIES
COMMON STOCK EQUITY:
Common stock without par value, 250,000,000
shares authorized, 97,336,826 shares
outstanding in 1998 and 97,062,954 in 1997 $1,221.1 $1,209.0
Retained earnings 640.9 567.0
--------- --------
1,862.0 1,776.0
CUMULATIVE PREFERRED STOCK OF FLORIDA POWER:
Without sinking funds 33.5 33.5
LONG-TERM DEBT 2,250.4 2,377.8
--------- --------
TOTAL CAPITAL 4,145.9 4,187.3
--------- --------
CURRENT LIABILITIES:
Accounts payable 297.9 253.2
Customers' deposits 104.1 97.1
Taxes payable 10.1 12.0
Accrued interest 70.4 56.8
Overrecovered utility fuel costs 22.2 -
Other 85.8 74.8
--------- --------
590.5 493.9
Notes payable 236.2 214.8
Current portion of long-term debt 145.9 15.2
--------- --------
972.6 723.9
--------- --------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 595.4 471.2
Unamortized investment tax credits 77.8 85.7
Other postretirement benefit costs 116.1 107.4
Other 253.0 184.5
--------- --------
1,042.3 848.8
--------- --------
COMMITMENTS AND CONTINGENCIES (Note 11)
--------- --------
$6,160.8 $5,760.0
========= ========
The accompanying notes are an integral part of these financial statements.
45
FLORIDA PROGRESS CORPORATION
Consolidated Statements of Cash Flows For the years ended December 31, 1998,
1997 and 1996 (In millions)
1998 1997 1996
------- ------ ------
OPERATING ACTIVITIES:
Income from continuing operations $ 281.7 $ 54.3 $250.7
Adjustments for noncash items:
Depreciation and amortization 424.6 364.2 366.7
Extended nuclear outage - replacement power cost - 73.3 -
Provision for loss on investment in life insurance subsidiary - 86.9 -
(Gain) on sale of business - - (44.2)
Provision for loss on coal properties - - 40.9
Deferred income taxes and investment tax credits, net 44.8 (30.7) (56.6)
Increase in accrued post-employment benefit costs 8.7 8.6 15.5
Changes in working capital, net of effects from acquisition or sale of
businesses:
Accounts receivable (2.5) (108.3) 35.4
Inventories 51.1 2.2 (10.9)
Overrecovery (underrecovery) of fuel cost 51.7 (33.1) (82.3)
Accounts payable 17.8 58.3 21.6
Taxes payable (8.2) (47.1) 21.0
Other 3.1 1.2 (13.5)
Other operating activities 5.1 12.8 26.6
-------- ------ ------
Cash provided by continuing operations 877.9 442.6 570.9
-------- ------ ------
Cash used by discontinued operations - - (8.9)
-------- ------ ------
877.9 442.6 562.0
-------- ------ ------
INVESTING ACTIVITIES:
Property additions (including allowance for borrowed funds used
during construction) (543.3) (513.6) (264.0)
Acquisition of businesses (206.6) (32.7) (53.8)
Cogeneration facility acquisition and contract termination costs - (445.0) -
Proceeds from sales of properties and businesses 40.6 24.3 61.1
Proceeds from sale and leaseback 153.0 - -
Investing activities of discontinued operations - - 56.5
Other investing activities (129.3) (63.7) (107.4)
-------- ------ ------
(685.6)(1,030.7) (307.6)
-------- -------- ------
FINANCING ACTIVITIES:
Issuance of long-term debt 259.1 482.8 178.0
Repayment of long-term debt (275.1) (34.9) (190.4)
Increase (decrease) in commercial paper with long-term support - 130.6 (15.3)
Redemption of preferred stock - - (106.4)
Sale of common stock 12.7 - 18.5
Dividends paid on common stock (207.8) (203.8) (199.5)
Increase in short-term debt 21.4 210.8 4.1
Financing activities of discontinued operations - - 61.5
Other financing activities (3.2) .5 (4.0)
-------- ------ ------
(192.9) 586.0 (253.5)
-------- ------ ------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (.6) (2.1) .9
Beginning cash and equivalents 3.1 5.2 4.3
-------- ------ ------
ENDING CASH AND EQUIVALENTS $ 2.5 $ 3.1 $ 5.2
======== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 159.7 $142.7 $128.7
Income taxes (net of refunds) $ 110.4 $141.7 $189.3
The accompanying notes are an integral part of these financial statements.
46
FLORIDA PROGRESS CORPORATION
Consolidated Statements of Common Equity and Comprehensive Income For the years
ended December 31, 1998, 1997 and 1996
(Dollars in millions, except per share amounts) Accumulated
Other
Common Retained Comprehensive
Total Stock Earnings Income
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $2,078.1 $1,187.6 $ 888.4 $ 2.1
Net income 224.4 224.4
Common stock issued - 586,555 shares 20.7 20.7
Echelon International stock dividend (194.5) (194.5)
Cash dividends on common stock ($2.06 per share) (199.5) (199.5)
Unrealized gain on marketable securities (2.7) (2.7)
Preferred stock redeemed - 1,050,000 shares (2.3) (2.3)
- --------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 1,924.2 1,208.3 716.5 (.6)
Net income 54.3 54.3
Common stock issued - 55,772 shares .7 .7
Cash dividends on common stock ($2.10 per share) (203.8) (203.8)
Reversal of unrealized loss on marketable securities
due to deconsolidation .6 .6
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,776.0 1,209.0 567.0 -
Net income 281.7 281.7
Common stock issued - 273,872 shares 12.1 12.1
Cash dividends on common stock ($2.14 per share) (207.8) (207.8)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $1,862.0 $1,221.1 $640.9 $ -
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
47
FLORIDA POWER CORPORATION
Statements of Income
For the years ended December 31, 1998, 1997 and 1996
(In millions)
1998 1997 1996
--------- --------- ---------
OPERATING REVENUES: $2,648.2 $2,448.4 $2,393.6
--------- --------- ---------
OPERATING EXPENSES:
Operation:
Fuel used in generation 595.7 458.1 409.7
Purchased power 433.8 490.6 531.6
Energy Conservation Cost Recovery 79.6 67.0 62.6
Operations and maintenance 471.6 422.3 413.4
Extended nuclear outage - O&M and
replacement fuel costs 5.1 173.3 -
Depreciation 347.1 325.9 324.2
Taxes other than income taxes 203.6 193.6 183.6
Income taxes 140.3 69.9 135.8
--------- --------- ---------
2,276.8 2,200.7 2,060.9
--------- --------- ---------
OPERATING INCOME 371.4 247.7 332.7
--------- --------- ---------
OTHER INCOME AND DEDUCTIONS:
Allowance for equity funds used
During construction 7.5 5.4 4.6
Miscellaneous other expense, net (1.7) (4.2) (3.4)
--------- --------- ---------
5.8 1.2 1.2
--------- --------- ---------
INTEREST CHARGES
Interest on long-term debt 115.6 102.4 86.6
Other interest expense 20.9 14.9 11.8
--------- --------- ---------
136.5 117.3 98.4
Allowance for borrowed funds used
during construction (9.4) (4.3) (2.9)
--------- --------- ---------
127.1 113.0 95.5
--------- --------- ---------
NET INCOME 250.1 135.9 238.4
DIVIDENDS ON PREFERRED STOCK 1.5 1.5 5.8
--------- --------- ---------
NET INCOME AFTER DIVIDENDS
ON PREFERRED STOCK $248.6 $134.4 $232.6
========= ========= =========
The accompanying notes are an integral part of these financial statements.
48
FLORIDA POWER CORPORATION
Balance Sheets
For the years ended December 31, 1998, and 1997
(Dollars in millions)
1998 1997
-------- ---------
ASSETS
PROPERTY, PLANT AND EQUIPMENT:
Electric utility plant in service and held $6,307.8 $6,166.8
for future use
Less - Accumulated depreciation 2,716.0 2,511.0
Accumulated decommissioning for nuclear plant 254.8 223.7
Accumulated dismantlement for fossil plants 130.7 128.5
--------- ----------
3,206.3 3,303.6
Construction work in progress 378.3 279.4
Nuclear fuel, net of amortization of $377.2
in 1998 and $356.7 in 1997 45.9 66.5
--------- ----------
3,630.5 3,649.5
Other property, net 11.5 33.2
---------- ---------
3,642.0 3,682.7
---------- ---------
CURRENT ASSETS:
Accounts receivable, less reserve of $3.8
in 1998 and $3.2 in 1997 206.0 243.9
Inventories at average cost:
Fuel 48.4 44.0
Materials and supplies 83.3 91.9
Underrecovered utility fuel cost - 34.5
Income tax receivable 16.0 13.5
Deferred income taxes 56.0 5.8
Prepaid and other 53.5 32.2
---------- --------
463.2 465.8
---------- --------
DEFERRED CHARGES AND OTHER ASSETS:
Costs deferred pursuant to regulation:
Deferred purchased power contract termination costs 321.0 348.2
Other 113.6 126.4
Nuclear plant decommissioning fund 332.1 266.7
Other 56.2 11.0
---------- --------
822.9 752.3
---------- --------
$4,928.1 $4,900.8
=========== =========
The accompanying notes are an integral part of these financial statements.
49
FLORIDA POWER CORPORATION
Balance Sheets
For the years ended December 31, 1998, and 1997
(Dollars in millions)
1998 1997
----------- ----------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock $1,004.4 $1,004.4
Retained earnings 815.7 763.1
---------- ----------
1,820.1 1,767.5
CUMULATIVE PREFERRED STOCK:
Without sinking funds 33.5 33.5
LONG-TERM DEBT 1,555.1 1,745.4
---------- ----------
TOTAL CAPITAL 3,408.7 3,546.4
---------- ----------
CURRENT LIABILITIES:
Accounts payable 173.0 161.9
Accounts payable to associated companies 27.2 26.5
Customers' deposits 104.1 97.1
Accrued other taxes 6.3 7.9
Accrued interest 55.8 45.7
Overrecovered utility fuel cost 22.2 -
Other 51.8 59.2
---------- ----------
440.4 398.3
Notes payable 47.3 179.8
Current portion of long-term debt 91.6 1.5
---------- ----------
579.3 579.6
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 563.2 451.3
Unamortized investment tax credits 77.2 85.1
Other postretirement benefit costs 112.9 104.7
Other 186.8 133.7
---------- ----------
940.1 774.8
---------- ----------
$4,928.1 $4,900.8
========== ==========
The accompanying notes are an integral part of these financial statements.
50
FLORIDA POWER CORPORATION
Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
(In millions)
1998 1997 1996
-------- -------- -------
OPERATING ACTIVITIES:
Net income after dividends on preferred stock $ 248.6 $ 134.4 $ 232.6
Adjustments for noncash items:
Depreciation and amortization 382.7 333.8 341.1
Extended nuclear outage - Replacement power costs - 73.3 -
Deferred income taxes and investment
tax credits, net 36.5 (15.2) ( 32.8)
Increase in accrued other postretirement
benefit costs 8.2 8.3 14.9
Allowance for equity funds used during construction (7.5) (5.4) (4.6)
Changes in working capital:
Accounts receivable 37.9 (69.2) 16.2
Inventories 4.2 6.7 (.5)
Overrecovery (underrecovery) of fuel cost 51.7 (33.1) (82.3)
Accounts payable 11.1 46.4 25.7
Accounts payable to associated companies .7 5.3 (3.5)
Taxes payable (4.2) (26.0) (.8)
Other (11.6) 12.3 (12.1)
Other operating activities 20.7 (38.8) 3.8
--------- --------- --------
779.0 432.8 497.7
--------- --------- --------
INVESTING ACTIVITIES:
Construction expenditures (310.2) (387.2) (217.3)
Allowance for borrowed funds used during construction (9.4) (4.3) (2.9)
Additions to non-utility property (6.4) (3.5) (2.7)
Acquisition cogeneration facility and
Payment of contract termination costs - (445.0) -
Proceeds from sale of properties 12.2 19.7 5.5
Other investing activities (62.6) (22.2) (27.6)
--------- --------- -------
(376.4) (842.5) (245.0)
-------- --------- -------
FINANCING ACTIVITIES:
Issuance of long-term debt 144.1 447.7 -
Repayment of long-term debt (259.3) (21.3) (47.3)
Increase in commercial paper with
Long term support - - 54.8
Redemption of preferred stock - - (106.3)
Dividends paid on common stock (154.9) (192.4) (171.3)
Equity contributions from parent - - 12.5
Increase (decrease) in short-term debt (132.5) 175.7 4.1
--------- --------- --------
(402.6) 409.7 (253.5)
--------- --------- --------
NET INCREASE IN CASH AND EQUIVALENTS - - (.8)
Beginning cash and equivalents - - .8
--------- --------- --------
ENDING CASH AND EQUIVALENTS $ - $ - $ -
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 112.6 $ 98.9 $ 90.7
Income taxes (net of refunds) 107.3 108.4 166.9
Non-Cash Investing Activities:
Property Dividend to Parent $ 41.1 $ - $ -
The accompanying notes are an integral part of these financial statements
51
FLORIDA POWER CORPORATION
Statements of Common Equity and Comprehensive Income For the years ended
December 31, 1998, 1997 and 1996 (Dollars in millions, except share amounts)
Accumulated
Other
Common Retained Comprehensive
Total Stock Earnings Income
------------- ----------- ---------- ------------
Balance, December 31, 1995 $1,754.0 $992.9 $761.1 $ -
Net income after dividends on
preferred stock 232.6 232.6
Capital contribution by parent company 12.5 12.5
Dividends paid to parent (171.3) (171.3)
Preferred stock redemption costs (1.3) (1.3)
Premium on preferred stock redemption (1.0) (1.0)
Preferred stock redeemed -
1,050,000 shares
------------- ----------- ---------- ------------
Balance, December 31, 1996 1,825.5 1,004.4 821.1 -
Net income after dividends on
preferred stock 134.4 134.4
Capital contribution by parent company
Dividends paid to parent (192.4) (192.4)
Preferred stock redemption costs
Premium on preferred stock redemption
Preferred stock redeemed -
1,050,000 shares
------------- ----------- ---------- ------------
Balance, December 31, 1997 1,767.5 1,004.4 763.1 -
Net income after dividends on
preferred stock 248.6 248.6
Dividends paid to parent (196.0) (196.0)
------------- ----------- ---------- ------------
Balance, December 31, 1998 $1,820.1 $1,004.4 $815.7 $ -
============= =========== ========== ============
The accompanying notes are an integral part of these financial statements.
52
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - Florida Progress is an exempt holding company under the Public Utility
Holding Company Act of 1935. Its two primary subsidiaries are Florida Power and
Electric Fuels. Florida Power is a public utility engaged in the generation,
purchase, transmission, distribution and sale of electricity primarily within
Florida. Electric Fuels' operations include the mining, processing and
procurement of coal, marine and rail transportation, transfer and storage of
coal and other bulk commodities, railcar leasing and railcar maintenance and
repair.
Electric Fuels reports the results of its Rail Services, Inland Marine
Transportation, and the non-Florida Power portion of its Energy and Related
Services operations one month in arrears.
The consolidated financial statements include the financial results of Florida
Progress and its majority-owned operations. All significant intercompany
balances and transactions have been eliminated. Investments in 20%- to 50%-owned
joint ventures are accounted for using the equity method.
Effective December 31, 1997, Florida Progress deconsolidated the financial
statements of Mid-Continent, and the investment in Mid-Continent is accounted
for under the cost method. The deconsolidation has not been reflected in the
financial statements of prior periods.
Certain reclassifications have been made to prior-year amounts to conform to the
current year's presentation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. This could affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reported period. These estimates involve judgments with respect to various
items including future economic factors that are difficult to predict and are
beyond the control of Florida Progress. Therefore actual results could differ
from these estimates.
Regulation - Florida Power is regulated by the FPSC and the FERC. The utility
follows the accounting practices set forth in Financial Accounting Standard
(FAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." This
standard allows utilities to capitalize or defer certain costs or revenues based
on regulatory approval and management's ongoing assessment that it is probable
these items will be recovered through the ratemaking process.
53
Florida Power has total regulatory assets (liabilities) at December 31, 1998 and
1997 as detailed below:
1998 1997
(In millions)
-----------------
Deferred purchased power
contract termination costs $321.0 $ 348.2
Replacement fuel (extended nuclear outage) 39.3 55.0
Underrecovered/(overrecovered)utility
fuel costs (22.2) 34.5
Revenue decoupling - 21.8
Unamortized loss on reacquired debt 25.2 16.8
Other regulatory assets, net 27.7 25.2
------------------
Net regulatory assets $391.0 $501.5
==================
Florida Power expects to fully recover these assets and refund the liabilities
through customer rates under current regulatory practice.
If Florida Power no longer applied FAS No. 71 due to competition, regulatory
changes or other reasons, the utility would make certain adjustments. These
adjustments could include the write-off of all or a portion of its regulatory
assets and liabilities, the evaluation of utility plant, contracts and
commitments and the recognition, if necessary, of any losses to reflect market
conditions.
Property, Plant and Equipment
Electric Utility Plant - Utility plant is stated at the original cost of
construction, which includes payroll and related costs such as taxes, pensions
and other fringe benefits, general and administrative costs, and an allowance
for funds used during construction. Substantially all of the utility plant is
pledged as collateral for Florida Power's first mortgage bonds.
The allowance for funds used during construction represents the estimated cost
of equity and debt for utility plant under construction. Florida Power is
permitted to earn a return on these costs and recover them in the rates charged
for utility services while the plant is in service. The average rate used in
computing the allowance for funds was 7.8%.
The cost of nuclear fuel is amortized to expense based on the quantity of heat
produced for the generation of electric energy in relation to the quantity of
heat expected to be produced over the life of the nuclear fuel core.
Florida Power's annual provision for depreciation, including a provision for
nuclear plant decommissioning costs and fossil plant dismantlement costs,
expressed as a percentage of the average balances of depreciable utility plant,
was 4.7% for 1998, 4.8% for 1997 and 4.9% for 1996.
The fossil plant dismantlement accrual has been suspended for a period of four
years, effective July 1, 1997. (See Note 9 contained herein.)
Florida Power charges maintenance expense with the cost of repairs and minor
renewals of property. The plant accounts are charged with the cost of renewals
and replacements of property units. Accumulated depreciation is charged with the
cost, less the net salvage, of property units retired.
54
Florida Power accrues a reserve for maintenance and refueling expenses
anticipated to be incurred during scheduled nuclear plant outages.
Other Property - Other property consists primarily of railcar and recycling
equipment, barges, towboats, land, mineral rights and telecommunications
equipment.
Depreciation on other property is calculated principally on the straight-line
method over the estimated useful lives of assets. Depletion is provided on the
units-of-production method based upon the estimates of recoverable tons of clean
coal.
Utility Revenues, Fuel and Purchased Power Expenses - Revenues include amounts
resulting from fuel, purchased power and energy conservation cost recovery
clauses, which generally are designed to permit full recovery of these costs.
The adjustment factors are based on projected costs for a 12-month period. The
cumulative difference between actual and billed costs is included on the balance
sheet as a current regulatory asset or liability. Any difference is billed or
refunded to customers during the subsequent period.
In December 1997, Florida Power ended the three-year test period for residential
revenue decoupling, which was ordered by the FPSC and began in January 1995.
Revenue decoupling eliminated the effect of abnormal weather from revenues and
earnings. The difference between target revenues and actual revenues is included
as a current asset on the balance sheet for the period ended December 31, 1997.
The regulatory asset of $21.8 million at December 31, 1997, is currently being
recovered from customers over a two-year period, ending in the year 2000,
through the energy conservation cost recovery clause as directed by the FPSC
decoupling order.
Florida Power accrues the non-fuel portion of base revenues for services
rendered but unbilled.
Diversified Revenues - Revenues are recognized at the time products are shipped
or as services are rendered. Leasing activities are accounted for in accordance
with FAS No. 13, "Accounting for Leases."
Income Taxes - Deferred income taxes are provided on all significant temporary
differences between the financial and tax basis of assets and liabilities using
presently enacted tax rates.
Deferred investment tax credits, subject to regulatory accounting practices, are
amortized to income over the lives of the related properties.
Accounting for Certain Investments - Florida Progress considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Florida Progress' investments in debt and equity securities are classified and
accounted for as follows:
Type of Security Accounting Treatment
- ------------------- -----------------------------
Debt securities held to maturity Amortized cost
- --------------------------------------------------------------------
Trading securities Fair value with unrealized
gains and losses included
in earnings
- --------------------------------------------------------------------
55
Securities available for sale Fair value with unrealized
gains and losses, net of taxes,
reported separately in
comprehensive income
- ----------------------------------------------------------------------
Florida Progress held only securities classified as available for sale at both
December 31, 1998 and 1997. A decline in the market value of any security
available for sale below cost results in a reduction in carrying amount to fair
value if the decline is not considered temporary. The impairment is charged to
earnings and a new cost basis for the security is established. (See Note 2
contained herein.) Dividend and interest income are recognized when earned.
Accounting for Long-Lived Assets - Long-lived assets and certain identifiable
intangibles subject to the provisions of FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. FAS No. 121 also
amends FAS No. 71, "Accounting for the Effects of Certain Types of Regulation,"
to require that regulatory assets, which include certain deferred charges, be
charged to earnings if such assets are no longer considered probable of
recovery. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Acquisitions - During 1998 and 1997, subsidiaries of Electric Fuels acquired 13
and three businesses, respectively, in separate transactions. The cash paid for
the 1998 and 1997 acquisitions was $206.6 million and $32.7 million,
respectively. The excess of the aggregate purchase price over the fair value of
net assets acquired was approximately $87.8 million and $15.6 million in 1998
and 1997, respectively. The acquisitions were accounted for under the purchase
method of accounting and, accordingly, the operating results of the acquired
businesses have been included in Florida Progress' consolidated financial
statements since the date of acquisition. Each of the acquired companies
conducted operations similar to those of the subsidiaries and has been
integrated into their operations. The pro forma results of consolidated
operations for 1998 and 1997, assuming the 1998 acquisitions were made at the
beginning of each year, would not differ significantly from the historical
results.
Goodwill - Goodwill is being amortized on a straight-line basis over the
expected periods to be benefited, generally 40 years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Stock-Based Compensation - Florida Progress' Long-Term Incentive Plan ("LTIP")
authorizes the granting of up to 2,250,000 shares of common stock to certain
executives in various forms, including stock options, stock appreciation rights,
56
restricted stock and performance shares. Currently, the Company has only granted
performance shares, which upon achievement of performance criteria for a
three-year performance cycle, can result in the award of shares of common stock
of Florida Progress or cash if certain stock ownership requirements are met.
Florida Progress accounts for its LTIP in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as allowed under FAS No. 123, "Accounting for Stock Based
Compensation." Compensation costs for performance shares have been recognized at
the fair market value of the Company's stock and are recognized over the
performance cycle.
Environmental - Florida Progress accrues environmental remediation liabilities
when the criteria of FAS No. 5, "Accounting for Contingencies," have been met.
Environmental expenditures are expensed as incurred or capitalized depending on
their future economic benefit. Expenditures that relate to an existing condition
caused by past operations and that have no future economic benefits are
expensed.
Liabilities for expenditures of a noncapital nature are recorded when
environmental assessment and/or remediation is probable, and the costs can be
reasonably estimated.
New Accounting Standards - Florida Progress adopted FAS No. 130, "Reporting
Comprehensive Income," on January 1, 1998. The standard defines comprehensive
income as all changes in equity of an enterprise during a period except those
resulting from shareholder transactions. As the standard addresses reporting and
presentation issues only, there was no impact on earnings from the adoption of
this standard. Comprehensive income is included for Florida Progress in the
accompanying Consolidated Statements of Common Equity and Comprehensive Income.
Prior-year financial statements have been reclassified to conform to the
requirements of FAS No. 130.
Florida Progress adopted FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" for the year ended December 31, 1998. The
standard requires financial and descriptive information be disclosed for
segments meeting certain materiality criteria whose operating results are
reviewed for decisions on resource allocation and for which discrete financial
information is available. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. As the
standard addresses reporting and disclosure issues only, there was no impact on
earnings. (See Note 8 contained herein.)
Florida Progress adopted FAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" for the year ended December 31, 1998. As the
standard addresses reporting and disclosure issues only, there was no impact on
earnings. (See Note 7 contained herein.)
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair values. Florida Progress will be required to adopt this standard for
financial statements issued beginning the first quarter of fiscal year 2000.
Florida Progress is currently evaluating the effect the standard will have on
its financial statements.
57
Note 2: Financial Instruments
Estimated fair value amounts have been determined by Florida Progress using
available market information and discounted cash-flow analysis. Judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates may be different than the amounts that Florida
Progress could realize in a current market exchange.
Florida Progress' exposure to market risk for changes in interest rates relates
primarily to Florida Progress' marketable securities and long-term debt
obligations.
At December 31, 1998 and 1997, Florida Progress had the following financial
instruments with estimated fair values and carrying amounts:
1998 1997
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
ASSETS:
- -----------------------------------------------------------------------------
Investments for nonqualified
retirement plans $80.4 $80.4 $5.0 $5.0
Nuclear decommissioning
fund 332.1 332.1 266.7 266.7
- -----------------------------------------------------------------------------
CAPITAL AND LIABILITIES:
Long-term debt:
Florida Power Corporation $1,646.7 $1,740.4 $1,746.9 $1,801.1
Progress Capital Holdings 749.6 763.9 646.1 656.5
- ----------------------------------------------------------------------------
NOTE 3: INCOME TAXES
FLORIDA PROGRESS
(In millions) 1998 1997 1996
- ----------------------------------------------------------------------------
Components of income tax expense:
Payable currently:
Federal $ 85.8 $ 86.6 $179.7
State 15.3 10.5 23.0
- ----------------------------------------------------------------------------
101.1 97.1 202.7
- ----------------------------------------------------------------------------
Deferred, net:
Federal 47.2 (22.4) (41.9)
State 8.2 (.5) (6.9)
- ----------------------------------------------------------------------------
55.4 (22.9) (48.8)
- ----------------------------------------------------------------------------
Amortization of investment
tax credits, net (7.9) (7.8) (8.0)
- ----------------------------------------------------------------------------
$ 148.6 $ 66.4 $ 145.9
============================================================================
58
FLORIDA POWER
(In millions) 1998 1997 1996
- ----------------------------------------------------------------------------
Components of income tax expense:
Payable currently:
Federal $ 89.2 $ 73.5 $143.6
State 15.3 11.6 24.9
- ----------------------------------------------------------------------------
104.5 85.1 168.5
- ----------------------------------------------------------------------------
Deferred, net:
Federal 37.7 (7.6) (20.9)
State 6.6 .2 (4.0)
- ----------------------------------------------------------------------------
44.3 ( 7.4) (24.9)
- ----------------------------------------------------------------------------
Amortization of investment
tax credits, net (7.9) (7.8) (7.9)
- ----------------------------------------------------------------------------
Total income tax expense 140.9 69.9 135.7
Less: Amounts charged or (credited)
to non-operating income .7 -- (.1)
- ----------------------------------------------------------------------------
Amounts charged to operating income $ 140.2 $ 69.9 $ 135.8
============================================================================
The primary differences between the statutory rates and the effective income tax
rates are detailed below:
FLORIDA PROGRESS
1998 1997 1996
- ----------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
income tax benefits 3.5 5.4 2.6
Amortization of investment tax credits (1.8) (6.4) (2.0)
Other income tax credits (1.9) (2.7) -
Provision for loss on investment in
life insurance subsidiary - 24.9 -
Preferred dividends .1 - -
Other (.4) (1.8) .6
- ----------------------------------------------------------------------------
Effective income tax rates 34.5% 54.4% 36.2%
============================================================================
FLORIDA POWER
1998 1997 1996
- ----------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
income tax benefits 3.6 3.7 3.6
Amortization of investment tax credits (2.0) (3.8) (2.2)
Other (.4) (.9) -
- ----------------------------------------------------------------------------
Effective income tax rates 36.2% 34.0% 36.4%
============================================================================
59
The following summarizes the components of deferred tax liabilities and assets
at December 31, 1998 and 1997:
FLORIDA PROGRESS
(In millions) 1998 1997
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Difference in tax basis of property,
plant and equipment $624.5 $539.0
Investment in partnerships 19.2 19.7
Deferred book expenses 23.4 34.1
Other 47.2 29.7
- ---------------------------------------------------------------------------
Total deferred tax liabilities $ 714.3 $ 622.5
===========================================================================
Deferred tax assets:
Loss reserves not currently deductible $ 18.0 $ 17.0
Accrued book expenses 108.7 110.8
Unbilled revenues 17.6 17.6
Other 30.5 11.7
- ---------------------------------------------------------------------------
Total deferred tax assets $ 174.8 $ 157.1
===========================================================================
At December 31, 1998 and 1997, Florida Progress had net noncurrent deferred tax
liabilities of $595.4 million and $471.2 million and net current deferred tax
assets of $55.9 million and $5.8 million, respectively. Florida Progress
believes it is more likely than not that the results of future operations will
generate sufficient taxable income to allow for the utilization of deferred tax
assets.
FLORIDA POWER
(In millions) 1998 1997
- --------------------------------------------------------------------------
Deferred tax liabilities:
Difference in tax basis of property,
plant and equipment $ 575.1 $ 506.3
Deferred book expenses 23.3 34.1
Under recovery of fuel 3.8 2.8
Carrying value of securities over cost 22.0 15.0
Other 10.5 1.5
-------------------------------------------------------------------------
Total deferred tax liabilities $ 634.7 $ 559.7
==========================================================================
Deferred tax assets:
Accrued book expenses $ 90.2 $ 95.0
Unbilled revenues 17.6 17.6
Regulatory liability for deferred income taxes - 1.6
Other 19.7 -
- --------------------------------------------------------------------------
Total deferred tax assets $ 127.5 $ 114.2
==========================================================================
At December 31, 1998 and 1997, Florida Power had net noncurrent deferred tax
liabilities of $563.1 million and $451.3 million and net current deferred tax
assets of $55.9 million and $5.8 million, respectively. Florida Power expects
the results of future operations will generate sufficient taxable income to
allow the utilization of deferred tax assets.
60
NOTE 4: NUCLEAR OPERATIONS
Florida Power's Crystal River nuclear plant began an extended outage in
September 1996, which caused Florida Power to incur $100 million in additional
operation and maintenance expenses in 1997. The plant was placed on the NRC's
"Watch List," as a plant whose operations will be closely monitored until the
plant demonstrates a period of improved performance. In January 1998, the NRC
granted Florida Power permission to restart the plant. On February 15, 1998, the
plant returned to service. On July 29, 1998, the NRC removed CR3 from the "Watch
List." Earlier in July 1998, the NRC gave CR3 an overall report of good
performance and improvements in all areas assessed for the agency's Systematic
Assessment of Licensee Performance (SALP) ratings. CR3 has produced more than
100% of its rated capacity since its restart in February 1998. (See Note 9
contained herein.)
Jointly Owned Plant - The following information relates to Florida Power's 90.4%
proportionate share of the nuclear plant at December 31, 1998 and 1997:
(In millions) 1998 1997
- ----------------------------------------------------------------------
Utility plant in service $708.9 $673.8
Construction work in progress 44.2 49.3
Unamortized nuclear fuel 45.9 66.5
Accumulated depreciation 368.7 341.0
Accumulated decommissioning 254.8 223.7
======================================================================
Net capital additions for Florida Power were $30.0 million in 1998 and $64.7
million in 1997. Depreciation expense, exclusive of nuclear decommissioning, was
$32.8 million in 1998 and $29 million in 1997. Each co-owner provides for its
own financing of their investment. Florida Power's share of the asset balances
and operating costs is included in the appropriate consolidated financial
statements. Amounts exclude any allocation of costs related to common
facilities.
Decommissioning Costs - Florida Power's nuclear plant depreciation expenses
include a provision for future decommissioning costs, which are recoverable
through rates charged to customers. Florida Power is placing amounts collected
in an externally managed trust fund. The recovery from customers, plus income
earned on the trust fund, is intended to be sufficient to cover Florida Power's
share of the future dismantlement, removal and land restoration costs. Florida
Power has a license to operate the nuclear unit through December 3, 2016, and
contemplates decommissioning beginning at that time.
In November 1995, the FPSC approved the current site-specific study that
estimates total future decommissioning costs at approximately $2 billion, which
corresponds to $464.8 million in 1998 dollars. Florida Power's share of the
total annual decommissioning expense is $21.7 million.
Florida Power is required to file a new site-specific study with the FPSC at
least every five years, which will incorporate current cost factors, technology
and radiological criteria.
Fuel Disposal Costs - Florida Power has entered into a contract with the U.S.
Department of Energy for the transportation and disposal of SNF. Disposal costs
for nuclear fuel consumed are being collected from customers through the fuel
adjustment clause at a rate of $.001 per net nuclear kilowatt-hour sold and are
paid to the DOE quarterly. Florida Power currently is storing SNF on-site and
has sufficient storage capacity in place for fuel consumed through the year
2011.
61
NOTE 5 PREFERRED AND PREFERENCE STOCK AND SHAREHOLDER RIGHTS
The authorized capital stock of Florida Progress includes 10 million shares of
preferred stock, without par value, including 2 million shares designated as
Series A Junior Participating Preferred Stock. No shares of Florida Progress'
preferred stock are issued and outstanding. However, under Florida Progress'
Shareholder Rights Agreement, each share of common stock has associated with it
approximately two-thirds of one right to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Stock, subject to adjustment, which
is exercisable in the event of certain attempted business combinations. If
exercised, the rights would cause substantial dilution of ownership, thus
adversely affecting any attempt to acquire the Company on terms not approved by
the Company's Board of Directors. The rights have no voting or dividend rights
and expire in December 2001, unless redeemed earlier by the Company.
The authorized capital stock of Florida Power includes three classes of
preferred stock: 4 million shares of Cumulative Preferred Stock, $100 par value;
5 million shares of Cumulative Preferred Stock, without par value; and 1 million
shares of Preference Stock, $100 par value. No shares of Florida Power's
Cumulative Preferred Stock, without par value, or Preference Stock are issued
and outstanding. A total of 334,967 shares of Cumulative Preferred Stock, $100
par value, were issued and outstanding at December 31, 1998 and 1997. Florida
Power redeemed 1,050,000 shares of its Cumulative Preferred Stock in 1996 for
$106.4 million
Cumulative Preferred Stock for Florida Power is detailed below:
Current Outstanding at
Dividend Redemption Shares December 31,
Rate Price Outstanding 1998 & 1997
(In millions)
- ------------------------------------------------------------------
4.00% $104.25 39,980 $ 4.0
4.40% $102.00 75,000 7.5
4.58% $101.00 99,990 10.0
4.60% $103.25 39,997 4.0
4.75% $102.00 80,000 8.0
- ------------------------------------------------------------------
334,967 $33.5
==================================================================
All Cumulative Preferred Stock series are without sinking funds and are not
subject to mandatory redemption.
NOTE 6 DEBT
Florida Progress' long-term debt at December 31, 1998 and 1997, is scheduled to
mature as follows:
Interest Rate(a) 1998 1997
- -----------------------------------------------------------------------------------------------
Florida Power Corporation
(In millions)
First mortgage bonds, maturing 1999-2023 6.88% $585.0 $835.0
Pollution control revenue bonds, maturing 2014-2027 6.59% 240.9 240.9
Medium-term notes, maturing 1999-2028 6.63% 624.5 476.0
Commercial paper, supported by revolver
maturing November 30, 2003 5.25% 200.0 200.0
Discount, net of premium, being amortized over term of bonds (3.7) (5.0)
- ----------------------------------------------------------------------------------------------
1,646.7 1,746.9
62
Progress Capital Holdings:
Medium-term notes,maturing 1999-2008 6.63% 444.0 339.0
Commercial paper, supported by revolver
maturing November 30, 2003 5.38% 300.0 300.0
Other debt, maturing 1999-2006 6.13% 5.6 7.1
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
2,396.3 2393.0
Less: Current portion of long-term debt 145.9 15.2
- ---------------------------------------------------------------------------------------------
$2,250.4 $2,377.8
(a)Weighted average interest rate at December 31, 1998.
Florida Progress' consolidated subsidiaries have lines of credit totaling $800
million, which are used to support commercial paper. The lines of credit were
not drawn on as of December 31, 1998. Interest rate options under the lines of
credit arrangements vary from subprime or money market rates to the prime rate.
Banks providing lines of credit are compensated through fees. Commitment fees on
lines of credit vary between .06 and .10 of 1%.
The lines of credit consist of four revolving bank credit facilities, two each
for Florida Power and Progress Capital. The Florida Power facilities consist of
$200 million with a 364-day term and $200 million with a five-year term. The
Progress Capital facilities consist of $100 million with a 364-day term and $300
million with a five-year term. In 1998, both 364-day facilities were extended to
November 1999. In addition, both five-year facilities were extended to November
2003. Based on the duration of the underlying backup credit facilities, $500
million of outstanding commercial paper at December 31, 1998, and December 31,
1997, are classified as long-term debt. Additionally, as of December 31, 1998,
Florida Power and Progress Capital had an additional $47.3 million and $38.9
million, respectively, of outstanding commercial paper classified as short-term
debt.
Progress Capital has uncommitted bank bid facilities authorizing it to borrow
and re-borrow, and have outstanding at any time, up to $300 million. As of
December 31, 1998, $150 million was outstanding under these bid facilities.
Florida Power has a public medium-term note program providing for the issuance
of either fixed or floating interest rate notes. These notes have maturities
ranging from nine months to 30 years. A balance of $250 million is available for
issuance.
In March 1998, Florida Power redeemed all of its $150 million principal amount
of first mortgage bonds, 8 5/8% series due November 2021 at a redemption price
of 105.17% of the principal amount thereof. Substantially all of this redemption
was funded from the net proceeds of $150 million of medium-term notes issued in
February 1998, which bear an interest rate of 6 3/4% and mature in February
2028. Florida Power also redeemed in November 1998, an additional $100 million
of first mortgage bonds. The entire $50 million principal of the 7 3/8% series
was redeemed at a price of 100.93%, and the entire $50 million principal of the
7 1/4% series was redeemed at a price of 100.86%. Both issues were due in 2002.
The redemption was funded from internally generated funds and commercial paper.
Florida Power has registered $370 million of first mortgage bonds, which are
unissued and available for issuance.
Progress Capital has a private medium-term note program providing for the
issuance of either fixed or floating interest rate notes, with maturities
ranging from nine months to 30 years. A balance of $185 million is available for
issuance under this program.
63
The combined aggregate maturities of long-term debt for 1999 through 2003 are
$145.9 million, $147.6 million, $183 million, $32.2 million and $775.4 million,
respectively.
Florida Progress and Progress Capital entered into an amended guaranty and
support agreement in 1996, pursuant to which Florida Progress has
unconditionally guaranteed the payment of Progress Capital's debt.
NOTE 7 RETIREMENT BENEFIT PLANS
Pension Benefits - Florida Progress and some of its subsidiaries have a
noncontributory defined benefit pension plan (Retirement Plan) covering most
employees. Florida Progress also has two supplementary defined benefit pension
plans that provide benefits to higher-level employees. Effective January 1,
1998, the Retirement Plan was split into two separate plans, one covering
eligible bargaining unit employees and the other covering all other eligible
employees. Plan assets were allocated to each plan in accordance with applicable
law.
Other Postretirement Benefits - Florida Progress and some of its subsidiaries
also provide certain health care and life insurance benefits for retired
employees when they reach retirement age while working for Florida Progress.
Shown below are the components of the net pension expense and net postretirement
benefit expense calculations for 1998, 1997 and 1996:
Pension Benefits Other Postretirement Benefits
(In millions) 1998 1997 1996 1998 1997 1996
Service cost $ 22.3 $ 18.7 $ 18.3 $ 3.5 $ 3.2 $ 5.3
Interest cost 37.7 34.9 32.3 10.5 10.4 12.4
Expected return on plan assets (68.5) (58.4) (52.0) (.3) (.4) (.3)
Net amortization and deferral (12.5) (6.5) (6.5) 3.2 3.4 6.1
Net cost/(benefit) recognized $(21.0) $(11.3) $ (7.9) $16.9 $16.6 $23.5
The following weighted average actuarial assumptions at December 31 were used in
the calculation of the year-end funded status:
Pension Benefits Other Postretirement Benefits
1998 1997 1996 1998 1997 1996
Discount rate 7.00% 7.25% 7.50% 7.00% 7.25% 7.50%
Expected long-term rate of return 9.00% 9.00% 9.00% 5.00% 5.00% 5.00%
Rate of compensation increase:
Bargaining unit employees 3.50% 4.50% 4.50% 3.50% 4.50% 4.50%
Nonbargaining unit employees 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Nonqualified plans 4.00% 4.00% 4.00% N/A N/A N/A
64
The following summarizes the change in the benefit obligation and plan assets
for both the pension plan and postretirement benefit plan for 1998 and 1997:
Pension Benefits Other Benefits
(In millions) 1998 1997 1998 1997
Change in benefit obligation
Benefit obligation at beginning of year $523.9 $472.0 $ 153.2 $ 182.6
Service cost 22.3 18.7 3.5 3.2
Interest cost 37.7 34.9 10.5 10.4
Plan amendment - 9.5 - (36.1)
Actuarial (gain)/loss 16.1 12.6 1.2 (.3)
Benefits paid (25.8) (23.8) (6.9) (6.6)
Benefit obligation at end of year 574.2 523.9 161.5 153.2
Change in plan assets
Fair value of plan assets at beginning of year 769.0 655.0 6.4 4.7
Return on plan assets (net of expenses) 140.2 136.6 .4 .4
Employer contributions - - 1.3 1.3
Benefits paid (24.2) (22.6) - -
Fair value of plan assets at end of year 885.0 769.0 8.1 6.4
Funded status 310.8 245.1 (153.4) (146.8)
Unrecognized transition (asset) obligation (20.5) (25.4) 51.4 55.0
Unrecognized prior service cost 13.3 14.5 - -
Unrecognized net actuarial (gain)/loss (283.5) (236.6) (14.1) (15.6)
Prepaid (accrued) benefit cost $ 20.1 $ (2.4) $(116.1) $(107.4)
Between 1996 and 1998, Florida Progress set assets aside in a rabbi trust for
the purpose of providing benefits to the participants in the supplementary
retirement plans. The assets of the rabbi trust are not reflected as plan assets
because the assets could be subject to creditors' claims. The assets and
liabilities of the supplementary defined benefit retirement plans are included
in Other Assets and Other Liabilities on the accompanying Consolidated Balance
Sheets.
A one-percentage point increase or decrease in the assumed health care cost
trend rate would change the total service and interest cost by approximately $1
million and the postretirement benefit obligation by approximately $10 million.
Due to different retail and wholesale regulatory rate requirements, Florida
Power began making quarterly contributions for the postretirement benefit plan
in 1995 to an irrevocable external trust fund for wholesale ratemaking, while
continuing to accrue postretirement benefit costs to an unfunded reserve for
retail ratemaking. Florida Power contributed approximately $1.3 million annually
in both 1998 and 1997 to the trust fund.
NOTE 8 BUSINESS SEGMENTS
Florida Progress' principal business segment is Florida Power, an electric
utility engaged in the generation, purchase, transmission, distribution and sale
of electricity. The other reportable business segments are Electric Fuels'
Energy and Related Services, Rail Services and Inland Marine Transportation
units. Energy and Related Services includes coal operations, river terminal
services and off-shore marine transportation. Rail Services' operations include
railcar repair, rail parts reconditioning and sales, railcar leasing and sales,
providing rail and track material, and metal recycling. Inland Marine provides
transportation of coal, agricultural and other dry-bulk commodities as well as
fleet management services. The other category includes the parent holding
company Florida Progress, which allocates a portion of its operating expenses to
65
business segments. This category also includes segments below the quantitative
threshold required for separate disclosure.
Florida Progress' business segment information for 1998, 1997 and 1996 is
summarized below. Florida Progress' significant operations are geographically
located in the United States. Florida Progess' segments are based on differences
in products and services, and therefore no additional disclosures are presented.
Intersegment sales and transfers consist of coal sales from Electric Fuels to
Florida Power. The price Electric Fuels charges Florida Power is based on market
rates for coal procurement and for water borne transportation under a
methodology approved by the FPSC. Rail transportation is also based on market
rates plus a return allowed by the FPSC on equity utilized in transporting coal
to Florida Power. The allowed rate of return is currently 12%. No single
customer accounted for 10% or more of unaffiliated revenues.
Energy and Rail Inland Marine
(In millions) Utility Related Services Services Transportation Other Eliminations Consolidated
1998
Revenues $2,648.2 $173.8 $658.5 $124.6 $ 10.9 $ 4.3 $3,620.3
Intersegment revenues - 273.9 1.3 14.0 - (289.2) -
Depreciation and amortization 382.7 14.4 19.4 4.5 3.6 - 424.6
Interest expense 136.5 5.8 21.3 4.4 20.8 (1.7) 187.1
Income taxes 141.0 6.3 12.3 6.3 (17.3) - 148.6
Segment net income (loss) 248.6 20.4 15.9 10.3 (13.5) - 281.7
Total assets 4,928.1 316.5 680.0 99.5 334.0 (197.3) 6,160.8
Property additions 326.0 32.0 91.0 93.6 .7 - 543.3
1997
Revenues $2,448.4 $165.6 $477.1 $105.5 $115.7 $ 4.1 $3,316.4
Intersegment revenues - 286.0 1.3 14.2 - (301.5) -
Depreciation and amortization 333.8 11.7 11.2 4.3 3.2 - 364.2
Interest expense 117.3 6.5 13.9 2.5 19.1 (.6) 158.7
Income taxes 69.9 8.4 9.8 3.3 (25.0) - 66.4
Segment net income (loss) 134.4 16.8 13.3 5.9 (116.1) - 54.3
Total assets 4,900.8 299.2 385.3 138.9 210.4 (174.6) 5,760.0
Property additions 395.0 16.8 41.6 59.0 1.2 - 513.6
1996
Revenues $2,393.6 $165.6 $353.7 $ 86.4 $155.2 $ 3.4 $3,157.9
Intersegment revenues - 273.2 .8 13.7 - (287.7) -
Depreciation and amortization 341.1 11.4 7.4 4.5 2.3 - 366.7
Interest expense 98.4 6.3 9.9 1.9 20.5 (1.1) 135.9
Income taxes 135.7 (9.3) 6.9 4.4 8.2 - 145.9
Segment net income (loss) 232.6 (12.5) 9.7 7.1 (12.5) - 224.4
Total assets 4,264.0 272.4 294.2 79.0 577.2 (138.4) 5,348.4
Property additions 222.9 11.7 16.1 12.7 .6 - 264.0
In December 1996, the Energy and Related Services segment of Electric Fuels
revised its assessment that low-sulfur coal market prices were depressed
temporarily. Electric Fuels decided to close and dispose of its unprofitable
coal operations and recorded a provision for loss of $40.9 million.
NOTE 9 RATES
Florida Power's retail rates are set by the FPSC, while its wholesale rates are
governed by the FERC. Florida Power's last general rate case was approved in
1992 and allowed a 12% regulatory return on equity with an allowed range between
11% and 13%.
Tiger Bay Buy-Out - In 1997, Florida Power bought out the Tiger Bay purchased
power contracts for $370 million and acquired the cogeneration facility for $75
million, for a total of $445 million. Of the $370 million of contract
66
termination costs, $350 million was recorded as a regulatory asset and the
remaining $20 million was written off. Florida Power recorded $75 million as
electric plant.
The regulatory asset is being recovered pursuant to an agreement between Florida
Power and several intervening parties, which was approved by the FPSC in June
1997. The amortization of the regulatory asset is calculated using revenues
collected under the fuel adjustment clause as if the purchased power agreements
related to the facility were still in effect, less the actual fuel costs and the
related debt interest expense. This will continue until the regulatory asset is
fully amortized. Florida Power has the option to accelerate the amortization.
Approximately $27.2 million and $4.4 million of amortization expense was
recorded in 1998 and 1997, respectively.
In December 1998, Florida Power received approval from the FPSC to defer
non-fuel revenues towards the development of a plan that would allow customers
to realize the benefits earlier than if they are used to accelerate the
amortization of the Tiger Bay regulatory asset. If this plan is not submitted by
May 1, 1999, or not approved by the FPSC, then deferred revenues of $10.1
million plus interest will be applied towards the amortization of Tiger Bay.
Extended Nuclear Outage - In June 1997, a settlement agreement between Florida
Power and all parties who intervened in Florida Power's request to recover
replacement fuel and purchased power costs resulting from the extended outage of
its nuclear plant was approved by the FPSC. The plant was taken off-line in
September 1996 to address certain design issues related to its safety systems.
In late January 1998, Florida Power notified the NRC that it had completed all
of the requirements and was subsequently granted permission to restart the
plant. The plant returned to service in February 1998.
Florida Power incurred approximately $174 million in 1997 and an additional $5
million in 1998 in total system replacement power costs. In accordance with the
settlement agreement, Florida Power recorded a charge of approximately $73
million in 1997 and $5 million in 1998 for retail replacement power costs
incurred that will not be recovered through its fuel cost recovery clause.
Florida Power is currently recovering approximately $38 million through its fuel
cost recovery clause, and approximately $63 million of replacement power costs
were recorded as a regulatory asset in 1997. The regulatory asset is being
amortized for a period of up to four years. The amortization is being recovered
by the suspension of fossil plant dismantlement accruals during the amortization
period.
The parties to the settlement agreement agreed not to seek or support any
increase or reduction in Florida Power's base rates or the authorized range of
its return on equity during the four-year amortization period. The settlement
agreement also provided that for purposes of monitoring Florida Power's future
earnings, the FPSC will exclude the nuclear outage costs when assessing Florida
Power's regulatory return on equity. The agreement resolved all present and
future disputed issues between the parties regarding the extended outage of the
nuclear plant.
NOTE 10 DISCONTINUED OPERATIONS
On November 21, 1996, Florida Progress' Board of Directors declared a spin-off
distribution to common shareholders of record on December 5, 1996, of the common
shares of Echelon, which comprised the Company's lending, leasing and real
estate operations. Common shares were distributed on the basis of one share of
Echelon common stock for every 15 shares of Florida Progress' common stock.
67
In connection with the spin-off in 1996, Florida Progress has presented Echelon
as a discontinued operation in the accompanying Consolidated Statements of
Income.
Summarized income statement information relating to Echelon's results of
operations (as reported in discontinued operations) for the year ended December
31 is as follows:
(In millions) 1996
- ---------------------------------------------------------------------
Sales and revenues $ 63.2
- ---------------------------------------------------------------------
Loss from operations (net of income tax) -
Provision for loss on disposition of assets
(net of income tax benefits of $11.3) (18.0)
Spin-off transaction costs (net
of income tax benefits of $1.8) (8.3)
- ---------------------------------------------------------------------
Total discontinued operations $(26.3)
=====================================================================
NOTE 11 COMMITMENTS AND CONTINGENCIES
Fuel, Coal and Purchased Power Commitments - Florida Power has entered into
various long-term contracts to provide the fossil and nuclear fuel requirements
of its generating plants and to reserve pipeline capacity for natural gas. In
most cases, such contracts contain provisions for price escalation, minimum
purchase levels and other financial commitments. Estimated annual payments,
based on current market prices, for Florida Power's firm commitments for fuel
purchases and transportation costs, excluding delivered coal and purchased
power, are $56 million, $56 million, $62 million, $63 million and $64 million
for 1999 through 2003, respectively, and $499 million in total thereafter.
Additional commitments will be required in the future to supply Florida Power's
fuel needs.
Electric Fuels has two coal supply contracts with Florida Power, the provisions
of which require Florida Power to buy and Electric Fuels to supply substantially
all of the coal requirements of four of Florida Power's power plants, two
through 2002 and two through 2004. In connection with these contracts, Electric
Fuels has entered into several contracts with outside parties for the purchase
of coal. The annual obligations for coal purchases and transportation under
these contracts are $107.1 million, $61 million, $48.9 million and $22.7 million
for 1999 through 2002, respectively, with no further obligations thereafter. The
total cost incurred for these commitments was $117.7 million in 1998, $156.8
million in 1997 and $161.5 million in 1996.
Florida Power has long-term contracts for about 460 MW of purchased power with
other utilities, including a contract with The Southern Company for
approximately 400 MW of purchased power annually through 2010. This represents
4.5% of Florida Power's total current system capacity. Florida Power has an
option to lower these Southern purchases to approximately 200 MW annually with a
three-year notice. The purchased power from Southern is supplied by generating
units with a capacity of approximately 3,500 MW and is guaranteed by Southern's
entire system, totaling more than 30,000 MW.
As of December 31, 1998, Florida Power had entered into purchased power
contracts with certain qualifying facilities for 871 MW of capacity with
68
expiration dates ranging from 2002 to 2025. The purchased power contracts
provide for capacity and energy payments. Energy payments are based on the
actual power taken under these contracts. Capacity payments are subject to the
qualifying facilities meeting certain contract performance obligations. In most
cases, these contracts account for 100% of the generating capacity of each of
the facilities. Of the 871 MW under contract, approximately 831 MW currently are
available to Florida Power. All commitments have been approved by the FPSC.
The FPSC allows the capacity payments to be recovered through a capacity cost
recovery clause, which is similar to, and works in conjunction with, energy
payments recovered through the fuel cost recovery clause.
In 1997, through the buy-out of the Tiger Bay purchased power contracts, Florida
Power reduced its long-term purchased power commitments by 20 percent. Florida
Power incurred purchased power capacity costs totaling $260.1 million in 1998,
$292.3 million in 1997 and $284 million in 1996. The following table shows
minimum expected future capacity payments for purchased power commitments.
Because the purchased power commitments have relatively long durations, the
total present value of these payments using a 10% discount rate also is
presented. These amounts assume that all units are brought into service as
contracted and meet contract performance requirements:
Purchased Power Capacity Payments
(In millions) Utilities Cogenerators Total
- ----------------------------------------------------------------------------
1999 58 215 273
2000 59 223 282
2001 58 230 288
2002 32 236 268
2003 32 244 276
2004-2025 212 5,555 5,767
- ----------------------------------------------------------------------------
Total $451 $6,703 $ 7,154
============================================================================
Total net present value $ 2,577
============================================================================
Leases - Electric Fuels has several noncancelable operating leases, primarily
for transportation equipment, with varying terms extending to 2015, and
generally require Electric Fuels to pay all executory costs such as maintenance
and insurance. Some rental payments include minimum rentals plus contingent
rentals based on mileage. Contingent rentals were not significant. The minimum
future lease payments under noncancelable operating leases, including the
synthetic lease described below, are $38.7 million, $31.7 million, $27.7
million, $23.4 million and $23.4 million for 1999 through 2003, respectively,
with a $227 million total obligation thereafter. The total costs incurred under
these commitments were $30.9 million, $34.8 million and $33.3 million during
1998, 1997 and 1996, respectively.
On August 6, 1998, MEMCO, a wholly owned subsidiary of Electric Fuels, entered
into a synthetic lease financing, accomplished via a sale and leaseback, for an
aggregate of approximately $175 million in inland river barges and $25 million
in towboats (vessels). As of December 31, 1998, MEMCO had sold and leased back
$153 million of vessels. Acquisition and subsequent sale and leaseback of the
remaining $47 million of vessels are expected to occur by June 30, 1999. The
lease (charter) is an operating lease for financial reporting purposes and a
secured financing for tax purposes.
69
The term of the noncancelable charter expires on December 30, 2012, and provides
MEMCO one 18-month renewal option on the same terms and conditions. MEMCO is
responsible for all executory costs, including insurance, maintenance and taxes,
in addition to the charter payments. MEMCO has options to purchase the vessels
throughout the term of the charter, as well as an option to purchase at the
termination of the charter. Assuming MEMCO exercises no purchase options during
the term of the charter, the purchase price for all vessels aggregates $141.8
million at June 30, 2014. In the event that MEMCO does not exercise its purchase
option for all vessels, it will be obligated to remarket the vessels, and, at
the expiration of the charter, pay a maximum residual guarantee amount of $89.3
million.
The minimum future charter payments as of December 31, 1998 are $14.4 million,
$15.3 million, $15.4 million, $15.4 million and $15.8 million for 1999 through
2003 and $172.2 million thereafter (excluding the purchase option payment). All
MEMCO payment obligations under the transaction documents are unconditionally
guaranteed by Progress Capital; those obligations in turn are guaranteed by
Florida Progress.
Construction Program - Substantial commitments have been made in connection with
the Company's construction program. In 1999, Florida Power has projected
construction expenditures of $323 million, primarily for electric plant and
nuclear fuel. Diversified operations have projected capital additions of $155
million in 1999, primarily for barges and equipment.
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 partnership liabilities.
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. The reserve balance at December 31,
1998 and 1997 was $24.1 million and $18.1 million, respectively.
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 $88.1 million per incident, with a maximum
assessment of $10 million per year.
Florida Power is a member of the Nuclear Electric Insurance, Ltd. ("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
70
plant. Florida Power is subject to a retroactive premium assessment by NEIL
under this policy in the event loss experience exceeds NEIL's available surplus.
Florida Power's present maximum share of any such retroactive assessment is $2.7
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, Florida Power could be assessed up to a maximum of $9.5
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 - The Company is subject to regulation with respect to
the environmental impact of its operations. The Company's 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 U.S. EPA as PRPs at certain
sites, including the Sanford, Florida that Florida Power previously owned and
operated. There are five parties, including Florida Power, that have been
identified as PRPs at the Sanford site. Liability for the cleanup costs of these
sites is joint and several.
An agreement has been reached among the PRPs to spend up to $1.5 million to
perform the Risk Investigation and Feasibility Study (RI/FS). Florida Power is
liable for 39.7% of those costs. On September 25, 1998, the EPA formally
approved the PRP RI/FS Work Plan. The RI/FS field work was completed in January
1999. The EPA is expected to review the final Treatability Study report and
provide further guidance to the PRPs by August 1999.
The discussions and resolution of liability for cleanup costs could cause
Florida Power to increase its estimate of its liability for those costs.
Although estimates of any additional costs are not currently available, the
outcome is not expected to have a material effect on Florida Progress' financial
position, results of operations or liquidity.
In addition to these designated sites, there are other sites where affiliates
may be responsible for additional environmental cleanup.
Florida Progress believes that its subsidiaries will not be required to pay a
disproportionate share of the costs for cleanup of any of these designated
sites. Florida Progress' best estimates indicate that its proportionate share of
liability for cleaning up all designated sites ranges from $2.5 million to $7.5
million. It has accrued $4.4 million against these potential costs.
Legal Matters
Age Discrimination Suit - Florida Power and Florida Progress have been named
defendants in an age discrimination lawsuit. The number of plaintiffs remains at
116, however, four of those plaintiffs have had their federal claims dismissed
and five others have had their state age claims dismissed. While no dollar
amount was requested, each plaintiff seeks back pay, reinstatement or front pay
71
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. On August 10, 1998, Florida Power filed a
motion to decertify the class, and the plaintiffs filed their response in
opposition on September 30, 1998. A hearing date for the motion has not yet been
set. Florida Power has entered into settlement discussions with the plaintiffs.
In December 1998, plaintiffs alleged damages of $100 million. Company
management, while not believing plaintiffs' claim to have merit, offered $5
million in an attempted settlement of all claims. Plaintiffs rejected that
offer. As a result, management has identified a probable range of $5 million to
$100 million with no amount within that range a better estimate of probable loss
than any other amount; accordingly, Florida Power has accrued $5 million. There
can be no assurance that this litigation will be settled, or if settled, that
the settlement will not exceed $5 million. Additionally, the ultimate outcome,
if litigated, cannot presently be determined.
Advanced Separation Technologies, Inc. - In 1996, Florida Progress sold its
80%-interest in AST to Calgon for $56 million in cash. Calgon filed a lawsuit in
January 1998, 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 accuses Florida Progress of failing to
disclose flaws in AST's manufacturing process and a lack of quality control. No
projection of an outcome or estimate of a potential liability, if any, can be
determined at the date of issuance of these financial statements. Florida
Progress believes the lawsuit is without merit and intends to vigorously defend
itself. Accordingly, Florida Progress has not made provision for any loss for
this matter.
Qualifying Facilities Contracts - The purchased power contracts with qualifying
facilities employ separate pricing methodologies for capacity payments and
energy payments. Florida Power has interpreted the pricing provision in these
contracts to allow it to pay an as-available energy price rather than a higher
firm energy price when the avoided unit upon which the applicable contract is
based would not have been operated.
Owners of four qualifying facilities filed suit against Florida Power in state
court over the contract payment terms, one of which also filed in federal court.
Two of the suits have been settled, and the federal case was dismissed, although
the plaintiff has appealed. Of the two remaining suits, one trial concluded in
December 1998. The other remaining suit remains with no date presently set for
trial. 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 anticipates that all fuel and capacity expenses will be
recovered from its customers.
Mid-Continent Life Insurance Company - A series of events in 1997 as discussed
below, significantly jeopardized the ability of Mid-Continent to implement a
plan to eliminate a projected reserve deficiency resulting in the impairment of
Florida Progress' investment in Mid-Continent.
Therefore, the Company recorded a provision for loss on investment of $86.9
million in 1997. In addition, tax benefits of approximately $11 million related
to the excess of the tax basis over the book value in the investment in
Mid-Continent as of December 31, 1997, were not recorded because of
uncertainties associated with the timing of a tax deduction. Florida Progress
also recorded an accrual at December 31, 1997, for legal fees associated with
defending its position in current Mid-Continent legal proceedings.
72
In the spring of 1997, the Commissioner received court approval to seize control
of the operations of Mid-Continent. The Commissioner had alleged that
Mid-Continent's reserves were understated by more than $125 million, thus
causing Mid-Continent to be statutorily impaired. The Commissioner further
alleged that Mid-Continent had violated Oklahoma law relating to deceptive trade
practices in connection with the sale of its "Extra Life" insurance policies and
was not entitled to raise premiums, a key element to Mid-Continent's plan to
address the projected reserve deficiency. While sustaining the receivership, the
court also ruled that premiums could be raised. Although both sides appealed the
decision to the Oklahoma Supreme Court, those appeals were withdrawn in early
1999.
In December 1997, the Commissioner filed a lawsuit against Florida Progress,
certain of its directors and officers, and certain former Mid-Continent
officers, making a number of allegations and seeking access to Florida Progress'
assets to satisfy policyholder and creditor claims. On April 17, 1998, the court
granted motions to dismiss the individual defendants, leaving Florida Progress
as the sole remaining defendant in the lawsuit.
A new Commissioner was elected in November 1998 and has stated his intention to
work with Florida Progress and others to develop a plan to rehabilitate
Mid-Continent rather than pursue litigation against Florida Progress. Although
Florida Progress hasn't had access to recent Mid-Continent data, its estimate of
the present value of the projected deficiency, after applying Mid-Continent's
statutory surplus, is in the range of $100 million, rather than the $348 million
alleged by the former Commissioner. Florida Progress believes that the former
Commissioner's estimate is untenable and not based on sound actuarial
principles. Florida Progress is working with the new Commissioner to develop a
viable plan to rehabilitate Mid-Continent, which would include the sale of that
company.
In January 1999, five Mid-Continent policyholders filed a purported class action
against Mid-Continent and the same defendants named in the case filed by the
former Commissioner. The complaint contains substantially the same factual
allegations as those made by the Commissioner. The suit asserts "Extra Life"
policyholders have been injured as a result of representations made in
connection with the sale of that policy. The suit seeks unspecified actual and
punitive damages.
Although Florida Progress hopes to reach a negotiated resolution of these
matters, it would continue to vigorously defend itself against the two lawsuits
should negotiations fail, since it believes they are without merit. Because
neither the outcome of the litigation nor the ultimate effects of any
rehabilitation plan, including the possible sale of Mid-Continent, can be
estimated, Florida Progress has not made provision for any additional losses
that might result.
Other Legal Matters - Florida Progress is involved in various other claims and
legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect upon Florida Progress' consolidated financial position, results
of operations or liquidity.
73
QUARTERLY FINANCIAL DATA
FLORIDA PROGRESS CORPORATION
(Unaudited)
Three Months Ended
(In millions, except per share amounts) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------
1998
OPERATING RESULTS
Revenues $787.5 $903.1 $1,031.5 $898.2
Income (loss) from operations 118.2 167.7 228.1 86.3
Net income (loss) 50.5 77.8 117.3 36.1
DATA PER SHARE
Earnings (loss) per common share 0.52 0.80 1.21 0.37
Dividends per common share .535 .535 .535 .535
Common stock price per share:
High 42 1/4 42 7/8 43 15/16 47 1/8
Low 37 11/16 39 38 1/16 41
- -------------------------------------------------------------------------------------------------------------------
1997
OPERATING RESULTS
Revenues $747.5 $797.3 $ 922.5 $849.1
Income(loss) from operations 95.0 37.9 166.0 (25.2)
Net income (loss) 42.0 6.3 81.6 (75.6)
DATA PER SHARE
Earnings(loss)per common share .43 .07 .84 (.78)
Dividends per common share .525 .525 .525 .525
Common stock price per share:
High 32 7/8 31 5/8 33 5/8 39 1/4
Low 29 1/2 27 3/4 30 9/16 31 1/8
- -------------------------------------------------------------------------------------------------------------------
FLORIDA POWER CORPORATION
(Unaudited)
- ----------------------------------------------------------------------------------------------------
Three Months Ended
(In millions) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------
1998
Operating revenues $565.2 $663.8 $795.6 $623.6
Net income (loss) $46.2 $68.1 $109.1 $26.7
Earnings (loss) on common stock $45.8 $67.7 $108.8 $26.3
1997
Operating revenues $553.8 $597.2 $706.9 $590.5
Net income $41.6 $1.3 $76.3 $16.7
Earnings on common stock $41.2 $.9 $76.0 $16.3
The business of Florida Power is seasonal in nature and comparisons of earnings
for the quarters do not give a true indication of overall trends and changes in
Florida Power's operations. In June 1998, Florida Power restated its financial
results for the second, third and fourth quarters of 1997 to reflect recognition
of the extended nuclear outage as incurred. The change affected the financial
results for the interim reporting periods but did not have any effect on results
for the fiscal year ended 1997. Effective December 31, 1997, Florida Progress
deconsolidated the financial statements of Mid-Continent and established a
provision for loss for the full amount of its investment. The deconsolidation
has not been reflected in the consolidated financial statements of prior
periods.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
FLORIDA PROGRESS
Information concerning the Directors of Florida Progress is included under the
headings "Information as to Nominees" and "Information as to Continuing
Directors" in Florida Progress' Proxy Statement and is incorporated herein by
reference. Information concerning the executive officers of Florida Progress is
set forth in Part I, Item 1 hereof under the heading "Executive Officers".
Information concerning compliance by Florida Progress' directors and officers,
and persons who own more than 10% of Florida Progress' common stock, with the
reporting requirements of Section 16(a) of the Securities Act of 1934, is
included under the heading "Compliance with Section 16(a) of the Exchange Act"
in Florida Progress' Proxy statement and is incorporated have in by reference.
In addition, it has come to Florida Progress' attention that a Form 5 report of
the gift of 4,318 shares by Joseph Richardson to his wife was filed 24 days late
in March 1999.
FLORIDA POWER
DIRECTORS
W. D. ("Bill") Frederick, Jr., Age 64, Director since 1997.
Chairman - Compliance Committee
Mr. Frederick's principal occupation for the past five years has been as an
investor and citrus grower in Orlando, Florida. He served as Mayor of the City
of Orlando from 1980 to 1992. In 1966 he founded the Orlando law firm of
Frederick, Wooten & Honeywell P.A., and subsequently became a partner in the
Orlando law office of Holland & Knight, from which he retired in 1995. He is a
member of the Board of Directors of Florida Progress, Blue Cross/Blue Shield of
Florida, and SunTrust Bank, Central Florida, N.A.
Michael P. Graney, Esquire, Age 55, Director since 1997.
Member - Executive Committee
Mr. Graney has practiced law with the New York based law firm of Simpson Thacher
& Bartlett since 1980 and is now resident partner in its Ohio office. His
specialties are utilities, anti-trust and litigation. He is a member of the
American, District of Columbia, Ohio and Columbus Bar Associations and the
Federal Energy Bar Association. He is a director of Florida Progress.
Richard Korpan, Age 57, Director since 1989.
Chairman - Executive Committee
Information concerning Mr. Korpan is set forth in Part I, Item 1 hereof under
the heading "Executive Officers".
Clarence V. McKee, Esquire, Age 56, Director since 1988.
Mr. McKee's principal occupation is Chairman and Chief Executive Officer of
McKee Communications, Inc., Tampa, Florida, a firm involved in the acquisition
and management of television and radio stations. He served as Counsel to Pepper
& Corazinni, a Washington, D.C. communications law firm, from 1980 until 1987
when he became a co-owner of WTVT Holdings, Inc., where he held the position of
Chairman and Chief Executive Officer until 1992. He is a director of Florida
Progress, American Heritage Life Insurance Company, and Checkers Drive-In
Restaurants, Inc.
75
Vincent J. Naimoli, Age 61, Director since 1997.
Mr. Naimoli's principal occupation for more than five years has been as
Chairman, President and Chief Executive Officer of Anchor Industries
International, Inc., Tampa, Florida, an operating and holding company. He is
also Managing General Partner and Chief Executive Officer of the Tampa Bay Devil
Rays, Ltd. Major League Baseball Club, St. Petersburg, Florida. Mr. Naimoli is a
director of Florida Progress, and in conjunction with the business activities of
Anchor Industries, serves as a director of Russell Stanley Corp., and Players
International, Inc.
Richard A. Nunis, Age 66, Director since 1997.
Member - Executive Committee
Mr. Nunis' principal occupation for more than five years has been Chairman of
Walt Disney Attractions, Orlando, Florida, from which he retired in December
1998. He has held various positions with the Disney organization since 1955,
including Vice President, Operations in 1968, Executive Vice President of
DISNEYLAND and Walt Disney World in 1972, President of Walt Disney Attractions
in 1980, and Chairman in 1991. He is a director of Florida Progress, SunTrust
Bank, Central Florida N.A., and Director Emeritus of the Walt Disney Company.
Joseph H. Richardson, Age 49, Director since 1996.
Member - Executive Committee
Information concerning Mr. Richardson is set forth in Part I, Item 1 hereof
under the heading "Executive Officers".
Joan D. Ruffier, Age 59, Director since 1991.
Member - Compliance Committee
Ms. Ruffier's principal occupation is Chairman of Human Service Technologies,
Inc., a computer software products company. She also serves as Chairman of the
University of Florida Foundation and Chair of the Finance Committee of Shands
Healthcare,Inc. For more than five years and until November 1998, she was a
general partner of Sunshine Cafes, Ltd., Orlando, Florida, a food and beverage
concession business at major Florida airports. Previously, she practiced public
accounting with the firm of Colley, Trumbower & Howell from 1982 until 1986. She
also serves on the boards of directors of Florida Progress, Cyprus Equity Fund
and INVEST, Inc.
Robert T. Stuart, Jr., Age 66, Director since 1997
Mr. Stuart's principal occupation for more than five years has been as a rancher
and investor. Since 1949, he has held numerous executive positions with
Mid-Continent, including Vice President, President, Chairman of the Board and
Chief Executive Officer until 1986 when Mid-Continent was acquired by Florida
Progress. He is a director of Florida Progress.
Jean Giles Wittner, Age 64, Director since 1977.
Member - Compliance Committee
Mrs. Wittner's principal occupation is President of Wittner & Co. and Wittner &
Associates, Inc., St. Petersburg, Florida, firms involved in real estate
management, insurance brokerage and consulting, positions she has held for more
than five years. She previously served as President and Chief Executive Officer
of a savings association until it was sold in 1986. She serves on the boards of
Florida Progress and Raymond James Bank, F.S.B.
76
Each director holds office until the next Annual Meeting of Shareholders and
until the election and qualification of a successor.
EXECUTIVE OFFICERS
Information concerning the executive officers of Florida Power is set forth in
Part I, Item 1 hereof under the heading "Executive Officers" and is incorporated
herein by reference.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely on a review of the copies of Section 16(a) forms furnished to
Florida Power during 1998, or written representations that no forms were
required, Florida Power believes that all persons who at any time during 1998
were officers, directors or greater than 10% beneficial owners of Florida
Power's preferred stock, filed their applicable Section 16(a) reports on a
timely basis during 1998 and prior fiscal years.
ITEM 11. EXECUTIVE COMPENSATION
FLORIDA PROGRESS
The information under the headings "Compensation of Directors", "Executive
Compensation", "Pension Plan Table" and "Employment Contracts, Termination of
Employment and Change-in-Control Arrangements" in Florida Progress' Proxy
Statement is incorporated herein by reference.
FLORIDA POWER
COMPENSATION OF DIRECTORS
Compensation for all directors of Florida Power (excluding employees of Florida
Progress or subsidiaries) was $1,000 for attendance at each meeting of the
Florida Power Board of Directors or a committee of the Board of Directors. A
$750 fee is paid to each committee chairman for each meeting chaired.
EXECUTIVE COMPENSATION
The following table contains information with respect to compensation
awarded, earned or paid during the years 1996-1998, to (i) the current Chief
Executive Officer ("CEO") and (ii) the other four most highly compensated
executive officers of Florida Power (the individuals referred to in (i) and (ii)
are referred to collectively as the "Named Executive Officers") in 1998, whose
total remuneration paid in 1998 exceeded $100,000.
77
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Payouts
----------------------------------------- ------------------
Other
Name and Principal Annual LTIP All Other
Position Year Salary Bonus Compensation(1) Payouts(2) Compensation(3)
- -------------------------- ----- ------ ----- ------------- ------------ ---------------
RICHARD KORPAN 1998 $650,766 $594,000 $16,891 $792,754 $28,650
Chairman 1997 592,304 41,500 11,850 324,028 26,490
1996 535,610 333,500 1,489 339,107 18,900
JOSEPH H. RICHARDSON 1998 $421,158 $382,500 $2,625 $437,994 $18,900
President and Chief 1997 384,619 -0- 1,685 162,091 13,890
Executive Officer 1996 288,884 214,000 -0- 128,858 16,585(4)
ROY A. ANDERSON(5) 1998 $261,926 $290,802 $394 $136,371 $11,025
Senior Vice President, 1997 226,157 -0- 343,035(6) 32,518 5,643
Energy Supply 1996 N/A N/A N/A N/A N/A
JEFFREY R. HEINICKA 1998 $278,530 $190,000 $1,772 $208,288 $12,318
Senior Vice President and 1997 264,992 15,500 -0- 110,393 12,315
Chief Financial Officer 1996 258,456 169,000 -0- 113,139 8,585
KENNETH E. ARMSTRONG 1998 $231,933 $127,500 -0- $170,849 $9,882
Vice President and 1997 215,009 10,000 -0- 88,944 9,963
General Counsel 1996 212,785 144,500 -0- 101,748 8,595
(1) Except as otherwise noted, amounts represent the reimbursement of
taxes on certain perquisites and other personal benefits.
(2) Information for fiscal year 1998, represents the dollar value as of
February 17, 1999, the date of award, of shares of Common Stock
earned under the 1996-1998 performance cycle of Florida Progress'
Long-Term Incentive Plan ("LTIP"), none of which are restricted.
The total number of share earned including dividend equivalent
shares, is as follows: Richard Korpan 19,544 shares; Joseph H.
Richardson 10,798 shares; Roy A. Anderson 3,362 shares; Jeffery R.
Heinicka 5,135 shares; and Kenneth E. Armstrong 4,212 shares.
(See the discussion of the method of calculating payouts contained
in the Long-Term Incentive Compensation portion of the Compensation
Committee Report of the Board of Directors from the Florida
Progress Proxy Statement, which is incorporated herein by
reference.
(3) Company contributions to its Savings Plan and Executive Optional
Deferred Compensation Plan on behalf of the Named Executive Officers.
(4) Represents $8,835 in Company Contributions to the Savings Plan of
Florida Progress and the Executive Optional Deferred Compensation
Plan and $7,750 of director fees for services as a director of
Echelon International Corporation, a former subsidiary of Florida
Progress.
(5) No compensation information is provided for 1996 because Mr.
Anderson was not an executive officer or employee of Florida Power
during that year.
(6) Includes $282,686 paid to Mr. Anderson under the terms of his
employment agreement to place Mr. Anderson in substantially the
same economic position as he would have been had he remained
with his previous employer. Also includes reimbursement for
Mr. Anderson's moving expenses and tax reimbursement payments
for moving expenses and imputed flight income.
78
The following table contains information with respect to Performance Shares
granted in 1998 to each of the Named Executive Officers of Florida Power under
the LTIP:
LONG-TERM INCENTIVE PLAN(1)
AWARDS IN 1998
Number of Performance Estimated Payout in Shares at End of Period(3)
Performance Period ---------------------------------------------
Name Shares(2) Covered Threshold Target Maximum
- ------------------- ----------- ---------- ---------- -------- ---------
Richard Korpan 17,171 1998-2000 4,293 17,171 34,342
Joseph H. Richardson 8,293 1998-2000 2,073 8,293 16,586
Roy A. Anderson 2,758 1998-2000 690 2,758 5,516
Jeffrey R. Heinicka 2,924 1998-2000 731 2,924 5,848
Kenneth E. Armstrong 2,446 1998-2000 612 2,446 4,892
(1) The LTIP is a Common Stock and cash-based incentive plan to reward
participants for long-term performance of Florida Progress. It was approved
by the Florida Progress shareholders in 1990.
(2) The number of performance shares granted are based on a percentage of base
salary in effect at the time of each award and is subject to automatic
increase or decrease on a prorated basis in accordance with changes to a
participant's base salary or LTIP percentages throughout the performance
cycle.
In the event of a change in control of Florida Progress, 150% of all
performance shares granted to the Named Executive Officers under the LTIP
and then outstanding would automatically be considered earned and would be
paid in shares of unrestricted Common Stock together with shares of
unrestricted Common Stock payable for dividend equivalents accrued through
the date of the change in control.
(3) Payouts for the 1998-2000 performance cycle are based on achievement of
total shareholder return goals established by the Florida Progress
Corporation Compensation Committee.
Pension Plan Table
The table below illustrates the estimated annual benefits (computed as a
straight life annuity beginning at retirement at age 65) payable under the
Florida Progress Corporation Retirement Plan for Exempt and Nonexempt
Employees("Retirement Plan"), Nondiscrimination Plan and Supplemental Executive
Retirement Plan ("SERP") for specified final average compensation and years of
service levels.
Estimated Annual Retirement Benefits Payable Under the Retirement Plan for Exempt and Nonexempt Employees,
Nondiscrimination Plan and the Supplemental Executive Retirement Plan
---------------------------------------------------------------------
Average Annual
Compensation Service Years
- ------------------------------------------------------------------------------------------------------
5 10 15 20 25 30 35 or more
200,000 $37,500 $75,000 $112,000 $120,000 $120,000 $120,000 $126,000
300,000 56,250 112,500 168,750 180,000 180,000 180,000 189,000
400,000 75,000 150,000 225,000 240,000 240,000 240,000 252,000
500,000 93,750 187,500 281,250 300,000 300,000 300,000 315,000
600,000 112,500 225,000 337,500 360,000 360,000 360,000 378,000
700,000 131,250 262,500 393,750 420,000 420,000 420,000 441,000
800,000 150,000 300,000 450,000 480,000 480,000 480,000 504,000
900,000 168,750 337,500 506,250 540,000 540,000 540,000 567,000
1,000,000 187,500 375,000 562,500 600,000 600,000 600,000 630,000
1,100,000 206,250 412,500 618,750 660,000 660,000 660,000 693,000
1,200,000 225,000 450,000 675,000 720,000 720,000 720,000 756,000
1,300,000 243,750 487,500 731,250 780,000 780,000 780,000 819,000
1,400,000 262,500 525,000 787,500 840,000 840,000 840,000 882,000
1,500,000 281,250 562,500 843,000 900,000 900,000 900,000 945,000
1,600,000 300,000 600,000 900,000 960,000 960,000 960,000 1,008,000
The Named Executive Officers are entitled to benefits under the SERP. These
benefits are offset by the benefits payable under the Retirement Plan and the
79
Nondiscrimination Plan, as well as 50% of the executive's primary Social
Security benefit. The estimated annual SERP benefit for the Named Executive
Officers (prior to any offsets) may be determined using the Pension Plan Table
set forth above. For these purposes, the current compensation for each executive
that would be used in calculating benefits under the SERP is substantially the
same as the three-year average of the salary and bonus reported in the summary
compensation table, and the number of years of deemed credited service that
would be used in calculating benefits under the SERP for each such executive is
as follows: Mr. Korpan, 35 years of service; Mr. Richardson, 23 years of
service; ; Mr. Anderson 5 years of service; Mr. Heinicka, 21 years of service
and Mr. Armstrong, 15 years of service. Under the formula used for calculating
benefits under the SERP, the maximum benefit payable to each Named Executive
Officer is reached at 16 years of deemed credited service unless the Named
Executive Officer achieves 35 years of service.
Accrued benefits may also be paid under each of the Retirement Plan,
Nondiscrimination Plan and SERP if a participant terminates employment before
age 65 and meets the requirements for early retirement, disability, death or
other termination-of-employment benefits after becoming vested under the rules
of the particular plan.
Under the Retirement Plan and the Nondiscrimination Plan, the compensation taken
into account in calculating benefits is salary only. The years of credited
service that would be used in calculating benefits under the formula applicable
to the Retirement Plan and the Nondiscrimination Plan (1.8% of final average
earnings for each year of service) for the Named Executive Officers in the
summary compensation table are as follows: Mr. Korpan, 10 years of service; Mr.
Richardson, 23 years of service; Mr. Anderson, 2 years of service; Mr. Heinicka,
21 years of service; Mr. Armstrong, 12 years of service. The benefits under the
Retirement Plan and the Nondiscrimination Plan are subject to offset by an
amount equal to 1 1/7% of a participant's primary Social Security benefit for
each year of service (with a maximum offset of 40%).
In the event of a change in control of Florida Progress, each Named Executive
Officer will receive credit under the SERP for five additional years of service,
but in no event would such additional years of credited service cause the
maximum benefit to be increased. If a participant's employment were terminated
following a change in control, the benefit payable from the SERP would be as
follows: (1) an annuity beginning at age 55 through 59, subject to early payment
reductions in the amount of 3% for each year prior to age 60, or age 60 without
reduction; (2) the amount of any federal excise taxes (and income taxes on any
reimbursement under this provision) imposed on the executive under Section 4999
of the Internal Revenue Code; and (3) a 50% surviving spouse benefit payable
upon death.
In April 1998, Florida Power entered into an Amended and Restated Employment
Agreement with Roy A. Anderson which provides for his employment through April
30, 2003. His annual base salary will be $245,000, or such greater sum as shall
be mutually agreed, with additional award opportunities as a participant in the
Management Incentive Compensation Plan ("MICP") and LTIP , with minimum award
target levels of 40% of base salary for each plan. He is entitled to participate
in the SERP, and shall be credited with up to 22 years of additional service
constituting "Deemed Credited Service" thereunder depending on the number of
years of actual service. The agreement also provides that if Mr. Anderson's
employment with Florida Power continues until or beyond age 60 and his
employment terminates
80
thereafter other than as a result of a termination for good cause, Florida Power
shall pay to Mr. Anderson certain deferral award payments, based on his age,
with a maximum deferral award, if his employment terminates at age 65, of
$1,000,000 ($231,000 payable annually over five years). The agreement also
provides for certain payments designed to compensate Mr. Anderson for certain
benefits he would have enjoyed had he remained with his former employer. If Mr.
Anderson's employment terminates other than as a result of termination for good
cause, he will receive a $105,960 15-year annuity, to be offset by payments made
by his former employer pursuant to comparable arrangements. In the Amended and
Restated Agreement, Mr. Anderson also acknowledges that other payments due him
under his former employment agreement with Florida Power have been satisfied.
The agreement contains a confidentiality agreement and covenant not to compete.
In the event of a change in control of Florida Progress, all of the Named
Executive Officers are entitled to benefits under individual agreements
described in Florida Progress' Proxy Statement under the heading "Employment
Contracts, Termination of Employment and Change in Control Arrangements."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
FLORIDA PROGRESS
The information included under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in Florida Progress'
Proxy Statement is incorporated herein by reference.
FLORIDA POWER
All of Florida Power's common stock is held beneficially and of record by
Florida Progress. None of Florida Power's directors or executive officers owns
any shares of Florida Power's common or preferred stock. Information concerning
shares of Florida Progress common stock that are held by persons known to
Florida Progress to be the beneficial owners of more than 5% of Florida
Progress' common stock is set forth in the table under the heading "Security
Ownership of Certain Beneficial Owners" in the Florida Progress Proxy Statement
and is incorporated herein by reference.
The table below sets forth as of December 31, 1998, the number of shares of
common stock of Florida Progress owned by Florida Power's directors and Named
Executive Officers individually and the directors and all executive officers of
Florida Power as a group.
81
Florida Power Number of Shares Percent of
Officer or Director Name Beneficially Owned (1) Class (2)
- ------------------------ ---------------------- ----------
W. D. ("Bill") Frederick 3,409(3)
Michael P. Graney 4,335
Richard Korpan 26,057
Clarence V. McKee 2,537
Vincent J. Naimoli 11,148(4)
Richard A. Nunis 25,577
Joseph H. Richardson 14,075(5)
Joan D. Ruffier 5,462
Robert T. Stuart, Jr. 1,505,462(6) 1.55%
Jean Giles Wittner 11,036
Roy A. Anderson 2,279
Kenneth E. Armstrong 7,430
Jeffrey R. Heinicka 7,325(7)
All 16 directors, named executive
officers and executive officers
as a group, including those
named above 1,634,530 1.68%
(1) Unless otherwise noted, the directors, and named executive officers, and the
directors, and executive officers as a group, have sole voting and investment
power with respect to the shares listed.
(2) Unless otherwise noted, each director, and named executive officer and all
directors, and executive officers as a group, own less than one percent of the
outstanding shares of Florida Progress' common stock.
(3) Voting and investment power with respect to 1,500 shares is shared.
(4) Voting and investment power with respect to 1,600 shares is shared.
(5) Voting power with respect to 4,318 shares is shared.
(6) Voting and investment power with respect to 150,473 shares is shared.
(7) Voting and investment power with respect to 140 shares is shared.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the heading "Certain Relationships and Related
Transactions" in Florida Progress' Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FOR FLORIDA PROGRESS AND FLORIDA POWER
(a) 1. Financial Statements, notes to Financial Statements and
report thereon of KPMG LLP are found in Item 8 "Financial
Statements and Supplementary Data" herein.
82
2. The following Financial Statement Schedules and reports are
included herein:
Florida Progress
II-Valuation and Qualifying Accounts
for the years ended December 31,
1998, 1997 and 1996
Florida Power
II-Valuation and Qualifying Accounts
for the years ended December 31,
1998, 1997 and 1996
All other schedules are not submitted because they are not
applicable or not required or because the required information
is included in the financial statements or notes thereto.
3. Exhibits filed herewith:
Florida Florida
Number Exhibit Progress Power
------ ------- -------- -------
3.(a) Bylaws of Florida Progress, as amended X
February 18, 1999.
10.(a) Phantom Stock Plan for the benefit of X X
Non-Employee Directors of Florida Progress
Corporation. *
10.(b) Agreement between Florida Progress and X
William G. Kelly dated as of January 30,
1998, regarding change in control. *
12 Statement of Computation of Ratios. X
21 Subsidiaries of Florida Progress. X
23.(a) Consent of Independent Certified Public X
Accountants to the incorporation by reference
of their report on the financial statements
into the following registration statements of
Florida Progress: Form S-3 (No. 33-51573)
(relating to the registration of 4.5 million
shares of common stock and filed with the SEC
on December 17, 1993); Forms S-8 (No.333-19037
and 333-66161)(relating to the Savings Plan
for Employees of Florida Progress and filed
with the SEC on December 31, 1996); Form S-3
(No.333-07853)(relating to the Progress Plus
Plan and filed with the SEC on July 10, 1996);
Form S-8 (No.33-47623)(relating to Florida
Progress' Long-Term Incentive Plan and filed
with the SEC on May 1, 1992); Form S-3
83
(No. 2-93111)(relating to the acquisition of
Better Business Forms and filed with the SEC
on September 5, 1984.
23.(b) Consent of Independent Certified Public X
Accountants to the incorporation by reference
of their report on the financial statements
into Florida Power's registration statements
on Form S-3 (Nos. 33-62210 and 33-55273)
(relating to Florida Power's first mortgage
bonds) and Form S-3 (No. 333-29897)
(relating to Florida Power's medium-term
notes).
24 Powers of Attorney are included in the
signature pages of this Form 10-K.
27.(a) Florida Progress Financial Data Schedule X
27.(b) Florida Power Financial Data Schedule X
4. Exhibits incorporated herein by reference:
Florida Florida
Number Exhibit Progress Power
------ -------- -------- -------
3.(b) Bylaws of Florida Power, as amended to date. X
(Filed as Exhibit 3.(b) to the Florida Power
Form 10-K for the year ended December 31,
1995, as filed with the SEC on March 20,
1996.)
3.(c) Restated Articles of Incorporation, as X
amended, of Florida Progress. (Filed
as Exhibit 3(a) to Florida Progress'
Form 10-K for the year ended December
31, 1991, as filed with the SEC on
March 30, 1992.)
3.(d) Amended Articles of Incorporation, as X X
amended, of Florida Power. (Filed as
Exhibit 3(a) to the Florida Power Form
10-K for the year ended December 31,
1991, as filed with the SEC (File No.
1-3274) on March 30, 1992.)
4.(a) Amendment to Shareholder Rights X
Agreement dated February 20, 1997,
between Florida Progress and The First
National Bank of Boston. (Filed as
Exhibit 4(a) to the Florida Progress
Form 10-K for the year ended December
31, 1996, as filed with the SEC on
March 27, 1997.)
84
4.(b) Form of Certificate representing shares of X
Florida Progress Common Stock. (Filed as
Exhibit 4(b) to the Florida Progress Form
10-K for the year ended December 31,1996,
as filed with the SEC on March 27, 1997.)
4.(c) Rights Agreement, dated as of November 21, X
1991, between Florida Progress and
Manufacturers Hanover Trust Company,
including as Exhibit A the form of Rights
Certificate. (Filed as Exhibit 4(a) to
Florida Progress' Form 8-K dated November
21, 1991, as filed with the SEC on November
27, 1991.)
4.(d) Indenture, dated as of January 1, 1944 (the X X
"Indenture"), between Florida Power and
Guaranty Trust Company of New York and The
Florida National Bank of Jacksonville, as
Trustees. (Filed as Exhibit B-18 to Florida
Power's Registration Statement on Form A-2
(No. 2-5293) filed with the SEC on January
24, 1944.)
4.(e) Seventh Supplemental Indenture, dated as of X X
July 1, 1956, between Florida Power and
Guaranty Trust Company of New York and The
Florida National Bank of Jacksonville, as
Trustees, with reference to the modification
and amendment of the Indenture. (Filed as
Exhibit 4(b) to Florida Power's Registration
Statement on Form S-3 (No. 33-16788) filed
with the SEC on September 27, 1991.)
4.(f) Eighth Supplemental Indenture, dated as of X X
July 1, 1958, between Florida Power and
Guaranty Trust Company of New York and The
Florida National Bank of Jacksonville, as
Trustees, with reference to the modification
and amendment of the Indenture. (Filed as
Exhibit 4(c) to Florida Power's Registration
Statement on Form S-3 (No. 33-16788) filed
with the SEC on September 27, 1991.)
4.(g) Sixteenth Supplemental Indenture, dated as of X X
February 1, 1970, between Florida Power and
Morgan Guaranty Trust Company of New York and
The Florida National Bank of Jacksonville, as
Trustees, with reference to the modification
and amendment of the Indenture. (Filed as
Exhibit 4(d) to Florida Power's Registration
Statement on Form S-3 (No. 33-16788) filed
with the SEC on September 27, 1991.)
85
4.(h) Twenty-Ninth Supplemental Indenture, dated as X X
of September 1, 1982, between Florida Power
and Morgan Guaranty Trust Company of New York
and Florida National Bank, as Trustees, with
reference to the modification and amendment
of the Indenture. (Filed as Exhibit 4(c) to
Florida Power's Registration Statement on
Form S-3 (No. 2-79832) filed with the SEC on
September 17, 1982.)
4.(i) Thirty-Eighth Supplemental Indenture dated as X X
of July 25, 1994, between Florida Power and
First Chicago Trust Company of New York, as
successor Trustee, Morgan Guaranty Trust
Company of New York, as resigning Trustee,
and First Union National Bank of Florida, as
resigning Co-Trustee, with reference to
confirmation of First Chicago Trust Company
of New York as successor Trustee under the
Indenture. (Filed as exhibit 4(f) to Florida
Power's Registration Statement on Form S-3
(No. 33-55273) as filed with the SEC on August
29, 1994.)
10.(c) Management Incentive Compensation Plan X X
of Florida Progress Corporation, as
amended to date. (Filed as Exhibit 10(a)
to the Florida Progress Form 10-K for the
year ended December 31, 1997 as filed
with the SEC on March 18, 1998.)*
10.(d) Agreement between Florida Progress and X
Kenneth E. Armstrong dated as of January
30, 1998 regarding change in control.
(Filed as Exhibit 10(b) to the Florida
Progress Form 10-K for the year ended
December 31, 1997, as filed with the SEC
on March 18, 1998.)*
10.(e) Agreement between Florida Progress and X
Stanley I. Garnett, II dated as of
January 30, 1998 regarding change in
control. (Filed as Exhibit 10(c) to the
Florida Progress Form 10-K for the year
ended December 31, 1997, as filed with
the SEC on March 18, 1998.)*
10.(f) Agreement between Florida Progress and X
Jeffrey R. Heinicka dated as of January
30, 1998 regarding change in control.
(Filed as Exhibit 10(d) to the Florida
Progress Form 10-K for the year ended
December 31, 1997, as filed with the SEC
on March 18, 1998.)*
86
10.(g) Agreement between Florida Progress and X
Richard D. Keller dated as of January 30,
1998 regarding change in control. (Filed
as Exhibit 10(e) to the Florida Progress
Form 10-K for the year ended December 31,
1997, as filed with the SEC on March 18,
1998.)*
10.(h) Agreement between Florida Progress and X
Richard Korpan dated as of January 30,
1998 regarding change in control. (Filed
as Exhibit 10(f) to the Florida Progress
Form 10-K for the year ended December 31,
1997, as filed with the SEC on March 18,
1998.)*
10.(i) Agreement between Florida Progress and X
Joseph H. Richardson dated as of January
30, 1998 regarding change in control.
(Filed as Exhibit 10(g) to the Florida
Progress Form 10-K for the year ended
December 31, 1997, as filed with the SEC
on March 18, 1998.)*
10.(j) Employment Agreement between Florida X
Progress and Richard Korpan dated as of
March 1, 1998. (Filed as Exhibit 10(h)
to the Florida Progress Form 10-K for
the year ended December 31, 1997, as
filed with the SEC on March 18, 1998.)*
10.(k) Executive Optional Deferred Compensation X X
Plan*. (Filed as Exhibit 10.(c) to the
Florida Progress Form 10-K for the year
ended December 31, 1996 as filed with the
SEC on March 27, 1997.)
10.(l) Florida Progress Supplemental Executive X X
Retirement Plan*. (Filed as Exhibit 10.(b)
to the Florida Progress Form 10-K for the
year ended December 31, 1996 as filed
with the SEC on March 27, 1997.)
10.(m) Second Amended and Restated Guaranty and X
Support Agreement dated as of August 7,
1996. (Filed as Exhibit 4 to Florida
Progress' Form 10-Q for the quarter
ended June 30, 1996).
10.(n) Florida Progress Corporation Long-Term X X
Incentive Plan, approved by Florida
Progress' Shareholders on April 19,
1990. (Filed as Exhibit 10(d) to Florida
Progress' Form 10-Q for the quarter
ended March 31, 1990, as filed with
the SEC on May 14, 1990). *
87
10.(o) Stock Plan for Non-Employee Directors of X X
Florida Progress Corporation and Subsidiaries.
(Filed as Exhibit 4.(k) to the Florida Progress
Registration Statement on Form S-8 (No. 333-
02619) as filed with the SEC on April 18, 1996.)*
X = Exhibit is filed for that respective company.
* = Exhibit constitutes an executive compensation plan or arrangement.
In reliance upon Item 601(b)(4)(iii) of Regulation S-K, certain instruments
defining the rights of holders of long-term debt of Florida Progress and its
consolidated subsidiaries are not being filed herewith, because the total amount
authorized thereunder does not exceed 10% of the total assets of Florida
Progress and its subsidiaries on a consolidated basis. Florida Progress hereby
agrees to furnish a copy of any such instruments to the SEC upon request.
Florida Progress will furnish to its security holders who so request a copy of
any exhibit included or incorporated by reference in this Annual Report on Form
10-K upon payment of a fee of $.25 per page to cover expenses in furnishing such
exhibit.
(b) Reports on Form 8-K:
During the fourth quarter of the year ended December 31, 1998,
Florida Progress and Florida Power filed the following reports on
Form 8-K:
Form 8-K dated October 16, 1998, reporting under Item 5
"Other Events" a press release and related Investor
Information Report reporting Florida Progress' and Florida
Power's third quarter 1998 earnings.
Form 8-K dated November 18, 1998, reporting under Item 5
"Other Events" an Investor News Report providing an update
on Florida Power regulatory matters, and another Investor
News Report regarding the formation of a fiber-optic
telecommunications business.
In addition, Florida Progress and Florida Power filed the
following reports on Form 8-K subsequent to the fourth quarter of
1998:
Form 8-K dated January 25, 1999, reporting under Item 5
"Other Events" a press release and related Investor News
report which stated Florida Progress' and Florida Power's
1998 year-end earnings.
Form 8-K dated February 18, 1999 reporting under Item 5
"Other Events" an increase in Florida Progress' annual
dividend and the construction by Florida Power of peaking
units.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 19, 1999 By: /s/ Richard Korpan
---------------------------
Richard Korpan, Chairman of the Board,
President and Chief Executive Officer
KNOWN BY ALL MEN BY THESE PRESENTS that each of the undersigned officers
and directors of Florida Progress Corporation, a Florida corporation, for
himself or herself and not for one another, does hereby constitute and appoint
KENNETH E. ARMSTRONG, PAMELA A. SAARI and DOUGLAS E. WENTZ, and each of them, a
true and lawful attorney in his or her name, place and stead, in any and all
capacities, to sign his or her name to any and all amendments to this report,
and to cause the same to be filed with the Securities and Exchange Commission,
granting unto said attorneys and each of them full power and authority to do and
perform any act and thing necessary and proper to be done in the premises, as
fully to all intents and purposes as the undersigned could do if personally
present, and each of the undersigned for himself or herself hereby ratifies and
confirms all that said attorneys or any one of them shall lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
---------- ----- -----
/s/ Richard Korpan Chairman of the Board, March 19,1999
- --------------------------- President,Chief Executive
Richard Korpan Officer and Director
Principal Executive Officer
/s/ Edward W. Moneypenny Senior Vice President and March 19, 1999
- ---------------------------- Chief Financial Officer
Edward W. Moneypenny
Principal Financial Officer
/s/ John Scardino, Jr. Vice President and March 19, 1999
- ---------------------------- Controller
John Scardino, Jr.
Principal Accounting Officer
s/ W. D. Frederick, Jr. Director March 19, 1999
- ----------------------------
W. D. Frederick, Jr.
(Continued)
89
Signature Title Date
----------- ----- -----
/s/ Michael P. Graney Director March 19, 1999
- ----------------------------
Michael P. Graney
/s/ Clarence V. McKee Director March 19, 1999
- --------------------------
Clarence V. McKee
/s/ Vincent J. Naimoli Director March 19, 1999
- --------------------------
Vincent J. Naimoli
/s/ Richard A. Nunis Director March 19, 1999
- --------------------------
Richard A. Nunis
/s/ Joan D. Ruffier Director March 19, 1999
- --------------------------
Joan D. Ruffier
/s/ Robert T. Stuart, Jr. Director March 19, 1999
- --------------------------
Robert T. Stuart, Jr.
/s/ Jean Giles Wittner Director March 19, 1999
- --------------------------
Jean Giles Wittner
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. The signature of the
undersigned company shall be deemed to relate only to matters having reference
to such company.
FLORIDA POWER CORPORATION
March 19, 1999 By: /s/ Joseph H. Richardson
--------------------------------
Joseph H. Richardson, President
and Chief Executive Officer
KNOWN BY ALL MEN BY THESE PRESENTS that each of the undersigned officers
and directors of Florida Power Corporation, a Florida corporation, for himself
or herself and not for one another, does hereby constitute and appoint KENNETH
E. ARMSTRONG, PAMELA A. SAARI and DOUGLAS E. WENTZ, and each of them, a true and
lawful attorney in his or her name, place and stead, in any and all capacities,
to sign his or her name to any and all amendments to this report, and to cause
the same to be filed with the Securities and Exchange Commission, granting unto
said attorneys and each of them full power and authority to do and perform any
act and thing necessary and proper to be done in the premises, as fully to all
intents and purposes as the undersigned could do if personally present, and each
of the undersigned for himself or herself hereby ratifies and confirms all that
said attorneys or any one of them shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Joseph H. Richardson President, Chief March 19, 1999
- -------------------------- Executive Officer
Joseph H. Richardson and Director
/s/ Jeffrey R. Heinicka Senior Vice President March 19, 1999
- -------------------------- and
Jeffrey R. Heinicka Chief Financial Officer
Principal Financial Officer
/s/ John Scardino, Jr. Vice President March 19, 1999
- -------------------------- and Controller
John Scardino, Jr.
Principal Accounting Officer
/s/ Richard Korpan Chairman of the Board, March 19, 1999
- -------------------------- and Director
Richard Korpan
/s/ W. D. Frederick, Jr. Director March 19, 1999
- --------------------------
W. D. Frederick, Jr. (Continued)
91
Signature Title Date
- ----------- ----- -----
/s/ Michael P. Graney Director March 19, 1999
- --------------------------
Michael P. Graney
/s/ Clarence V. McKee Director March 19, 1999
- --------------------------
Clarence V. McKee
/s/ Vincent J. Naimoli Director March 19, 1999
- --------------------------
Vincent J. Naimoli
/s/ Richard A. Nunis Director March 19, 1999
- --------------------------
Richard A. Nunis
/s/ Joan D. Ruffier Director March 19, 1999
- --------------------------
Joan D. Ruffier
/s/ Robert T. Stuart, Jr. Director March 19, 1999
- --------------------------
Robert T. Stuart, Jr.
/s/ Jean Giles Wittner Director March 19, 1999
- --------------------------
Jean Giles Wittner
92
Schedule II
FLORIDA PROGRESS CORPORATION
Valuation and Qualifying Accounts
For the Years Ended December 31, 1998, 1997, and 1996
(In millions)
Balance at Additions Balance at
Beginning Charged to Other End of
Description of Period Expense Deductions Add (Ded) Period
- -------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998
Nuclear Refueling Outage Reserve $22.2 $ - $2.3 $ - $19.9
======= ======= ======= ======= =======
Provision for loss on coal properties $12.8 $ - $ - $(6.2) $ 6.6
======= ======= ======= ======= =======
FOR THE YEAR ENDED DECEMBER 31, 1997
Nuclear Refueling Outage Reserve $8.7 $14.0 $ 0.5 $ - $22.2
======= ======= ======= ======= =======
Insurance policy benefit reserves $325.3 $52.7 $ - $(378.0) $ -
======= ======= ======= ======= =======
Provision for loss on coal properties $40.9 $ - $ - $ (28.1) $12.8
======= ======= ======= ======= =======
FOR THE YEAR ENDED DECEMBER 31, 1996
Nuclear Refueling Outage Reserve $14.7 $17.4 $23.4 $ - $8.7
======= ======= ======= ======= =======
Insurance policy benefit reserves $265.0 $60.3 $ - $ - $325.3
======= ======= ======= ======= =======
Provision for loss on coal properties $ - $40.9 $ - $ - $40.9
======= ======= ======= ======= =======
(A) Effective December 31, 1997, Florida Progress deconsolidated the financial
statements of Mid-Continent Life in its consolidated financial statements.
Florida Progress' investment from Mid-Continent is accounted for under the cost
method.
93
Schedule II
FLORIDA POWER CORPORATION
Valuation and Qualifying Accounts
For the Years Ended December 31, 1998, 1997, and 1996
(In millions)
Balance at Additions Balance at
Beginning Charged to Deductions End of
Description of Period Expense (See Note) Period
- -----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998
1998 Nuclear Refueling Outage Reserve (#11) $22.2 $0.0 $2.3 $19.9
------ ------ ------ ------
$22.2 $0.0 $2.3 $19.9
======= ======= ======= =======
FOR THE YEAR ENDED DECEMBER 31, 1997
1996 Nuclear Refueling Outage Reserve (#10) $0.5 $0.0 $0.5 $0.0
1998 Nuclear Refueling Outage Revenue (#11) $8.2 $14.0 $0.0 $22.2
------- ------- ------- -------
$8.7 $14.0 $0.5 $22.2
======= ======= ======= =======
FOR THE YEAR ENDED DECEMBER 31, 1996
1996 Nuclear Refueling Outage Reserve (#10) $14.7 9.2 $23.4 $0.5
1996 Nuclear Refueling Outage Reserve (#11) 0.0 8.2 0.0 8.2
------- ------- ------- -------
$14.7 $17.4 $23.4 $8.7
======= ======= ======= =======
Note: Deductions are payments of actual expenditures related to the outage.