UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
-------------- ---------------
Commission Exact name of registrants as specified in their charters, state of I.R.S. Employer
File Number incorporation, address of principal executive offices, and telephone number Identification Number
1-8349 Florida Progress Corporation 59-2147112
A Florida Corporation
410 South Wilmington Street
Raleigh, North Carolina 27601
Telephone (919) 546-6111
1-3274 Florida Power Corporation 59-0247770
A Florida Corporation
One Progress Plaza
St. Petersburg, Florida 33701
Telephone (727) 820-5151
NONE
----
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X. No .
--
This combined Form 10-Q is filed separately by two registrants: Florida
Progress Corporation and Florida Power Corporation. Information contained
herein relating to either individual registrant is filed by such registrant
solely on its own behalf.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of April 30, 2002,
each registrant had the following shares of common stock outstanding
Registrant Description Shares
---------- ----------- ------
Florida Progress Corporation Common Stock, without par value 98,616,658 (all of which were
held by Progress Energy, Inc.)
Florida Power Corporation Common Stock, without par value 100 (all of which were held by
Florida Progress Corporation)
FLORIDA PROGRESS CORPORATION AND FLORIDA POWER CORPORATION
FORM 10-Q - For the Quarter Ended March 31, 2002
Glossary of Terms
Safe Harbor For Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Florida Progress Corporation
----------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Florida Power Corporation
-------------------------
Statements of Income
Balance Sheets
Statements of Cash Flows
Notes to Financial Statements
Florida Progress Corporation and Florida Power Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in the text of this combined Form
10-Q are defined below:
TERM DEFINITION
---- ----------
AST Advanced Separation Technologies
Btu British thermal units
Company or Florida Progress Florida Progress Corporation
CP&L Carolina Power and Light Company
CP&L Energy CP&L Energy, Inc.
CR3 Florida Power's nuclear generating plant, Crystal River Unit No. 3
DOE United States Department of Energy
EPA United States Environmental Protection Agency
FASB Financial Accounting Standards Board
FDEP Florida Department of Environmental Protection
FERC Federal Energy Regulatory Commission
Florida Power or the utility Florida Power Corporation
Florida Progress or the Company Florida Progress Corporation
FPSC Florida Public Service Commission
Funding Corp. Florida Progress Funding Corporation
IRS Internal Revenue Service
MEMCO MEMCO Barge Line, Inc.
MGP Manufactured Gas Plant
MW megawatts
NEIL Nuclear Electric Insurance Limited
NRC United States Nuclear Regulatory Commission
PLR Private Letter Ruling
Preferred Securities 7.10% Cumulative Quarterly Income Preferred Securities, Series A, of FPC Capital
I, fully and unconditionally guaranteed by Florida Progress
Preferred Stock Florida Power Cumulative Preferred Stock, $100 par value
Progress Capital Progress Capital Holdings, Inc.
Progress Energy Progress Energy, Inc.
Progress Fuels Progress Fuels Corporation, formerly referred to as Electric Fuels Corporation
Progress Rail Progress Rail Services Corporation
Progress Telecom Progress Telecommunications Corporation
Progress Ventures, Inc. Legal entity holding certain non-regulated operations and part of Progress
Energy's Progress Ventures business segment
PRP potentially responsible party, as defined in CERCLA
PUHCA Public Utility Holding Company Act of 1935, as amended
RTO Regional Transmission Organization
SEC United States Securities and Exchange Commission
Section 29 Section 29 of the Internal Revenue Service Code
SFAS Statements of Financial Accounting Standards
The Trust FPC Capital I
3
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The matters discussed throughout this combined Form 10-Q that are not historical
facts are forward-looking and, accordingly, involve estimates, projections,
goals, forecasts, assumptions, risks and uncertainties that could cause actual
results or outcomes to differ materially from those expressed in the
forward-looking statements.
In addition, forward-looking statements are discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including, but not limited to, statements under the sub-heading "Other Matters"
concerning synthetic fuel tax credits and regulatory developments.
Any forward-looking statement speaks only as of the date on which such statement
is made, and Florida Progress and Florida Power undertake no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made.
Examples of factors that you should consider with respect to any forward-looking
statements made throughout this document include, but are not limited to, the
following: governmental policies and regulatory actions (including those of the
Federal Energy Regulatory Commission, the Environmental Protection Agency, the
Nuclear Regulatory Commission, the Department of Energy, the Securities and
Exchange Commission under the Public Utility Holding Company Act of 1935, as
amended and the Florida Public Service Commission), particularly legislative and
regulatory initiatives regarding the restructuring of the electricity industry
or potential national deregulation legislation; the outcome of legal and
administrative proceedings, including proceedings before our principal
regulators, and the impact of the settlement of Florida Power's rate case; risks
associated with operating nuclear power facilities, availability of nuclear
waste storage facilities, and nuclear decommissioning costs; terrorist threats
and activities, economic uncertainty caused by such activities on the United
States, and potential adverse reactions to United States anti-terrorism
activities; changes in the economy of areas served by Florida Progress; the
extent to which we are able to obtain adequate and timely rate recovery of
costs, including potential stranded costs arising from the restructuring of the
electricity industry; weather conditions and catastrophic weather-related
damage; general industry trends, increased competition from energy and gas
suppliers, and market demand for energy; inflation and capital market
conditions; realization of cost savings related to synergies resulting from
acquisition by Progress Energy and the success of our direct and indirect
subsidiaries; the extent to which we are able to continue to use tax credits
associated with the operations of the synthetic fuel facilities; and
unanticipated changes in operating expenses and capital expenditures.
All such factors are difficult to predict, contain uncertainties that may
materially affect actual results, and may be beyond the control of Florida
Progress or Florida Power. New factors emerge from time to time, and it is not
possible for management to predict all such factors, nor can it assess the
effect of each such factor on Florida Progress or Florida Power.
4
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- ----------------------------
Florida Progress Corporation
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2002
CONSOLIDATED STATEMENTS of INCOME
(Unaudited)
Three Months Ended
March 31,
(In thousands) 2002 2001
- -----------------------------------------------------------------------------
Operating Revenues
Electric $686,441 $ 810,474
Diversified businesses 307,237 334,438
- -----------------------------------------------------------------------------
Total Operating Revenues 993,678 1,144,912
- -----------------------------------------------------------------------------
Operating Expenses
Fuel used in electric generation 192,946 216,386
Purchased power 115,309 125,619
Other operation and maintenance 131,334 110,866
Depreciation and amortization 69,294 152,069
Taxes other than on income 57,141 60,109
Diversified businesses 324,971 350,598
- -----------------------------------------------------------------------------
Total Operating Expenses 890,995 1,015,647
- -----------------------------------------------------------------------------
Operating Income 102,683 129,265
- -----------------------------------------------------------------------------
Other Income (Expense)
Interest income 708 38
Other, net (4,246) (5,040)
- -----------------------------------------------------------------------------
Total Other Income (Expense) (3,538) (5,002)
- -----------------------------------------------------------------------------
Net Interest Charges 46,445 50,428
- -----------------------------------------------------------------------------
Income from Continuing Operations before Income Taxes 52,700 73,835
Income Taxes (Benefit) (23,073) (1,790)
- -----------------------------------------------------------------------------
Income from Continuing Operations 75,773 75,625
Discontinued Operations, net of tax (Note 4):
Income from discontinued operations -- 363
- -----------------------------------------------------------------------------
Net Income $ 75,773 $ 75,988
=============================================================================
See Notes to Interim Financial Statements.
5
Florida Progress Corporation
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, December 31,
Assets 2002 2001
- ---------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 7,182,176 $ 7,151,729
Accumulated depreciation (4,038,712) (3,984,308)
- ---------------------------------------------------------------------------------------------------
Utility plant in service, net 3,143,464 3,167,421
Held for future use 7,921 8,274
Construction work in progress 325,237 292,883
Nuclear fuel, net of amortization 56,891 62,536
- ---------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,533,513 3,531,114
- ---------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 14,028 5,201
Accounts receivable 430,738 420,118
Accounts receivable-affiliates 182,416 21,851
Taxes receivable 35,235 14,761
Deferred income taxes 24,047 32,325
Inventory 502,186 485,891
Deferred fuel cost -- 15,147
Prepayments 25,312 10,748
Other current assets 33,371 48,184
- ---------------------------------------------------------------------------------------------------
Total Current Assets 1,247,333 1,054,226
- ---------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 29,640 27,610
Deferred purchased power contract termination costs 87,104 95,326
Unamortized debt expense 20,700 21,021
Nuclear decommissioning trust funds 417,284 406,100
Diversified business property, net 690,012 669,078
Miscellaneous other property and investments 113,435 117,535
Prepaid pension costs 205,663 202,167
Other assets and deferred debits 192,655 186,030
- ---------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 1,756,493 1,724,867
- ---------------------------------------------------------------------------------------------------
Total Assets $ 6,537,339 $ 6,310,207
===================================================================================================
Capitalization and Liabilities
- ---------------------------------------------------------------------------------------------------
Capitalization
Common stock $ 1,446,802 $ 1,409,034
Retained earnings 641,976 666,201
Accumulated other comprehensive loss (3,380) (2,985)
- ---------------------------------------------------------------------------------------------------
Total Common Stock Equity 2,085,398 2,072,250
Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497
Unsecured note with Parent 500,000 500,000
Long-term debt, net 2,120,293 2,143,934
- ---------------------------------------------------------------------------------------------------
Total Capitalization 4,739,188 4,749,681
- ---------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 103,374 88,053
Accounts payable 277,823 285,524
Payables to affiliated companies 411,106 263,389
Interest accrued 54,838 68,575
Short-term obligations 31,950 --
Customer deposits 124,422 118,285
Accrued taxes other than on income 51,406 16,361
Other current liabilities 141,821 122,879
- ---------------------------------------------------------------------------------------------------
Total Current Liabilities 1,196,740 963,066
- ---------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 173,052 165,816
Accumulated deferred investment tax credits 52,444 54,387
Other liabilities and deferred credits 375,915 377,257
- ---------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 601,411 597,460
- ---------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 10)
- ---------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 6,537,339 $ 6,310,207
===================================================================================================
See Notes to Interim Financial Statements.
6
Florida Progress Corporation
CONSOLIDATED STATEMENTS of CASH FLOWS Three Months Ended
(Unaudited) March 31,
(In thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 75,773 $ 75,988
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations -- (363)
Depreciation and amortization 75,925 150,466
Deferred income taxes and investment tax credits, net 19,359 21,948
Deferred fuel cost (credit) 45,651 24,113
Changes in working capital, net of effects from sale or acquisition of business
Net (increase) decrease in accounts receivable (171,185) 41,477
Net increase in inventories (17,540) (58,525)
Net (increase) decrease in prepaids and other current assets (408) 7,618
Net increase (decrease) in accounts payable 139,622 (41,271)
Net increase (decrease) in other current liabilities (4,604) 74,114
Other 12,903 (28,900)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 175,496 266,665
- ----------------------------------------------------------------------------------------------------------
Investing Activities:
Property additions (86,462) (43,956)
Diversified business property additions (35,648) (13,491)
Nuclear fuel additions (122) (36,019)
Other investing activities (4,620) (16,030)
- ----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (126,852) (109,496)
- ----------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase in commercial paper reclassified to long-term debt 45,750 --
Net increase (decrease) in short-term obligations 31,950 (78,235)
Retirement of long-term debt (54,835) (31,703)
Equity contribution from parent 37,799 --
Dividends paid on common stock (100,000) (54,612)
Other financing activities (481) (1,102)
- ----------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (39,817) (165,652)
- ----------------------------------------------------------------------------------------------------------
Cash Used in Discontinued Operations -- (16)
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 8,827 (8,499)
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period 5,201 24,200
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 14,028 $ 15,701
==========================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the period - interest (net of amount capitalized) $ 43,678 $ 67,980
Income taxes (net of refunds) $ 3,937 $ (22,544)
See Notes to Interim Financial Statements.
7
Florida Power Corporation
INTERIM FINANCIAL STATEMENTS
March 31, 2002
STATEMENTS of INCOME Three Months Ended
(Unaudited) March 31,
(In thousands) 2002 2001
- ------------------------------------------------------------------------
Operating Revenues
Electric $686,441 $810,474
Operating Expenses
Fuel used in electric generation 192,946 216,386
Purchased power 115,309 125,619
Operation and maintenance 131,334 110,866
Depreciation and amortization 69,294 152,069
Taxes other than on income 57,141 60,109
- ------------------------------------------------------------------------
Total Operating Expenses 566,024 665,049
- ------------------------------------------------------------------------
Operating Income 120,417 145,425
- ------------------------------------------------------------------------
Other Income (Expense)
Interest income 708 38
Other, net (1,336) (1,755)
- ------------------------------------------------------------------------
Total Other Income (Expense) (628) (1,717)
- ------------------------------------------------------------------------
Net Interest Charges 28,280 28,995
- ------------------------------------------------------------------------
Income before Income Taxes 91,509 114,713
Income Taxes 33,388 42,729
- ------------------------------------------------------------------------
Net Income 58,121 71,984
Dividends on Preferred Stock 378 378
- ------------------------------------------------------------------------
Earnings for Common Stock $ 57,743 $ 71,606
========================================================================
See Notes to Interim Financial Statements.
8
Florida Power Corporation
BALANCE SHEETS
(Unaudited)
(In thousands) March 31, December 31,
Assets 2002 2001
- ----------------------------------------------------------------------------------------------------
Utility Plant
Electric utility plant in service $ 7,182,176 $ 7,151,729
Accumulated depreciation (4,038,713) (3,984,308)
- ---------------------------------------------------------------------------------------------------
Utility plant in service, net 3,143,463 3,167,421
Held for future use 7,921 8,274
Construction work in progress 325,237 292,883
Nuclear fuel, net of amortization 56,892 62,536
- ---------------------------------------------------------------------------------------------------
Total Utility Plant, Net 3,533,513 3,531,114
- ---------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 5,898 --
Accounts receivable 269,541 248,642
Accounts and notes receivable-affiliates 153,201 136,223
Deferred income taxes 24,047 32,325
Inventory 184,267 188,630
Deferred fuel cost -- 15,147
Prepayments 4,489 4,345
Other current assets 4,421 --
- ---------------------------------------------------------------------------------------------------
Total Current Assets 645,864 625,312
- ---------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Income taxes recoverable through future rates 29,640 27,610
Deferred purchased power contract termination costs 87,104 95,326
Unamortized debt expense 11,604 11,844
Nuclear decommissioning trust funds 417,284 406,100
Miscellaneous other property and investments 44,910 46,442
Prepaid pension costs 204,001 198,351
Other assets and deferred debits 65,174 56,063
- ---------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 859,717 841,736
- ---------------------------------------------------------------------------------------------------
Total Assets $ 5,039,094 $ 4,998,162
===================================================================================================
Capitalization and Liabilities
- ---------------------------------------------------------------------------------------------------
Capitalization
Common stock $ 1,081,257 $ 1,081,257
Retained earnings 908,130 950,387
- ---------------------------------------------------------------------------------------------------
Total Common Stock Equity 1,989,387 2,031,644
Preferred stock of subsidiaries-not subject to mandatory redemption 33,497 33,497
Long-term debt, net 1,595,122 1,619,280
- ---------------------------------------------------------------------------------------------------
Total Capitalization 3,618,006 3,684,421
- ---------------------------------------------------------------------------------------------------
Current Liabilities
Current portion of long-term debt 102,000 32,000
Accounts payable 129,287 143,828
Accounts payable-affiliates 132,560 189,817
Taxes accrued 14,030 1,768
Interest accrued 42,444 54,440
Short-term obligations 31,950 --
Customer deposits 124,422 118,285
Accrued taxes other than on income 43,289 9,202
Other current liabilities 84,992 57,778
- ---------------------------------------------------------------------------------------------------
Total Current Liabilities 704,974 607,118
- ---------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 405,790 394,828
Accumulated deferred investment tax credits 51,937 53,875
Other liabilities and deferred credits 258,387 257,920
- ---------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 716,114 706,623
- ---------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 10)
- ---------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 5,039,094 $ 4,998,162
===================================================================================================
See Notes to Interim Financial Statements.
9
Florida Power Corporation
STATEMENTS of CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 58,121 $ 71,984
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 75,865 150,406
Deferred income taxes and investment tax credits, net 15,281 7,903
Deferred fuel cost 45,651 24,113
Changes in working capital:
Net (increase) decrease in accounts receivable (37,877) 41,325
Net (increase) decrease in inventories 4,363 (17,811)
Net (increase) decrease in prepaids and other current assets (4,565) 6,681
Net decrease in accounts payable (71,798) (51,492)
Net increase (decrease) in other current liabilities 37,191 (19,930)
Other (5,213) (67,306)
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 117,019 145,873
- --------------------------------------------------------------------------------------------------------
Investing Activities:
Property additions (86,462) (43,956)
Nuclear fuel additions (122) (36,019)
Other investing activities (1,859) (4,427)
- --------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (88,443) (84,402)
- --------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase in commercial paper reclassified to long-term debt 45,750 --
Net increase (decrease) in short-term obligations 31,950 (9,862)
Dividends paid on common stock (100,000) (54,611)
Dividends paid on preferred stock (378) (378)
- --------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (22,678) (64,851)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 5,898 (3,380)
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period -- 3,380
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 5,898 $ --
- --------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period - interest (net of amount capitalized) $ 40,276 $ 39,032
income taxes (net of refunds) $ 3,980 $ 7,362
See Notes to Interim Financial Statements.
10
Florida Progress Corporation and Florida Power Corporation
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization. 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).
Florida Power is a regulated public utility engaged in the generation,
transmission, distribution and sale of electricity in portions of Florida.
Florida Power is regulated by the Florida Public Service Commission (FPSC)
and the Federal Energy Regulatory Commission (FERC).
Progress Fuels is a diversified non-utility energy company, whose principal
business segments are Energy & Related Services and Rail Services. 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.
B. Basis of Presentation. These financial statements have been prepared in
---------------------
accordance with accounting principles generally accepted in the United
States of America (generally accepted accounting principles) for interim
financial information and with the instructions to Form 10-Q and Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Because the accompanying consolidated interim financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles, they should be read in
conjunction with the audited financial statements for the period ended
December 31, 2001 and notes thereto included in Florida Progress' and
Florida Power's Form 10-K for the year ended December 31, 2001.
The amounts included in the consolidated interim financial statements are
unaudited but, in the opinion of management, reflect all adjustments
necessary to fairly present Florida Progress' and Florida Power's financial
position and results of operations for the interim periods. Due to seasonal
weather variations and the timing of outages of electric generating units,
the results of operations for interim periods are not necessarily
indicative of amounts expected for the entire year. Certain
reclassifications have been made to prior-year amounts to conform to the
current year's presentation.
The financial statements include the financial results of the Company and
its majority-owned operations. All significant intercompany balances and
transactions have been eliminated. Investments in 20% to 50%-owned joint
ventures are accounted for using the equity method.
In preparing financial statements that conform with generally accepted
accounting principles, management must make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements
and amounts of revenues and expenses reflected during the reporting period.
Actual results could differ from those estimates.
NOTE 2. ACQUISITION BY PROGRESS ENERGY, INC.
On November 30, 2000, Progress Energy acquired all of the outstanding shares of
Florida Progress' common stock in accordance with the Amended and Restated Plan
of Exchange, including the related Plan of Share Exchange, dated as of August
22, 1999, as amended and restated as of March 3, 2000, among CP&L Energy,
Florida Progress and Carolina Power & Light Company (CP&L). Florida Progress
shareholders received $54.00 in cash or shares of Progress Energy common stock
having a value of $54.00, subject to proration, and one contingent value
obligation (CVO) in exchange for each share of Florida Progress common stock.
The exchange ratio for the shares of Progress Energy common stock issued to
Florida Progress shareholders was 1.3473. Each CVO represents the right to
receive contingent payments based upon the net after-tax cash flow to Progress
Energy generated by four synthetic fuel facilities purchased by subsidiaries of
Florida Progress in 1999.
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.
11
The first quarter 2002 activity for the non-executive termination costs is
detailed in the table below:
(In millions)
Balance at December 31, 2001 $7.7
Payments (4.0)
Adjustments --
----
Balance at March 31, 2002 $3.7
====
NOTE 3. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company's principal business segment is Florida Power, an electric utility
engaged in the generation, purchase, transmission, distribution and sale of
electricity primarily in Florida. The other reportable business segments are
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.
Financial data for business segments for the periods covered in this Form 10-Q
are presented in the table below:
Energy and
Related Rail
(In thousands) Utility Services Services Other Consolidated
- ------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2002:
Revenues $ 686,441 $ 70,015 $169,369 $ 67,853 $ 993,678
Intersegment revenues -- 131,930 495 (132,425) --
Income (loss) from continuing operations 57,743 30,747 (701) (12,016) 75,773
Total assets 5,039,094 580,002 596,765 321,478 6,537,339
============================================================================================================
Energy and
Related Rail
Utility Services Services Other Consolidated
- ------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2001:
Revenues $ 810,474 $ 84,688 $224,165 $ 25,585 $1,144,912
Intersegment revenues -- 80,516 37 (80,553) --
Income (loss) from continuing operations 71,606 29,181 (2,098) (23,064) 75,625
Total assets 4,829,168 393,713 822,859 302,996 6,348,736
============================================================================================================
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.
The results of operations for the three months ended March 31, 2001, has 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.
12
Results for discontinued operations for the three months ended March 31, 2001,
were as follows:
(in thousands) 2001
-------
Revenues $34,268
-------
Earnings before income taxes $ 730
Income taxes 367
-------
Net earnings $ 363
=======
NOTE 5. IMPACT OF NEW ACCOUNTING STANDARD
During the second quarter of 2001, the Financial Accounting Standards Board
(FASB) issued interpretations of Statements of Financial Accounting Standards
No. 133, "Accounting for Derivative and Hedging Activities," (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 revised interpretation did not result in any changes to the
Company's 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. 142, "Goodwill and Other
Intangible Assets." This statement clarifies the criteria for recording of other
intangible assets separately from goodwill. See Note 6 for more information.
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.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement 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 two-step fair-value based test. This assessment could result in periodic
impairment charges.
The Company is in the process of performing the first step of the initial
transitional goodwill impairment test. This test will be as of January 1, 2002,
and will be completed by June 30, 2002. The Company has not yet determined the
impact, if any, to the Company's consolidated financial position or results of
operations.
There were no changes in the carrying amount of goodwill for the three months
ended March 31, 2002. The Company's $11.1 million of goodwill is assigned to the
Energy and Related Services segment.
As required by SFAS No. 142, the results for the prior year's quarter have not
been restated. A reconciliation of net income as if SFAS No. 142 had been
adopted is presented below for the three months ended March 31, 2001.
(in thousands) Three Months Ended
March 31, 2001
------------------
Reported net income $75,988
Add back: Goodwill amortization (net of tax) 1,253
-------
Adjusted net income $77,241
13
The Company has no intangible assets as of March 31, 2002 and December 31, 2001.
NOTE 7. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE QUARTERLY INCOME
PREFERRED SECURITIES (QUIPS) OF A SUBSIDIARY TRUST HOLDING SOLELY
FLORIDA PROGRESS GUARANTEED SUBORDINATED DEFERRABLE INTEREST NOTES
In April 1999, FPC Capital I (the Trust), an indirect wholly owned subsidiary of
the Company, issued 12 million shares of $25 par cumulative Company-obligated
mandatorily redeemable preferred securities (Preferred Securities) due 2039,
with an aggregate liquidation value of $300 million and 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, Inc. (PCH), and used for
general corporate purposes including the repayment of a portion of certain
outstanding short-term bank loans and commercial paper.
The Company has fully and unconditionally guaranteed the obligations of Funding
Corp. under the subordinated notes (the Notes Guarantee). In addition, the
Company has guaranteed the payment of all distributions required to be made by
the Trust, but only to the extent that the Trust has funds available for such
distributions (Preferred Securities Guarantee). The Preferred Securities
Guarantee, considered together with the Notes Guarantee, constitutes a full and
unconditional guarantee by the Company of the Trust's obligations under the
Preferred Securities.
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 8. FLORIDA POWER RATE CASE SETTLEMENT
On March 27, 2002, the parties in Florida Power's rate case entered into a
Stipulation and Settlement Agreement (the Agreement) related to retail rate
matters. The Agreement was approved by the Florida Public Service Commission
(FPSC) on April 23, 2002. The Agreement is generally effective from May 1, 2002
through December 31, 2005; provided, however, that if Florida Power's base rate
earnings fall below a 10% return on equity, Florida Power may petition the FPSC
to amend its base rates.
The Agreement provides that Florida Power will reduce its retail revenues from
the sale of electricity by an annual amount of $125 million. The Agreement also
provides that Florida Power will operate under a Revenue Sharing Incentive Plan
(the Plan) through 2005, and thereafter until terminated by the FPSC, that
establishes annual revenue caps and sharing thresholds. The Plan provides that
retail base rate revenues between the sharing thresholds and the retail base
rate revenue caps will be divided into two shares - a 1/3 share to be received
by Florida Power's shareholders, and a 2/3 share to be refunded to Florida
Power's retail customers; provided, however, that for the year 2002 only, the
refund to customers will be limited to 67.1% of the 2/3 customer share. The
retail base rate revenue sharing threshold amounts for 2002 will be $1,296
million and will increase $37 million each year thereafter. The Plan also
provides that all retail base rate revenues above the retail base rate revenue
caps established for each year will be refunded to retail customers on an annual
basis. For 2002, the refund to customers will be limited to 67.1% of the retail
base rate revenues that exceed the 2002 cap. The retail base revenue caps for
2002 will be $1,356 million and will increase $37 million each year thereafter.
The Agreement also provides that beginning with the in-service date of Florida
Power's Hines Unit 2, currently expected to be late 2003, and continuing through
December 31, 2005, Florida Power will be allowed to recover through the fuel
cost recovery clause a return on average investment and depreciation expense for
Hines Unit 2, to the extent such costs do not exceed the Unit's cumulative fuel
savings over the recovery period.
14
Additionally, the Agreement provides that Florida Power will effect a mid-course
correction of its fuel cost recovery clause to reduce the fuel factor by $50
million for the remainder of 2002. The fuel cost recovery clause will operate as
it normally does, including, but not limited to any additional mid-course
adjustments that may become necessary, and the calculation of true-ups to actual
fuel clause expenses.
Florida Power will suspend accruals on its reserves for nuclear decommissioning
and fossil dismantlement through December 31, 2005. Additionally, for each
calendar year during the term of the Agreement, Florida Power will record a
$62.5 million depreciation expense reduction, and may, at its option, record up
to an equal annual amount as an offsetting accelerated depreciation expense. In
addition, Florida Power is authorized, at its discretion, to accelerate the
amortization of certain regulatory assets over the term of the Agreement.
Under the terms of the Agreement, Florida Power agreed to continue the
implementation of its four-year Commitment to Excellence Reliability Plan and
expects to achieve a 20% improvement in its annual System Average Interruption
Duration Index by no later than 2004. If this improvement level is not achieved
for calendar years 2004 or 2005, Florida Power will provide a refund of $3
million for each year the level is not achieved to 10% of its total retail
customers served by its worst performing distribution feeder lines.
The Agreement also provides that Florida Power will refund to customers $35
million of revenues Florida Power collected during the interim period since
March 13, 2001. This one-time retroactive revenue refund was recorded in the
first quarter of 2002.
NOTE 9. COMPREHENSIVE INCOME
Comprehensive income for Florida Progress for the three months ended March 31,
2002 and 2001 was $75.4 million and $75.7 million, respectively. Items of other
comprehensive income for the three month periods consisted primarily of foreign
currency translation adjustments. Florida Power does not have any items of other
comprehensive income.
NOTE 10. COMMITMENTS AND CONTINGENCIES
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 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
15
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 liabilities. Some
claims have settled and others are still pending. While management cannot
predict the outcome of these matters, the outcome is not expected to have a
material effect on the financial position or results of operations.
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 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 were held on March 20,
2002. On April 1, 2002, the U.S. Supreme Court issued a per curiam affirmed
order in the case stating they had improvidently granted the oral argument and
they would uphold the ruling of the Eleventh Circuit Court of Appeals.
Therefore, the case will remain decertified. As a result of the decertification,
the trial court has grouped the plaintiffs cases to be tried. The first set of
plaintiffs, 12 former information technology plaintiffs, is set for trial in
July, 2002. 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.
Franchise Litigation -- Seven cities, with a total of approximately 59,000
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
16
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 in one of the cases is
scheduled to occur in the third quarter of 2002. The Company cannot predict the
outcome of these matters.
Other Legal Matters -- Florida Progress and Florida Power are involved in
various other claims and legal actions arising in the ordinary course of
business, some of which involve substantial amounts. Where appropriate, accruals
have been made in accordance with SFAS No. 5, "Accounting for Contingencies," to
provide for such matters. In the opinion of management, the ultimate disposition
of these matters will not have a material adverse effect upon either company's
consolidated financial position, results of operations or liquidity.
NOTE 11. SUBSEQUENT EVENT
On April 26, 2002, Progress Energy finalized the acquisition of Westchester Gas
Company, which includes approximately 215 producing natural gas wells, 52 miles
of intrastate gas pipeline and 170 miles of gas-gathering systems. Total
consideration of $148 million included $128 million in Progress Energy common
stock and $20 million in cash. The properties are located within a 25-mile
radius of Jonesville, Texas, on the Texas-Louisiana border and will be owned by
subsidiaries of Progress Fuels.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING RESULTS
Florida Progress' consolidated income from continuing operations for the three
months ended March 31, 2002, was $75.8 million compared to earnings of $75.6
million for the same period in 2001.
Business segment results and the factors affecting them are discussed below.
FLORIDA POWER CORPORATION
Florida Power, the largest subsidiary of Florida Progress, reported earnings for
common stock of $57.7 million for the first quarter of 2002, compared to $71.6
million for the comparable period in 2001. Quarterly earnings were negatively
affected by the outcome of the Florida Power rate case settlement, which
included a one-time retroactive revenue refund of $35 million ($21 million
after-tax), as well as the impact of mild weather. See Note 8 to the Interim
Financial Statements for additional information on the settlement. Earnings for
the three months ended March 31, 2002, were positively impacted by lower ongoing
depreciation expense in accordance with the rate case settlement and increased
revenues from customer growth and usage. The tables below detail Florida Power's
sales by customer class.
Florida Power's electric revenues for the three months ended March 31, 2002 and
2001 and the percentage change by customer class are as follows (in millions):
- ---------------------------------------------------------------------------
Customer Class 2002 % Change 2001
- ---------------------------------------------------------------------------
Residential $379.2 (4.9)% $398.9
Commercial 166.8 5.0 158.9
Industrial 50.0 (6.5) 53.5
Governmental 39.9 5.6 37.8
Retroactive Retail Revenue Refund (35.0) -- --
- --------------------------------------------------- ------
Total Retail Revenues 600.9 (7.4) 649.1
Wholesale 52.4 (46.4) 97.7
Unbilled 6.5 129.2 (22.3)
Miscellaneous 26.6 (69.1) 86.0
- --------------------------------------------------- ------
Total Electric Revenues $686.4 (15.3)% $810.5
- ---------------------------------------------------------------------------
Florida Power's electric energy sales for the three months ended March 31, 2002
and 2001, and the percentage change by customer class are as follows (in
thousands of mWh):
- --------------------------------------------------------------------------
Customer Class 2002 % Change 2001
- --------------------------------------------------------------------------
Residential 4,060 (7.9)% 4,409
Commercial 2,456 1.4 2,422
Industrial 882 (9.9) 979
Governmental 621 0.8 616
- -------------------------------------------------- -----
Total Retail Energy Sales 8,019 (4.8) 8,426
Wholesale 979 (23.9) 1,286
Unbilled 32 106.5 (495)
- -------------------------------------------------- -----
Total mWh sales 9,030 (2.0)% 9,217
- --------------------------------------------------------------------------
As a result of the settlement of the Florida Power rate case, Florida Power
Electric recognized a one-time retroactive revenue refund of $35 million to its
retail customers in the first quarter of 2002. In addition, the first quarter
2002 revenues decreased when compared to the same period in the prior year due
to the recognition of $63 million of deferred revenue in the first quarter of
2001, which is included in miscellaneous revenues in the table above. Milder
weather conditions in the first quarter of 2002, when compared to the same
period in the prior year, negatively affected energy sales, which was partially
offset by an increase in Florida Power's customer base. A weaker economy
negatively impacted the industrial customer class.
Fuel used in generation and purchased power decreased $33.7 million for the
three months ended March 31, 2002, when compared to $342.0 million in the prior
year, primarily due to lower oil and gas prices and a decrease in system
requirements. Fuel and purchased power expenses are recovered primarily through
cost recovery clauses and, as such, have no material impact on operating
results. Other operation and maintenance expense increased $20.5 million for the
three months ended
18
March 31, 2002, when compared to $110.9 million in the prior year, primarily due
to a decrease in pension credits and increases in other benefit costs and
Service Company costs due to an increase in employee headcount in the current
quarter when compared to the prior quarter.
Depreciation and amortization expense decreased $82.8 million for the three
months ended March 31, 2002, when compared to $152.1 million in the prior year.
The Florida Power rate case settlement provides for ongoing reductions in
depreciation which reduced the amount of depreciation recorded in the first
quarter of 2002 by $15.6 million. In addition, the first quarter of 2001
includes $63 million of accelerated amortization on the Tiger Bay regulatory
asset associated with deferred revenue from 2000.
PROGRESS FUELS CORPORATION
Progress Fuels makes up the majority of Florida Progress' diversified
operations. The results of operations for Progress Fuels' Energy and Related
Services and Rail Services units are discussed below.
Energy and Related Services - Earnings at the Energy and Related Services Group
- ---------------------------
increased $1.6 million from the same period in the prior year. The increase was
due primarily to improved operating results of the terminal services operations.
The Energy and Related Services segment sold 1.4 million and 1.6 million tons of
synthetic fuel for the three months ended March 31, 2002 and 2001, respectively,
that resulted in tax credits of $43.9 million and $44.4 million being recorded
for the first quarter of 2002 and 2001, respectively. See OTHER MATTERS below
for information on associated tax credits.
Rail Services - Results in the Rail Services group improved $1.4 million when
- -------------
compared to a net loss of $2.1 million in 2001. Current year results were
positively impacted by the implementation of certain costs control programs at
Progress Rail. Rail Services' first quarter 2002 revenues of $169.9 million are
$54.3 million less than the comparable 2001 revenues of $224.2 million. This
decrease (with comparable decreases in operating expenses) results from selling
the Louisville Scrap and Metal operation in November 2001 and the transition
from acting as a scrap reseller in 2001 to acting as a scrap resale agent in
2002. Rail Services results for the three months ended March 31, 2002, have been
favorably impacted by the implementation of cost control programs.
OTHER
The other group includes telecommunications, holding company and financing
expenses. The decreased loss over the first quarter of 2001 is due primarily to
the recording of an intra-period income tax allocation adjustment. Generally
accepted accounting principles require companies to apply a levelized effective
tax rate to interim periods that is consistent with the estimated annual rate.
Income tax expense was increased by $2.8 million and $14.8 million for the first
quarter of 2002 and 2001, respectively, to maintain an effective tax rate
consistent with the estimated annual rate. The tax credits associated with the
Company's synthetic fuel operations lower the overall effective tax rate. These
credits, along with seasonal earnings variations, can also cause large swings in
the effective tax rate for interim periods. Therefore, this adjustment will vary
each quarter, but have no effect on net income for the year. The
telecommunications group also had slightly higher losses than the first quarter
of 2001 due to continued expansion of the business.
MATERIAL CHANGES IN LIQUIDITY AND CAPITAL RESOURCES
Statements of Cash Flows and Financing Activities
Cash provided by operating activities decreased $91.2 million for the three
months ended March 31, 2002, when compared to the corresponding period in the
prior year. The decrease in cash from operating activities for the 2002 period
is due to a decrease in operating income from the impact of the Florida Power
rate case settlement and the impact of unfavorable weather in the current
quarter. In addition, changes in the balances of certain current assets and
liabilities due to operational fluctuations decreased cash provided by operating
activities.
Net cash used in investing activities increased $17.4 million for the three
months ended March 31, 2002, when compared to the corresponding period in the
prior year, primarily due to increased expenditures on Florida Power's
construction program. During the first three months of 2002, $86.5 million was
spent on the Florida Power construction program and $35.6 million was spent in
diversified operations.
Net cash used in financing activities decreased $125.8 million for the three
months ended March 31, 2002, when compared to the corresponding period in the
prior year. The decrease in cash used in financing activities is primarily due
to an increase in short-term obligations during the current quarter.
19
In February 2002, $50 million of Progress Capital Holding (PCH) medium-term
notes, 5.78% Series, matured. Progress Energy funded this maturity through the
issuance of commercial paper.
On March 28, 2002, Standard & Poor's affirmed Progress Energy's corporate credit
rating of BBB+ and Florida Power's rating but revised the outlook for Progress
Energy to negative from stable. S&P stated that its change in outlook reflects
the increased business risk at Progress Energy's Progress Ventures business unit
and lower-than-projected credit protection measures.
The change in outlook by the rating agency has not affected the Company's access
to liquidity nor the cost of its short-term borrowings. The Company is committed
to maintaining its current ratings and is currently assessing the situation with
the rating agency to determine an appropriate course of action, if necessary, to
address its concerns.
Future Commitments
As of March 31, 2002, both Florida Progress' and Florida Power's contractual
cash obligations and other commercial commitments has not changed materially
from what was reported in the 2001 Annual Report on Form 10-K.
OTHER MATTERS
Florida Power Rate Case Settlement
On March 27, 2002, the parties in Florida Power's rate case entered into a
Stipulation and Settlement Agreement (the Agreement) related to retail rate
matters. The Agreement was approved by the FPSC on April 23, 2002. The Agreement
is generally effective from May 1, 2002 through December 31, 2005; provided,
however, that if Florida Power's base rate earnings fall below a 10% return on
equity, Florida Power may petition the FPSC to amend its base rates.
See Note 8 to the Interim Financial Statements for additional information on the
Agreement.
Fuel Acquisition
On April 26, 2002, Progress Energy finalized the acquisition of Westchester Gas
Company, which includes approximately 215 producing natural gas wells, 52 miles
of intrastate gas pipeline and 170 miles of gas-gathering systems. Total
consideration of $148 million included $128 million in Progress Energy common
stock and $20 million in cash. The properties are located within a 25-mile
radius of Jonesville, Texas, on the Texas-Louisiana border and will be owned by
subsidiaries of Progress Fuels. This transaction added 140 billion cubic feet
(Bcf) of gas reserves to Progress Fuels' fuel business, which more than doubled
its gas reserves and potential annual production levels.
Synthetic Fuels Tax Credits
Progress Fuels, through its subsidiaries, owns a majority interest in three
synthetic fuel entities; two located in Kentucky and the other located in West
Virginia. Progress Fuels has a minority interest in three other synthetic fuel
entities, each of which is located in West Virginia, Virginia and Kentucky.
Progress Ventures, Inc., a wholly owned subsidiary of Progress Energy, owns a
90% interest in two of these entities, which are located in Kentucky and West
Virginia. All entities have received private letter rulings (PLRs) from the
Internal Revenue Service with respect to their synfuel operations. The PLRs do
not limit the production on which synthetic fuel tax credits may be claimed.
Should the tax credits be denied on future audits and Florida Progress fails to
prevail through the audit/legal process, there could be significant tax
liability owed for previously taken Section 29 credits, with a significant
impact on earnings and cash flows. These tax credits are scheduled to expire in
2007.
In Management's opinion, Florida Progress 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 if
challenged by the IRS on any credits taken.
Franchise Litigation
Seven cities, with a total of approximately 59,000 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
20
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 in one of the cases is scheduled to occur in the third
quarter of 2002. The Company cannot predict the outcome of these matters.
Nuclear Matters
On April 1, 2002, Florida Power filed a response to an industry-wide request
from the Nuclear Regulatory Commission (NRC) concerning potential degradation of
the reactor vessel heads of pressurized water reactors (PWRs). Inspection of the
vessel head at Florida Power's Crystal River plant (CR3) was performed during
the 2001 outage. One nozzle was found to have a crack and was repaired; however,
no degradation of the reactor vessel head was identified. Current plans are to
replace the vessel head at CR3 during its next regularly scheduled refueling
outage in 2003.
On February 25, 2002, the NRC issued orders formalizing many of the security
enhancements made at CR3 since September 2001. These orders include additional
restrictions on access, increased security presence and closer coordination with
the Company's partners in intelligence, military, law enforcement and emergency
response at the federal, state and local levels. The Company is currently
reviewing the new requirements to determine the cost to implement these orders.
The Company does not expect those costs to be material to the Company's
consolidated financial position or results of operations. As the NRC, other
governmental entities, and the industry continue to consider security issues, it
is possible that more extensive security plans could be required.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Florida Progress Corporation
Certain market risks are inherent in Florida Progress' financial instruments,
which arise from transactions entered into in the normal course of business.
Florida Progress' primary exposures are changes in interest rates with respect
to long-term debt, commercial paper reclassified as long-term debt and
fluctuations in the return on marketable securities with respect to its nuclear
decommissioning trust funds. Florida Progress' exposure to return on marketable
securities for the decommissioning trust funds has not changed materially since
December 31, 2001. In addition, Florida Progress' exposure to changes in
interest rates from the Company's fixed rate long-term debt, commercial paper
reclassified as long-term debt, FPC mandatorily redeemable securities of trust
and unsecured note with parent at March 31, 2002, was not materially different
than at December 31, 2001.
Florida Power Corporation
Certain market risks are inherent in Florida Power's financial instruments,
which arise from transactions entered into in the normal course of business.
Florida Power's primary exposures are changes in interest rates with respect to
long-term debt, commercial paper reclassified as long-term debt and fluctuations
in the return on marketable securities with respect to its nuclear
decommissioning trust funds. Florida Power's exposure to return on marketable
securities for the decommissioning trust funds has not changed materially since
December 31, 2001. In addition, Florida Power's exposure to changes in interest
rates from its fixed rate long-term debt and commercial paper reclassified as
long-term debt at March 31, 2002, was not materially different than at December
31, 2001.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. Wanda L. Adams, et al. v. Florida Power Corporation and Florida Progress
Corporation, U.S. District Court, Middle District of Florida, Ocala
Division, Case No. 95-123-C.V.-OC-10.
See prior discussion of this matter in the 2001 Form 10-K, Item 3, paragraph 2.
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 Americans with Disabilities Act (ADEA). On
December 3, 2001, the United States Supreme Court agreed to hear the case. Oral
arguments on the issue were held on March 20, 2002. On April 1, 2002, the U.S.
Supreme Court issued a per curiam affirmed order in the case stating they had
improvidently granted the oral argument and they would uphold the ruling of the
Eleventh Circuit Court of Appeals. Therefore, the case will remain decertified.
As a result of the decertification, the trial court has grouped the plaintiffs
cases to be tried. The first set of plaintiffs, 12 former information technology
plaintiffs, is set for trial in July, 2002. The Company cannot predict the
outcome of this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K filed during or with respect to the quarter:
Florida Progress Corporation and Florida Power Corporation
Financial
Item Statements
Reported Included Date of Event Date Filed
- -------- ---------- ------------- ----------
7 Yes March 15, 2002 March 15, 2002
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLORIDA PROGRESS CORPORATION
FLORIDA POWER CORPORATION
(Registrants)
Date: May 15, 2002 By: /s/ Peter M. Scott III
-----------------------------------
Peter M. Scott III
Executive Vice President and
Chief Financial Officer
By: /s/ Robert H. Bazemore, Jr.
-----------------------------------
Robert H. Bazemore, Jr.
Vice President and Controller
Chief Accounting Officer
23