UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ____________.
Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer
File Number incorporation, address of principal executive offices, and telephone number Identification Number
1-8349 Florida Progress Corporation 59-2147112
A Florida Corporation
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
1-3274 Florida Power Corporation 59-0247770
A Florida Corporation
One Progress Plaza
St. Petersburg, Florida 33701
Telephone (727) 820-5151
NONE
-----
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
--- ---
This combined Form 10-Q is filed separately by two registrants: Florida
Progress Corporation and Florida Power Corporation. Information contained
herein relating to either individual registrant is filed by such registrant
solely on its own behalf.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of July 31, 2001,
each registrant had the following shares of common stock outstanding
Registrant Description Shares
---------- ----------- ------
Florida Progress Corporation Common Stock, without par value 98,616,658 (all of which were
held by Progress Energy, Inc.)
Florida Power Corporation Common Stock, without par value 100 (all of which were held by
Florida Progress Corporation)
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
FORM 10-Q - For the Quarter Ended June 30, 2001
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Florida Progress Corporation
----------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Florida Power Corporation
-------------------------
Statements of Income
Balance Sheets
Statements of Cash Flows
Notes to Financial Statements
Florida Progress Corporation and Florida Power Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
---- ----------
AST.......................................Advanced Separation Technologies
Btu.......................................British thermal units
CVO.......................................Contingent Value Obligation
Company or Florida Progress...............Florida Progress Corporation
CP&L......................................Carolina Power and Light Company
CP&L Energy...............................CP&L Energy, Inc.
CR3.......................................Florida Power's nuclear generating plant, Crystal River Unit No. 3
DOE.......................................United States Department of Energy
Electric Fuels............................Electric Fuels Corporation
EPA.......................................United States Environmental Protection Agency
Energy Ventures...........................Progress Energy Ventures, Inc.
FASB......................................Financial Accounting Standards Board
FDEP......................................Florida Department of Environmental Protection
FERC......................................Federal Energy Regulatory Commission
Florida Power or the utility..............Florida Power Corporation
Florida Progress or the Company...........Florida Progress Corporation
FPSC......................................Florida Public Service Commission
Funding Corp..............................Florida Progress Funding Corporation
IRS.......................................Internal Revenue Service
MEMCO.....................................MEMCO Barge Line, Inc.
MGP.......................................Manufactured Gas Plant
MW........................................megawatts
NEIL......................................Nuclear Electric Insurance Limited
NRC.......................................United States Nuclear Regulatory Commission
PLR.......................................Private Letter Ruling
Preferred Securities......................7.10% Cumulative Quarterly Income Preferred Securities, Series A, of
FPC Capital I, fully and unconditionally guaranteed by Florida
Progress
Preferred Stock...........................Florida Power Cumulative Preferred Stock, $100 par value
Progress Capital..........................Progress Capital Holdings, Inc.
Progress Energy...........................Progress Energy, Inc.
Progress Rail.............................Progress Rail Services Corporation
Progress Telecom..........................Progress Telecommunications Corporation
PRP.......................................potentially responsible party, as defined in CERCLA
PUHCA.....................................Public Utility Holding Company Act of 1935, as amended
QFs.......................................Qualifying facilities
RTO.......................................Regional Transmission Organization
SEC.......................................United States Securities and Exchange Commission
Section 29................................Section 29 of the Internal Revenue Service Code
SFAS......................................Statements of Financial Accounting Standards
the Trust.................................FPC Capital I
3
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The matters discussed throughout this Form 10-Q that are not historical facts
are forward-looking and, accordingly, involve estimates, projections, goals,
forecasts, assumptions, risks and uncertainties that could cause actual results
or outcomes to differ materially from those expressed in the forward-looking
statements.
In addition, forward-looking statements are discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including, but not limited to, statements under the sub-heading "Other Matters"
concerning synthetic fuel tax credits and regulatory developments.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: governmental policies and regulatory actions (including those of the
Federal Energy Regulatory Commission, the Environmental Protection Agency, the
Nuclear Regulatory Commission, the Department of Energy, the Securities and
Exchange Commission under the Public Utility Holding Company Act of 1935, as
amended, the Florida Public Service Commission), particularly legislative and
regulatory initiatives that may impact the speed and degree of the restructuring
of the electricity industry and the results of negotiations related to the
expiration of Florida Power's rate stipulation; the outcome of legal and
administrative proceedings before our courts and principal regulators; risks
associated with operating nuclear power facilities, availability of nuclear
waste storage facilities, and nuclear decommissioning costs; changes in the
economy of areas served by Florida Progress; the extent to which we are able to
obtain adequate and timely rate recovery of costs, including potential stranded
costs arising from the restructuring of the electricity industry; weather
conditions and catastrophic weather-related damage; general industry trends,
realization of cost savings related to synergies resulting from the acquisition
by Progress Energy, increased competition from energy and gas suppliers, and
market demand for energy; inflation and capital market conditions; the success
of our direct and indirect subsidiaries; the extent to which we are able to use
tax credits associated with the operations of the synthetic fuel facilities; and
unanticipated changes in operating expenses and capital expenditures.
All such factors are difficult to predict, contain uncertainties that may
materially affect actual results, and may be beyond the control of the Company.
New factors emerge from time to time, and it is not possible for management to
predict all such factors, nor can it assess the effect of each such factor on
the Company.
4
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- ----------------------------
CONSOLIDATED STATEMENTS of INCOME
- ---------------------------------
Florida Progress Corporation Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 783,660 $ 693,336 $ 1,594,133 $ 1,318,645
Diversified businesses 349,988 349,649 684,426 643,274
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,133,648 1,042,985 2,278,559 1,961,919
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 220,616 146,974 437,003 285,185
Purchased power 126,603 120,267 252,222 223,392
Operations and maintenance 119,815 124,694 230,681 237,897
Depreciation and amortization 94,646 92,162 246,714 177,823
Taxes other than on income 57,076 52,770 117,185 105,903
Diversified businesses 384,772 359,498 735,369 648,036
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,003,528 896,365 2,019,174 1,678,236
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income 130,120 146,620 259,385 283,683
- ------------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 738 163 777 329
Other, net (5,940) 1,360 (10,980) (2,209)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (5,202) 1,523 (10,203) (1,880)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before Interest Charges and Income Taxes 124,918 148,143 249,182 281,803
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 36,896 41,764 77,556 80,461
Other interest charges 9,342 11,688 19,204 23,316
Allowance for borrowed funds used during
construction (111) (470) (204) (870)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 46,127 52,982 96,556 102,907
- ------------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Income Taxes 78,791 95,161 152,626 178,896
Income Taxes (Benefit) (23,109) (11,338) (24,899) (2,760)
- ------------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 101,900 106,499 177,525 181,656
Discontinued Operations (Note 3) :
Income from discontinued operations (net of applicable
income tax expense of $1,481 and $2,157 for the three
months ended and $1,848 and $3,030 for the six months
ended June 30, 2001 and 2000, respectively) 2,319 3,488 2,682 4,786
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated loss on disposal of discontinued operations,
including provision of $5,468 for pre-tax operating
income during phase-out period,
(net of applicable income tax expense of $1,231) (14,408) (14,408)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 89,811 $ 109,987 $ 165,799 $ 186,442
====================================================================================================================================
See Notes to financial statements.
5
CONSOLIDATED BALANCE SHEETS
- ---------------------------
Florida Progress Corporation (In thousands) June 30, December 31,
Assets 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 7,057,058 $ 6,998,135
Accumulated depreciation (3,850,786) (3,701,975)
- ----------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,206,272 3,296,160
Held for future use 8,274 8,274
Construction work in progress 179,703 124,988
Nuclear fuel, net of amortization 62,395 39,879
- ----------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,456,644 3,469,301
- ----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 18,057 24,200
Accounts receivable 492,639 482,270
Accounts receivable-affiliates 21,162 507
Taxes receivable 38 16,363
Deferred income taxes - 39,576
Inventory 442,166 371,919
Deferred fuel cost 86,212 90,434
Prepayments 12,648 23,027
Net assets of discontinued operations 48,047 69,642
Other current assets 26,322 25,251
- ----------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,147,291 1,143,189
- ----------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 23,258 19,689
Deferred purchased power contract termination costs 148,757 226,656
Unamortized debt expense 18,575 19,128
Nuclear decommissioning trust funds 404,279 400,719
Diversified business property, net 679,860 666,360
Miscellaneous other property and investments 157,542 181,569
Goodwill, net 129,323 113,152
Other assets and deferred debits 257,499 252,821
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,819,093 1,880,094
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 6,423,028 $ 6,492,584
======================================================================================================================
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------------------
Capitalization
- ----------------------------------------------------------------------------------------------------------------------
Common stock $ 1,352,346 $ 1,318,309
Retained earnings 727,253 670,679
Accumulated other comprehensive loss (1,707) (1,407)
Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497
Long-term debt, net 2,221,153 2,276,416
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization 4,332,542 4,297,494
- ----------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 209,550 190,466
Accounts payable 303,580 352,606
Accounts payable-affiliates 35,597 48
Interest accrued 63,000 64,118
Short-term obligations 302,049 467,292
Advances from parent 192,770 45,180
Other current liabilities 306,937 308,418
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,413,483 1,428,128
- ----------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 313,766 302,029
Accumulated deferred investment tax credits 58,273 62,160
Other liabilities and deferred credits 304,964 402,773
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 677,003 766,962
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 6,423,028 $ 6,492,584
======================================================================================================================
See Notes to financial statements.
6
CONSOLIDATED STATEMENTS of CASH FLOWS
- -------------------------------------
Florida Progress Corporation Six Months Ended
June 30,
(In thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 165,799 $ 186,442
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations (2,682) (4,786)
Estimated loss on disposal of discontinued operations 14,408 -
Depreciation and amortization 250,972 194,485
Deferred income taxes and investment tax credits, net 22,518 (7,692)
Deferred fuel cost (credit) 4,222 (58,702)
Changes in working capital, net of effects from sale or acquisition of business
Net increase in accounts receivable (26,771) (76,177)
Net increase in inventories (84,989) (50,189)
Net (increase) decrease in prepaids and other current assets 9,353 (22,819)
Net decrease in accounts payable (8,211) (22,363)
Net increase in other current liabilities 178,280 20,533
Other operating activities (37,789) 56,919
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 485,110 215,651
- -----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Property additions (121,701) (109,943)
Nuclear fuel additions (33,058) -
Proceeds from sale of asset 5,532 -
Other investing activities (62,422) (86,451)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (211,649) (196,394)
- -----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of long-term debt 87 -
Net increase (decrease) in short-term indebtedness (165,243) 89,349
Retirement of long-term debt (36,429) (1,181)
Equity contribution from parent 33,466 -
Dividends paid to parent (109,224) -
Dividends paid on common stock - (109,461)
Other financing activities (2,244) 1,862
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided Used in Financing Activities (279,587) (19,431)
- -----------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used in) Discontinued Operations (17) 14
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (6,143) (160)
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period 24,200 9,587
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 18,057 $ 9,427
=======================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the period - interest (net of amount capitalized) $ 97,659 $ 102,100
income taxes (net of refunds) $ (86,670) $ 63,100
See Notes to financial statements.
7
STATEMENTS of INCOME
Florida Power Corporation Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 783,660 $ 693,336 $ 1,594,133 $ 1,318,645
Operating Expenses
Fuel used in electric generation 220,616 146,974 437,003 285,185
Purchased power 126,603 120,267 252,222 223,392
Operation and maintenance 119,815 124,694 230,681 237,897
Depreciation and amortization 94,646 92,161 246,714 177,824
Taxes other than on income 57,076 52,770 117,185 105,903
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 618,756 536,866 1,283,805 1,030,201
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income 164,904 156,470 310,328 288,444
- ------------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 739 163 777 329
Other, net (3,187) 2,350 (4,941) 2,447
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (2,448) 2,513 (4,164) 2,776
- ------------------------------------------------------------------------------------------------------------------------------------
Income before Interest Charges and Income Taxes 162,456 158,983 306,164 291,220
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 23,928 26,108 48,479 52,000
Other interest charges 4,017 6,363 8,554 12,666
Allowance for borrowed funds used during
construction (111) (470) (204) (871)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 27,834 32,001 56,829 63,795
- ------------------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 134,622 126,982 249,335 227,425
Income Taxes 49,933 47,122 92,662 83,785
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income 84,689 79,860 156,673 143,640
Dividends on Preferred Stock 378 378 756 756
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 84,311 $ 79,482 $ 155,917 $ 142,884
====================================================================================================================================
See Notes to financial statements.
8
BALANCE SHEETS
- --------------
Florida Power Corporation (In thousands) June 30, December 31,
Assets 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 7,057,058 $ 6,998,135
Accumulated depreciation (3,850,786) (3,701,975)
- ----------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,206,272 3,296,160
Held for future use 8,274 8,274
Construction work in progress 179,703 124,988
Nuclear fuel, net of amortization 62,395 39,879
- ----------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,456,644 3,469,301
- ----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 7,625 3,380
Accounts receivable 308,147 289,237
Accounts receivable-affiliates 18,111 38,729
Advances to parent 20,801 -
Deferred income taxes - 39,576
Inventory 176,925 139,116
Deferred fuel cost 86,212 90,434
Prepayments 3,327 9,097
Other current assets 79 -
- ----------------------------------------------------------------------------------------------------------------------
Total Current Assets 621,227 609,569
- ----------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 23,258 19,689
Deferred purchased power contract termination costs 148,757 226,656
Unamortized debt expense 9,210 9,526
Nuclear decommissioning trust funds 404,279 400,719
Miscellaneous other property and investments 49,216 54,816
Other assets and deferred debits 213,394 187,763
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 848,114 899,169
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 4,925,985 $ 4,978,039
======================================================================================================================
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------------------
Capitalization
- ----------------------------------------------------------------------------------------------------------------------
Common stock $ 1,075,414 $ 1,075,414
Retained earnings 936,307 889,614
Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497
Long-term debt, net 1,396,278 1,397,116
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization 3,441,496 3,395,641
- ----------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 82,000 82,000
Accounts payable 168,634 170,126
Accounts payable-affiliates 57,506 39,526
Taxes accrued 64,371 4,401
Interest accrued 44,427 47,117
Advances from parent - 20,180
Short-term obligations 117,600 192,530
Other current liabilities 255,402 258,633
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 789,940 814,513
- ----------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 379,000 387,901
Accumulated deferred investment tax credits 57,751 61,626
Other liabilities and deferred credits 257,798 318,358
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 694,549 767,885
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 8)
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 4,925,985 $ 4,978,039
======================================================================================================================
See Notes to financial statements.
9
STATEMENTS of CASH FLOWS
- ------------------------
Florida Power Corporation Six Months Ended
June 30,
(In thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 156,673 $ 143,640
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 249,542 194,235
Deferred income taxes and investment tax credits, net 4,397 (14,922)
Deferred fuel cost (credit) 4,222 (58,702)
Changes in working capital:
Net (increase) decrease in accounts receivable 1,708 (36,808)
Net increase in inventories (37,809) (13,491)
Net (increase) decrease in prepaids and other current assets 5,691 (17,349)
Net increase in accounts payable 16,487 1,337
Net increase in other current liabilities 31,901 72,023
Other operating activities (78,760) 10,638
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 354,052 280,601
- -----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Property additions (121,701) (109,943)
Nuclear fuel additions (33,058) -
Other investing activities (9,139) (8,321)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (163,898) (118,264)
- -----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net decrease in short-term indebtedness (74,930) (53,436)
Retirement of long-term debt (1,000) (900)
Dividends paid to parent (109,223) (102,461)
Dividends paid on preferred stock (756) (756)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (185,909) (157,553)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 4,245 4,784
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period 3,380 -
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 7,625 $ 4,784
=======================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest (net of amount capitalized) $ 59,519 $ 64,100
income taxes (net of refunds) $ 20,849 $ 31,300
See Notes to financial statements.
10
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General. Florida Progress Corporation (the Company or Florida Progress) is a
- -------
holding company under the Public Utility Holding Company Act of 1935 (PUHCA).
The Company became subject to the regulations of PUHCA when it was acquired by
CP&L Energy, Inc. on November 30, 2000 (See Note 2). CP&L Energy, Inc.
subsequently changed its name to Progress Energy, Inc. (Progress Energy or the
Parent). Florida Progress' two primary subsidiaries are Florida Power
Corporation (Florida Power) and Electric Fuels Corporation (Electric Fuels).
Florida Power is a regulated public utility engaged in the generation,
transmission, distribution and sale of electricity in portions of Florida.
Florida Power is regulated by the Florida Public Service Commission (FPSC) and
the Federal Energy Regulatory Commission (FERC).
Electric Fuels' Rail Services, Inland Marine Transportation and the non-Florida
portion of its Energy & Related Services operations report their results
one-month in arrears.
Basis of Presentation. These financial statements have been prepared in
- ---------------------
accordance with accounting principles generally accepted in the United States of
America (generally accepted accounting principles) for interim financial
information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Because the accompanying consolidated interim financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles, they should be read in conjunction with the audited
financial statements for the period ended December 31, 2000 and notes thereto
included in Florida Progress' and Florida Power's Form 10-K for the year ended
December 31, 2000.
The amounts included in the consolidated interim financial statements are
unaudited but, in the opinion of management, reflect all adjustments necessary
to fairly present Florida Progress' and Florida Power's financial position and
results of operations for the interim periods. Due to seasonal weather
variations and the timing of outages of electric generating units, the results
of operations for interim periods are not necessarily indicative of amounts
expected for the entire year. Certain reclassifications have been made to
prior-year amounts to conform to the current year's presentation.
The financial statements include the financial results of the Company 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.
In preparing financial statements that conform with generally accepted
accounting principles, management must make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and amounts of
revenues and expenses reflected during the reporting period. Actual results
could differ from those estimates.
NOTE 2. ACQUISITION BY PROGRESS ENERGY, INC.
On November 30, 2000, Progress Energy acquired all of the outstanding shares of
Florida Progress' common stock in accordance with the Amended and Restated Plan
of Exchange, including the related Plan of Share Exchange, dated as of August
22, 1999, as amended and restated as of March 3, 2000, among CP&L Energy,
Florida Progress and Carolina Power & Light Company (CP&L). Florida Progress
shareholders received $54.00 in cash or shares of Progress Energy common stock
having a value of $54.00, subject to proration, and one contingent value
obligation (CVO) in exchange for each share of Florida Progress common stock.
The exchange ratio for the shares of Progress Energy common stock issued to
Florida Progress shareholders was 1.3473. Each CVO represents the right to
receive contingent payments based upon the net after-tax cash flow to Progress
Energy generated by four synthetic fuel facilities purchased by subsidiaries of
Florida Progress in 1999.
The acquisition was accounted for by Progress Energy using the purchase method
of accounting; however, due to the significance of the public debt and preferred
securities of the Company and Florida Power, the acquisition cost was not pushed
down to the Company's separate financial statements or Florida Power's.
In connection with the acquisition of the Company by Progress Energy, the
Company began the implementation of a plan to combine operations with Progress
Energy. In the fourth quarter 2000, the Company recorded executive involuntary
11
termination costs of $24.5 million and non-executive involuntary termination
costs of $41.8 million. Substantially all of the executive termination expense
was attributable to lump-sum severance costs paid in December 2000. The second
quarter 2001 activity for the non-executive termination costs is detailed in the
table below:
Non-Executive
In millions Termination Costs
-----------------
Balance at March 31, 2001 $ 30.4
Payments (2.4)
----------------------
Balance at June 30, 2001 $ 28.0
======================
The Company completed the implementation phase of the non-executive plan in June
2001 and expects to finalize the plan by the end of 2001. The majority of the
related severance payments are expected to occur in 2001 with the remaining
payments occurring through 2003. The Company expects additional termination
effects related to pension and postretirement benefit plan curtailments in 2001.
NOTE 3. DISCONTINUED OPERATIONS
On July 23, 2001, Progress Energy announced the disposition of the Inland Marine
Transportation segment of the Company, which is operated by MEMCO Barge Line,
Inc. Inland Marine provides transportation of coal, agricultural and other
dry-bulk commodities as well as fleet management services. Progress Energy has
entered into a contract to sell MEMCO Barge Line, Inc., to AEP Resources, Inc.,
a wholly-owned subsidiary of American Electric Power. The purchase price for
MEMCO is $270 million, of which approximately $210 million will be used for the
early termination of certain off balance sheet arrangements for assets currently
leased by MEMCO.
The results of operations for all periods presented have been restated for the
discontinued operations of the Inland Marine Transportation segment. The net
income of these operations for the three and six months ended June 30, 2001 and
2000, is included in the consolidated statements of income under Discontinued
Operations. Revenues from such operations were $45.9 million and $48.9 million
for the three months ended June 30, 2001 and 2000, respectively, and $84.2
million and $91.1 million for the six months ended June 30, 2001 and 2000,
respectively.
An estimated loss on disposal of approximately $14.4 million has been recorded
until the disposition of the segment is complete and the actual loss can be
determined. The transaction is expected to close by the end of September 2001.
The net assets relating to the disposition have been segregated on the
consolidated balance sheets. A detail of these net assets as of each balance
sheet date is detailed in the table below:
In millions June 30, 2001 December 31, 2000
---------------- -------------------
Current assets $ 27.2 $ 28.6
Non-current assets 72.0 75.0
Current liabilities (20.9) (17.3)
Non-current liabilities (15.9) (16.7)
Provision for loss on disposal (14.4) -
---------------- -------------------
$ 48.0 $ 69.6
================ ===================
NOTE 4. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company's principal business segment is Florida Power, an electric utility
engaged in the generation, purchase, transmission, distribution and sale of
electricity primarily in Florida. The other reportable business segments are
Electric Fuels' Energy & Related Services and Rail Services. Electric Fuels'
Inland Marine Transportation unit is no longer a reportable segment due to the
pending disposition of these operations (See Note 3). Energy & Related Services
includes coal and synthetic fuel operations, natural gas production and sales,
river terminal services and off-shore marine transportation. Rail Services'
operations include railcar repair, rail parts reconditioning and sales, railcar
leasing and sales, providing rail and track material, and scrap metal recycling.
The other category consists primarily of Progress Telecom, the Company's
telecommunications subsidiary, the Company's investment in FPC Capital Trust,
which holds the Preferred Securities, the holding company, Florida Progress
Corporation and elimination entries. Progress Telecom markets wholesale
fiber-optic based capacity service in the Southeastern United States and also
markets wireless structure attachments to wireless communication companies and
governmental entities. Florida Progress allocates a portion of its operating
expenses to business segments.
12
Financial data for business segments for the periods covered in this Form 10-Q
are presented in the table below:
Energy and
Related Rail
(In thousands) Utility Services Services Other Consolidated
- ------------------------------------------------------------------------------------------------------
Three months ended
June 30, 2001:
Revenues $ 783,660 $ 91,800 $ 225,861 $32,327 $1,133,648
Intersegment revenues -- 111,896 541 (112,437) --
Income (loss) from
continuing operations 84,311 38,242 (9,690) (10,963) 101,900
Total assets 4,925,985 438,526 802,536 255,981 6,423,028
======================================================================================================
Energy and
Related Rail
Utility Services Services Other Consolidated
- ------------------------------------------------------------------------------------------------------
Three months ended
June 30, 2000:
Revenues $ 693,336 $ 59,699 $ 284,394 $5,556 $1,042,985
Intersegment revenues -- 66,434 327 (66,761) --
Income (loss) from
continuing operations 79,482 21,873 1,909 3,235 106,499
Total assets 4,895,026 579,393 875,544 158,100 6,508,063
======================================================================================================
Energy and
Related Rail
Utility Services Services Other Consolidated
- ------------------------------------------------------------------------------------------------------
Six months ended
June 30, 2001:
Revenues $1,594,133 $ 176,488 $ 450,026 $57,912 $2,278,559
Intersegment revenues -- 192,412 578 (192,990) --
Income (loss) from
continuing operations 155,917 67,423 (11,788) (34,027) 177,525
Total assets 4,925,985 438,526 802,536 255,981 6,423,028
======================================================================================================
Energy and
Related Rail
Utility Services Services Other Consolidated
- ------------------------------------------------------------------------------------------------------
Six months ended
June 30, 2000:
Revenues $1,318,645 $ 108,377 $ 525,004 $9,893 $1,961,919
Intersegment revenues -- 130,980 327 (131,307) --
Income (loss) from
continuing operations 142,884 34,507 2,847 1,418 181,656
Total assets 4,895,026 579,393 875,544 158,100 6,508,063
======================================================================================================
NOTE 5. IMPACT OF NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 requires that an entity recognize all
13
derivatives as assets or liabilities in the consolidated balance sheet and
measure those instruments at fair value. The adoption of SFAS No. 133 did not
have any effect on the Company's financial statements.
During the second quarter of 2001, the FASB issued an interpretation of SFAS No.
133 indicating that options, in general, cannot qualify for the normal purchases
and sales exception, but provided an exception that allows certain electricity
contracts, including certain capacity-energy contracts, to be excluded from the
mark-to-market requirements of SFAS No. 133. These interpretations are effective
July 1, 2001. The Company is continuing to review contracts to determine whether
they meet the criteria for the normal purchases and sales exception. If an
electricity or fuel supply contract in its regulated business is subject to
mark-to-market accounting, there would be no income statement effect of the
mark-to-market because the contract's mark-to-market gain or loss will be
recorded as a regulatory asset or liability. Any mark-to-market gains or losses
on contracts outside its regulated business will affect income unless those
contracts qualify for hedge accounting treatment.
The application of the new rules is still evolving and further guidance from the
Financial Accounting Standards Board (FASB) is expected, which could
additionally impact the Company's financial statements.
On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" and No.
142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and clarifies the criteria for recording of other
intangible assets separately from goodwill. SFAS No. 142 requires that,
effective January 1, 2002, the Company cease amortization of goodwill. It also
requires the Company to evaluate goodwill for impairment at least annually,
which could result in periodic impairment charges. Goodwill amortization on an
after-tax basis was $0.4 million and $1.3 million for the three and six months
ended June 30, 2001, and is expected to be approximately $2.5 million for the
year. The Company is currently assessing the impact adopting these statements
will have on the financial statements.
In June 2001, the FASB approved the issuance of SFAS No. 143 "Accounting for
Asset Retirement Obligations" that provides accounting guidance for the costs of
retiring long-lived assets and is effective for fiscal years beginning after
June 15, 2002. The Company will assess the impact adoption of this statement
will have on the financial statements once the final statement is issued.
NOTE 6. FINANCING ACTIVITIES
On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds,
6.65% Series due July 15, 2011. Proceeds from the issuance were primarily used
to retire commercial paper.
NOTE 7. FLORIDA PROGRESS OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE QUARTERLY
INCOME PREFERRED SECURITIES (QUIPS) OF A SUBSIDIARY TRUST HOLDING
SOLELY FLORIDA PROGRESS GUARANTEED SUBORDINATED DEFERRABLE INTEREST
NOTES
In April 1999, FPC Capital I (the Trust), an indirect wholly owned subsidiary of
the Company, issued 12 million shares of $25 par cumulative Company-obligated
mandatorily redeemable preferred securities due 2039 (Preferred Securities),
with an aggregate liquidation value of $300 million and a quarterly distribution
rate of 7.10%, payable quarterly. Currently, all 12 million shares of the
Preferred Securities that were issued are outstanding. Concurrent with the
issuance of the Preferred Securities, the Trust issued to Florida Progress
Funding Corporation (Funding Corp.) all of the common securities of the Trust
(371,135 shares), for $9.3 million. Funding Corp. is a direct wholly owned
subsidiary of the Company.
The existence of the Trust is for the sole purpose of issuing the Preferred
Securities and the common securities and using the proceeds thereof to purchase
from Funding Corp. its 7.10% Junior Subordinated Deferrable Interest Notes due
2039 (subordinated notes), for a principal amount of $309.3 million. The
subordinated notes and the Notes Guarantee (as discussed below) are the sole
assets of the Trust. Funding Corp.'s proceeds from the sale of the subordinated
notes were advanced to Progress Capital Holdings, Inc. (PCH), and used for
general corporate purposes including the repayment of a portion of certain
outstanding short-term bank loans and commercial paper.
The Company has fully and unconditionally guaranteed the obligations of Funding
Corp. under the subordinated notes (the Notes Guarantee). In addition, the
Company has guaranteed the payment of all distributions required to be made by
the Trust, but only to the extent that the Trust has funds available for such
distributions (Preferred Securities Guarantee). The Preferred Securities
Guarantee, considered together with the Notes Guarantee, constitutes a full and
unconditional guarantee by the Company of the Trust's obligations under the
Preferred Securities.
14
The subordinated notes may be redeemed at the option of Funding Corp. beginning
in 2004 at par value plus accrued interest through the redemption date. The
proceeds of any redemption of the subordinated notes will be used by the Trust
to redeem proportional amounts of the Preferred Securities and common securities
in accordance with their terms. Upon liquidation or dissolution of Funding
Corp., holders of the Preferred Securities would be entitled to the liquidation
preference of $25 per share plus all accrued and unpaid dividends thereon to the
date of payment.
These preferred securities are classified as long-term debt on Florida Progress'
balance sheets.
NOTE 8. COMPREHENSIVE INCOME
Comprehensive income for Florida Progress for the three months and the six
months ended June 30, 2001 was $89.8 million and $165.5 million, respectively.
For the three months and the six months ended June 30, 2000, comprehensive
income was $110.0 million and $186.3 million, respectively. Florida Power does
not have any items of other comprehensive income.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Insurance -- Florida Progress and its subsidiaries utilize various risk
management techniques to protect certain assets from risk of loss, including the
purchase of insurance. Risk avoidance, risk transfer and self-insurance
techniques are utilized depending on the Company's ability to assume risk, the
relative cost and availability of methods for transferring risk to third
parties, and the requirements of applicable regulatory bodies.
Florida Power self-insures its transmission and distribution lines against loss
due to storm damage and other natural disasters. Pursuant to a regulatory order,
Florida Power is accruing $6 million annually to a storm damage reserve and may
defer any losses in excess of the reserve.
Under the provisions of the Price Anderson Act, which limits liability for
accidents at nuclear power plants, Florida Power, as an owner of a nuclear
plant, can be assessed for a portion of any third-party liability claims arising
from an accident at any commercial nuclear power plant in the United States. If
total third-party claims relating to a single nuclear incident exceed $200
million (currently available through commercial insurance), Florida Power could
be assessed up to $88.1 million per incident, with a maximum assessment of $10
million per year.
Florida Power also maintains nuclear property damage insurance and
decontamination and decommissioning liability insurance totaling $1.6 billion.
This insurance coverage is purchased from Nuclear Electric Insurance Ltd.
(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 $9.13 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.
Claims and Uncertainties -- The Company is subject to federal, state and local
regulations addressing air and water quality, hazardous and solid waste
management and other environmental matters.
Various organic materials associated with the production of manufactured gas,
generally referred to as coal tar, are regulated under federal and state laws.
The lead or sole regulatory agency that is responsible for a particular former
coal tar site depends largely upon the state in which the site is located. There
are several MGP sites to which Florida Power has some connection. In this
regard, Florida Power, with other potentially responsible parties, is
participating in investigating and, if necessary, remediating former coal tar
sites with several regulatory agencies, including, but not limited to, the U.S.
Environmental Protection Agency (EPA) and the Florida Department of
Environmental Protection (FDEP). Although the Company may incur costs at these
sites about which it has been notified, based upon current status of these
sites, the Company does not expect those costs to be material to the financial
position or results of operations of the Company. The Company has accrued
amounts to address known costs at certain of these sites.
The Company is periodically notified by regulators such as the EPA and various
state agencies of its involvement or potential involvement in sites, other than
MGP sites, that may require investigation and/or remediation. Although the
Company may incur costs at the sites about which it has been notified, based
upon the current status of these sites, the Company does not expect those costs
to be material to the financial position or results of operations of the
Company.
The EPA has been conducting an enforcement initiative related to a number of
coal-fired utility power plants in an effort to determine whether modifications
at those facilities were subject to New Source Review requirements or New Source
Performance Standards under the Clean Air Act. Florida Power has recently been
asked to provide information to the EPA
15
as part of this initiative and has cooperated in providing the requested
information. The EPA has initiated enforcement actions against other
unaffiliated utilities as part of this initiative, some of which have resulted
in or may result in settlement agreements, ranging from $1.0 billion to $1.4
billion. These settlement agreements have generally called for expenditures to
be made over extended time periods, and some of the companies may seek recovery
of the related costs through rate adjustments. The Company cannot predict the
outcome of this matter.
In July 1997, the EPA issued final regulations establishing a new eight-hour
ozone standard. In October 1999, the District of Columbia Circuit Court of
Appeals ruled against the EPA with regard to the federal eight-hour ozone
standard. The U.S. Supreme Court has upheld, in part, the District of Columbia
Circuit Court of Appeals decision. Further litigation and rulemaking are
anticipated. The Company cannot predict the outcome of this matter.
Florida Power currently is storing spent nuclear fuel onsite in spent fuel
pools. If Florida Power does not seek renewal of the Crystal River Unit No. 3
(CR3) operating license, with certain modifications to its storage pools
currently underway, CR3 will have sufficient storage capacity in place for fuel
consumed through the end of the expiration of the license in 2016. If Florida
Power extends the CR3 operating license, dry storage may be necessary.
Florida Power has filed claims with the Company's general liability insurance
carriers to recover costs arising out of actual or potential liabilities. Some
claims have settled and others are still pending. While management cannot
predict the outcome of these matters, the outcome is not expected to have a
material effect on the financial position or results of operations.
Regulatory developments - Florida Power previously operated under an agreement
committing several parties not to seek any reduction in its base rates or
authorized return on equity. That agreement expired on June 30, 2001. On May 3,
2001, the staff of the Florida Public Service Commission, or FPSC, recommended
that the FPSC require Florida Power to submit, by September 14, 2001, minimum
filing requirements, based on a 2002 projected calendar year, to initiate a rate
proceeding regarding its future base rates. The FPSC staff also recommended to
the FPSC that, pending completion of Florida Power's rate case, annual revenues
of $114 million should be held subject to refund to its customers. On June 20,
2001, the FPSC issued an order accepting its staff's recommendation that Florida
Power be required to hold $114 million of revenue subject to refund and to file,
by September 14, 2001, minimum filing requirements based on a projected 2002
test year. On July 2, 2001, Florida Power filed a request for rehearing of the
portion of the FPSC 's order requiring that it hold $114 million of revenues
subject to refund on the grounds that the order contradicted FPSC precedent, was
inconsistent with the applicable statutory requirements and violated Florida
Power's due process rights. Florida Power is awaiting a decision from the FPSC
on how they intend to proceed in this matter. Also, since the FPSC's June 20,
2001 order, Florida Power has been working with FPSC staff and other interested
parties to establish special procedures for the filing of the minimum filing
requirements. The Company cannot predict the outcome or impact of these matters.
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, but four of those plaintiffs have had their federal claims dismissed and 74
others have had their state age claims dismissed. While no dollar amount was
requested, each plaintiff seeks back pay, reinstatement or front pay through
their projected dates of normal retirement, costs and attorneys' fees. In
October 1996, the Federal Court approved an agreement between the parties to
provisionally certify this case as a class action suit under the Age
Discrimination in Employment Act. Florida Power filed a motion to decertify the
class and in August 1999, the Court granted Florida Power's motion. In October
1999, the judge certified the question of whether the case should be tried as a
class action to the Eleventh Circuit Court of Appeals for immediate appellate
review. In December 1999, the Eleventh Circuit Court of Appeals agreed to review
the judge's order decertifying the class and oral arguments were held in January
2001. In anticipation of a potential ruling decertifying the case as a class
action, plaintiffs filed a virtually identical lawsuit, which identified all
opt-in plaintiffs as named plaintiffs. This case had been held in abeyance until
reactivated in July 2000 upon motion of the plaintiffs.
On July 5, 2001, the Eleventh Circuit Court of Appeals ruled that as a matter of
law, disparate claims cannot be brought under the Age Discrimination in
Employment Act. This ruling has the effect of decertifying this case as a class
action. The plaintiffs may appeal this ruling. The Company cannot predict the
outcome of this matter.
In December 1998, during mediation in this age discrimination suit, plaintiffs
alleged damages of $100 million. Company management, while not believing
plaintiffs' claim to have merit, offered $5 million in an attempt to settle all
claims. Plaintiffs rejected that offer. Florida Power and the plaintiffs engaged
in informal settlement discussions, which terminated on December 22, 1998. As a
result of the plaintiffs' claims, 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. In December 1999, Florida Power also recorded an accrual of $4.8
16
million for legal fees associated with defending its position in these
proceedings. 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 (AST) -- In 1996, Florida Progress sold its 80%
interest in AST to Calgon Carbon Corporation (Calgon) for net proceeds of $56
million in cash. In January 1998, Calgon filed a lawsuit against Florida
Progress and the other selling shareholder and amended it in April 1998,
alleging misstatement of AST's 1996 revenues, assets and liabilities, seeking
damages and granting Calgon the right to rescind the sale. The lawsuit also
accused the sellers of failing to disclose flaws in AST's manufacturing process
and a lack of quality control. Florida Progress believes that the aggregate
total of all legitimate warranty claims by customers of AST for which it is
probable that Florida Progress will be responsible for under the Stock Purchase
Agreement with Calgon is approximately $3.2 million, and accordingly, accrued
$3.2 million in the third quarter of 1999 as an estimate of probable loss.
Florida Progress filed a motion for summary judgement, which is pending.
Qualifying Facilities Contracts -- Florida Power's 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.
The owners of four qualifying facilities filed suits against Florida Power in
state court over the contract payment terms, and one owner also filed suit in
federal court. Three of the state court suits have been settled and the federal
case was dismissed.
In the remaining state court suit, the trial regarding NCP Lake Power (Lake)
concluded in December 1998. In April 1999, the judge entered an order granting
Lake's breach of contract claim and ruled that Lake is entitled to receive
"firm" energy payments during on-peak hours, but for all other hours, Lake is
entitled to the "as-available" rate. The Court also ruled that for purposes of
calculating damages, the breach of contract occurred at the inception of the
contract. In August 1999, a Final Judgement was entered for Lake for
approximately $4.5 million and Lake filed a Notice of Appeal. Also in this case,
in April 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, but Florida Power appealed to the Florida Supreme Court. On
January 26, 2001, the District Court of Appeals reversed the trial court's order
and held that the contract requires Florida Power to pay Lake the firm energy
rate for all hours that the avoided unit operates, less any maintenance
shut-down hours. The District Court of Appeals remanded the case to the trial
court for a new trial to determine the appropriate amount of damages consistent
with the appellate court's ruling. Florida Power has sought rehearing of the
District Court of Appeal's decision. Although granting Florida Power's request,
the District Court of Appeal's confirmed its initial decision.
Management does not expect that the results of these legal actions will have a
material impact on Florida Power's financial position, results of operations or
liquidity. Florida Power anticipates that all fuel and capacity expenses,
including any settlement amounts incurred as a result of the matters discussed
above, will be recovered from its customers.
Easement Litigation -- In December 1998, Florida Power was served with a class
action lawsuit seeking damages, declaratory and injunctive relief for the
alleged improper use of electric transmission easements. The plaintiffs contend
that the licensing of fiber optic telecommunications lines to third parties or
telecommunications companies for other than Florida Power's internal use along
the electric transmission line right-of-way exceeds the authority granted in the
easements. In June 1999, plaintiffs amended their complaint to add Progress
Telecommunications Corporation, an indirect wholly owned subsidiary of Florida
Progress, as a defendant and to add counts for unjust enrichment and
constructive trust. In January 2000, the court conditionally certified the class
statewide. In a mediation held in March 2000, the parties reached a tentative
settlement of this claim. In January 2001, the Court preliminarily approved the
amended settlement agreement, certified the settlement class and approved the
class notice. Management does not expect that the results of these legal actions
will have a material impact on Florida Progress' financial position, results of
operations or liquidity. Accordingly, no provision for loss has been recorded
pertaining to this matter. A final settlement hearing date set for June 2001 was
held, with no decision rendered.
Other Legal Matters -- Florida Progress and Florida Power are 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 either company's
consolidated financial position, results of operations or liquidity.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING RESULTS
For the three and six months ended June 30, 2001, as compared to the
corresponding periods in the prior year.
Florida Progress' consolidated income from continuing operations for the three
and six month periods ended June 30, 2001, was $101.9 million and $177.5
million, compared to income from continuing operations of $106.5 million and
$181.7 million, for the same periods in 2000.
FLORIDA POWER CORPORATION
Florida Power, the largest subsidiary of Florida Progress, reported net income
of $84.3 million and $155.9 million for the second quarter and first half of
2001, compared to $79.5 million and $142.9 million for the comparable periods in
2000.
The components of retail and wholesale electric megawatt-hour sales for the
three and six months ended June 30, 2001, and 2000 were as follows:
(In millions of mWh)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- --------
Residential 4,375 4,358 0.4% 8,525 8,077 5.5%
Commercial 2,900 2,828 2.5 5,231 5,102 2.5
Industrial 995 1,080 (7.9) 1,962 2,164 (9.3)
Governmental 690 685 0.7 1,283 1,266 1.3
Wholesale 977 904 8.1 1,698 1,588 6.9
---------------------------------------------------------------------------------------------------
Total mWh Sales 9,937 9,855 0.8% 18,699 18,197 2.8%
Florida Power's retail kilowatt-hour sales increased slightly during the second
quarter of 2001 and for the year to date, compared with 2000. Residential and
commercial sectors increased due to continued customer growth. Weather, a key
factor influencing usage among residential customers, negatively influenced
retail sales for the quarter due to cooler than normal temperatures. Year to
date, weather impacts have been flat compared to prior year. Industrial sales
declined due to weakness in the phosphate industry.
Wholesale sales increased for the quarter and year to date compared to 2000,
which is attributable to higher sales to Seminole Electric Cooperative, Florida
Power's largest wholesale customer. The increase reflects an increase in the
capacity contract with this customer.
Fuel used in generation and purchased power increased $80.0 million and $180.6
million, for the second quarter and first half of 2001, respectively, when
compared to the same periods last year. The increase is due mainly to the
increased price of coal, oil and gas and increased usage. Fuel and purchased
power expenses are recovered primarily through cost recovery clauses and, as
such, have no material impact on operating results.
Operations and maintenance expense decreased slightly during the quarter and
year to date. The decrease is due primarily to lower employee-related costs
resulting from the reorganization after the acquisition by Progress Energy.
Depreciation and amortization increased $68.9 million year to date primarily due
to accelerating the amortization of the Tiger Bay regulatory asset in March
2001. The additional amortization had no significant earnings impact as it was
offset by the recognition of $63 million of revenues that were deferred pursuant
to a regulatory order in the fourth quarter of 2000.
ELECTRIC FUELS CORPORATION
Electric Fuels makes up the majority of Florida Progress' diversified
operations. The results of operations for Electric Fuels' Energy and Related
Services and Rail Services units are discussed below. On July 23, 2001, Progress
Energy announced that it had entered into a contract to sell the Inland Marine
Transportation business segment to AEP Resources, Inc., a wholly owned
subsidiary of American Electric Power, for a purchase price of $270 million.
18
Therefore, the results of operations of the Inland Marine Transportation segment
are no longer included in Florida Progress' income from continuing operations.
Energy and Related Services - Earnings at the Energy and Related Services Group
- ---------------------------
increased $16.4 million and $32.9 million from the three and six month periods
in the prior year. The increase was due primarily to higher synthetic fuel sales
and related tax credits during the quarter compared with last year (See "Other
Matters" below). Improved operating results of the gas operations, resulting
from increases in the number of wells and a higher price for natural gas, and an
increase in coal deliveries over the prior year also contributed to increased
earnings in the Energy and Related Services group.
Rail Services - Results in the Rail Services group decreased $11.6 million and
- -------------
$14.6 million for the quarter and first half of 2001 when compared to 2000.
Current year results were negatively affected by the significant downturn in the
domestic scrap market and the continuing weak market for railcar parts.
OTHER
The other group includes telecommunications, holding company and financing
expenses. The increased losses for the three and six months ended June 30, 2001
when compared to the corresponding periods in the prior year are due primarily
to the recording of an intra-period income tax allocation adjustment. Generally
accepted accounting principles require companies to apply a levelized effective
tax rate to interim periods that is consistent with the estimated annual rate.
Income tax expense was increased by $5.5 million for the second quarter and
$20.4 million for the first half of 2001. For the comparable periods in 2000,
income tax expense was decreased by $11.1 million for the second quarter and
$18.7 million for the first half of 2000, to maintain an effective tax rate
consistent with the estimated annual rate. The tax credits associated with the
Company's synthetic fuel operations lower the overall effective tax rate. These
credits, along with seasonal earnings variations, can also cause large swings in
the effective tax rate for interim periods. Therefore, this adjustment will vary
each quarter, but have no effect on net income for the year. The
telecommunications group also had higher losses than the second quarter and
first half of 2000 due to continued expansion of the business.
MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2001, $121.7 million was spent on the
Florida Power construction program and $62.5 million was spent in diversified
operations.
During the first quarter of 2001, Progress Capital Holdings retired $31 million
in Medium-Term Notes. The $6 million of medium-term notes that were retired in
January had a 9.95% coupon rate and the $25 million of medium-term notes that
were retired in February had a 6.13% coupon rate. Progress Energy issued
commercial paper to fund the maturing medium-term notes.
On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds,
6.65% Series due July 15, 2011. Proceeds from the issuance were primarily used
to retire commercial paper.
OTHER MATTERS
Regulatory Developments
- -----------------------
Florida Power previously operated under an agreement committing several parties
not to seek any reduction in its base rates or authorized return on equity. That
agreement expired on June 30, 2001. On May 3, 2001, the staff of the Florida
Public Service Commission, or FPSC, recommended that the FPSC require Florida
Power to submit, by September 14, 2001, minimum filing requirements, based on a
2002 projected calendar year, to initiate a rate proceeding regarding its future
base rates. The FPSC staff also recommended to the FPSC that, pending completion
of Florida Power's rate case, annual revenues of $114 million should be held
subject to refund to its customers. On June 20, 2001, the FPSC issued an order
accepting its staff's recommendation that Florida Power be required to hold $114
million of revenue subject to refund and to file, by September 14, 2001, minimum
filing requirements based on a projected 2002 test year. On July 2, 2001,
Florida Power filed a request for rehearing of the portion of the FPSC 's order
requiring that it hold $114 million of revenues subject to refund on the grounds
that the order contradicted FPSC precedent, was inconsistent with the applicable
statutory requirements and violated Florida Power's due process rights. Florida
Power is awaiting a decision from the FPSC on how they intend to proceed in this
matter. Also, since the FPSC's June 20, 2001 order, Florida Power has been
working with FPSC staff and other interested parties to establish special
procedures for the filing of the minimum filing requirements. The Company cannot
predict the outcome or impact of these matters.
In its May 3, 2001 recommendation, the FPSC staff expressed concerns related to
Florida Power's plans to participate in the creation of the GridFlorida regional
transmission organization, or GridFlorida RTO, along with Florida Power & Light
19
Company and Tampa Electric Company. The FPSC staff raised questions about the
prudence of establishing the new system and costs associated with the process.
Florida Power is continuing to evaluate the concerns that the FPSC staff has
raised about the GridFlorida RTO and the impact those concerns might have on the
implementation of the GridFlorida RTO plan this year.
On June 27, 2001, the FPSC issued an order establishing a two-phase process for
addressing these GridFlorida RTO issues in the context of Florida Power's
pending rate case. In the first phase, the FPSC will address the general issues
associated with the prudence of the GridFlorida RTO on an expedited basis, with
a decision scheduled for October 30, 2001. The second phase will address
ratemaking issues and will be decided as part of the general rate proceeding.
The Company cannot predict the outcome or impact of these matters.
Regional Transmission Organizations
- -----------------------------------
In October 2000, Florida Power, along with Florida Power & Light Company and
Tampa Electric Company filed with the Federal Energy Regulatory Commission, or
FERC, an application for approval of a regional transmission organization, or
RTO, for peninsular Florida, currently named GridFlorida. On March 28, 2001,
FERC issued an order provisionally granting GridFlorida RTO status and directing
the GridFlorida applicants to make certain changes in the RTO documents and to
file such changes within 60 days. On May 29, 2001, the GridFlorida applicants
made the compliance filing as directed by FERC but FERC has not yet issued an
order on that compliance filing.
On May 16, 2001, the FPSC initiated dockets to review the prudence of the
GridFlorida applicants' decision to form and participate in the GridFlorida RTO.
The GridFlorida applicants have announced that they will hold GridFlorida
development activities in abeyance. An order on this issue is expected in late
October of 2001. The Company cannot predict the outcome of this matter.
On July 12, 2001, FERC issued an order requiring certain parties involved in the
GridSouth RTO to develop a plan for a single RTO for the southeast. The
GridFlorida applicants and the parties to the GridFlorida docket before FERC
were encouraged to participate, but were not required to do so. Florida Power
and the other GridFlorida applicants are participating in the mediation. The
mediation is scheduled to last 45 days from July 12th, and ten days after the
mediation the presiding administrative law judge will submit a proposal to FERC.
The Company cannot predict the outcome of this mediation or the effect that it
may have on the GridFlorida proceedings currently ongoing before the FERC and
the FPSC.
Synthetic Fuels Tax Credits
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On April 20, 2001 and May 4, 2001, the Internal Revenue Service (IRS) released
Revenue Procedure 2001-30 and Revenue Procedure 2001-34, respectively, that
outline the conditions that must be met to receive a Private Letter Ruling (PLR)
for Section 29 tax credits from the IRS. PLRs represent advance rulings from the
IRS applying its interpretation of the tax law to an entities' facts for Section
29 credits. The Company continues to pursue PLRs for its two majority-owned
facilities and two minority-owned facilities that have not received PLRs. In
management's opinion, the Company is complying with all the necessary
requirements to be allowed such credits under Section 29, although it cannot
provide with certainty that it will receive PLRs or prevail, if challenged by
the IRS, on any credits taken.
Franchise Litigation
- --------------------
Five cities, with a total of approximately 36,000 customers, have sued Florida
Power in various circuit courts in Florida. The lawsuits principally seek (1) a
declaratory judgment that the cities have the right to purchase Florida Power's
electric distribution system located within the municipal boundaries of the
cities, (2) a declaratory judgment that the value of the distribution system
must be determined through arbitration, and (3) injunctive relief requiring
Florida Power to continue to collect from Florida Power's customers and remit to
the cities franchise fees during the pendency of the litigation and as long as
Florida Power continues to occupy the cities' rights-of-way to provide electric
service, notwithstanding the expiration of the franchise ordinances under which
Florida Power had agreed to collect such fees. One circuit court has entered a
declaratory judgment and order requiring arbitration to establish the purchase
price of Florida Power's facilities within one of the cities. Florida Power has
appealed that decision to a district court of appeal. The appeal has been fully
briefed and orally argued, and Florida Power is awaiting a decision from the
appeals court. To date, no city has attempted to actually exercise the right to
purchase any portion of Florida Power's electric distribution system, nor has
there been any proceeding to determine the price at which such a purchase could
be made. The Company cannot predict the outcome of these matters.
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NEW ACCOUNTING STANDARDS
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During the second quarter of 2001, the FASB issued an interpretation of SFAS No.
133 indicating that options in general cannot qualify for the normal purchases
and sales exception, but provided an exception that allows certain electricity
contracts, including capacity-energy contracts, to be excluded from the
mark-to-market requirements of SFAS No. 133. These interpretations are effective
July 1, 2001. The Company is continuing to review contracts to determine whether
they meet the criteria for the normal purchases and sales exception. If an
electricity capacity-energy contract or fuel supply contract in its regulated
business is subject to mark-to-market accounting, there would be no income
statement effect of the mark-to-market because the contract's mark-to-market
gain or loss will be recorded as a regulatory asset or liability. Any
mark-to-market gains or losses on contracts outside its regulated business will
affect income unless those contracts qualify for hedge accounting treatment.
On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" and No.
142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and clarifies the criteria for recording of other
intangible assets separately from goodwill. SFAS No. 142 requires that,
effective January 1, 2002, the Company cease amortization of goodwill. It also
requires the Company to evaluate goodwill for impairment at least annually,
which could result in periodic impairment charges. Goodwill amortization on an
after-tax basis was $0.4 million and $1.3 million for the three and six months
ended June 30, 2001, and is expected to be approximately $2.5 million for the
year. The Company is currently assessing the impact adopting these statements
will have on the financial statements.
In June 2001, the FASB approved the issuance of SFAS No. 143 "Accounting for
Asset Retirement Obligations" that provides accounting guidance for the costs of
retiring long-lived assets and is effective for fiscal years beginning after
June 15, 2002. The Company will assess the impact adoption of this statement
will have on the financial statements once the final statement is issued.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Certain market risks are inherent in Florida Progress' financial instruments,
which arise from transactions entered into in the normal course of business.
Florida Progress' primary exposures are changes in interest rates with respect
to long-term debt, commercial paper and the FPC obligated mandatorily redeemable
securities of trust, and fluctuations in the return on marketable securities
with respect to its nuclear decommissioning trust funds. Florida Progress'
exposure to return on marketable securities for the decommissioning trust funds
has not changed materially since December 31, 2000. The total fixed rate debt at
June 30, 2001 was $1.6 billion, with an average interest rate of 6.79% and the
total commercial paper outstanding at June 30, 2001 was $500 million, with an
average interest rate of 4.20%. Florida Progress also had $300 million
outstanding of FPC mandatorily redeemable securities of trust, with a fixed
interest rate of 7.10%.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. 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.
See prior discussion of this matter in the 2000 Form 10-K, Item 3,
paragraph 3. The plaintiffs filed a motion with the District Court to
reopen the case of Akin, et al. vs. Florida Power, and to dismiss the Adams
------------------------------ -----
case. The Akin case was originally filed in an effort to preserve the
----
litigation rights of the 61 plaintiffs who opted into the Adams case. The
-----
Court had previously stayed the Akin case pending a ruling on Florida
----
Power's motion to decertify the class. Oral arguments were held in January
2001. On July 5, 2001, the Eleventh Circuit Court of Appeals ruled that as
a matter of law, disparate claims cannot be brought under the Americans
with Disabilities Act. This ruling has the effect of decertifying the Akin
----
case as a class action. The plaintiffs may appeal this ruling. The Company
cannot predict the outcome of this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
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(b) Reports on Form 8-K:
During the second quarter of 2001, Florida Progress and Florida Power did
not file any reports on Form 8-K. However, the following report on Form 8-K
was filed in the third quarter of 2001:
Florida Power Corporation
-------------------------
Financial
Item Statements
Reported Included Date of Event Date Filed
-------- -------- ------------- ----------
5 No July 1, 2001 July 23, 2001
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLORIDA PROGRESS CORPORATION
FLORIDA POWER CORPORATION
(Registrants)
Date: August 10, 2001 By: /s/ Peter M. Scott III
------------------------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
By: /s/ Robert H. Bazemore, Jr.
-----------------------------------
Robert H. Bazemore, Jr.
Vice President and Controller
Chief Accounting Officer
23