EXHIBIT 99
INDEPENDENT AUDITORS' REPORT
TO THE BOARDS OF DIRECTORS OF FLORIDA PROGRESS CORPORATION AND FLORIDA POWER
CORPORATION:
We have audited the accompanying consolidated balance sheet and schedule of
capitalization of Florida Progress Corporation and its subsidiaries (Florida
Progress) and the accompanying balance sheet and schedule of capitalization of
Florida Power Corporation (Florida Power) as of December 31, 2001, and the
related Florida Progress consolidated statements of income, of common equity and
comprehensive income, and of cash flows and the related Florida Power statements
of income, of common equity, and of cash flows for the year then ended. These
financial statements are the responsibility of the respective company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Florida Progress and of Florida Power,
respectively, at December 31, 2001, and the results of their respective
operations and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
February 15, 2002
8
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF FLORIDA PROGRESS CORPORATION:
We have audited the accompanying balance sheets and schedules of capitalization
of Florida Progress Corporation and subsidiaries, and of Florida Power
Corporation, as of December 31, 2000 and 1999, and the related statements of
income, cash flows, and common equity and comprehensive income for the years
then ended. These financial statements are the responsibility of the respective
management of Florida Progress Corporation and Florida Power Corporation. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Florida Progress Corporation
and subsidiaries, and Florida Power Corporation, as of December 31, 2000 and
1999, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
- ------------
KPMG LLP
St. Petersburg, Florida
February 15, 2001
9
CONSOLIDATED STATEMENTS of INCOME
- ---------------------------------
Florida Progress Corporation Years ended December 31
(In thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 3,212,841 $ 2,871,563 $ 2,649,413
Diversified businesses 1,378,278 1,403,997 1,086,132
- ---------------------------------------------------------------------------------------------------------------
Total Operating Revenues 4,591,119 4,275,560 3,735,545
- ---------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 912,735 681,869 615,389
Purchased power 514,528 498,458 414,080
Energy conservation costs 61,673 65,041 81,215
Other operation and maintenance 425,471 524,090 463,843
Depreciation and amortization 452,972 402,625 347,515
Taxes other than on income 230,169 213,280 203,099
Diversified businesses 1,690,073 1,655,336 1,038,550
- ---------------------------------------------------------------------------------------------------------------
Total Operating Expenses 4,287,621 4,040,699 3,163,691
- ---------------------------------------------------------------------------------------------------------------
Operating Income 303,498 234,861 571,854
- ---------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 2,872 1,852 867
Other, net (28,382) (18,668) 1,513
- ---------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (25,510) (16,816) 2,380
- ---------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 150,693 163,047 155,232
Other interest charges 35,718 47,561 33,344
Allowance for borrowed funds used during
construction (AFUDC) (1,087) (3,117) (3,350)
- ---------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 185,324 207,491 185,226
- ---------------------------------------------------------------------------------------------------------------
Income before Income Taxes 92,664 10,554 389,008
Income Taxes (Benefit) (172,719) (124,715) 84,858
- ---------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 265,383 135,269 304,150
Discontinued Operations (Note 4):
Income from discontinued operations 2,682 8,972 10,747
Net loss on disposal of discontinued operations,
(net of applicable estimated income tax benefit of
$7,896) (23,734) - -
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 244,331 $ 144,241 $ 314,897
===============================================================================================================
See Notes to financial statements.
10
CONSOLIDATED BALANCE SHEETS
- ---------------------------
Florida Progress Corporation
(In thousands) December 31
Assets 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 7,151,729 $ 6,998,135
Accumulated depreciation (3,984,308) (3,701,975)
- ---------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,167,421 3,296,160
Held for future use 8,274 8,274
Construction work in progress 292,883 124,988
Nuclear fuel, net of amortization 62,536 39,879
- ---------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,531,114 3,469,301
- ---------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 5,201 24,200
Accounts receivable 420,118 482,270
Accounts receivable-affiliates 21,851 507
Taxes receivable 14,761 16,363
Deferred income taxes 32,325 39,576
Inventory 485,891 371,919
Deferred fuel cost 15,147 90,434
Prepayments 10,748 23,027
Net assets of discontinued operations - 69,642
Other current assets 48,184 25,251
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,054,226 1,143,189
- ---------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 27,610 19,689
Deferred purchased power contract termination costs 95,326 226,656
Unamortized debt expense 21,021 19,128
Nuclear decommissioning trust funds 406,100 400,719
Diversified business property, net 669,078 666,360
Miscellaneous other property and investments 117,535 181,569
Goodwill, net 11,139 113,152
Other assets and deferred debits 375,641 252,821
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,723,450 1,880,094
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $ 6,308,790 $ 6,492,584
- ---------------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
- ---------------------------------------------------------------------------------------------------------------------
Capitalization
- ---------------------------------------------------------------------------------------------------------------------
Common stock $ 1,409,034 $ 1,318,309
Retained earnings 666,201 670,679
Accumulated other comprehensive loss (2,985) (1,407)
Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497
Long-term debt, net 2,643,934 2,276,416
- ---------------------------------------------------------------------------------------------------------------------
Total Capitalization 4,749,681 4,297,494
- ---------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 88,053 190,466
Accounts payable 285,524 352,606
Accounts payable-affiliates 110,290 48
Interest accrued 74,091 64,118
Short-term obligations - 467,292
Advances from parent 147,583 45,180
Other current liabilities 257,525 268,842
- ---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 963,066 1,388,552
- ---------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 165,816 341,605
Accumulated deferred investment tax credits 54,387 62,160
Other liabilities and deferred credits 375,840 402,773
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 596,043 806,538
- ------------------------------------------------------------------------------ --------------------------------------
Commitments and Contingencies (Notes 15 and 16)
- ---------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 6,308,790 $ 6,492,584
=====================================================================================================================
See Notes to Financial Statements.
11
CONSOLIDATED STATEMENTS of CASH FLOWS
- -------------------------------------
Florida Progress Corporation
Years ended December 31
(In thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 244,331 $ 144,241 $ 314,897
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations (2,682) (8,972) (10,747)
Net loss on disposal of discontinued operations 23,734 - -
Net loss on sale of assets 25,994 - -
Impairment of long-lived assets 169,710 130,700 -
Depreciation and amortization 468,576 453,757 385,490
Deferred income taxes and investment tax credits, net (201,787) (236,978) (53,940)
Deferred fuel cost (credit) 75,287 (122,076) 9,424
Net (increase) decrease in accounts receivable 44,932 (137,794) (16,793)
Net (increase) decrease in inventories (131,662) 47,572 (82,634)
Net (increase) decrease in prepayments and other current assets (10,600) (57,602) (39,838)
Net increase (decrease) in accounts payable 42,700 48,979 (14,942)
Net increase (decrease) in other current liabilities 118,708 84,242 80,978
Other (45,931) 174,627 101,348
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 821,310 520,696 673,243
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Property additions $ (323,170) (286,800) (361,068)
Diversified business property additions (133,447) (194,195) (152,234)
Nuclear fuel additions (43,087) - -
Proceeds from sale of assets 24,988 - 29,043
Proceeds from sale of discontinued operations 28,023 - -
Other investing activities (28,644) (65,644) (114,294)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (475,337) (546,639) (598,553)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of long-term debt 299,201 7,307 50,044
Proceeds from issuance of long-term debt to parent 500,000 - -
Proceeds from issuance of common stock - - 43,221
Issuance of company obligated mandatorily redeemable preferred securities - - 300,000
Increase (decrease) in commercial paper reclassified to long-term debt (345,750) 16,455 (16,455)
Increase (decrease) in short-term debt (467,292) 314,156 (83,064)
Repayment of long-term debt (190,642) (166,441) (144,382)
Equity contributions from parent 90,149 84,490 -
Dividends paid to parent (248,808) - -
Dividends paid on common stock - (215,277) (214,017)
Other financing activities (1,782) (168) (2,946)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (364,924) 40,522 (67,599)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used in ) Discontinued Operations (48) 33 (2)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (18,999) 14,612 7,089
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 24,200 9,588 2,499
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 5,201 $ 24,200 $ 9,588
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 169,983 $ 195,500 $ 160,600
income taxes (net of refunds) $ (3,926) $ 182,500 $ 152,000
See Notes to financial statements.
12
CONSOLIDATED SCHEDULES of CAPITALIZATION
- ----------------------------------------
Florida Progress Corporation December 31
(In thousands except per share data) 2001 2000
- --------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value, 250,000,000 shares
authorized; 98,616,658outstanding in 2001 and 2000 $1,409,034 $1,318,309
Accumulated other comprehensive loss (2,985) (1,407)
Retained earnings 666,201 670,679
- --------------------------------------------------------------------------------------------------------
Total Common Stock Equity $2,072,250 $1,987,581
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Preferred Stock of Florida Power Corporation-not-subject to mandatory redemption
Authorized-4,000,000 shares cumulative, $100 par value Preferred Stock;
5,000,000 shares cumulative, no par value preferred stock; 1,000,000 shares,
$100 par value Preference Stock
$100 par value Preferred Stock:
4.00% - 39,980 shares outstanding (redemption price $104.25) $ 3,998 $ 3,998
4.40% - 75,000 shares outstanding (redemption price $102.00) 7,500 7,500
4.58% - 99,990 shares outstanding (redemption price $101.00) 9,999 9,999
4.60% - 39,997 shares outstanding (redemption price $103.25) 4,000 4,000
4.75% - 80,000 shares outstanding (redemption price $102.00) 8,000 8,000
- --------------------------------------------------------------------------------------------------------
Total Preferred Stock of Florida Power Corporation $ 33,497 $ 33,497
- --------------------------------------------------------------------------------------------------------
Long-Term Debt (maturities and weighted average interest
rates as of December
31, 2001) Florida Power Corporation:
First mortgage bonds, maturing 2003-2023 6.00-8.00% $ 810,000 $ 510,000
Pollution control revenue bonds, maturing 2014-2027 6.35-7.20% 240,865 240,865
Medium-term notes, maturing 2002-2028 6.54-6.81% 449,100 531,100
Commercial paper, reclassified to long-term debt 2.54% 154,250 200,000
Unamortized premium and discount, net (2,935) (2,849)
- --------------------------------------------------------------------------------------------------------
1,651,280 1,479,116
- --------------------------------------------------------------------------------------------------------
Florida Progress Funding Corporation:
Mandatorily redeemable preferred securities, maturing
2039 7.10% 300,000 300,000
- --------------------------------------------------------------------------------------------------------
300,000 300,000
- --------------------------------------------------------------------------------------------------------
Progress Capital Holdings:
Medium-term notes, maturing 2002-2008 5.78-7.45% 273,000 374,000
Commercial paper, reclassified to long-term debt - 300,000
Unsecured note with parent, maturing 2011 6.43% 500,000 -
Miscellaneous notes 7,707 13,766
- ---------------------------------------------------------------------------------------------------------
780,707 687,766
- ---------------------------------------------------------------------------------------------------------
Less: Current portion of long-term debt (88,053) (190,466)
- ---------------------------------------------------------------------------------------------------------
Total Long-Term Debt, Net $2,643,934 $2,276,416
- ---------------------------------------------------------------------------------------------------------
Total Capitalization $4,749,681 $4,297,494
=========================================================================================================
All debt securities, except commercial paper, have fixed interest rates.
See Notes to financial statements.
13
CONSOLIDATED STATEMENTS of COMMON EQUITY and COMPREHENSIVE INCOME
- -----------------------------------------------------------------
Florida Progress Corporation Years ended December 31
(In thousands except per share data) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Beginning Balance $1,987,581 $ 2,008,707 $ 1,861,952
Net income 244,331 144,241 314,897
Foreign currency translation adjustment (1,578) (982) (425)
--------------------------------------------------
Comprehensive Income 242,753 143,259 314,472
Common Stock Issued - 162,570 shares and 1,117,623
Shares, respectively - 6,854 46,300
Equity contribution from parent, net 90,720 44,038 -
Dividend to parent (248,804) - -
Common stock dividends at annual per share rate of
$2.22 and $2.18, respectively - (215,277) (214,017)
- ---------------------------------------------------------------------------------------------------------------------
Ending Balance $2,072,250 $ 1,987,581 $ 2,008,707
=====================================================================================================================
See Notes to financial statements.
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------
Florida Progress Corporation
(In thousands except per share data) First Quarter(a) Second Quarter(a) Third Quarter(a) Fourth Quarter (a)(b)
- ------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Operating revenues $ 1,144,912 $ 1,133,648 $ 1,260,604 $ 1,051,955
Operating income (loss) 129,266 130,120 178,265 (134,153)
Income (loss) from continuing operations 75,626 101,900 181,452 (93,595)
Net income (loss) 75,988 89,811 167,332 (88,800)
Common stock data: (c)
Price per share - high NA NA NA NA
low NA NA NA NA
- ------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
Operating revenues $ 918,934 $ 1,042,985 $1,267,718 $ 1,045,923
Operating income (loss) 137,064 146,620 196,293 (245,116)
Income (loss) from continuing operations 75,158 106,499 147,205 (193,593)
Net income (loss) 76,454 109,987 150,303 (192,503)
Common stock data: (c)
Price per share - high 46.50 50.56 53.44 56.06
low 40.06 45.31 46.88 51.81
- ------------------------------------------------------------------------------------------------------------------------------
(a) In the opinion of management, all adjustments necessary to fairly present
amounts shown for interim periods have been made. Results of operations for
an interim period may not give a true indication of results for the year.
Certain reclassifications have been made to previously reported amounts to
conform to the current year's presentation.
(b) Includes impairment, loss on sale of assets, and other one-time charges of
$136.5 million after-tax for 2001. Includes merger and separation costs and
impairment charges of $200.9 million after-tax in 2000. See Note 2 for a
discussion of the purchase of Florida Progress by Progress Energy.
(c) As of November 30, 2000, all outstanding shares of Florida Progress were
acquired by Progress Energy.
See Notes to financial statements.
14
STATEMENTS of INCOME
- --------------------
Florida Power Corporation Years ended December 31
(In thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Operating Revenues
Electric $ 3,212,841 $ 2,871,563 $2,649,413
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 3,212,841 2,871,563 2,649,413
- ---------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 912,735 681,869 615,389
Purchased power 514,528 498,458 414,080
Energy conservation costs 61,673 65,041 81,215
Other operation and maintenance 425,471 524,090 463,843
Depreciation and amortization 452,972 402,625 347,515
Taxes other than on income 230,169 213,280 203,099
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,597,548 2,385,363 2,125,141
- ---------------------------------------------------------------------------------------------------------------------
Operating Income 615,293 486,200 524,272
- ---------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 2,872 1,852 867
Other, net (10,780) (407) 13,780
- ---------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (7,908) 1,445 14,647
- ---------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 100,377 102,218 105,812
Other interest charges 14,417 26,261 18,139
Allowance for borrowed funds used during construction (1,087) (3,117) (3,350)
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Charges, Net 113,707 125,362 120,601
- ---------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 493,678 362,283 418,318
Income Taxes 182,590 150,473 151,280
- ---------------------------------------------------------------------------------------------------------------------
Net Income 311,088 211,810 267,038
Dividends on Preferred Stock 1,512 1,512 1,512
- ---------------------------------------------------------------------------------------------------------------------
Earnings For Common Stock $ 309,576 $ 210,298 $ 265,526
=====================================================================================================================
See Notes to financial statements.
15
BALANCE SHEETS
- --------------
Florida Power Corporation
(In thousands) December 31
Assets 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 7,151,729 $ 6,998,135
Accumulated depreciation (3,984,308) (3,701,975)
- ----------------------------------------------------------------------------------------------------------------------
Utility plant in service, net 3,167,421 3,296,160
Held for future use 8,274 8,274
Construction work in progress 292,883 124,988
Nuclear fuel, net of amortization 62,536 39,879
- ----------------------------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,531,114 3,469,301
- ----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents - 3,380
Accounts receivable 248,642 289,237
Accounts and notes receivable-affiliates 16,424 38,729
Advances to parent 119,799 -
Deferred income taxes 32,325 39,576
Inventory 188,630 139,116
Deferred fuel cost 15,147 90,434
Prepayments 4,345 9,097
- ----------------------------------------------------------------------------------------------------------------------
Total Current Assets 625,312 609,569
- ----------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 27,610 19,689
Deferred purchased power contract termination costs 95,326 226,656
Unamortized debt expense 11,844 9,526
Nuclear decommissioning trust funds 406,100 400,719
Miscellaneous other property and investments 46,442 54,816
Other assets and deferred debits 254,414 187,763
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 841,736 899,169
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 4,998,162 $ 4,978,039
======================================================================================================================
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------------------
Capitalization
- ----------------------------------------------------------------------------------------------------------------------
Common stock $ 1,081,257 $ 1,075,414
Retained earnings 950,387 889,614
Preferred stock -not subject to mandatory redemption 33,497 33,497
Long-term debt, net 1,619,280 1,397,116
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization 3,684,421 3,395,641
- ----------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 32,000 82,000
Accounts payable 143,828 170,126
Accounts payable-affiliates 189,817 39,526
Taxes accrued 1,768 4,401
Interest accrued 54,440 47,117
Advances from parent - 20,180
Short-term obligations - 192,530
Other current liabilities 185,265 219,057
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 607,118 774,937
- ----------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 394,828 427,477
Accumulated deferred investment tax credits 53,875 61,626
Other liabilities and deferred credits 257,920 318,358
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 706,623 807,461
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 15 and 16)
- ----------------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 4,998,162 $ 4,978,039
======================================================================================================================
See Notes to Financial Statements.
16
STATEMENTS of CASH FLOWS
- ------------------------
Florida Power Corporation Years ended December 31
(In thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 311,088 $ 211,810 $ 267,038
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 467,025 453,291 384,967
Deferred income taxes and investment tax credits, net (41,080) (59,495) (62,178)
Deferred fuel cost (credit) 75,287 (122,076) 9,424
Net (increase) decrease in accounts receivable 62,900 (117,191) (4,763)
Net (increase) decrease in inventories (49,514) 28,124 (35,566)
Net (increase) decrease in prepayments and other current assets 4,761 (55,550) (37,627)
Net increase (decrease) in accounts payable 123,993 33,720 (34,284)
Net increase (decrease) in other current liabilities (29,100) 30,433 48,205
Other (129,818) 52,599 41,261
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 795,542 455,665 576,477
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Property additions (323,170) (286,800) (361,068)
Nuclear fuel additions (43,087) - -
Other investing activities (19,711) (16,470) (27,516)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (385,968) (303,270) (388,584)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of long-term debt 297,621 - -
Net decrease in commercial paper reclassified to long-term debt (45,750) - -
Increase (decrease) in short-term debt (192,530) 39,374 105,836
Repayment of long-term debt (82,000) (76,800) (91,600)
Equity contributions from parent - 71,000 -
Advances from parent (139,979) 20,200 -
Dividends paid to parent (248,804) (201,277) (200,617)
Dividends paid on preferred stock (1,512) (1,512) (1,512)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Financing Activities (412,954) (149,015) (187,893)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents (3,380) 3,380 -
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 3,380 - -
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ - $ 3,380 $ -
===========================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year - interest (net of amount capitalized) $ 106,384 $ 135,000 $ 114,200
income taxes (net of refunds) $ 210,629 $ 194,400 $ 210,900
See Notes to financial statements.
17
SCHEDULES of CAPITALIZATION
- ---------------------------
Florida Power Corporation December 31
(In thousands except per share data) 2001 2000
- -------------------------------------------------------------------------------------------------------------
Common Stock Equity
Common stock without par value $1,081,257 $1,075,414
Retained earnings 950,387 889,614
- -------------------------------------------------------------------------------------------------------------
Total Common Stock Equity $2,031,644 $1,965,028
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Preferred Stock-not-subject to mandatory redemption
Authorized-4,000,000 shares cumulative, $100 par
value Preferred Stock; 5,000,000 shares cumulative, no
par value preferred stock; 1,000,000 shares, $100 par
value Preference Stock
$100 par value Preferred Stock:
4.00% - 39,980 shares outstanding (redemption price
$104.25) $ 3,998 $ 3,998
4.40% - 75,000 shares outstanding (redemption price
$102.00) 7,500 7,500
4.58% - 99,990 shares outstanding (redemption price
$101.00) 9,999 9,999
4.60% - 39,997 shares outstanding (redemption price
$103.25) 4,000 4,000
4.75% - 80,000 shares outstanding (redemption price
$102.00) 8,000 8,000
- -------------------------------------------------------------------------------------------------------------
Total Preferred Stock $ 33,497 $ 33,497
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt (maturities and weighted average interest
rates as of December 31, 2000)
First mortgage bonds, maturing 2003-2023 6.00-8.00% $ 810,000 $ 510,000
Pollution control revenue bonds, maturing 2014-2027 6.35-7.20% 240,865 240,865
Medium-term notes, maturing 2002-2028 6.54-6.81% 449,100 531,100
Commercial paper, reclassified to long-term debt 2.54% 154,250 200,000
Unamortized premium and discount, net
(2,935) (2,849)
- -------------------------------------------------------------------------------------------------------------
1,651,280 1,479,116
- -------------------------------------------------------------------------------------------------------------
Less: Current portion of long-term debt (32,000) (82,000)
- -------------------------------------------------------------------------------------------------------------
Total Long-Term Debt, Net $1,619,280 $1,397,116
- -------------------------------------------------------------------------------------------------------------
Total Capitalization $3,684,421 $3,395,641
=============================================================================================================
All debt securities, except commercial paper, have fixed interest rates.
See Notes to financial statements.
18
STATEMENTS of COMMON EQUITY
- ---------------------------
Florida Power Corporation Years ended December 31
(In thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Beginning Balance $ 1,965,028 $ 1,885,007 $ 1,820,098
Net income 309,576 210,298 265,526
Equity contribution from parent 5,844 71,000 -
Dividends paid to parent (248,804) (201,277) (200,617)
- ---------------------------------------------------------------------------------------------------
Ending Balance $ 2,031,644 $ 1,965,028 $ 1,885,007
===================================================================================================
See Notes to financial statements.
QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------
Florida Power Corporation
(In thousands) First Quarter(a) Second Quarter(a) Third Quarter(a) Fourth Quarter(a)(b)
- -----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Operating revenues $ 810,474 $ 783,660 $ 906,131 $ 712,576
Operating income 145,425 164,904 213,158 91,806
Net income 71,606 84,311 114,079 39,580
- -----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
Operating revenues $ 625,309 $ 693,336 $ 907,965 $ 644,953
Operating income (loss) 131,974 156,470 221,459 (23,703)
Net income (loss) 63,402 79,482 121,960 (54,546)
(a) In the opinion of management, all adjustments necessary to fairly present
amounts shown for interim periods have been made. Results of operations for
an interim period may not give a true indication of results for the year.
Certain reclassifications have been made to previously reported amounts to
conform to the current year's presentation.
(b) Includes merger and separation costs of $94.2 million after-tax in 2000.
The business of Florida Power is seasonal in nature and comparisons of earnings
for the quarters do not give a true indication of overall trends and changes in
Florida Power's operations. In the fourth quarter of 2000 the FPSC approved the
establishment of a regulatory liability for the purpose of deferring nonfuel
revenues. The 2000 deferral was $63 million. In the first quarter of 2001 and
third quarter of 2000, respectively, Florida Power recognized the 2000 $63
million and 1999 $44 million deferral in electric utility revenues and applied
it to the amortization of the Tiger Bay regulatory asset, which resulted in no
impact to 2001 or 2000 earnings (see Note 15).
See Notes to financial statements.
19
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- Florida Progress Corporation (the Company or Florida Progress) is a
holding company under the Public Utility Holding Company Act of 1935 (PUHCA).
The Company became subject to the regulations of PUHCA when it was acquired by
CP&L Energy, Inc. on November 30, 2000 (See Note 2). CP&L Energy, Inc.
subsequently changed its name to Progress Energy, Inc. (Progress Energy or the
Parent). Florida Progress' two primary subsidiaries are Florida Power
Corporation (Florida Power) and Progress Fuels Corporation (Progress Fuels).
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. These investments, which
total approximately $33 million at December 31, 2001, are included as
miscellaneous property and investments in the Consolidated Balance Sheets.
Certain reclassifications have been made to prior-year amounts to conform to the
current year's presentation.
Use of Estimates -- In preparing financial statements that conform with
accounting principles generally accepted in the United States of America,
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.
Regulation -- Florida Power is regulated by the Florida Public Service
Commission (FPSC) and the Federal Energy Regulatory Commission (FERC). The
utility follows the accounting practices set forth in the Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." This standard allows utilities to capitalize or defer certain
costs or reduce revenues based on regulatory approval and management's ongoing
assessment that it is probable these items will be recovered or refunded through
the ratemaking process.
PROPERTY, PLANT AND EQUIPMENT
Electric Utility Plant -- Utility plant is stated at the original cost of
construction, which includes payroll and related costs such as taxes, pensions
and other fringe benefits, general and administrative costs, and an allowance
for funds used during construction. Substantially all of the utility plant is
pledged as collateral for Florida Power's first mortgage bonds.
The allowance for funds used during construction (AFUDC) represents the
estimated cost of equity and debt for utility plant under construction. Florida
Power is permitted to earn a return on construction costs and recover them in
the rates charged for utility services while the plant is in service. The
average rate used in computing the allowance for funds was 7.8% for 2001, 2000
and 1999.
The cost of nuclear fuel is amortized to expense based on the quantity of heat
produced for the generation of electric energy in relation to the quantity of
heat expected to be produced over the life of the nuclear fuel core.
Florida Power's annual provision for depreciation, including a provision for
nuclear plant decommissioning costs and fossil plant dismantlement costs,
expressed as a percentage of the average balances of depreciable utility plant,
was 4.3% for 2001 and 4.6 % for 2000 and 1999.
Florida Power also maintains a reserve for fossil plant dismantlement. (See Note
8).
Florida Power charges maintenance expense with the cost of repairs and minor
renewals of property. The plant accounts are charged with the cost of renewals
and replacements of property units. Accumulated depreciation is charged with the
cost, less the net salvage, of property units retired.
In compliance with a regulatory order, Florida Power accrues a reserve for
maintenance and refueling expenses anticipated to be incurred during scheduled
nuclear plant outages. (See Note 15)
20
Diversified Business Property -- Diversified business property consists
primarily of railcars, marine equipment, land, synthetic fuel facilities,
mineral rights and telecommunications equipment.
The following is a summary of diversified business property (in thousands):
2001 2000
---------- ----------
Equipment $ 238,092 $ 259,070
Land and mineral rights 116,998 132,715
Buildings and plants 118,662 142,082
Telecommunications equipment 184,539 116,034
Railcars 77,919 84,988
Marine equipment 78,868 73,287
Computers, office equipment and software 27,887 35,431
Construction work in progress 108,570 111,598
Accumulated depreciation (282,457) (288,845)
---------- ----------
Diversified business property, net $ 669,078 $ 666,360
========== ==========
Depreciation on diversified business property is calculated principally on the
straight-line method over the following estimated useful lives:
Equipment, buildings and plant 3 to 40 years
Telecommunications equipment 5 to 20 years
Railcars 3 to 20 years
Marine equipment 3 to 35 years
Computers, office equipment and software 3 to 10 years
The synthetic fuel facilities are being depreciated through 2007 at which time
the Section 29 tax credits will expire.
In December 2000, Progress Fuels wrote down certain of its 180 million tons of
coal reserves (See Note 3). Excluding reserves determined to be impaired,
Progress Fuels owns, in fee, properties that contain estimated proven and
probable coal reserves of approximately 2 million tons, and controls, through
mineral leases, additional estimated proven and probable coal reserves of
approximately 22 million tons. Depletion is provided on the units-of-production
method based upon the estimates of recoverable tons of clean coal.
Inventory
Inventory is carried at average cost. As of December 31, 2001 and 2000,
inventory was comprised of :
FLORIDA PROGRESS
(in thousands) 2001 2000
-------- --------
Fuel $155,188 $ 74,112
Rail equipment and parts 200,697 191,756
Materials and supplies 113,638 91,145
Other 16,368 14,906
-------- --------
Inventory $485,891 $371,919
======== ========
FLORIDA POWER
(in thousands) 2001 2000
-------- --------
Fuel $ 92,417 $ 51,949
Materials and supplies 96,213 87,167
-------- --------
Inventory $188,630 $139,116
======== ========
Utility Revenues, Fuel and Purchased Power Expenses -- The Company recognizes
electric utility revenues as service rendered to customers. Operating revenues
include unbilled electric utility revenues earned when service has been
delivered but not billed by the end of the accounting period. Revenues include
amounts
21
resulting from fuel, purchased power and energy conservation cost recovery
clauses, which generally are designed to permit full recovery of these costs.
The adjustment factors are based on projected costs for a 12-month period. The
cumulative difference between actual and billed costs is included on the balance
sheet as a current regulatory asset or liability. Any difference is billed or
refunded to customers during the subsequent period.
Florida Power accrues the nonfuel portion of base revenues for services rendered
but unbilled. As of December 31, 2001 and 2000, the amounts accrued were $63.1
million and $85.1 million, respectively.
Diversified Revenues -- Revenues include revenues from mining, processing, and
procurement of coal, production and sale of natural gas, river terminal
services, production and sale of synthetic fuel, offshore marine transportation,
railcar repair and parts reconditioning, railcar leasing and sales,
manufacturing and supplying rail and track material, metal recycling, and sales
of wholesale telecommunications services. Revenues are recognized at the time
products are shipped or as services are rendered. Leasing activities are
accounted for in accordance with SFAS No. 13, "Accounting for Leases".
Diversified Business Expenses
The major components of diversified business expenses for the years ended
December 31, 2001, 2000 and 1999 are as follows (in thousands):
2001 2000 1999
---- ---- ----
Cost of sales $1,360,487 $1,320,168 $ 910,465
Depreciation and amortization 69,407 64,958 51,552
General and administrative expenses 96,616 137,174 75,894
Impairment of assets (Note 3) 160,569 130,700 -
Other 2,994 2,336 639
------------------------------------
Diversified Business Expenses $1,690,073 $1,655,336 $1,038,550
====================================
Income Taxes -- Deferred income taxes are provided on all significant temporary
differences between the financial and tax basis of assets and liabilities using
current tax rates.
Deferred investment tax credits, subject to regulatory accounting practices, are
amortized to income over the lives of the related properties.
Accounting for Certain Investments -- The Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents. Dividend and interest income are recognized when earned.
Amounts funded in externally managed decommissioning trusts are recorded at fair
value. The trust funds consist primarily of equity securities and municipal,
government, corporate, and mortgage-backed debt securities. The debt securities
have a weighted-average maturity of approximately 10 years. All realized and
unrealized gains and losses are reflected as an adjustment to the accumulated
provision for nuclear decommissioning.
Acquisitions -- During 2000, subsidiaries of Progress Fuels acquired 7
businesses, in separate transactions. The cash paid for the 2000 acquisitions
was $45.7 million. The excess of the aggregate purchase price over the fair
value of net assets acquired was approximately $11.1 million. The acquisitions
were accounted for under the purchase method of accounting and, accordingly, the
operating results of the acquired businesses have been included in the Company's
financial statements since the date of acquisition. Each of the acquired
companies conducted operations similar to those of the subsidiaries and has been
integrated into Progress Fuels' operations. The pro forma results of
consolidated operations for 2000 and 1999, assuming the 2000 acquisitions were
made at the beginning of each year, would not differ significantly from the
historical results. The Company had no acquisitions during 2001.
22
Accounting for the Impairment of Goodwill and Long-Lived Assets -- SFAS No. 121
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
Be Disposed Of" requires review of long-lived assets and certain intangibles for
impairment when events or circumstances indicate that the carrying value of an
asset may not be recoverable. Any impairment losses are reported in the period
in which the recognition criteria are first applied based on the fair value of
the asset. SFAS No. 121 was superseded by SFAS No. 142 and SFAS No. 144 as of
January 1, 2002. (See New Accounting Standards)
Environmental -- The Company accrues environmental remediation liabilities when
the criteria of SFAS No. 5, "Accounting for Contingencies," have been met.
Environmental expenditures are expensed as incurred or capitalized depending on
their future economic benefit. Expenditures that relate to an existing condition
caused by past operations and have no future economic benefits are expensed.
Liabilities for expenditures of a non-capital nature are recorded when
environmental assessment and/or remediation is probable, and the costs can be
reasonably estimated.
Loss Contingencies -- Liabilities for loss contingencies arising from litigation
are recorded when it is probable that a liability has been incurred and the
amount can be reasonably estimated.
Other Policies -- Leasing activities are accounted for in accordance with SFAS
No. 13, "Accounting for Leases." Due to the geographical locations of Progress
Fuels' Rail Services and the non-Florida portion of its Energy & Related
Services operations, it is necessary to report their results one-month in
arrears.
The Company maintains an allowance for doubtful accounts receivable, which
totaled approximately $25.7 million and $26.2 million at December 31, 2001 and
2000, respectively. Florida Power's allowance for doubtful accounts receivable
totaled $2.5 million and $5.2 million, respectively, at December 31, 2001 and
2000. Long-term debt premiums, discounts and issuance expenses are amortized
over the life of the related debt using the straight-line method. Any expenses
or call premiums associated with the reacquisition of debt obligations by
Florida Power are amortized over the remaining life of the original debt using
the straight-line method. The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.
New Accounting Standards -- Effective January 1, 2001, the Company adopted 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 interpretations 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. The interpretations were effective
July 1, 2001. Those interpretations did not require the Company to
mark-to-market any of its electricity capacity-energy contracts currently
outstanding. In December 2001, the FASB revised the criteria related to the
exception for certain electricity contracts, with the revision to be effective
April 1, 2002. The Company does not expect the revised interpretation to change
its assessment of mark-to-market requirements for its current contracts. If an
electricity or fuel supply contract in its regulated businesses 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
in its non-regulated businesses 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 FASB is expected, which could additionally impact the Company's financial
statements.
Effective January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." These
statements require that all business combinations initiated after June 30, 2001
be accounted for using the purchase method of accounting and clarifies the
criteria for recording of other intangible assets separately from goodwill.
Effective January 1, 2002, goodwill is no longer subject to amortization over
its estimated useful life. Instead, goodwill is subject to at least an
annual assessment for impairment by applying a fair-value based test. This
assessment could result in periodic impairment charges.
23
The Company has not yet determined whether its goodwill is impaired under the
initial impairment test required.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" in
July 2001. This statement provides accounting requirements for retirement
obligations associated with tangible long-lived assets and is effective January
1, 2003. This statement requires that the present value of retirement costs for
which the Company has a legal obligation be recorded as liabilities with an
equivalent amount added to the asset cost and depreciated over an appropriate
period. The Company is currently assessing the effects this statement may
ultimately have on the Company's accounting for decommissioning, dismantlement
and other retirement costs.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides guidance for
the accounting and reporting of impairment or disposal of long-lived assets. The
statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." It also supersedes 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. Adoption of
this statement did not have a material effect on the Company's financial
statements.
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. Florida Progress
shareholders received $54.00 in cash or shares of Progress Energy common stock
having a value of $54.00, subject to proration, and one contingent value
obligation (CVO) in exchange for each share of Florida Progress common stock.
The exchange ratio for the shares of Progress Energy common stock issued to
Florida Progress shareholders was 1.3473. Each CVO represents the right to
receive contingent payments based upon the net after-tax cash flow to Progress
Energy generated by four synthetic fuel facilities purchased by subsidiaries of
Florida Progress in 1999.
The acquisition was accounted for by Progress Energy using the purchase method
of accounting; however, due to the significance of the public debt and preferred
securities of the Company and Florida Power, the acquisition cost was not pushed
down to the Florida Progress or Florida Power separate financial statements.
Even though a new basis of accounting and reporting for the Company was not
established, significant merger-related costs were incurred in 2000 and reported
in the following captions on the Consolidated Statements of Income:
Florida Power Total - Florida
Other Operation Diversified Business Progress
and Maintenance Expenses Corporation
----------------------------------------------------------
(in millions)
Employee separation costs $72.8 $17.9 $ 90.7
Other merger-related costs 21.4 34.9 56.3
----- ----- ------
Total $94.2 $52.8 $147.0
===== ===== ======
In connection with the acquisition of the Company by Progress Energy, the
Company began the implementation of a plan to combine operations with Progress
Energy. In the fourth quarter 2000, the Company recorded executive involuntary
termination costs of $24.5 million and non-executive involuntary termination
costs of $41.8 million. Substantially all of the executive termination expense
was attributable to lump-sum severance costs paid in December 2000. In
connection with the termination of certain key executives, the Company also
recorded a curtailment and special termination benefit charge of $25.5 million
related to two supplemental defined benefit pension plans (See Note 13). The
non-executive involuntary termination accrual includes estimates for
administrative leave, severance, employer FICA, medical benefits and
outplacement costs associated with the Company's employee involuntary
termination plan. During 2001, the Company finalized the plan to combine
operations of the companies with certain final termination
payments occurring in 2002. The termination did not result in a plan curtailment
related to postretirement benefits other than pension. An immaterial curtailment
gain was recorded for the pension plan in 2001.
24
The activity for the non-executive involuntary termination costs is detailed in
the table below:
(in millions) 2001
------
Balance at January 1 $ 41.8
Payments (28.0)
Adjustments credited to operating results (6.1)
------
Balance at December 31 $ 7.7
======
Other merger-related costs include $17.9 million of change of control costs
substantially related to the immediate vesting of a stock-based performance plan
(See Note 12), and $17.3 million of direct transaction costs related to
investment banker, legal and accounting fees. Other costs incurred include
employee retention costs and excise tax payments triggered by executive
severance and change of control payments.
NOTE 3: IMPAIRMENT OF LONG-LIVED ASSETS AND INVESTMENTS
SFAS No. 121 "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed Of" requires review of long-lived assets and
certain intangibles for impairment when events or circumstances indicate that
the carrying value of an asset may not be recoverable. Any impairment losses are
reported in the period in which the recognition criteria are first applied based
on the fair value of the asset. Due to results of divestiture efforts and the
decision to retain the Rail Services business segment through the allocation
period, coupled with prior and current year losses and a continued decline in
the rail services industry, the Company evaluated the recoverability of rail
long-lived assets and associated goodwill. Fair value was generally determined
based on discounted cash flows. As a result of this review, the Company recorded
asset impairments, primarily goodwill, of $160.6 million pre-tax ($108.1 million
after-tax) during the fourth quarter of 2001. Asset write-downs resulting from
this review were charged to Diversified Business Expenses on the Consolidated
Statements of Income.
The Company continually reviews its investments to determine whether a decline
in fair value below the cost basis is other-than-temporary. During the fourth
quarter of 2001, the Company determined that the decline in fair value of its
affordable housing investments, held by Progress International Holdings, a
subsidiary of Progress Capital Holdings, was other-than-temporary. As a result,
the Company has recorded investment impairments for other-than-temporary
declines in the fair value of its affordable housing investments. Investment
write-downs of $9.1 million pre-tax were charged to Other, net.
During the fourth quarter of 2000, Progress Fuels evaluated the economic
feasibility of accessing and mining its existing coal reserves in light of the
intended changes for the use of these assets by management and a significant
downturn in the coal industry. Progress Fuels concluded that approximately 180
million tons of its existing reserves are impaired. Based on the Progress Fuels'
expectation of future net cash flow, these reserves were written-down to their
fair value, resulting in a pre-tax loss of $70.2 million. This impairment charge
is included in diversified business expenses on the Company's Consolidated
Statements of Income.
During 2000, Progress Energy hired a financial adviser to assist Florida
Progress in evaluating its strategic alternatives with respect to two of
Progress Fuels' business segments, Rail Services and Inland Marine
Transportation. Preliminary valuations on the Rail Services business segment
indicated that the carrying amounts of goodwill and other long-lived assets are
not recoverable. As such, the carrying values of these assets were written down
to estimated fair value based on discounted cash flows considering cash flows
expected to result from the use of the assets and their eventual disposition.
During the fourth quarter of 2000, the Rail Services segment recognized the
resulting pre-tax impairment loss of $60.5 million, which was substantially
attributed to the write-down of goodwill. This impairment charge is included in
diversified business expenses on the Company's Consolidated Statements of
Income. (See Note 14 for additional information on the Rail Services segment.)
NOTE 4: 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 sale, the Company recorded a pre-tax loss on disposal of $31.6
million ($23.7 million after-tax). The $23.7 million net loss on disposal
includes net earnings from the period between measurement date and date of sale
of $6.4 million, net of $4.0 million income tax expense. Proceeds
25
from disposal were $270 million, of which approximately $230 million was used
for the early termination of certain off balance sheet arrangements for assets
leased by MEMCO. Remaining proceeds were used to retire commercial paper.
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. Results for discontinued operations are as
follows:
(in thousands) 2001 2000 1999
-------- -------- --------
Revenues $142,721 $170,329 $141,041
-------- -------- --------
Earnings before income taxes $ 4,530 $ 16,961 $ 17,588
Income taxes 1,848 7,989 6,841
-------- -------- --------
Net earnings $ 2,682 $ 8,972 $ 10,747
======== ======== ========
In connection with the sale, the Company entered into environmental
indemnification provisions covering both unknown and known sites. 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. Management
cannot predict the outcome of this matter.
NOTE 5: RELATED PARTY TRANSACTIONS
The Company and its subsidiaries participate in two internal money pools,
operated by Progress Energy, to more effectively utilize cash resources and to
reduce outside short-term borrowings. Short-term borrowing needs are met first
by available funds of the money pool participants. Borrowing companies pay
interest at a rate designed to approximate the cost of outside short-term
borrowings. Subsidiaries, which invest in the money pool, earn interest on a
basis proportionate to their average monthly investment. The interest rate used
to calculate earnings approximates external interest rates. Funds may be
withdrawn from or repaid to the pool at any time without prior notice. Interest
expense related to advances from Progress Energy was $8.2 for Florida Progress
in 2001. Florida Progress and Florida Power both recorded $2.4 million of
interest income related to the money pool for 2001. Interest expense and
interest income related to the money pool in 2000 were not significant
During 2000, Progress Energy formed Progress Energy Service Company, LLC (PESC)
to provide specialized services, at cost, to the Company and its subsidiaries,
as approved by the SEC. The Company and its subsidiaries have an agreement with
PESC under which PESC services, including purchasing, accounting, treasury, tax,
marketing, legal, and human resources are rendered at cost. Amounts billed by
PESC to Florida Progress and Florida Power for these services during 2001
amounted to $116.1 million and $110.9 million, respectively. At December 31,
2001, Florida Progress and Florida Power had a net $31.7 million and $28.1
million, respectively, payable to the service company that are included in
accounts payable to affiliates on the consolidated balance sheet.
Progress Fuels sells coal to Florida Power. For the years ended December 31,
2001, 2000 and 1999, sales of coal to Florida Power that were not eliminated on
Florida Power, but were eliminated in consolidation, were $302.6 million, $244.1
million and $262.1 million, respectively.
From time-to-time the Company and its subsidiaries may receive equity
contributions from Progress Energy. During 2001, the Company received cash
equity contributions of $90.1 million and a non-cash equity contribution of $0.6
million. During 2000, the Company received cash equity contributions totaling
$84.5 million from Progress Energy.
In April 2000, Progress Ventures, a wholly-owned subsidiary of Progress Energy,
purchased a 90% interest in an affiliate of Progress Fuels that owns a synthetic
fuel facility located at the company-owned mine site in Virginia. In May 2000,
Progress Ventures purchased a 90% ownership interest in another synthetic fuel
facility located in West Virginia. The purchase agreements contained a provision
that would require Progress Ventures to sell, and the respective Progress Fuels
affiliate to repurchase, the 90% interest had the share exchange among Florida
Progress, CP&L Energy and CP&L not occurred.
Progress Fuels has accounted for the transactions as a sale for tax purposes
and, because of the repurchase obligation, as a financing for financial
reporting purposes in the pre-acquisition period and as a transfer of assets
within a controlled group as of the acquisition date. At the date of
acquisition, assets of $8.3 million
26
were transferred to Progress Energy. As of December 31, 2001, the Company has a
note receivable of $59.9 million from Progress Ventures that has been recorded
as a reduction to equity for financial reporting purposes. Payments on the note
during 2001 totaled $13.9 million representing $9.4 million in principal and
$4.5 million representing interest. As of December 31, 2000, the company had a
note receivable of $69.3 million from Progress Ventures that has been recorded
as a reduction to equity for financial reporting purposes, offset by a $46.8
million reclassification of the repurchase obligation to equity.
NOTE 6: FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined by the Company using available
market information. Judgment is required in interpreting market data to develop
the estimates of fair value. Accordingly, the estimates may be different than
the amounts that the Company could realize in a current market exchange.
The Company's exposure to market risk for a change in interest rates relates
primarily to the Company's marketable securities, debt obligations and
Company-obligated mandatorily redeemable preferred securities. The Company's
short-term obligations, comprised of commercial paper, are carried at cost,
which approximate market value. There were miscellaneous investments, consisting
primarily of investments in company-owned life insurance, included in
miscellaneous other property and investments.
The Company held only securities classified as available for sale at both
December 31, 2001 and 2000. At December 31, 2001 and 2000, the Company had the
following financial instruments with estimated fair values and carrying amounts:
FLORIDA PROGRESS 2001 2000
---------------------- -----------------------
CARRYING FAIR CARRYING FAIR
(in millions) AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
ASSETS:
Investments in company-owned
life insurance $ 74.3 $ 74.3 $ 87.3 $ 87.3
Nuclear decommissioning fund 406.1 406.1 400.7 400.7
- -----------------------------------------------------------------------------------------------------------
LIABILITIES:
Long-term debt:
Florida Power Corporation $1,651.3 $1,692.4 $ 1,479.1 $1,467.0
Florida Progress Funding Corporation 300.0 290.7 300.0 271.5
Progress Capital Holdings 780.7 788.9 687.8 684.3
- -----------------------------------------------------------------------------------------------------------
FLORIDA POWER 2001 2000
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
(In millions) AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in company-owned
life insurance $ 38.4 $ 38.4 $ 45.4 $ 45.4
Nuclear decommissioning fund 406.1 406.1 400.7 400.7
- -----------------------------------------------------------------------------------------------------------
LIABILITIES:
Long-term debt:
Florida Power Corporation $1,651.3 $1,692.4 $ 1,479.1 $1,467.0
The change in the cash surrender value of the Company's investment in
company-owned life insurance is reflected in other expense (income) in the
accompanying Consolidated Statements of Income.
27
NOTE 7: INCOME TAXES
FLORIDA PROGRESS
(In millions) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Components of income tax expense:
Payable currently:
Federal $ 3.4 $ 96.8 $ 117.9
State 25.7 15.5 20.9
- ----------------------------------------------------------------------------------------------------------
29.1 112.3 138.8
- ----------------------------------------------------------------------------------------------------------
Deferred, net:
Federal (187.5) (215.6) (41.6)
State (6.5) (13.5) (4.5)
- ----------------------------------------------------------------------------------------------------------
(194.0) (229.1) (46.1)
- ----------------------------------------------------------------------------------------------------------
Amortization of investment
tax credits, net (7.8) (7.9) (7.8)
- ----------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $(172.7) $ (124.7) $ 84.9
- ----------------------------------------------------------------------------------------------------------
FLORIDA POWER
(In millions) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Components of income tax expense:
Payable currently:
Federal $ 192.9 $ 181.3 $ 185.1
State 30.7 28.6 28.4
- ----------------------------------------------------------------------------------------------------------
223.6 209.9 213.5
- ----------------------------------------------------------------------------------------------------------
Deferred, net:
Federal (30.2) (46.0) (49.5)
State (3.1) (5.6) (4.9)
- ----------------------------------------------------------------------------------------------------------
(33.3) (51.6) (54.4)
- ----------------------------------------------------------------------------------------------------------
Amortization of investment
tax credits, net (7.8) (7.8) (7.8)
- ----------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $ 182.5 $ 150.5 $ 151.3
- ----------------------------------------------------------------------------------------------------------
The primary differences between the statutory rates and the effective income tax
rates are detailed below:
FLORIDA PROGRESS
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
income tax benefits 12.8 12.4 2.7
Amortization of investment tax credits (8.4) (74.8) (2.0)
Synthetic fuel income tax credits (230.3) (1,402.7) (10.0)
Other income tax credits (6.5) (66.3) (1.6)
Goodwill amortization 9.7 0.2 0.4
Non deductible acquisition costs - 233.8 0.5
Net unfunded taxes from prior years - 40.0 -
Other 1.3 40.7 (3.2)
- ----------------------------------------------------------------------------------------------------------
Effective income tax rates (186.4)% (1,181.7)% 21.8%
- ----------------------------------------------------------------------------------------------------------
FLORIDA POWER
2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
income tax benefits 3.6 4.1 3.7
Amortization of investment tax credits (1.6) (2.2) (1.9)
Non deductible acquisition costs - 3.0 -
Other - 1.6 (0.6)
- --------------------------------------------------------------------------------------------------------
Effective income tax rates 37.0% 41.5% 36.2%
- --------------------------------------------------------------------------------------------------------
28
The following summarizes the components of deferred tax liabilities and assets
at December 31, 2001 and 2000:
FLORIDA PROGRESS
(In millions) 2001 2000
- ------------------------------------------------------------------------------------
Deferred tax liabilities:
Difference in tax basis of property,
plant and equipment $436.4 $566.2
Investment in partnerships 1.8 6.2
Deferred book expenses 7.0 9.1
Other 80.6 16.4
- ------------------------------------------------------------------------------------
Total deferred tax liabilities $525.8 $597.9
- ------------------------------------------------------------------------------------
Deferred tax assets:
Accrued book expenses $ 71.4 $109.8
Income tax credit carry forward 202.9 92.9
Unbilled revenues 17.7 17.8
State income tax loss carry forward 20.4 10.9
Valuation allowance (20.4) (10.9)
Other 100.3 75.4
- ------------------------------------------------------------------------------------
Total deferred tax assets $392.3 $295.9
- ------------------------------------------------------------------------------------
FLORIDA POWER
(In millions) 2001 2000
- ------------------------------------------------------------------------------------
Deferred tax liabilities:
Difference in tax basis of property,
plant and equipment $413.7 $491.8
Deferred book expenses 7.0 9.1
Other 10.4 9.2
- ------------------------------------------------------------------------------------
Total deferred tax liabilities $431.1 $510.1
- ------------------------------------------------------------------------------------
Deferred tax assets:
Accrued book expenses $ 40.4 $ 90.2
Unbilled revenues 17.7 17.8
Other 10.5 14.2
- ------------------------------------------------------------------------------------
Total deferred tax assets $ 68.6 $122.2
- ------------------------------------------------------------------------------------
At December 31, 2001 and 2000, Florida Progress had net non-current deferred tax
liabilities of $165.8 million and $341.6 million and net current deferred tax
assets of $32.3 million and $39.6 million, respectively. Income tax credit carry
forward at December 31, 2001, consists of $196.9 million of alternative minimum
tax credit with an indefinite carry forward period and $6 million of general
business credit with a carry forward period expiring in 2020. The valuation
allowance in 2001 offsets a related amount of deferred tax assets recorded for
state income tax net operating losses. The valuation allowance was recorded
because of uncertainties associated with the ability to offset future state
taxable amounts during the carry forward period. The Company believes it is more
likely than not that the results of future operations will generate sufficient
taxable income to allow for the utilization of the remaining deferred tax
assets.
At December 31, 2001 and 2000, Florida Power had net non-current deferred tax
liabilities of $394.8 million and $427.5 million and net current deferred tax
assets of $32.3 million and $39.6 million, respectively. Florida Power expects
the results of future operations will generate sufficient taxable income to
allow for the utilization of deferred tax assets.
The Company, through its subsidiaries, is a majority owner in three entities and
a minority owner in three entities that own facilities that produce synthetic
fuel as defined under the Internal Revenue Service Code (Code). The production
and sale of the synthetic fuel from these facilities qualifies for tax credits
under Section 29 of the Code (Section 29) if certain requirements are satisfied,
including a requirement that the synthetic fuel differs significantly in
chemical composition from the coal used to produce such synthetic fuel. All
entities have received private letter rulings (PLR's) from the Internal Revenue
Service (IRS) with respect to their synthetic fuel operations. The PLR's do not
limit the production on which synthetic fuel credits may be claimed. Should the
tax credits be denied on future audits, and the Company fails to prevail through
the IRS or legal process, there could be a significant tax liability owed for
previously-taken Section 29 credits, with a
29
significant impact on earnings and cash flows. In management's opinion, the
Company is complying with all the necessary requirements to be allowed such
credits under Section 29 and believes it is probable, although it cannot provide
certainty, that it will prevail on any credits taken.
NOTE 8: NUCLEAR OPERATIONS
Jointly Owned Plant -- In September 1999, Florida Power purchased the City of
Tallahassee's 1.33% interest in the Crystal River Nuclear Plant (CR3), which was
approved by regulatory authorities. The following information relates to Florida
Power's 91.78% proportionate share of the nuclear plant at December 31, 2001 and
2000:
(In millions) 2001 2000
- ----------------------------------------------------------------------
Utility plant in service $ 773.8 $ 773.3
Construction work in progress 25.7 14.1
Unamortized nuclear fuel 62.5 39.9
Accumulated depreciation (469.8) (431.9)
Accumulated decommissioning (417.0) (423.7)
- ----------------------------------------------------------------------
Net capital additions/(retirements) for Florida Power were $12.1 million in 2001
and $(4.9) million in 2000. Depreciation expense, exclusive of nuclear
decommissioning, was $36.4 million in 2001 and 2000. Each co-owner provides for
its own financing of its investment. Florida Power's share of the asset balances
and operating costs is included in the appropriate financial statements. Amounts
exclude any allocation of costs related to common facilities.
Decommissioning and Dismantlement Provisions -- Florida Power's nuclear plant
depreciation expenses include a provision for future decommissioning costs,
which are recoverable through rates charged to customers. Florida Power is
placing amounts collected in an externally managed trust fund. Management
believes that the decommissioning costs being recovered through rates by Florida
Power, when coupled with reasonable assumed after-tax fund earnings rates, are
currently sufficient to provide for the costs of decommissioning.
In January 2002, Florida Power received regulatory approval from the FPSC to
decrease its retail provision for nuclear decommissioning from approximately
$20.5 million annually to approximately $7.7 million annually, effective January
1, 2001.
Florida Power's most recent site-specific estimate of decommissioning costs for
the Crystal River Nuclear Plant (CR3) was developed in 2000 based on prompt
dismantlement decommissioning. The estimate, in 2000 dollars, is $490.9 million
and is subject to change based on a variety of factors including, but not
limited to, cost escalation, changes in technology applicable to nuclear
decommissioning and changes in federal, state or local regulations. The cost
estimate excludes the portion attributable to other co-owners of CR3. Florida
Power has a license to operate the nuclear unit through December 3, 2016. Plans
are in place to request the extension of the CR3 operating license in 2005.
Florida Power's reserve for fossil plant dismantlement was approximately $140.5
million and $134.6 million at December 31, 2001 and 2000, respectively, and was
included in accumulated depreciation. The provision for fossil plant
dismantlement was previously suspended per a 1997 FPSC settlement agreement, but
resumed mid-2001. The current annual provision, approved by the FPSC, is $8.8
million.
Fuel Disposal Costs -- Florida Power has entered into a contract with the DOE
for the transportation and disposal of spent nuclear fuel. Disposal costs for
nuclear fuel consumed are being collected from customers through the fuel
adjustment clause at a rate of $.001 per net nuclear kilowatt-hour sold and are
paid to the DOE quarterly. Florida Power currently is storing spent nuclear fuel
on-site and has sufficient storage capacity in place for fuel consumed through
the year 2016.
NOTE 9: PREFERRED AND PREFERENCE STOCK
The authorized capital stock of the Company includes 10 million shares of
preferred stock, without par value, including 2 million shares designated as
Series A Junior Participating Preferred Stock. No shares of the Company's
preferred stock are issued and outstanding.
30
The authorized capital stock of Florida Power includes three classes of
preferred stock: 4 million shares of Cumulative Preferred Stock, $100 par value;
5 million shares of Cumulative Preferred Stock, without par value; and 1 million
shares of Preference Stock, $100 par value. No shares of Florida Power's
Cumulative Preferred Stock, without par value, or Preference Stock are issued
and outstanding. All Cumulative Preferred Stock series are without sinking funds
and are not subject to mandatory redemption.
NOTE 10: COMPANY-OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE QUARTERLY INCOME
PREFERRED SECURITIES 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 (Preferred Securities) due 2039,
with an aggregate liquidation value of $300 million with an annual 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
(subordinated notes) due 2039, 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 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.
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'
consolidated balance sheets.
NOTE 11: DEBT AND CREDIT FACILITIES
The Company's consolidated subsidiaries have lines of credit totaling $370
million, which are used to support the issuance of commercial paper. The lines
of credit were not drawn on as of December 31, 2001. Interest rate availability
under the lines of credit arrangements vary from subprime or money market rates
to the prime rate. Banks providing lines of credit are compensated through fees.
Commitment fees on lines of credit vary between .08 and .20 of 1%.
The lines of credit consist of two revolving bank credit facilities for Florida
Power. The Florida Power facilities consist of $170 million with a 364-day term
and $200 million long-term revolving bank credit facility, expiring in 2004.
During November 2001, Progress Capital Holding's $600 million commercial paper
program, which was in existence at December 31, 2000, was eliminated. At the
same time, Progress Energy established its own $1 billion commercial paper
facility, which funds working capital needs of the
diversified businesses. Based on the duration of the underlying backup credit
facilities, $154.2 million and $200 million of Florida Power's outstanding
commercial paper at December 31, 2001 and 2000, respectively, are classified as
long-term debt. As of December 31, 2000, Progress Capital Holdings also had $300
million of outstanding commercial paper classified as long-term debt. At
December 31, 2000 Florida Progress had $467.3 million and Florida Power had
$192.5 million of short-term commercial paper outstanding at average interest
rates of 7.10% and 6.89%, respectively.
31
In March 2000, Florida Power established an uncommitted bank bid facility
allowing it to borrow and re-borrow and have loans outstanding at any time, up
to $100 million. The facility was established to temporarily supplement
commercial paper borrowings, as needed. As of December 31, 2001 and 2000, there
were no loans outstanding under this bid facility.
Florida Power has a public medium-term note program providing for the issuance
of either fixed or floating interest rate notes. These notes may have maturities
ranging from nine months to 30 years. A balance of $250 million is available for
issuance at December 31, 2001.
The combined aggregate maturities of long-term debt for 2002 through 2006 for
Florida Progress are $88 million, $430 million, $68 million, $48 million and
$109 million, respectively. Florida Power's maturities of long-term debt for
2002 through 2006 are $32 million, $372 million, $43 million, $48 million and
$48 million, respectively.
Florida Progress has unconditionally guaranteed the payment of Progress
Capital's debt.
NOTE 12: STOCK-BASED COMPENSATION
A. Long Term Incentive Plan
Prior to November 30, 2000, the Company and one of its subsidiaries had
Long-Term Incentive Plans (LTIPs) which authorized the granting of common stock
to certain executives in various forms. These plans were terminated on November
30, 2000, in conjunction with the acquisition by Progress Energy (See Note 2).
All outstanding LTIP awards as of November 30, 2000 were paid in full in 2000 in
accordance with the change in control provisions of these plans. Certain
executives were also eligible to receive restricted stock, which also fully
vested and was paid in conjunction with the merger.
The Company accounted for these plans in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as allowed under SFAS No. 123, "Accounting for Stock Based
Compensation." Compensation costs for performance shares; performance units and
restricted stock were recognized at the fair market value of the Company's stock
and recognized over the performance cycle. Compensation costs related to the
LTIPs for 2000 and 1999 were $17 million and $19 million, respectively. There
was no expense during 2001. In addition the Company recognized merger-related
costs of $18 million associated with these plans in 2000, as a result of the
immediate vesting of all outstanding awards.
B. Stock Option Agreements
Pursuant to Progress Energy's 1997 Equity Incentive Plan, Amended and Restated
as of September 26, 2001, Progress Energy may grant options to purchase shares
of common stock to officers and eligible employees. During 2001, approximately
2.4 million common stock options were granted to officers and eligible employees
of Progress Energy. Of this amount, approximately 0.4 million were granted to
officers and eligible employees of both Florida Progress and Florida Power. No
compensation expense was recognized under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees and
related Interpretations." Had compensation expense been measured based on the
fair value of the options on the date of grant, calculated under the provisions
of SFAS No. 123, "Accounting for Stock Based Compensation," Florida Progress's
and Florida Power's allocated share of such compensation expense would have
reduced reported net income in 2001 by approximately $0.6 million and $0.5
million, respectively. The allocated share of compensation expense for Florida
Power includes approximately $0.3 million of after-tax expense allocated to
Florida Power for PESC employees.
NOTE 13: BENEFIT PLANS
Pension Benefits -- The Company and some of its subsidiaries (including Florida
Power) have two noncontributory defined benefit pension plans covering most
employees.
The Company also has two supplementary defined benefit pension plans, that
provide additional benefits to certain higher-level employees. As a result of
the acquisition by Progress Energy, the benefits of one plan were frozen on
December 31, 2000 and the Company recorded merger-related charges of $24.4
million associated
32
with the two plans. (See Note 2) The net pension benefit recognized in 2000 of
$53.6 million does not include the merger-related charges.
Other Postretirement Benefits -- The Company and some of its subsidiaries
(including Florida Power) also provide certain health care and life insurance
benefits for retired employees that reach retirement age while working for the
Company.
Shown below are the components of the net pension expense and net postretirement
benefit expense calculations for 2001, 2000 and 1999:
Pension Benefits Other Postretirement Benefits
(In millions) 2001 2000 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 10.5 $ 18.7 $ 22.0 $ 3.9 $ 3.2 $ 3.5
Interest cost 42.0 42.5 39.4 12.5 10.9 10.4
Expected return on plan assets (86.3) (92.0) (78.4) (0.6) (0.5) (0.4)
Net amortization and deferral (18.8) (22.8) (15.1) 3.5 2.7 3.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net cost/(benefit) recognized by Florida Progress $ (52.6) $ (53.6) $ (32.1) $ 19.3 $ 16.3 $ 16.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net cost/(benefit) recognized by Florida Power $ (50.3) $ (51.3) $ (32.7) $ 18.0 $ 15.9 $ 15.9
The following weighted average actuarial assumptions at December 31 were used in
the calculation of the year-end funded status:
Pension Benefits Other Postretirement Benefits
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) 2001 2000 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Discount rate 7.50 % 7.50 % 7.50 % 7.50 % 7.50 % 7.50 %
Expected long-term rate of return 9.25 % 9.00 % 9.00 % 5.00 % 5.00 % 5.00 %
Rate of compensation increase:
Bargaining unit employees 3.50 % 3.50 % 3.50 % 3.50 % 3.50 % 3.50 %
Nonbargaining unit employees 4.00 % 4.50 % 4.50 % 4.00 % 4.50 % 4.50 %
Nonqualified plans 4.50 % 4.50 % 4.50 % N/A % N/A % N/A %
- ------------------------------------------------------------------------------------------------------------------------------------
The following summarizes the change in the benefit obligation and plan assets
for both the pension plan and postretirement benefit plan for 2001 and 2000:
Pension Benefits Other Postretirement Benefits
(In millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $627.7 $ 582.2 $156.2 $154.5
Service cost 10.5 18.7 3.9 3.2
Interest cost 42.0 42.5 12.5 10.9
Plan amendment (43.0) - 7.8 -
Actuarial (gain)/loss (13.4) (10.7) 9.6 (3.8)
Benefits paid (35.0) (30.5) (9.6) (8.6)
Curtailment gain and special
termination benefits (See Note 2) (1.0) 25.5 - -
- ------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 587.8 627.7 180.4 156.2
- ------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 948.8 1,039.0 11.6 9.2
Return on plan assets (63.3) (61.7) 0.5 1.1
Employer contributions 3.2 - 10.9 1.3
Benefits paid (35.0) (28.5) (9.6) -
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 853.7 948.8 13.4 11.6
- ------------------------------------------------------------------------------------------------------------------------
33
Funded status 265.9 321.1 (167.0) (144.6)
Unrecognized transition (asset) obligation (5.6) (10.6) 38.4 41.9
Unrecognized prior service cost (21.7) 19.6 7.5 -
Unrecognized net actuarial gain (96.5) (244.8) (16.6) (25.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost-Florida Progress $142.1 $ 85.3 $ (137.7) $ (128.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost-Florida Power $168.4 $ 113.5 $ (132.9) $ (125.2)
The Company has assets in a rabbi trust for the purpose of providing benefits to
the participants in the supplementary defined benefit retirement plans and
certain other plans for higher level employees. The assets of the rabbi trust
are not reflected as plan assets because the assets could be subject to
creditors' claims. The assets and liabilities of the supplementary defined
benefit retirement plans are included in Other Assets and Deferred Debits and
Other Liabilities and Deferred Credits on the accompanying Consolidated Balance
Sheets.
The assumed pre-medicare and post medicare health care cost trend rates for are:
2001 2000
---- ----
Initial medical cost trend for pre-medicare benefits 7.50% 7.20%
Initial medical cost trend for post-medicare benefits 7.50% 6.20%
Ultimate medical cost trend rate 5.00% 5.30%
Year ultimate medical cost trend rate is achieved 2008 2005
A one-percentage point increase or decrease in the assumed health care cost
trend rate would change the total service and interest cost by approximately $1
million and the postretirement benefit obligation by approximately $10 million.
Due to different retail and wholesale regulatory rate requirements, Florida
Power makes quarterly contributions to the postretirement benefit plan to an
irrevocable external trust fund for wholesale ratemaking, while continuing to
accrue post-retirement benefit costs to an unfunded reserve for retail
ratemaking.
NOTE 14: BUSINESS SEGMENTS
The Company's principal business segment is Florida Power, an electric utility
engaged in the generation, purchase, transmission, distribution and sale of
electricity primarily in Florida. The other reportable business segments are
Progress Fuels' Energy & Related Services and Rail Services. The Inland Marine
Transportation business, formerly a business segment, was sold in November 2001
(See Note 4). The 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 Telecommunications the Company's
telecommunications subsidiary, the Company's investment in FPC Capital Trust,
which holds the Preferred Securities, and the holding company, Florida Progress
Corporation. Progress Telecommunications markets wholesale fiber-optic based
capacity service in the Eastern United States and also markets wireless
structure attachments to wireless communication companies and governmental
entities. Florida Progress allocates a portion of its operating expenses to
business segments.
The Company's business segment information for 2001, 2000 and 1999 is summarized
below. The Company's significant operations are geographically located in the
United States with limited operations in Mexico and Canada. The Company's
segments are based on differences in products and services, and therefore no
additional disclosures are presented. Intersegment sales and transfers consist
primarily of coal sales from the Energy and Related Services segment of Progress
Fuels to Florida Power. The price Progress Fuels charges Florida Power is based
on market rates for coal procurement and for water-borne transportation under a
methodology approved by the FPSC. Rail transportation is also based on market
rates plus a return allowed by the FPSC on equity in transportation equipment
utilized in transporting coal to Florida Power. The allowed rate of return is
currently 12%. No single customer accounted for 10% or more of unaffiliated
revenues.
Segment net income (loss) for 2001 includes a long-lived asset impairment
pre-tax loss of $160.6 million (after-tax $108.1 million) included in the Rail
Services segment. Segment net income (loss) for 2000 includes a long-lived asset
impairment pre-tax loss of $70.2 million (after-tax $47.3 million) included in
the Energy & Related Services segment and $60.5 million impairment pre-tax loss
(after-tax $36.3 million) included in the Rail Services segment (See Note 3).
34
Energy and
Related Rail
(In millions) Utility Services Services Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------
2001
Revenues $ 3,212.8 $ 369.7 $ 874.7 $ 133.9 $ 4,591.1
Intersegment revenues - 398.3 1.1 (399.4) -
Depreciation and amortization 453.0 23.6 33.8 12.0 522.4
Interest expense 113.7 12.0 36.4 23.2 185.3
Income tax expense/(benefit) 182.6 (253.6) (74.7) (27.0) (172.7)
Income (loss) from continuing
operations 309.6 128.5 (144.4) (28.3) 265.4
Total assets 4,998.2 452.9 602.6 255.1 6,308.8
Property additions 323.2 43.5 18.0 71.9 456.6
- ------------------------------------------------------------------------------------------------------------------------
2000
Revenues $ 2,871.6 $ 329.3 $ 1,047.4 $ 27.3 $ 4,275.6
Intersegment revenues - 244.3 0.7 (245.0) -
Depreciation and amortization 402.6 25.2 32.3 7.5 467.6
Interest expense 125.4 12.2 42.7 27.2 207.5
Income tax expense/(benefit) 150.5 (200.4) (28.9) (45.9) (124.7)
Income (loss) from continuing
operations 210.3 34.1 (52.9) (56.2) 135.3
Total assets 4,978.0 345.4 802.3 366.9 6,492.6
Property additions 286.8 63.0 25.1 106.1 481.0
- ------------------------------------------------------------------------------------------------------------------------
1999
Revenues $ 2,649.4 $ 193.7 $ 880.2 $ 12.2 $ 3,735.5
Intersegment revenues - 262.9 1.5 (264.4) -
Depreciation and amortization 347.5 21.0 27.5 3.0 399.0
Interest expense 120.6 6.9 32.3 25.4 185.2
Income tax expense/(benefit) 151.3 (39.2) 16.6 (43.8) 84.9
Income (loss) from continuing
operations 265.5 38.9 21.3 (21.5) 304.2
Total assets 4,961.2 390.5 815.0 286.8 6,453.5
Property additions 361.1 39.5 61.8 50.9 513.3
- ------------------------------------------------------------------------------------------------------------------------
NOTE 15: REGULATORY MATTERS
Rates -- Florida Power's retail rates are set by the FPSC, while its
wholesale rates are governed by FERC. Florida Power's last general retail
rate case was approved in 1992 and allowed a 12% regulatory return on
equity with an allowed range between 11% and 13%.
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 June 20, 2001, the
Florida Public Service Commission (FPSC) initiated a rate proceeding
regarding Florida Power's future base rates when it 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 Florida Power to reduce the amount
subject to refund for the accelerated amortization of a regulatory asset
and may allow Florida Power to further reduce revenue subject to refund if
successful in the rate case.
35
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 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
a minimum of $37 million annually beginning in 2004. 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. Florida Power filed supplemental minimum
filing requirements and testimony on 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. Progress Energy cannot
predict the outcome or impact of these matters.
Regulatory Assets and Liabilities --Florida Power has total regulatory assets
(liabilities) at December 31, 2001 and 2000 as detailed below:
(in thousands) 2001 2000
---- ----
Deferred fuel (included in current assets) $ 15,147 $ 90,434
------------------------------
Income taxes recoverable through future rates 27,610 19,689
Deferred purchased power contract termination costs 95,326 226,656
Loss on reacquired debt 19,848 21,568
Deferred DOE enrichment facilities-related costs 8,531 9,979
Other 13,103 23,248
------------------------------
Total long-term regulatory assets 164,418 301,140
------------------------------
Nuclear maintenance and refueling (346) (10,835)
Deferred revenues - (63,000)
Storm reserve (Note 16) (35,527) (29,527)
Other (9,669) (10,077)
------------------------------
Total long-term regulatory liabilities (45,542) (113,439)
------------------------------
Net regulatory assets $ 134,023 $ 278,135
==============================
Except for portions of deferred fuel, all assets earn a return or the cash has
not yet been expended, in which case the assets are offset by liabilities that
do not incur a carrying cost.
The utility expects to fully recover these assets and refund the liabilities
through customer rates under current regulatory practice.
If Florida Power no longer applied SFAS No. 71 due to competition, regulatory
changes or other reasons, the utility would make certain adjustments. These
adjustments could include the write-off of all or a portion of its regulatory
assets and liabilities, the evaluation of utility plant, contracts and
commitments and the recognition, if necessary, of any losses to reflect market
conditions.
The Tiger Bay regulatory asset, for contract termination costs, is being
recovered pursuant to an agreement between Florida Power and several intervening
parties, which was approved by the FPSC in June 1997. The amortization of the
regulatory asset is calculated using revenues collected under the fuel
adjustment clause as if the purchased power agreements related to the facility
were still in effect, less the actual fuel costs and the related debt interest
expense. This will continue until the regulatory asset is fully amortized. Under
the plan, Florida Power has the option to accelerate the amortization at its
discretion. Including accelerated amounts, Florida Power recorded amortization
expense of $130.5 million, $71.2 million, and $23 million, in 2001, 2000 and
1999, respectively.
In December 2000, Florida Power received approval from the FPSC to establish a
regulatory liability to defer 2000 revenues for disposition by April 2, 2001.
Florida Power applied the deferred revenues of $63 million, plus accrued
interest, to amortization of the Tiger Bay regulatory asset during the first
quarter of 2001.
36
Similar approvals were given by the FPSC in November 1999 and December 1998.
Florida Power received approval from the FPSC to defer nonfuel revenues towards
the development of a plan that would allow customers to realize the benefits
earlier than if they were used to accelerate the amortization of the Tiger Bay
regulatory asset. Florida Power was unable to identify any rate initiatives that
might allow its ratepayers to receive these benefits sooner. In September 2000
and June 1999, Florida Power recognized $44.4 million and $10.1 million of
revenue, and recorded $44.4 million and $10.1 million, plus interest, of
amortization against the Tiger Bay regulatory asset.
NOTE 16: COMMITMENTS AND CONTINGENCIES
Fuel, Coal and Purchased Power Commitments -- Progress Fuels has two coal supply
contracts with Florida Power, the provisions of which require Florida Power to
buy and Progress Fuels to supply substantially all of the coal requirements of
four of Florida Power's power plants, two through 2002 and two through 2004. In
connection with these contracts, Progress Fuels has entered into several
contracts with outside parties for the purchase of coal. The annual obligations
for coal purchases and transportation under these contracts are $208.0 million,
$142.3 million and $30.6 million for 2002 though 2004, respectively, with no
current obligations thereafter. The total cost incurred for these commitments in
2001, 2000 and 1999 was $134.1 million, $110.6 million, and $125.3 million,
respectively.
Florida Power has long-term contracts for about 460 MW of purchased power with
other utilities, including a contract with The Southern Company for
approximately 400 MW of purchased power annually through 2010. This represents
less than 5% of Florida Power's total current system capacity. Florida Power has
an option to lower these purchases to approximately 200 MW annually with a
three-year notice. The purchased power from The Southern Company is supplied by
generating units with a capacity of approximately 3,500 MW and is guaranteed by
The Southern Company's entire system, totaling more than 30,000 MW.
As of December 31, 2001, Florida Power has ongoing purchased power contracts
with certain qualifying facilities for 871 MW of capacity with expiration dates
ranging from 2002 to 2025. The purchased power contracts provide for capacity
and energy payments. Energy payments are based on the actual power taken under
these contracts. Capacity payments are subject to the qualifying facilities
meeting certain contract performance obligations. In most cases, these contracts
account for 100% of the generating capacity of each of the facilities. Of the
871 MW under contract, 831 MW currently are available to Florida Power. All
commitments have been approved by the FPSC.
The FPSC allows the capacity payments to be recovered through a capacity cost
recovery clause, which is similar to, and works in conjunction with, energy
payments recovered through the fuel cost recovery clause.
Florida Power incurred purchased power capacity costs totaling $279.9 million in
2001, $280.4 million in 2000, and $240.6 million in 1999. The following table
shows minimum expected future capacity payments for purchased power commitments.
Because the purchased power commitments have relatively long durations, the
total present value of these payments using a 10% discount rate also is
presented.
Purchased Power Capacity Payments
---------------------------------
(In millions) Utilities Cogenerators Total
- ------------------------------------------------------------------------------------------
2002 $ 53 $ 236 $ 289
2003 51 244 295
2004 29 255 284
2005 29 268 297
2006 29 279 308
2007-2025 128 4,757 4,885
- ------------------------------------------------------------------------------------------
Total $319 $6,039 $6,358
- ------------------------------------------------------------------------------------------
Total net present value $2,615
- ------------------------------------------------------------------------------------------
Leases -- The Company has several non-cancelable operating leases, primarily for
transportation equipment, with varying terms extending to 2014, and generally
require the subsidiaries to pay all executory costs such as maintenance and
insurance. Some rental payments include minimum rentals plus contingent rentals
based on mileage. Contingent rentals were not significant. The minimum future
lease payments under noncancelable operating leases, with initial terms in
excess of one year are $19.9 million, $39.0 million, $28.1 million, $10.5
million and $4.9 million for 2002 through 2006, respectively, with a $18.1
million total obligation thereafter. The total costs incurred under these
commitments were $25.3 million, $73.9 million, and $51.1 million during 2001,
2000 and 1999, respectively.
37
In addition, Progress Telecom has entered into capital leases for equipment that
have minimum future lease payments of approximately $1.4 million annually
through 2006, with a $13.2 million total obligation thereafter.
In December 2000, Progress Rail Services Corporation (PRS), a subsidiary of
Progress Fuels, sold a portfolio of railcars to Railcar Asset Financing Trust
(RAFT). PRS made a $4.9 million (9.95%) investment in RAFT and will remain as
servicer of the portfolio. The RAFT term is five years at which time PRS has the
option to repurchase the railcars at fair value.
Construction Program -- Substantial commitments have been made in connection
with the Company's construction program. For the year 2002, Florida Power has
projected annual construction expenditures of $524.1 million, primarily for
electric plant.
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 balances at December 31,
2001 and 2000 were $35.5 million and $29.5 million, respectively are recorded in
other long-term liabilities. (See Note 15)
Under the provisions of the Price Anderson Act, which limits liability for
accidents at nuclear power plants, Florida Power, as an owner of a nuclear
plant, can be assessed for a portion of any third-party liability claims arising
from an accident at any commercial nuclear power plant in the United States. If
total third-party claims relating to a single nuclear incident exceed $200
million (the amount of currently available commercial liability insurance),
Florida Power could be assessed up to $88.1 million per incident, with a maximum
assessment of $10 million per year.
Florida Power 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 $8.7 million in any policy year if losses in excess of NEIL's
available surplus are incurred.
There have been recent revisions made to the nuclear property and nuclear
liability insurance policies regarding the maximum recoveries available for
multiple terrorism occurrences. Under the NEIL policies, if there were multiple
terrorism losses occurring within one year after the first loss from terrorism,
NEIL would make available one industry aggregate limit of $3.2 billion, along
with any amounts it recovers from reinsurance, government indemnity or other
sources up to the limits for each claimant. If terrorism losses occurred beyond
the one-year period, a new set of limits and resources would apply. For nuclear
liability claims arising out of terrorist acts, the primary level available
through commercial insurers is now subject to an industry aggregate limit of
$200.0 million. The second level of coverage obtained through the assessments
discussed above would continue to apply to losses exceeding $200.0 million and
would provide coverage in excess of any diminished primary limits due to the
terrorist acts aggregate.
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 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
38
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 their 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 they have 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.
There has been and may be further proposed federal legislation requiring
reductions in air emissions for nitrogen oxides, sulfur dioxide and mercury
setting forth national caps and emission levels over an extended period of time.
This national multi-pollutant approach would have significant costs which could
be material to the Company's consolidated financial position or results of
operations. Some companies may seek recovery of the related cost through rate
adjustments or similar mechanisms. The Company cannot predict the outcome of
this matter.
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 was asked to
provide information to the EPA as part of this initiative and cooperated in
providing the requested information. The EPA has initiated enforcement actions
against other 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. A utility that was not subject to a civil enforcement action settled
its New Source Review issues with the EPA for $300 million. These settlement
agreements have generally called for expenditures to be made over extended time
periods, and some of the companies may seek recovery of the related costs
through rate adjustments. The Company cannot predict the outcome of this matter.
In July 1997, the EPA issued final regulations establishing a new eight-hour
ozone standard. In October 1999, the District of Columbia Circuit Court of
Appeals ruled against the EPA with regard to the federal eight-hour ozone
standard. The U.S. Supreme Court has upheld, in part, the District of Columbia
Circuit Court of Appeals decision. Further litigation and rulemaking are
anticipated. The Company cannot predict the outcome of this matter.
On November 1, 2001, the Company completed the sale of the Inland Marine
Transportation segment to AEP Resources, Inc. In connection with the sale, the
Company entered into environmental indemnification provisions covering both
unknown and known sites. The Company has recorded an accrual to cover estimated
probable future environmental expenditures. The Company 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. The Company 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 been 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.
Other Commitments - Florida Progress has certain future commitments related to
synthetic fuel facilities purchased that provide for contingent payments
(royalties) of up to $25.2 million on sales from Florida Progress' interests in
these plants annually through 2007. The related agreements were amended in
December 2001 to require the payment of minimum annual royalties of which
Florida Progress' share is approximately $14.5 million through 2007. As a result
of the amendment, the Florida Progress recorded a liability (included in other
liabilities and deferred credits on the Consolidated Balance Sheets) and a
deferred cost asset (included in other assets and deferred debits in the
Consolidated Balance Sheets) of approximately $67.0 million at December 31,
2001, representing the minimum amounts due through 2007, discounted at 6.05%. As
of December 31, 2001, the portion of the asset and liability recorded that was
classified as current was $12.9 million. The deferred cost asset will be
amortized to expense each year as synthetic fuel sales are made. The maximum
amounts payable under these agreements remain unchanged. Actual amounts accrued
under these agreements were approximately $25.2 million in 2001, $22.5 million
in 2000, and $0.9 thousand in 1999.
In January 2002, the Company entered into a letter of intent to acquire
approximately 215 natural gas wells, 52 miles of intrastate gas pipeline and 170
miles of gas-gathering systems. Total consideration of $153 million is
39
expected to include $135 million in Progress Energy common stock and $18 million
in cash. This transaction is expected to be completed in the first half of 2002.
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 Court of Appeals agreed to review the judge's
order decertifying the class. 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. 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. On December 3, 2001, the United States
Supreme Court agreed to hear the case. Oral arguments on the issue will be held
on March 20, 2002. As of this date, the trial court has not stayed the
litigation pending the outcome of the Supreme Court. 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. The most recent case to settle involved Dade County/Dade
Cogen. In May 1999, the parties reached an agreement to settle their dispute in
its entirety, including all of the ongoing litigation. The definitive settlement
agreement was approved by the Dade County Commission in December 1999 and by the
FPSC in June 2000.
In the remaining state court suit, the trial regarding NCP Lake Power (Lake)
concluded in December 1998. In April 1999, the judge entered an order granting
Lake's breach of contract claim and ruled that Lake is entitled to receive
"firm" energy payments during on-peak hours, but for all other hours, Lake is
entitled to the "as-available" rate. The Court also ruled that for purposes of
calculating damages, the breach of contract occurred
40
at the inception of the contract. In August 1999, a Final Judgment was entered
for Lake for approximately $4.5 million and Lake filed a Notice of Appeal. Also
in this case, in April 1998, Florida Power filed a petition with the FPSC for a
Declaratory Statement that the contract between the parties limits energy
payments thereunder to the avoided costs based upon an analysis of a
hypothetical unit having the characteristics specified in the contract. In
October 1998, the FPSC denied the petition, but Florida Power appealed to the
Florida Supreme Court. On January 26, 2001, the District Court of Appeals
reversed the trial court's order and held that the contract requires Florida
Power to pay Lake the firm energy rate for all hours that the avoided unit
operates, less any maintenance shut-down hours. The District Court of Appeals
remanded the case to the trial court for a new trial to determine the
appropriate amount of damages consistent with the appellate court's ruling.
Florida Power sought rehearing of the District Court of Appeal's decision, 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 approximately $20 million, which Florida Power
recorded as a charge to purchased power expense. Florida Power anticipates that
all fuel and capacity expenses, including any settlement amounts incurred as a
result of the matters discussed above, will be recovered from its customers.
Mid-Continent Life Insurance Company (Mid-Continent) -- As discussed below, a
series of events in 1997 significantly jeopardized the ability of Mid-Continent
to implement a plan to eliminate a projected reserve deficiency, resulting in
the impairment of Florida Progress' investment in Mid-Continent. Therefore,
Florida Progress recorded a provision for loss on investment of $86.9 million in
1997. Florida Progress also recorded an accrual at December 31, 1997, for legal
fees associated with defending its position in current Mid-Continent legal
proceedings.
In the spring of 1997, the Oklahoma State Insurance Commissioner (Commissioner)
received court approval to seize control as receiver of the operations of
Mid-Continent. The Commissioner had alleged that Mid-Continent's reserves were
understated by more than $125 million, thus causing Mid-Continent to be
statutorily impaired. The Commissioner further alleged that Mid-Continent had
violated Oklahoma law relating to deceptive trade practices in connection with
the sale of its "Extra Life" insurance policies and was not entitled to raise
premiums, a key element of Mid-Continent's plan to address the projected reserve
deficiency. While sustaining the receivership, the court also ruled that
premiums could be raised. Although both sides appealed the decision to the
Oklahoma Supreme Court, those appeals were withdrawn in early 1999.
In December 1997, the receiver filed a lawsuit (Receiver's Lawsuit) against
Florida Progress, certain of its directors and officers, and certain former
Mid-Continent officers, making a number of allegations and seeking access to
Florida Progress' assets to satisfy policyholder and creditor claims. In April
1998, the court granted motions to dismiss the individual defendants, leaving
Florida Progress as the sole remaining defendant in the lawsuit.
A new Commissioner was elected in November 1998 and has worked with Florida
Progress and others to develop a plan to rehabilitate Mid-Continent rather than
pursue litigation against Florida Progress. Based on data through December 31,
1998, Florida Progress' actuarial estimate of the additional assets necessary to
fund the reserve, after applying Mid-Continent's statutory surplus is in the
range of $100 million. The amount put forth by the actuary hired by the former
Commissioner was in the range of $350 million. Florida Progress believes that
any estimate of the projected reserve deficiency would affect only the assets of
Mid-Continent, because Florida Progress has legal defenses to any claims
asserted against it.
In January 1999, five Mid-Continent policyholders filed a purported class action
(Policyholders' Lawsuit) against Mid-Continent and the same defendants named in
the case filed by the former Commissioner. The complaint contains substantially
the same factual allegations as those made by the former Commissioner. The suit
asserts "Extra Life" policyholders have been injured as a result of
representations made in connection with the sale of that policy. The suit seeks
actual and punitive damages.
On April 17, 2000, Florida Progress filed an answer in the purported
policyholder class action. That answer denied all material allegations of the
petition. On April 27, 2000, Florida Progress filed an amended answer and third
party petition, which asserted claims for indemnity and contribution against
John P. Crawford in his capacity as a prior actuary to Mid-Continent and Lewis &
Ellis, Inc., the actuarial firm that designed the Mid-Continent "Extra Life"
policy.
Proposals for a plan of rehabilitation were received and opened in June 1999. In
October 1999, the new Commissioner signed a letter of intent, subject to
approval by the Oklahoma District Court, concerning the assumption of all
policies of Mid-Continent. In a letter of intent in connection with the proposed
plan of rehabilitation, Florida Progress agreed to assign all of Mid-Continent's
stock to the receiver, and contribute
41
$10 million to help offset future premium rate increases or coverage reductions,
provided that, among other things, Florida Progress receives a full release from
liability, and the receiver's action against Florida Progress is dismissed, with
prejudice. The $10 million was proposed to be held in escrow by the Commissioner
for a period of 10 years and invested for the benefit of the policyholders. Any
proposed premium increases would have been offset by this fund until it was
exhausted. The Mid-Continent plan was originally scheduled to be considered by
the Oklahoma County District Court in December 1999, but the Court postponed its
consideration. Florida Progress accrued an additional provision for loss of $10
million in December 1999. The loss was more than offset by the recognition of
tax benefits of approximately $11 million, related to the excess of the tax
basis over the current book value of the investment in Mid-Continent, and thus,
did not have a material impact on Florida Progress' consolidated financial
position, results of operations, or liquidity. This benefit had not been
recorded earlier due to uncertainties associated with the timing of the tax
deduction.
The Court ordered the filing of new proposals by May 22, 2000. The Commissioner
recommended the proposal submitted by American Fidelity Assurance Company
(American Fidelity). In September 2000, the Oklahoma County District Court began
a hearing to approve the rehabilitation plan proposed by the Oklahoma Insurance
Commissioner, under which American Fidelity would acquire Mid-Continent's
policies. On September 26, 2000, the Court approved acquisition of the
Mid-Continent policies by American Fidelity. In addition, Florida Progress
reached a settlement to resolve the Policyholders' Lawsuit. Under the terms of
the settlement, Florida Progress agreed to contribute an additional $7.5
million, towards protecting policyholders in the event that future premium rate
increases are necessary, and pay attorney's fees and expenses up to $4.875
million. Florida Progress also agreed with the Commissioner to provide
approximately $.6 million to fund welfare benefits for retired Mid-Continent
employees. Accordingly Florida Progress accrued $12.8 million in September 2000.
The additional $7.5 million brings the total contribution to the fund by Florida
Progress to $17.5 million. In the event that future premium rate increases are
necessary, the $17.5 million, plus interest accrued, will offset increases until
the fund is exhausted. Dismissal of the Receiver's Lawsuit is part of the
settlement. The Policyholders' Lawsuit case has been transferred to the
rehabilitation court. On February 21, 2001, the Court approved the settlement of
the Policyholders' Lawsuit and the dismissal of the Receiver's Lawsuit. During
2001, Florida Progress paid the settlement and attorney's fees. In December
2001, Florida Progress, having filed a claim with its insurance carrier related
to Mid-Continent, was awarded an $8.8 million insurance settlement that was
recorded in Other income(net), resulting in after-tax income of $5.4 million.
Easement Litigation -- 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. On November 16, 2001, the Court issued a final order approving the
settlement. Several objectors to the settlement appealed the order to the 1st
District Court of Appeal. If the order approving settlement is ultimately upheld
on appeal, the settlement would not have a material adverse impact on the
financial position, results of operations or liquidity of Florida Power or
Progress Telecom.
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 pending
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.
Three circuit courts have entered orders requiring arbitration to establish the
purchase price of Florida Power's electric distribution facilities within three
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 value at which such a purchase could be made.
Arbitration's for two of the cases have been scheduled for the third quarter of
2002. The Company cannot predict the outcome of these matters.
42
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.
43