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 September 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
October 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 September 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
---- ----------
ADEA ................................... Age Discrimination in Employment Act
AEP .................................... American Electric Power
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
------------------------------------------
Statements made throughout this Form 10-Q that are not statements of
historical facts are forward-looking statements 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.
For example, forward-looking statements are made 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 and 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, including proceedings before our principal
regulators; risks associated with operating nuclear power facilities,
availability of nuclear waste storage facilities, and nuclear
decommissioning costs; terrorist threats and activities, particularly with
respect to our nuclear facilities, economic uncertainty caused by recent
terror attacks on the United States, and potential adverse reactions to
United States anti-terrorism activities; 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
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
----------------------------
INTERIM FINANCIAL STATEMENTS (Unaudited)
----------------------------------------
CONSOLIDATED STATEMENTS of INCOME
---------------------------------
Florida Progress Corporation Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 906,131 $ 907,965 $ 2,500,265 $ 2,226,611
Diversified businesses 354,473 359,753 1,038,899 1,003,028
--------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,260,604 1,267,718 3,539,164 3,229,639
--------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 259,763 207,347 696,766 492,532
Purchased power 154,958 166,261 407,180 389,653
Operations and maintenance 119,931 118,015 350,612 355,912
Depreciation and amortization 95,087 135,507 341,801 313,331
Taxes other than on income 63,234 59,377 180,420 165,280
Diversified businesses 389,366 384,918 1,124,735 1,032,955
--------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,082,339 1,071,425 3,101,514 2,749,663
--------------------------------------------------------------------------------------------------------------------------------
Operating Income 178,265 196,293 437,650 479,976
--------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 736 1,262 1,512 1,592
Other, net (4,462) 1,320 (15,442) (890)
--------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (3,726) 2,582 (13,930) 702
--------------------------------------------------------------------------------------------------------------------------------
Income before Interest Charges and Income Taxes 174,539 198,875 423,720 480,678
--------------------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 35,613 40,761 113,169 121,222
Other interest charges 8,414 12,118 27,618 35,434
Allowance for borrowed funds used during construction (270) (521) (474) (1,391)
--------------------------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 43,757 52,358 140,313 155,265
--------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Income Taxes 130,782 146,517 283,407 325,413
Income Taxes (Benefit) (50,670) (688) (75,570) (3,448)
--------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 181,452 147,205 358,977 328,861
Discontinued Operations (Note 3) :
Income from discontinued operations (net of applicable
income tax expense of $0 and $1,976 for the three months
ended and $1,848 and $5,006 for the nine months ended
September 30, 2001 and 2000, respectively) - 3,098 2,682 7,884
--------------------------------------------------------------------------------------------------------------------------------
Estimated loss on disposal of discontinued operations,
including provision of $5,468 for pre-tax operating
income during phase-out period, (net of applicable
estimated income tax benefit of $9,028 and $7,797 for
the three and nine months ended September 30, 2001) (14,120) - (28,528) -
--------------------------------------------------------------------------------------------------------------------------------
Net Income $ 167,332 $ 150,303 $ 333,131 $ 336,745
================================================================================================================================
See Notes to Interim Financial Statements.
5
CONSOLIDATED BALANCE SHEETS
---------------------------
Florida Progress Corporation (In thousands) September 30, December 31,
Assets 2001 2000
--------------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 7,099,705 $ 6,998,135
Accumulated depreciation (3,926,506) (3,701,975)
--------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,173,199 3,296,160
Held for future use 8,274 8,274
Construction work in progress 226,757 124,988
Nuclear fuel, net of amortization 66,336 39,879
--------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,474,566 3,469,301
--------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 38,949 24,200
Accounts receivable 532,666 482,270
Accounts receivable-affiliates 24,909 507
Taxes receivable 30,144 16,363
Deferred income taxes - 39,576
Inventory 468,512 371,919
Deferred fuel cost 57,801 90,434
Prepayments 13,388 23,027
Net assets of discontinued operations 32,642 69,642
Other current assets 29,699 25,251
--------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,228,710 1,143,189
--------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets 25,098 19,689
Income taxes recoverable through future rates
Deferred purchased power contract termination costs 138,601 226,656
Unamortized debt expense 21,347 19,128
Nuclear decommissioning trust funds 401,517 400,719
Diversified business property, net 694,794 666,360
Miscellaneous other property and investments 144,079 181,569
Goodwill, net 128,427 113,152
Other assets and deferred debits 280,345 252,821
--------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,834,208 1,880,094
--------------------------------------------------------------------------------------------------------------------
Total Assets $ 6,537,484 $ 6,492,584
====================================================================================================================
Capitalization and Liabilities
--------------------------------------------------------------------------------------------------------------------
Capitalization
--------------------------------------------------------------------------------------------------------------------
Common stock $ 1,358,533 $ 1,318,309
Retained earnings 789,970 670,679
Accumulated other comprehensive loss (1,931) (1,407)
Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497
Long-term debt, net 2,349,598 2,276,416
--------------------------------------------------------------------------------------------------------------------
Total Capitalization 4,529,667 4,297,494
--------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 88,513 190,466
Accounts payable 350,311 352,606
Accounts payable-affiliates 39,880 48
Interest accrued 53,011 64,118
Short-term obligations 313,936 467,292
Advances from parent 170,802 45,180
Other current liabilities 347,326 308,418
--------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,363,779 1,428,128
--------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 282,437 302,029
Accumulated deferred investment tax credits 56,330 62,160
Other liabilities and deferred credits 305,271 402,773
--------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 644,038 766,962
--------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
--------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 6,537,484 $ 6,492,584
====================================================================================================================
See Notes to Interim Financial Statements.
6
CONSOLIDATED STATEMENTS of CASH FLOWS
-------------------------------------
Florida Progress Corporation
Nine Months Ended
September 30,
(In thousands) 2001 2000
---------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 333,131 $ 336,745
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations (2,682) (7,884)
Estimated loss on disposal of discontinued operations 28,528 -
Depreciation and amortization 352,262 339,301
Deferred income taxes and investment tax credits, net 501 (20,872)
Deferred fuel cost (credit) 32,633 (102,587)
Changes in working capital, net of effects from sale or acquisition of business
Net increase in accounts receivable (70,601) (141,534)
Net increase in inventories (113,200) (23,667)
Net (increase) decrease in prepaids and other current assets 5,601 (41,136)
Net increase (decrease) in accounts payable 43,134 (2,063)
Net increase (decrease) in other current liabilities 140,548 (16,944)
Other operating activities (35,481) 36,608
----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 714,374 355,967
----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Property additions (212,981) (187,536)
Nuclear fuel additions (42,783) -
Proceeds from sale of asset 5,532 -
Other investing activities (88,930) (129,499)
----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (339,162) (317,035)
----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of long-term debt 299,058 -
Net increase in commercial paper reclassified to long-term debt (141,276) 16,455
Net increase (decrease) in short-term indebtedness (153,356) 179,364
Retirement of long-term debt (188,756) (76,727)
Equity contribution from parent 39,651 -
Dividends paid to parent (213,837) -
Dividends paid on common stock - (164,193)
Other financing activities (2,224) 533
----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (360,740) (44,568)
----------------------------------------------------------------------------------------------------------------------
Cash Provided by Discontinued Operations 277 12
----------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents 14,749 (5,624)
----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period 24,200 9,587
----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 38,949 $ 3,963
======================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the period - interest (net of amount capitalized) $ 151,405 $ 154,800
income taxes (net of refunds) $ (76,300) $ 120,000
See Notes to Interim Financial Statements.
7
STATEMENTS of INCOME
--------------------
Florida Power Corporation Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 906,131 $ 907,965 $ 2,500,265 $ 2,226,611
Operating Expenses
Fuel used in electric generation 259,763 207,347 696,766 492,532
Purchased power 154,958 166,261 407,180 389,653
Operation and maintenance 119,931 118,015 350,612 355,912
Depreciation and amortization 95,087 135,506 341,801 313,330
Taxes other than on income 63,234 59,377 180,420 165,280
--------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 692,973 686,506 1,976,779 1,716,707
--------------------------------------------------------------------------------------------------------------------------------
Operating Income 213,158 221,459 523,486 509,904
--------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 736 1,262 1,513 1,591
Other, net (1,193) 3,146 (6,134) 5,594
--------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (457) 4,408 (4,621) 7,185
--------------------------------------------------------------------------------------------------------------------------------
Income before Interest Charges and Income Taxes 212,701 225,867 518,865 517,089
--------------------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 25,828 25,097 74,307 77,097
Other interest charges 3,090 6,793 11,644 19,459
Allowance for borrowed funds used during construction (271) (521) (475) (1,391)
--------------------------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 28,647 31,369 85,476 95,165
--------------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 184,054 194,498 433,389 421,924
Income Taxes 69,597 72,160 162,259 155,946
--------------------------------------------------------------------------------------------------------------------------------
Net Income 114,457 122,338 271,130 265,978
Dividends on Preferred Stock 378 378 1,134 1,134
--------------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 114,079 $ 121,960 $ 269,996 $ 264,844
================================================================================================================================
See Notes to Interim Financial Statements.
8
BALANCE SHEETS
--------------
Florida Power Corporation (In thousands) September 30, December 31,
Assets 2001 2000
-------------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 7,099,705 $ 6,998,135
Accumulated depreciation (3,926,506) (3,701,975)
-------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,173,199 3,296,160
Held for future use 8,274 8,274
Construction work in progress 226,757 124,988
Nuclear fuel, net of amortization 66,336 39,879
-------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,474,566 3,469,301
-------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 8,342 3,380
Accounts receivable 338,052 289,237
Accounts receivable-affiliates 18,978 38,729
Advances to parent 127,510 -
Deferred income taxes 39,576
Inventory 163,660 139,116
Deferred fuel cost 57,801 90,434
Prepayments and other current assets 3,157 9,097
-------------------------------------------------------------------------------------------------------------------
Total Current Assets 717,500 609,569
-------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 25,098 19,689
Deferred purchased power contract termination costs 138,601 226,656
Unamortized debt expense 12,084 9,526
Nuclear decommissioning trust funds 401,517 400,719
Miscellaneous other property and investments 47,060 54,816
Other assets and deferred debits 227,603 187,763
-------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 851,963 899,169
-------------------------------------------------------------------------------------------------------------------
Total Assets $ 5,044,029 $ 4,978,039
===================================================================================================================
Capitalization and Liabilities
-------------------------------------------------------------------------------------------------------------------
Capitalization
-------------------------------------------------------------------------------------------------------------------
Common stock $ 1,075,414 $ 1,075,414
Retained earnings 945,773 889,614
Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497
Long-term debt, net 1,569,664 1,397,116
-------------------------------------------------------------------------------------------------------------------
Total Capitalization 3,624,348 3,395,641
-------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 32,000 82,000
Accounts payable 189,837 170,126
Accounts payable-affiliates 51,302 39,526
Taxes accrued 160,545 4,401
Interest accrued 38,522 47,117
Advances from parent - 20,180
Short-term obligations - 192,530
Other current liabilities 291,883 258,633
-------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 764,089 814,513
-------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 340,992 387,901
Accumulated deferred investment tax credits 55,813 61,626
Other liabilities and deferred credits 258,787 318,358
-------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 655,592 767,885
-------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
-------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 5,044,029 $ 4,978,039
===================================================================================================================
See Notes to Interim Financial Statements.
9
STATEMENTS of CASH FLOWS
------------------------
Florida Power Corporation
Nine Months Ended
September 30,
(In thousands) 2001 2000
----------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 271,130 $ 265,978
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 350,771 338,934
Deferred income taxes and investment tax credits, net (22,180) (28,210)
Deferred fuel cost (credit) 32,633 (102,587)
Changes in working capital:
Net increase in accounts receivable (29,064) (94,141)
Net increase in inventories (24,544) (7,083)
Net (increase) decrease in prepaids and other current assets 5,940 (35,874)
Net increase (decrease) in accounts payable 31,487 (13,252)
Net increase in other current liabilities 36,734 82,122
Other operating activities (90,690) (18,850)
----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 562,217 387,037
----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Property additions (212,981) (187,536)
Nuclear fuel additions (42,783) -
Other investing activities (14,336) (13,946)
----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (270,100) (201,482)
----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of long-term debt 297,621 -
Net decrease in commercial paper reclassified to long-term debt (96,276) -
Net increase (decrease) in short-term indebtedness (192,530) 47,364
Retirement of long-term debt (81,000) (75,900)
Dividends paid to parent (213,836) (153,693)
Dividends paid on preferred stock (1,134) (1,134)
----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (287,155) (183,363)
----------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents 4,962 2,192
----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period 3,380 -
----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 8,342 $ 2,192
======================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest (net of amount capitalized) $ 94,071 $ 104,800
income taxes (net of refunds) $ 17,071 $ 117,800
See Notes to Interim Financial Statements.
10
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
NOTES TO INTERIM 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 is a diversified non-utility energy company, whose principal
business segments are Energy & Related Services and Rail Services. On July 23,
2001, Progress Energy announced the disposition of the Inland Marine
Transportation segment of the Company. The transaction closed on November 1,
2001 (see Note 3). Due to the geographical locations of Electric Fuels' Rail
Services, Inland Marine Transportation and the non-Florida portion of its Energy
& Related Services operations, it is necessary to 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. As the Company's common stock is no longer
publicly traded, earnings per share data is not presented. 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.
11
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 non-executive
involuntary termination costs of $41.8 million. The third quarter 2001 activity
for the non-executive termination costs is detailed in the table below:
Non-Executive
In millions Termination Costs
-----------------
Balance at June 30, 2001 $ 28.0
Payments (9.5)
-------------------
Balance at September 30, 2001 $ 18.5
===================
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 termination did not result in a plan
curtailment related to postretirement benefits other than pension. An immaterial
curtailment gain is being recorded for the pension plan.
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
entered into a contract to sell MEMCO Barge Line, Inc., to AEP Resources, Inc.,
a wholly-owned subsidiary of American Electric Power. On November 1, 2001, the
Company completed the sale of the Inland Marine Transportation segment. As a
result of the completion of the sale, the Company has updated the estimated loss
on disposal. An estimated loss on disposal of approximately $28.5 million,
including an additional loss of $14.1 million for the three months ended
September 30, 2001, has been recorded. The additional loss is related to the
interest rate effects on the early termination of certain off balance sheet
arrangements and an accrual related to an environmental indemnification
provision. Proceeds from disposal were $270 million, of which approximately $225
million will be used for the early termination of certain off balance sheet
arrangements for assets currently leased by MEMCO. Remaining proceeds were used
to retire commercial paper. Since Inland Marine results of operations are
recorded one month in arrears, the loss on disposal will be finalized in the
fourth quarter.
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 is reported in the consolidated statements of income
under Discontinued Operations, for all periods presented, except for the
three-month period ending September 30, 2001. Net income of $2.6 million for the
three months ended September 30, 2001, has been reflected in estimated phase out
period income, included in the estimated loss on disposal of $28.5 million.
Revenues from such operations were $43.6 million and $47.0 million for the three
months ended September 30, 2001 and 2000, respectively, and $127.8 million and
$138.1 million for the nine months ended September 30, 2001 and 2000,
respectively.
In connection with the sale, the Company entered into environmental
indemnification provisions covering both unknown and known sites. As of
September 30, 2001, the Company has recorded an accrual to cover estimated
probable future environmental expenditures. Management believes that it is
reasonably possible that additional costs, which cannot be currently estimated,
may be incurred related to the environmental indemnification provision beyond
the amounts accrued, as a result of new information. Management cannot predict
the outcome of this matter.
12
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 September 30, 2001 December 31, 2000
--------------------------------------------------
Current assets $ 26.1 $ 28.6
Non-current assets 78.4 75.0
Current liabilities (25.3) (17.3)
Non-current liabilities (15.5) (16.7)
Provision for estimated loss on disposal:
Estimated Loss on Disposal (31.9) -
Accrued net income during phase out period
(estimated net income of $3.4 million offset by
actual net income of $2.6 million for the three
months ended September 30, 2001) 0.8 -
--------------------------------------------------
$ 32.6 $ 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 in portions of 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
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.
Financial data for business segments for the periods covered in this Form 10-Q
are presented in the table below:
Energy and
Florida Related Rail
(In thousands) Power Services Services Other Consolidated
--------------------------------------------------------------------------------------------------
Three months ended
September 30, 2001:
Revenues $ 906,131 $ 99,416 $ 219,554 $ 35,503 $ 1,260,604
Intersegment revenues -- 88,014 477 (88,491) --
Income (loss) from
continuing operations 114,079 39,098 (2,165) 30,440 181,452
Total assets 5,044,029 550,141 828,384 114,930 6,537,484
==================================================================================================
Energy and
Florida Related Rail
Power Services Services Other Consolidated
--------------------------------------------------------------------------------------------------
Three months ended
September 30, 2000:
Revenues $ 907,965 $ 101,045 $ 250,197 $ 8,511 $ 1,267,718
Intersegment revenues -- 57,883 188 (58,071) --
Income (loss) from
continuing operations 121,960 25,495 79 (329) 147,205
Total assets 4,920,010 649,555 852,734 305,332 6,727,631
===================================================================================================
13
Energy and
Florida Related Rail
Power Services Services Other Consolidated
--------------------------------------------------------------------------------------------------
Nine months ended
September 30, 2001:
Revenues $ 2,500,265 $ 275,904 $ 669,580 93,415 $ 3,539,164
Intersegment revenues -- 280,426 1,055 (281,481) --
Income (loss) from
continuing operations 269,996 106,521 (13,953) (3,587) 358,977
Total assets 5,044,029 550,141 828,384 114,930 6,537,484
==================================================================================================
Energy and
Florida Related Rail
Power Services Services Other Consolidated
--------------------------------------------------------------------------------------------------
Nine months ended
September 30, 2000:
Revenues $ 2,226,611 $ 209,422 $ 775,201 $ 18,405 $ 3,229,639
Intersegment revenues -- 188,863 515 (189,378) --
Income (loss) from
continuing operations 264,844 60,002 2,926 1,089 328,861
Total assets 4,920,010 649,555 852,734 305,332 6,727,631
==================================================================================================
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 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 were
effective July 1, 2001. Those interpretations would not result in mark-to-market
effects on the Company's financial statements based on contracts currently
outstanding. In October 2001, the FASB revised criteria related to the exception
for certain electricity contracts, with the revision to be effective January 1,
2002. It is unclear whether or not that revision will be sustained and, if so,
what effects the revision would have on the Company's financial statements. 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 amortization of goodwill will cease. It also
requires that goodwill be evaluated for impairment at least annually, which
could result in periodic impairment charges. Goodwill amortization on an
after-tax basis was $0.4 million and $1.7 million for the three and nine months
ended September 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.
14
On August 15, 2001, the FASB issued 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 is currently assessing the impact adoption of this
statement will have on the financial statements.
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 provides accounting guidance for
financial accounting and reporting for the impairment or disposal of long-lived
assets. The statement supercedes FASB No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". It also
supercedes the accounting and reporting provisions of APB Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" related to the disposal of a segment of a business. The
Statement is effective for fiscal years beginning after December 15, 2001, with
early adoption encouraged. The Company is currently assessing the impact
adopting this statement will have on the financial statements.
NOTE 6. FINANCING ACTIVITIES
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 1, 2001, $80 million of Florida Power's Medium-Term Notes, 6.47% Series
matured. Florida Power issued commercial paper to fund the maturing medium-term
notes.
On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds,
6.650% Series due July 15, 2011. Proceeds from the issuance were primarily used
to retire commercial paper and for general corporate purposes.
During the third quarter of 2001, Progress Capital Holdings retired $70 million
of Medium-Term Notes. The $10 million of medium-term notes that were retired in
July had a 9.55% coupon rate, and the $60 million of medium-term notes that were
retired in August had a 6.88% coupon rate. Progress Energy issued commercial
paper to fund the maturing medium-term notes.
On October 30, 2001, Progress Energy issued $400 million of senior notes, 5.85%
Series due 2008 and $400 million of senior notes, 7.00% Series due 2031.
Approximately $600 million of the proceeds from the issuance were used to retire
Progress Capital Holding's 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.
15
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 nine
months ended September 30, 2001, was $181.2 million and $346.7 million,
respectively. For the three months and the nine months ended September 30, 2000,
comprehensive income was $150.1 million and $336.4 million, respectively. Items
of other comprehensive income for the three and nine month periods consisted
primarily of foreign currency translation adjustments. 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. The reserve balance is approximately
$34.0 million as of September 30, 2001.
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.
16
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 been asked to
provide information to the EPA 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 or similar
mechanism. 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.
On November 1, 2001, the Company completed the sale of the Inland Marine
Transportation segment, which was operated by MEMCO Barge Line, Inc. to AEP
Resources, Inc. In connection with the sale, the Company entered into
environmental indemnification provisions covering both unknown and known sites.
As of September 30, 2001, the Company has recorded an accrual to cover estimated
probable future environmental expenditures. Management believes that it is
reasonably possible that additional costs, which cannot be currently estimated,
may be incurred related to the environmental indemnification provision beyond
the amounts accrued as a result of new information. Management cannot predict
the outcome of this matter.
Florida Power has filed claims with the Company's general liability insurance
carriers to recover costs arising out of actual or potential environmental
liabilities. Some claims have 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
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, 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.
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 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. On
October 16, 2001, the Commission approved Florida Power's motion for
reconsideration and reduced the revenue subject to refund by $16 million to $98
million. The Commission also allowed the Company to reduce the amount subject to
refund if it is successful in recovering certain expenses incurred during 2001,
thus potentially reducing the amount subject to refund.
On September 14, 2001, Florida Power submitted its required rate filing,
including its revenue requirements and supporting testimony. Under the filing,
Florida Power customers would receive a $5 million annual credit rate for 15
years, or $75 million in total, from net synergies of its merger with Progress
Energy. Additionally, the filing provides that the regulatory asset related to
the purchase of Tiger Bay cogeneration facility in 1997 would be fully amortized
by the end of 2003, which would provide customers with a further rate reduction
of $37 million annually beginning in 2004. Also included in the filing is an
incentive regulatory plan, which would provide for additional rate reductions
through efficiencies derived as a result of Florida Power's ability to lower the
future costs of its utility operations. The Company expects to satisfy an
additional filing requirement due November 15, 2001. Hearings are scheduled to
begin March 20, 2002, with a final decision expected in July 2002. The FPSC has
encouraged its staff, Florida Power, and other parties to negotiate a
settlement, if possible, before the hearings begin. The Company cannot predict
the outcome or impact of these matters.
17
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 (ADEA). This ruling has the effect of decertifying this case as a
class action. On October 3, 2001, the plaintiffs filed a petition in the United
States Supreme Court, requesting a hearing of the case, on the issue of whether
disparate claims can be brought under the ADEA. 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
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 Cogen (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 awarding damages to Lake
of approximately $4.5 million and Lake filed a Notice of Appeal. 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 sought rehearing of this decision with
the District Court of Appeal's, which subsequently confirmed its initial
decision. On remand, Florida Power entered a stipulation on issues of fact that
resulted in the issuance of a Final Judgement awarding damages to Lake of
18
approximately $20 million, which Florida Power recorded as a charge to purchased
power expense. Also in the Lake matter, 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. Florida Power appealed
this decision to the Florida Supreme Court, which subsequently upheld the FPSC.
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 or judicial awards 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. A final settlement hearing was held in June 2001. As of October
31, 2001, the Court has not entered a final order. 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.
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.
Two circuit courts have entered orders requiring arbitration to establish the
purchase price of Florida Power's electric distribution facilities within two
cities. One appellate court has held that one city has the right to determine
the value of Florida Power's facilities within the city through arbitration. 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. One
court has ordered Florida Power to continue to collect franchise fees of the
city of Winter Park, Florida, and hold those fees in escrow, pending resolution
of the litigation. The Company cannot predict the outcome of these matters.
Other Legal Matters -- Florida Progress and Florida Power are involved in
various other claims and legal actions arising in the ordinary course of
business, some of which involve substantial amounts. Where appropriate, accruals
have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to
provide for such matters. 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.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING RESULTS
For the three and nine months ended September 30, 2001, as compared to the
corresponding periods in the prior year.
Florida Progress' consolidated income from continuing operations for the three
and nine month periods ended September 30, 2001, was $181.5 million and $359.0
million, respectively, compared to income from continuing operations of $147.2
million and $328.9 million, for the same periods in 2000.
Business segment results and the factors affecting them are discussed below.
FLORIDA POWER CORPORATION
Florida Power, the largest subsidiary of Florida Progress, reported earnings for
common stock of $114.1 million and $270.0 million for the third quarter and
first nine months of 2001, compared to $122.0 million and $264.8 million for the
comparable periods in 2000.
The components of retail and wholesale electric megawatt-hour sales for the
three and nine months ended September 30, 2001, and 2000 were as follows:
(In millions of mWh)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 % Change 2001 2000 % Change
---- ---- -------- ---- ---- --------
Residential 5,370 5,467 (1.8) % 13,842 13,267 4.3 %
Commercial 3,164 3,184 (0.6) 8,367 8,215 1.9
Industrial 934 1,078 (13.4) 2,923 3,244 (9.9)
Governmental 751 738 1.8 2,041 1,988 2.7
------------------- -------------------
Total Retail mWh Sales 10,219 10,467 (2.4) 27,173 26,714 1.7
Wholesale 1,201 1,232 (2.5) 2,886 2,683 7.6
------------------- -------------------
Total mWh Sales 11,420 11,699 (2.4) % 30,059 29,397 2.3 %
Florida Power's retail megawatt-hour sales decreased slightly during the third
quarter of 2001 and increased slightly for the year to date, compared with 2000.
Residential and commercial sectors increased year to date due to continued
customer growth, partially offset by cooler weather, which is a key factor
influencing usage among residential customers. Cooler weather also negatively
influenced retail sales for the quarter, but was partially offset by customer
growth. Industrial sales declined due to weakness in the manufacturing sector
and phosphate industry, which continue to be affected by the economic downturn
that is expected to continue.
Wholesale sales decreased for the quarter, but have increased year to date
compared to 2000, which is attributable to sales to Seminole Electric
Cooperative, Florida Power's largest wholesale customer. The year to date
increase reflects an increase in the capacity contracts with the City of
Homestead and Florida Power & Light, with milder weather negatively impacting
the third quarter results.
Fuel used in generation and purchased power, combined, increased $41.1 million
and $221.8 million, for the third quarter and first nine months of 2001,
respectively, when compared to the same periods last year. The increase is due
mainly to the increased price of coal in the third quarter, and coal, oil and
gas for the year compared to the same periods in 2000, as well as, damages paid
to NCP Lake Cogen related to its qualify facilities contract suit (See Footnote
9). 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 increased slightly during the quarter, but
decreased year to date, as compared with 2000. The decrease for the first nine
months of 2001, is due primarily to lower plant maintenance costs, partially
offset by a prior year refund of transmission charges from a supplier.
20
Depreciation and amortization decreased $40.4 million for the third quarter and
increased $28.5 million year to date. The results were primarily due to
accelerated amortization of the Tiger Bay regulatory asset of $63.0 million in
March 2001 compared to $44.4 million in September 2000. The additional
amortization amounts had no earnings impact as they were offset by the
recognition of revenues that were deferred pursuant to a regulatory order in the
fourth quarter of 2000.
Other Expenses increased $4.9 million and $11.8 million, respectively, for the
three and nine months ended September 30, 2001, as compared with the same
periods in 2000. This increase was primarily due to a decrease in power
marketing net operating income and lower returns on company owned life
insurance.
Other interest charges decreased $3.7 million and $7.8 million, respectively,
for the three and nine months ended September 30, 2001, as compared with 2000.
The decrease for the quarter was due to lower average borrowings on commercial
paper, combined with lower interest rates. The year to date decrease is due
primarily to a reduction in the amortization of a regulatory asset representing
interest charges on federal income taxes.
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. On November 1, 2001, the Company
completed the sale of the Inland Marine Transportation segment, which was
operated by MEMCO Barge Line, Inc. to AEP Resources, Inc. Proceeds from disposal
were $270 million, of which approximately $225 million will be used for the
early termination of certain off balance sheet arrangements for assets currently
leased by MEMCO. Remaining proceeds were used to retire commercial paper. The
results of operations of the Inland Marine Transportation segment are reflected
as discontinued operations and, therefore, are no longer included in Florida
Progress' income from continuing operations.
In connection with the sale, the Company entered into environmental
indemnification provisions covering both unknown and known sites. As of
September 30, 2001, the Company has recorded an accrual to cover estimated
probable future environmental expenditures. Management believes that it is
reasonably possible that additional costs, which cannot be currently estimated,
may be incurred related to the environmental indemnification provision beyond
the amounts accrued, as a result of new information. Management cannot predict
the outcome of this matter.
Energy and Related Services - Earnings at the Energy and Related Services Group
---------------------------
increased $13.6 million and $46.5 million from the three and nine month periods
in the prior year. The increase was due primarily to higher synthetic fuel sales
and related tax credits during the quarter and nine months ended September 30,
2001, compared with last year (See "Other Matters" below). Increases in the
market price and volume of coal deliveries over the prior year also contributed
to increased earnings in the Energy and Related Services group. Production
volumes and the market price of natural gas decreased in the third quarter, as
compared to 2000, but remain higher for the year compared to 2000.
Rail Services - Earnings in the Rail Services group decreased $2.2 million and
-------------
$16.9 million for the quarter and first nine months of 2001, respectively, 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 income for the three and nine months ended September 30,
2001 when compared to the corresponding periods of 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 decreased by $38.2 million for the third
quarter and $17.8 million for the first nine months of 2001. For the comparable
periods in 2000, income tax expense was decreased by $17.2 million for the third
quarter and $35.9 million for the first nine months 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. Fluctuations in estimated earnings and tax credits, can also
cause large swings in the effective tax rate for interim periods. Therefore,
this adjustment will vary each quarter, but have no effect on net income for the
year. Decreases in operating expenses at the holding company, resulting from
decreased operations and staffing levels, also positively impacted results for
the other segment for the quarter and the year, when compared to the same
periods in 2000. The telecommunications group had higher losses than the third
quarter and first nine months of 2000 due to continued expansion of the
business.
21
MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2001, $213.0 million was spent on the
Florida Power construction program and $88.9 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 1, 2001, $80 million of Florida Power's Medium-Term Notes, 6.47% Series
matured. Florida Power issued commercial paper to fund the maturing medium-term
notes.
On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds,
6.650% Series due July 15, 2011. Proceeds from the issuance were primarily used
to retire commercial paper and for general corporate purposes.
During the third quarter of 2001, Progress Capital Holdings retired $70 million
of Medium-Term Notes. The $10 million of medium-term notes that were retired in
July had a 9.55% coupon rate, and the $60 million of medium-term notes that were
retired in August had a 6.88% coupon rate. Progress Energy issued commercial
paper to fund the maturing medium-term notes.
On October 30, 2001, Progress Energy issued $400 million of senior notes, 5.85%
Series due 2008 and $400 million of senior notes, 7.00% Series due 2031.
Approximately $600 million of the proceeds from the issuance were used to retire
the Progress Capital Holding's 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
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. On October 16, 2001, the Commission
approved Florida Power's motion for reconsideration and reduced the revenue
subject to refund by $16 million to $98 million. The Commission also allowed the
Company to reduce the amount subject to refund if it is successful in recovering
certain expenses incurred during 2001, thus potentially reducing the amount
subject to refund.
On September 14, 2001, Florida Power submitted its required rate filing,
including its revenue requirements and supporting testimony. Under the filing,
Florida Power customers would receive a $5 million annual credit rate for 15
years, or $75 million in total, from net synergies of its merger with Progress
Energy. Additionally, the filing provides that the regulatory asset related to
the purchase of Tiger Bay cogeneration facility in 1997 would be fully amortized
by the end of 2003, which would provide customers with a further rate reduction
of $37 million annually beginning in 2004. Also included in the filing is an
incentive regulatory plan, which would provide for additional rate reductions
through efficiencies derived as a result of Florida Power's ability to lower the
future costs of its utility operations. The Company expects to satisfy an
additional filing requirement due November 15, 2001. Hearings are scheduled to
begin March 20, 2002, with a final decision expected in July 2002. The FPSC has
encouraged its staff, Florida Power, and other parties to negotiate a
settlement, if possible, before the hearings begin. 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
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
22
raised about the GridFlorida RTO and the impact those concerns might have on the
implementation of the GridFlorida RTO plan this year.
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. 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. A hearing on Phase I was held October 3 through
October 5, 2001, with a final FPSC order scheduled for November 26, 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 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 participated in the mediation. On September
10, 2001, the presiding administrative law judge of the mediation submitted a
mediation report to FERC. The report, which has not yet been acted on by FERC,
recommended adoption of a for-profit transmission company RTO model. FERC
intends to issue an order regarding the mediation report in November 2001. 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
---------------------------
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. Two circuit courts have entered
orders requiring arbitration to establish the purchase price of Florida Power's
electric distribution facilities within two cities. One appellate court has held
that one city has the right to determine the value of Florida Power's facilities
within the city through arbitration. 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. One court has ordered Florida Power to
continue to collect franchise fees of the city of Winter Park, Florida, and hold
those fees in escrow, pending resolution of the litigation. The Company cannot
predict the outcome of these matters.
NEW ACCOUNTING STANDARDS
------------------------
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
23
contracts, including certain capacity-energy contracts, to be excluded from the
mark-to-market requirements of SFAS No. 133. These interpretations were
effective July 1, 2001. Those interpretations would not result in mark-to-market
effects on the Company's financial statements based on contracts currently
outstanding. In October 2001, the FASB revised criteria related to the exception
for certain electricity contracts, with the revision to be effective January 1,
2002. It is unclear whether or not that revision will be sustained and, if so,
what effects the revision would have on the Company's financial statements. 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 amortization of goodwill will cease. It also
requires the goodwill be evaluated for impairment at least annually, which could
result in periodic impairment charges. Goodwill amortization on an after-tax
basis was $0.4 million and $1.7 million for the three and nine months ended
September 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.
On August 15, 2001, the FASB issued 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 is currently assessing the impact adoption of this
statement will have on the financial statements.
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 provides accounting guidance for
financial accounting and reporting for the impairment or disposal of long-lived
assets. The statement supercedes FASB No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". It also
supercedes the accounting and reporting provisions of APB Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" related to the disposal of a segment of a business. The
Statement is effective for fiscal years beginning after December 15, 2001, with
early adoption encouraged. The Company is currently assessing the impact
adopting this statement will have on the financial statements.
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.
On July 18, 2001, Florida Power issued $300 million of First Mortgage Bonds,
6.650% Series due July 15, 2011. Proceeds from the issuance were primarily used
to retire commercial paper. As a result of this issuance, the exposure to
changes in interest rates from Florida Progress' fixed rate long-term debt and
commercial paper at September 30, 2001 has changed from December 31, 2000. The
total fixed rate long-term debt at September 30, 2001, was $1.8 billion, with an
average interest rate of 6.71% and fair market value of $1.8 billion. The total
commercial paper outstanding at September 30, 2001 was $359 million, with an
average interest rate of 3.59% and fair market value of $359 million.
24
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 (ADEA). This ruling has the effect of decertifying
the Akin case as a class action. On October 3, 2001, the plaintiffs filed a
----
petition in the United States Supreme Court, requesting a hearing of the
case, on the issue of whether disparate claims can be brought under the
ADEA. The Company cannot predict the outcome of this matter.
2. Wallace Bentley, et al. v. City of Tallahassee, Interstate Fibernet, Inc.
and Florida Power Corporation, Circuit Court for Leon County, Florida. Case
No. 98-7107.
In December 1998, Florida Power was served with this 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 Telecom as a defendant and adding counts for unjust
enrichment and constructive trust. In January 2000, the court conditionally
certified the class statewide. In 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. A final settlement hearing
was held in June 2001. To date, the Court has not entered a final order. If
given final approval, the settlement would not have a material adverse
impact on the financial position, results of operations or liquidity of
Florida Power or Progress Telecom.
3. 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.
Florida Power's purchased power contracts with qualifying facilities (QFs)
employ separate pricing methodologies for capacity payments and energy
payments. Florida Power has interpreted the pricing provision in its
qualifying facility 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.
On October 21, 1994, NCP Lake Cogen, 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.
The trial regarding 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 awarding damages to Lake of
approximately $4.5 million and Lake filed a Notice of Appeal. 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
sought rehearing of this decision with the District Court of Appeal's,
which subsequently confirmed its initial decision. On remand, Florida Power
entered a stipulation on issues of fact that resulted in the issuance of a
Final
25
Judgement awarding damages to Lake of approximately $20 million, which
Florida Power recorded as a charge to purchased power expense. Also in the
Lake matter, 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. Florida Power appealed this
decision to the Florida Supreme Court, which subsequently upheld the FPSC.
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 or judicial awards
incurred as a result of the matters discussed above, will be recovered from
its customers.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the third quarter of 2001, the following report on Form 8-K was
filed.
Florida Power Corporation
-------------------------
Financial
Item Statements
Reported Included Date of Event Date Filed
-------- -------- ------------- ----------
5 No July 1, 2001 July 23, 2001
27
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: November 7, 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
28